Why we hate Warren Buffett, the economist! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why we hate Warren Buffett, the economist! 

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In this issue:
» Raghuram Rajan takes the unpopular decision
» Which are the major risks in the global economy now?
» Is India staring at stagflation?
» Will there be any reprieve for the Indian auto sector?
» ...and more!


00:00
 
We have immense respect for Warren Buffett, the value investor. His ideas have had a significant influence on our investment philosophy. But that does not mean we follow him blindly on everything. In fact, when it comes to macroeconomic views, we are often at loggerheads with him.

What Buffett just said about Ben Bernanke and the quantitative easing (QE) program shocked us. Before we tell you what he said, we're sure you must have been reading that the US Federal Reserve has deferred the QE tapering plan for now. In other words, it will continue with its money printing extravaganza. US$ 85 bn of cheap money will continue to be pumped into the world financial system for some more time. Or maybe much longer... We don't know.

But Buffett seems to have full faith in Ben Bernanke's monetary policy. As per him, the QE has not hurt the economy and could be helping the economy. H even credits the QE program for saving the economy from diving into negative growth.

And here's the next shocker... When asked who should be made the next central bank chairman after Bernanke steps down, he said that he would have rather preferred Bernanke to continue. "Bernanke may want to depart, but since the panic of five years ago, I think he's done a terrific job. And I think he ought to get a little bit more of a chance to play out the hand," Buffett said to CNBC.

Well, we could have never disagreed more. If anything, Bernanke has been an absolute disaster as the central banker. Five years of unprecedented money pumping and the economy is nowhere close to recovery. Bernanke's unwillingness to start unwinding the QE program shows how vulnerable the economy is and how clueless he is about what to do. To take the US economy off the easy money drug would mean a big upheaval. And to keep continuing the QE would mean postponing the crisis to a future date. In the meanwhile, Bernanke could quietly exit with a neat scorecard. And let the next Fed chairman bear the brunt of his misdoings.

Do you think Warren Buffett is wrong in praising US Fed Chairman Ben Bernanke? Let us know your comments or post them on our Facebook page / Google+ page

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01:20  Chart of the day
 
The Indian rupee has witnessed tumultuous times during the current year. It plunged over 20% to hit an all-time low of Rs 68.81 against the US dollar on August 28, 2013. However, there has been a sharp recovery in the last three weeks with the USD-INR exchange rate currently at Rs 62.11 per US dollar.

This recovery has prompted several experts to suggest that the RBI must take advantage of the recent rupee rally to build up its forex reserves. As of September 06, 2013, India's forex reserves stood at US$ 274.8 bn. As the chart shows, this is the second lowest amount in the last seven years. So building up sufficient forex reserves when the rupee is strengthening will help RBI deal with adverse situations that may lead to exodus of the dollar. But there are two sides to this argument. On one hand, building up forex reserves will provide the RBI enough ammunition to intervene during adverse scenarios and thus provide stability to the currency. But there will be side-effects. RBI's dollar purchases will exert downward pressure on the rupee and arrest its recovery. And this will impact India's import bills, corporate earnings and fiscal deficit. Thus, the RBI will have to take into consideration both the scenarios and take steps that will augur well for India's long term economic prospects.

High time we buck up India's forex reserves
Data source: The Economic Times
*As of 06 September, 2013


01:55
 
Make no mistake. The market euphoria after Dr Rajan's appointment and after Bernanke's speech yesterday was all in anticipation of this day. Fed up with ex-governor Subbarao's careful and conservative monetary policies, Indian government and markets were hoping for a change. Dr Rajan, however, as promised by him in his maiden speech as new RBI Governor, has chosen to be as unpopular as his predecessor.

The markets were jubilant following US Fed chief's proposal to keep the liquidity tap open for a prolonged period. As a result, the RBI's move came as a shock to many. Dr Raghuram Rajan, in his maiden monetary policy today, hiked the repo rate by 0.25% to 7.5%. Thankfully for us, it was an assurance of the fact that the sanity is not completely absent. True that it is sadly missing amongst other central bankers. However, it rests firmly on the incumbent RBI Governor's head. Meanwhile, the marginal hike to the repo rate will not do much to change the liquidity scenario. In fact, even the marginal breather in the overnight lending rate is just a temporary measure. However, a liquidity tightening mode will certainly arrest asset bubbles. Especially, given the possible inflow of cheap money into the economy in coming months.

