In this issue:
» US does not mind its growing deficit
» ING comes to ING's rescue
» OPEC likely to cut crude output
» The Diwali bonanza
» ...and more!
The Cold War largely between the US and Russia (then the USSR) and their respective allies lasted for a considerable part of the twentieth century. While the former was an advocate of capitalism, the latter embraced communism. Economic deterioration led to the collapse of the USSR thereby ensuring the US the status of being the sole superpower in the world.
|| Turning into socialists?
While the US has prided itself on its free market policies and minimal government intervention, the financial turmoil that began a year ago has definitely put the tenets of capitalism into question. This is especially so when the government has had to step in and assume part control in the financial institutions to prevent them from collapsing.
While the Americans have termed this as 'nationalisation', shuddering to call themselves socialists, we wonder whether labeling themselves conveniently can really hide the stark reality?
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The ever expanding US deficit has been a well documented fact. Now it seems that in the present scenario, the US does not mind if this deficit widens further. And widen it definitely will with the gargantuan bailout package that the country has announced to pull out the financial system from the brink of a collapse. The fact that as the economy slows, tax revenues are expected to dip is only expected to worsen the problem further. Plus, the US' war in Iraq and Afghanistan is only adding to the strain on the government's finances.
|| US does not mind its growing deficit
While the US acknowledges this, its focus on bailing out the troubled financial system is so great that it considers the widening of the deficit as lesser of the two evils and is therefore ready to compromise on this front in a bid to keep the economy from replicating the Great Depression era.
The deficit in the current fiscal year is expected to balloon to US$ 700 bn, up by more than 50% from the previous year. One assumption that the US is banking heavily on is the fact that despite the swelling deficit, people all over the world are still willing to lend to the US as they are confident that the country will not default on its obligations however trying the conditions may be. But if the Americans think that they can keep the deficit issue permanently on the backburner, they will have to think again as this problem is most likely to resurface once the economy recovers. For the time being, however, curtailing the deficit is certainly not the top most priority.
The past one month has been witness to high octane drama globally and in India. The financial institutions the world over are in a crisis, global economies are slowing and job and pay cuts seem to be the order of the day. In such a scenario, many people are just happy to go to office the next day and realise that they still have their job.
However, employees in India have something more to look forward too - namely the lucrative Diwali bonuses. The tumbling Sensex, erosion in investor wealth and moderate growth in corporate profits have failed to dampen the festive spirit of companies who 'have lined up lip-smacking pay outs and gifts for their workforce'.
At times such as these does such a move make sense? If a company has to absolutely cut down on its costs, then doing away with bonuses seems to be the more logical thing to do than blindly axing people and then reinstating them the way a leading company did last week. But if companies are still reporting good numbers, what is to stop them from rewarding its employees? Absolutely nothing!
Indian parents are a proud lot these days. This is because they are seeing their wards earn in a year what probably took them the whole lifetime to do so. After all, economic liberalisation has set off an unprecedented prosperity boom and hence, they deserve every bit of the money they earn. In fact, salaries at the executive level have grown the fastest in India in the last few years. However, there is a catch here.
|| Not inclusive enough
Although economic growth has helped salary levels, a part of the rise has also come at the expense of the poor. This sad truth came to light recently in a report by the ILO (International Labour Organisation), which has painted a grim picture of the overall wage scenario in India. As per the report, India has witnessed a mere 1% hike in wages against a 5% growth in productivity during the last two decades.
What has further rubbed salt into India's wounds is the fact that China, a country not really known for its human rights has fared far better than India. Thus, while there is a lot to cheer for the country as far as executive level salaries are concerned, benefits of economic growth need to be far more inclusive. Looks like we are sitting on a fast ticking social bomb.
