Does this mark the arrival of next crisis? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Does this mark the arrival of next crisis? 

A  A  A
In this issue:
» What's up with European stability fund?
» Power sector threat to Indian banking system
» Who will China prove correct? A bull or a bear
» US' standard of living undergoing a major transformation
» ...and more!

----------------------------- Don't Miss! Best of The Daily Reckoning... -----------------------------

We are proud to present an exclusive publication - The Guide to Gold, a compilation of Bill's most popular articles on Gold.

Join Bill as he discusses the past, present and most importantly, the future of Gold as an investment opportunity. And find out if Gold is still the best bet for you...

Quick! Sign Up Right Away & Get this guide FREE!

---------------------------------------------------------------------------------------

00:00
 
How does the world view India's central bank? An idea can be had from a statement made by the famous economist and Nobel laureate Joseph Stiglitz. He once commented that if the US had a central banker like Mr Y V Reddy, the country wouldn't have gotten into so much trouble in the first place. While Stiglitz must be commenting upon a certain Mr Reddy, we believe that most Indian central bankers, past as well as present, have discharged their duties with equal honour and integrity. There is no surprise then that while some or the other financial crises have gripped most big nations in the past, India has managed to escape relatively unhurt.

Thus, in view of Reserve Bank of India's (RBI) stellar reputation on risk management, any warning from its side cannot be taken lightly. One such statement of caution was given by one of the bank's executive directors to a gathering in Singapore recently. The gentleman in question has warned that there is yet again a huge under-pricing of risks in the financial system. Hence, as per him, it is not a question of if but when the generic asset bubbles caused by a multi fold increase in balance sheets of central banks will burst.

And where does he come from? Well, the RBI director is of the view that balance sheets of major banks have grown by almost three times from pre-2007 levels and near-zero policy rates have added US$ 4 trillion to the central bank liquidity. Thus, the asset bubbles that have been built across the world on account of such a huge cache of surplus liquidity are all but guaranteed to burst.

Of course, no one can know for sure when the bubble will burst. But as Buffett says, predicting rain does not count, building the ark does. And the investing ark should be built by nothing else but businesses that are not at the mercy of low interest rate money but have pricing power and the ability to grow by relying entirely on internal accruals. If bought at reasonable prices, no matter how hard the downpour, the ark made of such investments will always protect and even enhance your wealth.

Do you think the global asset bubble will burst eventually or there exists hardly any bubble at all presently? Share your views with us or you can also comment on our Facebook page

01:21  Chart of the day
 
Most of us know that India is one of the biggest consumers of gold in the world. But does the country have a similar standing when it comes to the production of the yellow metal? Certainly not. As today's chart of the day shows, as per data collected by the British Geological Survey, India stands nowhere as compared to the largest producers of gold in the world. At a little more than 2,000 tonnes of gold, its production absolutely pales in comparison to the largest producers like China and the US. Little wonder, it has to satisfy the needs of its gold consumers by resorting to large scale imports.

Source: British Geological Survey, Rediff.com

01:54
 
China's role in the global economy has mounted significantly in the last few years, especially after the global financial crisis has made the developed economies bed-ridden. So, the most important question currently in the mind of the global economy is: What's going to become of China?

Asking the question was an easy task. But getting an answer is anything but easy. For China is a huge emerging economy with very diverse regional economies. Add to that the communist party's love for secrecy. All these factors make China seem extremely capricious, so much so that people change their views on China in a matter of few weeks. There are economists who believe China is gearing towards some short-term pain while in the long term China will lead the global economy. Then there are those who believe that China could save its face in the short term by pumping up its economy through monetary or fiscal stimuli. But 2 to 3 years from now, China is set for a hard landing. The years of high growth and low inflation would be passe. It seems that both bulls and bears could be right about China. But only time will tell whose timing was right.

02:35
 
The latest suggestion by the Eurozone members is to allow the risky countries to issue bonds to bail themselves out of trouble. The guarantee for these bonds would be by them borrowing 20% of the bond value from the EFSF (European Financial Stability Fund). This way in case of a default on the bonds issued by the borrowing country, the lender will be compensated by the 'guarantee' that would be held by the EFSF.