02:35
 
Have you heard of the famous Bed of Procrustes, now also a book by Nassim Taleb? Well, it is a great mythical story passed down the ages to show how when we as humans face limits of knowledge, we interpret the world as we see it rather than describe the way it really is. A recent brokerage report by Citi has done just that. It has classified the risks facing the global economy into four broad categories whereas we believe that anything could topple the applecart. However, it does us no harm in trying to understand what these risks are. They are classified as geopolitical, political, policy related and economic.

While Syria and upcoming German elections are the focal point of the first two risks, the Fed tapering and possible Chinese slowdown take centre stage in the next two. Our view is that such reports do make for good reading. But they are seldom helpful in making long term investment decisions. Risks like the ones outlined are there all the time. And few years down the line even these would be replaced by something else. Thus, we would be better off focusing on individual companies and their competitive advantages and follow the dictum of being fearful when others are greedy and vice versa.

03:10
 
Stagflation. It is a paradoxical situation where inflation and stagnation co-exist. Stagflation is a vicious circle and getting out from it is very difficult. High inflation means that interest rates are required to be raised. However, raising rates means that economy will falter further as cost of capital increases. This renders monetary policy tools futile. In short, there is no tested medicine to get over this economic disease.

Now, the bad news is that India is perhaps in stagflation. Growth has reached sub 5-6% levels from 8-9% that prevailed in the past. On the other hand, inflation is rearing its ugly head. Consumer inflation is in double digits and is not subsiding. Rising fuel and vegetable prices means that the inflationary scenario is likely to persist in future as well. All these factors indicate that India is trapped in stagflation.

So, how does one get out of this trap? We feel that government should take steps to overcome supply side shocks that cause inflation. At the same time, in order to boost growth, government should also ease the way of doing business. Once bureaucracy reduces and business climate is healthy capex cycle will get a kick start. And this should help restore growth. If these steps are not taken immediately India may dig its feet deep into stagflation.

03:50
 
The fortunes of the auto industry are closely linked to that of the economy. And because the Indian economy has considerably slowed down, auto companies too are facing the brunt of the same. Indeed, most major players have seen a decline in volumes in most of the months in the recent past. Sluggish industrial growth, high inflation, firm interest rates and fuel prices have taken a toll on demand. Even heavy levels of discounting seen in some segments of the auto space have not done the trick in terms of bolstering demand.

Not surprisingly, auto ancillary players have been hard hit as well. And the falling rupee has made matters worse for them. Simply because it has not been easy for pass on the rise in costs to auto companies. Exports have remained tepid too. All this is in sharp contrast to fiscals FY10 and FY11 when volumes for the industry had surged as demand remained robust. The auto industry is typically cyclical and periods of boom are followed by periods of weakness. The scenario in the near term remains hazy. But the sector is banking on the good monsoons and the festival season to provide the much needed breather. However, from a longer term perspective the growth prospects still look good as the focus on ramping up road infrastructure increases.

04:30
 
In the meanwhile Indian stock markets are trading deep in the red. At the time of writing, the benchmark BSE-Sensex was down by 427 points (2.07%). Banking and Realty stocks were the biggest losers. Most of the Asian stock markets were trading lower led by Japan and Singapore. The European markets opened on a negative note.

04:45  Today's investing mantra
"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a mispriced bet - that they can occasionally find one."- Charlie Munger
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11 Responses to "Why we hate Warren Buffett, the economist!"

Kirandeep Atwal

Sep 28, 2013

Service sector in USA’s economy the biggest and average American spends huge portion of their earnings in buying services. The spending on essential items like food is very less. Therefore, inflation can only rise if cost of services rises. The cost of services will only rise when average wages starts increasing and there is no glut in labor market. At present, labor market is very weak.

One of mandate that fed controls is inflation. Therefore, I think, the fed will not raise interest rates until they clearly see huge inflation cropping up in the economy.

