A Golden Opportunity
(Oct 23, 2008)
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In this issue:
Given the expectation of high inflation, cash is one of the least desirable assets to hold right now. "If we're right about inflation, you might want to buy some gold at today's low prices", says Bill Bonner. He adds, "We don't know where the price of gold is going. But we know what we'll be doing if it goes to US$ 650; we will be buying more." And guess what, gold prices have hit US$ 709 an ounce as we write.
» Golden opportunity to buy gold?
» Anand in Sanand while sadness in Singur
» Volker's mantra for rebuilding the system
» Hedging crisis for corporates
» ...and more!!
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Nano has moved out of Singur and with it, the hopes of landowners in and around Singur. As per reports, real estate prices have come crashing down in this town of the state of West Bengal on account of pullout of the project. A handful of brokers that had cornered a huge chunk of land and had rode the wave of prosperity over the past of couple of years are now finding it hard to sell the same even at vastly reduced prices. This has however proved to be a blessing in disguise for people owning land near Sanand in Gujarat, the new home of the project. Despite lying on the outskirts of the city of Ahmedabad, where real estate has taken a real beating, some brokers are hopeful that the relocation of the plant would give a much-needed boost to the real estate scenario even in the heart of the city. This is indeed a testimony to how one big thing could lead to another. Some politicians in West Bengal however chose to go the other way.
||Anand in Sanand while sadness in Singur
With financial, technology and aviation companies choosing to streamline their employee base with their tempered business prospects, the employment scenario has witnessed a significant debacle in India. Even fresh graduates from technical and business schools are anticipating a lukewarm placement season. While the problem of poor employment prospects is a huge psychological dampener for a growing economy like ours, the problems that come along with it are bigger and can grow manifold.
||Unemployment - Not a problem in isolation
While growth in average disposable income is directly related to the growth in employment levels, even savings and investment levels bear the consequence of lack of employment opportunities. This is particularly so when incremental savings dip and individuals have to dig into their past savings to sustain their livelihood. The problem can exacerbate if the individuals are leveraged and have debt to repay from their past earnings.
This can at times also cause social and psychological distress as has been witnessed in several occasions over the past few months. While companies can do little to avoid such discomfiture during economic downturn, probably individuals themselves need to guard themselves more prudently against such casualties.
The rupee's sharp move against the US dollar in the past 12 months has made it not just difficult but nearly impossible for corporates to hedge their revenues and foreign currency borrowings. While exporters have seen their fortunes change several times in the past few months, even companies that are not exposed to the foreign markets for their sales operations, have borne the brunt of losses if they have borrowings denominated in foreign currency.
||Hedging crisis for corporates
The already shrinking margins of corporates have had to bear the further impact of such unpredictability. Corporates may soon choose to keep their receivables and payables in open positions (unhedged), if the whole effort of hedging continues to remain futile.
Paul Volcker, the former Chairman of the US Federal Reserve, is of the view that the US is in an 'unprecedented' financial crisis. And his mantra to repair the same - rebuild the banking system. Another noted economist, Joseph Stiglitz has opined that the economic downturn in the US is unlikely to be as bad as the Great Depression of the 1930s. However, he believes that this is likely to be long drawn and 'probably the worst in a quarter century'.
||Volcker's mantra for rebuilding the system
In a recent speech and as reported on Bloomberg, Volcker has said that moral hazard* is what he is most circumspect about. He says, "People will come to expect bailouts and take undo risk. People will assume they'll be protected in the future. I don't think regulation is the answer to all problems. It's important to come up with rules that won't make the government too intrusive."
*As defined on Wikipedia, "Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his or her car, because the negative consequences of automobile theft are (partially) borne by the insurance company."
The Indian markets opened weak today, made a comeback during the mid session but capitulated thereafter. The US Dow Jones Index closed yesterday with yet another record loss (of over 500 points). Fears of a worldwide recession caused the BSE-Sensex to drop 700 points at one point in the trading session. Asian markets, taking cues from the US, closed deep in the red. Benchmark indices in Korea (down 7%), India and China (down 4% each) closed lower.
||In the meanwhile...
The International Monetary Fund (IMF), once a saviour to economies in distress, but then relegated to being an onlooker, is suddenly being called back into action. As the list of troubled countries grows, the list of places they can seek help has not.
||Sovereign funds-Vehicle for financial bailout?
The IMF is nearing agreements to make emergency loans to Iceland and Ukraine, and discussing aid packages with Pakistan and Hungary. Probably we would not like to forget that it was the IMF that came to India's rescue when we faced the currency crisis back in 1991. However back then, the conditions attached to the bailout were much stricter than those today. It is thus being debated whether the IMF is still the best recourse for bailout for economies where the government cannot fund the same.
The US and Western Europe are in the middle of their own costly financial bailouts. While huge sovereign wealth funds (SWFs) have sprung up in the Middle East and Asia (read China), economists say borrowing from them could prove more painful than borrowing from the IMF. The beleaguered Iceland, for example will borrow from the fund but also supplement that with packages from Russia, Norway and Japan.
The SWFs are government-owned funds set up by the world's leading exporters. Until now China, Japan and other exporting superpowers, along with the big oil exporters in the Persian Gulf, were content to keep most of their trillions of dollars of reserves in safe investments like bank deposits and US Treasury bonds. That is no longer the case.
Increasingly they are channeling investments into the private sectors of other countries to fetch a higher return. With their huge asset base, the government investors can afford to diversify and pursue riskier opportunities. These SWFs are therefore increasingly being approached to bailout distressed economies. However, given that their fundamental structure is not autonomous, unlike the IMF, there are risks attached to the same.
India has been making its mark on the world stage in recent times. While the headlines cover the nuclear deal and international acquisitions by corporate India, one of India's rapidly growing exports is its culture and popular art.
||Some sparkle amidst the stock market gloom
Princess Victoria, heir apparent to the throne of Sweden, makes a trip to a different country every year. She has chosen India as her destination this year. On her maiden visit to the country, the one thing that the Princess could not talk enough about was the traditional and folk dances of India. She is also supposedly a great admirer of movie Taare Zameen Par. In fact, the Swedish royalty invited the movie's director, Aamir Khan for dinner during her visit to Mumbai recently.
So, while the term 'Saare Zameen Par' is sometimes used to describe the market turmoil, the movie Taare Zameen Par continues to provide a reason for us to smile.
"Even a very indefinite idea of the intrinsic value may still justify a conclusion if the current price falls far outside either the maximum or minimum appraisal" - Benjamin Graham.
|| Today's investing mantra
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