Is China to blame for the global slowdown? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is China to blame for the global slowdown? 

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In this issue:
» Regulate capital movement, feels Soros
» Has capitalism failed us?
» Jim Rogers' bullishness on agri-products
» Gold prices may be in bubble territory
» ...and more!


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00:00
 
Do you know what is among the biggest economic abnormalities of our times? It is the ability of the US dollar to buy the same number of Chinese Yuan now as few months earlier. Isn't it shocking that a currency that has lost significant value against all the major currencies of the world has not moved one bit against the currency of a country that not only has a amongst the biggest trade surplus with the US but also has the largest forex reserves in the world. Blame it on the Chinese policy of maintaining a fixed exchange rate policy vis-à-vis the dollar.

If George Soros, world's top currency speculator is to be believed, it is the artificial undervaluation of the Chinese currency that is dragging down the US GDP growth and in turn, the world GDP growth. Infact, Soros is of the opinion that the entire globalisation of financial markets was built on a 'false pretence' that markets could be self-regulating. However, nothing could be further from the truth. He believes that the current currency arrangements are dangerous and should be contained by global regulation. In other words, there should be some sort of global regulation for the financial markets. Interestingly, his views echo that of many other experts who believe that it is time stringent regulations are put in place to prevent a similar catastrophe in the future.

00:42  Chart of the day
Today's chart of the day denotes the appreciation of the world's major currencies against the US dollar in the past one year. The Australian dollar is way ahead of the pack, rising by as much as 32%. The country's relatively high interest rates and its commodity driven economy made it a preferred diversification play. Also, the interest in the country further increased when it recently became the first G20 nation to hike interest rates after they were lowered across the world to tackle the credit crunch. The rupee has not done badly for itself, rising by 8% as India attracted record capital inflows from investors looking to cash in on the country's growth story. Others like the Euro and the Yen also witnessed strong appreciation.

Source: The Economist (+ve sign denotes appreciation of currencies)

01:26
 
"No success or achievement in material terms is worthwhile unless it serves the needs or interest of the country and its people and is achieved by fair and honest means". This wonderful quote by the late JRD Tata has been sent to us by one of our readers. The timing couldn't have been better. It has come at a time when one of India's biggest industrial hubs in Gurgaon is simmering with tension over the death of a worker killed in police firing during an agitation. About 8,000 workers have walked off their jobs, making it one of the largest turnouts after a long, long time. What is the connection between JRD Tata and these agitating workers you would say?

Apparently, the revolt has not just to do with the death of a colleague. It is something far deeper. It is an expression of discontent and dissatisfaction of the workers towards the management who seem to be reluctant to share the benefits that a strong recovery has brought to the auto sector. We don't know whether the workers' demands are justified or not but the increasing frequency with which these incidences are occurring does give enough reasons for worry. And it's not just in India that allegations of disproportionate distribution of rewards have come to the fore. The privatization of profits and the socialization of losses in the US banking sector are also giving its policymakers sleepless nights. So, the question that begs itself is, 'Has capitalism failed us?' Certainly not. It is in the nature of capitalism that rewards are going to be disproportionate but if we stick closely to the principles laid down by the late JRD Tata, we could avoid a lot of the current malaise that's afflicted our society.

02:19
 
When the price of an asset class goes through the roof, it always helps to step back and put things in perspective. And if there's one asset that deserves this kind of scrutiny in recent times, it's the yellow metal gold. Indeed, gold has been on a sustained rise in the past few years and is creating new price records with constant regularity these days. But is the rally sustainable? Maybe not if a few experts are to be believed. According to Moneynews, fundamentals for gold do not seem to support the current lofty prices. Fortune, a popular magazine has reported that gold mines have invested US$ 40 bn into new projects since 2001, a sign that supply will rise. Also, fear of a collapse in the financial markets had led some hedge fund traders to bid up the price of gold to record levels. However, with some companies reporting strong earnings numbers, even this fear seems to have subsided.

Some people have gone to the extent of questioning the long term track record of the yellow metal. And there could be some merit in their argument. People who would have invested in gold at its previous peak in 1980 would require it go to US$ 2,312 per ounce (approx Rs 32,000 per 10 gms) just to stay even with inflation. The answer to whether a similar fate awaits investors who would buy into the yellow metal at current levels cannot be given with a great degree of certainty. Hence, it is advisable to invest in gold in a staggered manner and also not keep a large portion of one's savings in it. No doubt it's a good hedge against inflation but if the economy recovers, there could be better options around like stocks and other commodities.