The OPEC (supplier of more than 40% of the world's oil) rejoiced when crude prices soared to US$ 147 a barrel in July. The organisation is now faced with the prospect of falling prices as the global economies slow down. As per reports on Bloomberg, it plans to cut output for the first time in two years given that oil is expected to hurtle towards the US$ 50 a barrel mark as countries sink into recession and demand further cools down. Oil receding further was amply demonstrated by the fact that options contracts to sell oil at US$ 50 by December soared 50-fold in the past two weeks.
|| OPEC contemplates cut in crude output
While falling oil prices takes the heat off economies and helps in some measure to arrest the rise in inflation, the OPEC nations are not enthused given that their economic growth engine depends upon crude prices staying high. In fact, the growth of some nations such as Iran and Venezuela, whose earnings largely come from oil exports, will need oil to remain at US$ 80 a barrel if they want to sustain growth. Further, ING Bank estimates that GDP of the six countries which are a part of the Gulf Cooperation Council (GCC) will slump 25% if oil hovers around US$ 50 a barrel. However, while the intention to cut prices has been stated, the extent of the same has yet to be determined.
Concerns over the global economic slowdown have driven the price of oil down. However interestingly, prices of consumer products (like beer, toothpaste, cereal and the like) are in no mood to follow suit immediately. This has been attributed to what is known as 'sticky' prices. This means that even if the rationale for the hike in prices is no longer evident, companies still do not go in for price cuts. Thus, while companies in the US will be able to earn decent profit margins, consumers are not likely to see an easing of their grocery bill anytime soon.
|| Oil is down. But what about food?
And in the current scenario, companies are more interested in what their competitors are doing rather than have a look at the cost of the ingredients. No company wants to be the first one to go in for price hikes lest consumers flock to their competitors. Similarly, no company wants to take the initiative to cut prices to reflect the falling input costs as this is likely to escalate into a price war. A 'sticky' issue indeed and one where the consumer is definitely at the receiving end.
Leaving the 'Nano' controversy aside, Rata Tata has made the headlines for another reason and a positive one at that. As reported in a leading business daily, Mr. Tata has gifted US$ 50 m to his alma mater Cornell University, New York to help recruit top Indian students for the purpose of supporting joint research projects with Indian universities in the fields of agriculture and nutrition.
|| Ratan Tata's generosity
Given that getting an entry into Cornell may be daunting in terms of the fees to be paid, this endowment will be used to set up a scholarship fund to attract more Indian students to the university. This could be a positive for India in the longer term especially if this move helps in significantly contributing to advances in agriculture, an important component of India's GDP. But only if these scholars turn back to India after receiving their degrees!
Yesterday we had written about our concerns with regard to the poor capital adequacy ratio (CAR) of ING Vysya Bank and the parent's (ING Bank NV) possible inability to fund the same. The concerns were primarily based on the fact that the parent entity is itself seeking financial bailout from the Netherlands government.
|| ING to ING's rescue
Also, the RBI in recent times has been very strict with banks failing to stay above the minimum CAR (9%) requirement and ING Vysya is close to breaching the same. The concerns however seem to have been addressed.
As per a press note released today, ING Bank N.V. will be investing Rs 945 m in ING Vysya Bank, by way of perpetual bonds. This will also have a call option at the end of 10 years. The same will shore up ING Vysya Bank's CAR enabling it to sustain growth in the medium term.
While Asian indices closed mixed, European stocks traded higher today as there was widespread optimism that governments will expand efforts to bolster economic growth. The BSE-Sensex closed 4.5% higher. Crude, however, advanced by 1% to US$ 75.7 a barrel prompted by the fact that the OPEC is likely to cut crude output to arrest the decline in price.
|| In the meanwhile...
Gold rose by 1% to US$ 803.6 an ounce as the price of the yellow metal below the US$ 800 mark lured investors. Besides this, demand for the metal as a hedge against inflation also rose given the increase in crude prices. Meanwhile, the Fed chairman Ben Bernanke has given his support for a second round of financial stimulus to the economy. This led to the dollar strengthening for a fifth day against the Euro.
"Time is the friend of the wonderful company, the enemy of the mediocre" - Warren Buffett
|| Today's investing mantra