As confusing as this process sounds, it is actually very simple at heart. What the Eurozone is suggesting is that they solve the problem of debt through more debt. This process would help the risky countries that are on the brink of a default appear risk free as they have the 'guarantee' of the EFSF borrowing. So the new debt now acts as a guarantee instead of a risk. We really wonder when these policymakers would understand that hiding behind fancy words would really not solve the problem. The only way to solve the problem of debt is to pay it back and reduce it. Not create more of it.

03:15
 
Is the power sector emerging as the biggest threat to the stability of India's banking system? Policy inaction, lack of coal linkages and financial distress of select State Electricity Boards (SEBs) have brought the fortunes of the otherwise high potential sector to its knees. However, it is the 70:30 debt to equity financial structure of power projects that is most worrying. With several new capacities coming up, banks are worried that the power producers may not be able to service the loans if fuel scarcity affects utilization rates. Also, lack of recovery from SEBs may put the power producers' finances in distress.

Having said that we do not think that the power sector is in the same condition as the steel and cement companies were in the late 90s. Neither is the sector in a state of overcapacity, nor are its problems incorrigible. Re-pricing of tariffs and coal mining rights to power producers can solve most of the problem. Also, increased private sector participation in electricity distribution will go a long way in making the sector more economically resilient. We do not think that the sector will heap NPAs on banks unless the government keeps sleeping on policy reforms for a very long time.

03:57
 
The standard of living for US citizens has fallen longer and sharper over the past 3 years than at any time since the government began recording it 50 years ago. Americans now have US$ 1,315 less disposable income than they did at the onset of the financial crisis. People are spending money on just the necessities. So what has led to this dramatic drop in the US standard of living which is the worst since the 1960s? Real income is down almost 10% since the start of the recession till June 2011. Another reason is falling net worth. Real estate investments and even retirement funds have all tanked in value. A third reason is rising consumer price inflation. This has eroded people's buying power by 3.25% since mid-2008. All in all, this means that the American economy is less vibrant. The spending giant is cutting back. And this is having repercussions across the world. Even emerging markets like China and India are seeing a slowdown. Plus the middle class in America are becoming more and more restless and disillusioned. Movements like 'Occupy Wall Street' are becoming ways for them to showcase their frustrations. Living the American dream is now becoming harder with each passing day.

04:39
 
Meanwhile, indices in the Indian stock market seemed well on their way to giving up almost all the gains from yesterday and in fact, some more. At the time of writing, the Sensex was down in the region of 320 points, with heavyweights like HDFC and ICICI Bank putting the maximum pressure. While nearly every Asian index is bathing in a sea of red, Europe too seems to head down the same path.

04:55  Today's investing mantra
"As I grow older, I pay less attention to what men say. I just watch what they do." - Andrew Carnegie
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "Does this mark the arrival of next crisis?". Click here!

2 Responses to "Does this mark the arrival of next crisis?"

Som Nanda

Oct 21, 2011

Hi,

I completely agree with Parag. Always some economics like PIIGS pull down all the goods done by others. Anyways, I belive the initial stage of individual conuntries in the Europe region was a better idea than the Union system. Atleast the problems were curtailed and isolated to these countries and don't spread to rest of the zone.

Thanks

Like 

Parag

Oct 20, 2011

Euro Crisis: Sovereign problem; corporate solution

European Monetary Union is in crisis.
Greece is likely to default on its monetary commitments.
There is talk of kicking Greece out of the European Union (EU).
Greece has PIIGS for company (Portugal, Italy, Ireland, Greece & Spain). All have weak Sovereign finances.
It is believed that if Greece becomes independent of EU it could devaluate itself out of its problems.
But this surgical treatment has many side effects.
Once Greece is out, Currency speculators will cause havoc with the other PIIGS. It would kick-start a contagion in Europe. The treatment may itself turn into a disease.

The suggestion proposed is similar to corporate restructuring / Split.
Split Euro into two.
Euro (S): representing strong countries like Germany, France and others, and
Euro (W): representing weak PIIGS.

Euro (W) will gradually devaluate itself and come out of its problems. The union will have sufficient size to take the currency speculators head on. And it will be a full and final solution, unlike the piece meal breakup of each country.

A corporate example to a similar exercise is the split of Reliance Industries into
RIL and
R. Com, RNRL etc.

Like 
  
Equitymaster requests your view! Post a comment on "Does this mark the arrival of next crisis?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407