03:13
 
India has seen a spate of insider trading scams of different proportions for a long many years now. Several promoters and other insiders have indulged in unlawful practices in buying/selling their holdings just before important events that later impacted their share prices. Minority investors were then left high and dry, especially when insiders sold their shares before a negative event that led to a crash in the company's stock. Interestingly, all this has happened even when regulations prohibiting insider trading were among the first to be issued after the SEBI (Securities & Exchange Board of India) was set up as an independent stock market regulator in 1988.

Yet, even while the SEBI has been attempting to crack down on insider trading, it has met with limited success. However, all blame must not lie on the SEBI alone. This is given that insiders can go undetected, if purchases or sales are made in some friend's of relative's name and are of a small number. In such an instance, the best way to protect them from bad insiders is to invest only in companies that have honest and trustworthy promoters and/or managements. While it is difficult to assess the real intentions of even some good management, one can take a leaf from history and see how they (managements) have acted across different business and stock market cycles.

03:56
 
You can live without buying stocks and gold. But you will risk your survival by not buying this. It is not surprising that the legendry commodity guru Jim Rogers is very bullish on agri-products due to their acute shortage in the offing. Mr Rogers believes that the short supply of food crops may last for many years as no one is bringing new supply on stream. Infact in an interview to Bloomberg, Mr Rogers said that he believes that the world is going to have a period when one will not get food at any price in some parts of the world. More particularly, he expects rice and cotton prices to soar in the coming decade as prices of agricultural commodities boom because of declining inventories and production disruptions. While unpredictable weather, water shortage and insufficient inventory storage are likely to disrupt production, a greater demand for food crops is very unlikely to be met in the coming decade.

Further, it is believed that world food production will face increasing competition from the biofuel market which has the potential to change the fundamentals of agricultural market. With biofuel production set to climb by almost 90% over the next 10 years to reach 192 bn liters by 2018, farmers are expected to switch cultivation of foodcrops other than corn. Global agriculture will also have to cope with the effects of climate change, notably higher temperatures, greater rainfall variability and more frequent extreme weather events such as floods and droughts. Thus, prices of agricultural commodities may be the key indicator to watch out for an outlook on inflation as well as investments.

04:47
 
Meanwhile, exhibiting significant volatility, the benchmark indices were trading slightly in the negative at the time of writing. Tech bluechips however, were seen bucking the trend. Amongst global indices, while Asia closed weak today, European indices have also opened on a weak note.

04:55  Today's investing mantra
"If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall." - Warren Buffett
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7 Responses to "Is China to blame for the global slowdown?"

vasudha

Nov 5, 2009

ur wrapupsr amazing...they just add grist to the mill for anyone who wanna analyze things in a better manner..

Like 

Agnes

Oct 23, 2009

Teach a good lessonno education, discipline.Robbed all my property and PCs since 20 months by USA Google internet Women dirt Robber

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KBR PRASAD

Oct 23, 2009

the information is very useful while entering into the
equity and gold purchases and also a light to understand

Like 

M.S. Rajasekaran

Oct 21, 2009

Re: Auto employees strike at Gurgaon
There should be New National Wage Policy for industrial workers, that should have a mandatory fixed minimum, and variable average based on the productivity and profit, after providing a reasonable return on investment of stake holders.This will take care of the requirements of all without bad blood at all times.Employees' unions should also agree to such a policy to ensure growth with consolidation in an atmosphere of everlasting industrial peace and make Shri JRD Tata's words getting translated into a reality.

Like 

MURALIKRISHNAN K

Oct 21, 2009

spate of insider trading scams
THE SCAMSTERS ARE NOT PROPERLY PUNISHED BY THE LAW - THEY ARE ONLY PENALISED - PROFITED MONEY AT THE MAXIMUM IS THE PENALTY - ELSE THEIR LICENCES CANCELLED, IN WHICH CASE THEY ACT WITH SOME OTHER NAME - ARE THEY NOT ECONOMIC OFFENDERS AFFECTING THE SOCIETY? SHOULD THEY NOT BE IMPRISONED FOR LONG PERIODS?

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Peush Prabhakar

Oct 21, 2009

that's cool stuff this surely will help me understand the mechanism of economic downturn better!!! keep sending them as they create delight..

Like 

P.V.Ranganathan

Oct 21, 2009

Is there any MF for Platinum like GOLD ETFs?

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