If you visit USA, you will see lot of highly qualified people working at fast food joints, wall-mart and as waiters. Read this article in businessweek: businessweek.com/articles/2013-09-26/fewer-jobless-women-more-dead-end-jobs . In India, with this kind of qualification, should would have become IAS or IFS officer. She is the topper from one of the renowned universities.

So, how do you say that Buffet is wrong? He is trying to protect highly intelligent people who belong to modest background. I know you will not post my comments because I am contradicting your views.

Like (1)

Kirandeep Atwal

Sep 28, 2013

Service sector in USA’s economy the biggest and average American spends huge portion of their earnings in buying services. The spending on essential items like food is very less. Therefore, inflation can only rise if cost of services rises. The cost of services will only rise when average wages starts increasing and there is no glut in labor market. At present, labor market is very weak.

One of mandate that fed controls is inflation. Therefore, I think, the fed will not raise interest rates until they clearly see huge inflation cropping up in the economy.

If you visit USA, you will see lot of highly qualified people working at fast food joints, wall-mart and as waiters. Read this article in businessweek: businessweek.com/articles/2013-09-26/fewer-jobless-women-more-dead-end-jobs . In India, with this kind of qualification, should would have become IAS or IFS officer. She is the topper from one of the renowned universities.

So, how do you say that Buffet is wrong? He is trying to protect highly intelligent people who belong to modest background.

Like (1)

D J K Varma

Sep 24, 2013

I do not agree with your view. Would be great to know if you were put in Bernake's shoes what would you do?

Like (1)

chandrasekaran

Sep 23, 2013

Fuel cost is endlessly growing day by day & the cost vehicles too moving upward, environment slowly loosing its health, commoners are hardly pulling their living with tiny strength & enormous effort, you people need your business only to grow by the cost of simple man`s hard earned labor money to purchase motor-cars & bikes with low interest rate loan, which is another vicious cycle for to get doomed.You do not have to feel bad on Stagflation but on detrimental business growth!!!!

Like (1)

nandish

Sep 23, 2013

we can see the most powerfull and well trained experts are given above in my point how many times they are failed in trading give us approximate range
fail percentange and passed percentage
how robots works

Like (1)

sunilkumar tejwani

Sep 21, 2013

for the obvious reasons: Warren Buffet has a vested interest in the stock market, any tapering off of Q E program would have resulted in a massive downfall in the stock exchanges, which would have brought down stock prices across the board.
That's why I utterly hate this man. I would like to see his comments if Dow Index plunges below 8K level.

Like (1)

Meet

Sep 21, 2013

Why does the author / writer "hate" Warren? The right word would be "disagree". Can we all be humble and loving? It costs nothing.

Like (1)

ramesh shah

Sep 20, 2013

I admire Mr Rajan's (RBI) bold move to raise Interest rates ,just as Mr Volcker dis in Us in 1979-1982, when US had 12%Inflation. It led to massive recession, but, removed "stagflation" and US had unprecedented growth(Inventiveness and lower prices from improved productivity without Govt meddling) for 25 yrs !!till ofcourse 2008 Financial crisis, Indian property costs need to come down sharply and this will "free" up Capital for productive Assets.

Like (1)

Saurabh

Sep 20, 2013

"If anything, Bernanke has been an absolute disaster as the central banker. Five years of unprecedented money pumping and the economy is nowhere close to recovery."

Absoulte disaster? Can you be a little more specific? What Obi Wan Bernanke has done has worked to a large extent. 2008, we were losing jobs at 600,000/month. Now we are adding roughly 200,000/month. Un-employment rates down from 2008. Corporate profits up. Post Lehman bankruptcy when credit markets seized up and we were staring down the abyss what would you do? Austerity?? Look what that did to EU. The so called effects of QE on other countries are due to their own fiscal/monetary policies/structural problems and not QE itself. Exiting QE would be hard, no doubt about it, and hindsight being 20/20 it would be a stretch to call Bernanke an absolute disaster.

Like (1)

Aneel maha

Sep 20, 2013

Fear psychosis had gripped the world about the consequences of USFED QE program.
You say correctly that the easing must cease and
pampering the beneficiaries should cease.
Your disagreement with Buffet is quire in order, and Bernanke should retire on his due date

Like (1)
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