From 'super powers' to 'colossal mess' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

From 'super powers' to 'colossal mess' 

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In this issue:
» Is this the key propeller for India's GDP?
» Is the Redback finally here?
» Why authentic delivery systems are important
» Fortunes of commercial real estate to improve?
» ...and more!

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It has been five years now since the global financial crisis and the US and Europe are nowhere closer to a recovery. The US has amassed massive debt. Same is the case with Europe where the debt burdens of certain countries have reached such alarming levels so as to bring them to the edge of bankruptcy. The central banks in both these regions have not done much to stir growth other than announce more and more stimulus measures. These have not yielded the benefits desired but have instead piled on to the debt, and raised the issue of higher inflation and paper currencies losing value. Meanwhile, economic growth has continued to stagnate with no respite seen either in job growth or consumption.

Is this a cause for alarm? Will we see a better US and Europe say 5-10 years from now? It all depends on what these countries do to cut debt. Marc Faber, author of the Gloom, Boom & Doom report opines that the US and other industrialized nations are on track to a "colossal mess" due to their inability to pay down their growing debt burdens. Most of the government efforts have been rather shortsighted and what these countries need to do is seriously lower long-term debt burdens and narrow gaping fiscal deficits. Indeed, things cannot remain in the same state they are in now. There is bound to be a major change that will take place going forward. This will happen either in a peaceful fashion through reforms or in a violent manner through revolutions.

There have not been any visible signs of a revolution taking place in the industrialized nations. But if things are allowed to remain in a state of limbo with no pathway for improvement, a revolution could just be around the corner. The recent Arab uprisings have been a classic example of what dictatorial regimes, lack of meaningful growth and rising unemployment can do.

So unless the US and Europe governments come out with meaningful solutions to their problems which does not involve more money printing, they could very well be headed for a disaster. This then is bound to have repercussions on the global economy including emerging countries as well.

Do you think the economic environment in the US and Europe will be worse in 5-10 years going forward compare to what it is now? Share your views or you can also comment on Facebook page / Google+ page

01:36  Chart of the day
That female employment in the developing economies has not caught up with that of the developed world is a fact well known. But what will happen if the environment changes and female employment rates match that of male rates? As today's chart of the day shows, India will see the fastest growth in GDP by 2020 if that happens. Indeed, the Economist points out that in the next decade nearly 1 bn women are likely to enter the global labour force. So there is large economic potential to be tapped. But will such a change pan out in India? Only time will tell.

Data Source: The Economist

Move over Greenback, the Redback is finally here. Or is it? The Economist has published an article on how the Yuan is slowly but steadily displacing the dollar as a key currency. It observes that a number of East Asian currencies do not move in sync with dollar as strongly as they did during the pre-crisis years. Instead, their co-relation with the Yuan has become better than the US dollar.

But is this a correct assessment to make? Especially when the Yuan itself is not freely floating and is pegged to the dollar. The magazine does think so. It argues that the Yuan now moves independently enough to carry out an exercise of this sort. Does this mean that the days of US dollar as the world's reserve currency are pretty much numbered now? Not so soon as far as we are concerned. Outside of East Asia, there is hardly any trace of the Yuan. Besides China has its own internal problem to solve. Thus, it would be risky to place one's bet on currency of any sort. As we have seen, the dynamics are pretty tough to wrap one's head around. Hence gold is likely to be one's best bet over the long term.

After fake voter ID cards, fake ration cards, here come fake UID cards! The Unique Identification (UID) cards, popularly known as Aadhaar cards, were conceived to be the poor man's visa to economic independence. Right from payment for NREGS, to banking facilities to subsidy payments were supposed to be backed by this single ID. The concept no doubt makes a lot of sense given the economic divide and multiplicity of paper work for welfare schemes. Moreover, with gross under penetration of financial services, offering aid in cash is vulnerable to corruption.

But make no mistake. Corruption is as deep rooted in our country as is poverty. And even though UID cards are yet to make an impact on India's economic divide, corruption has already impacted their authenticity. Instance of fake UID cards being issued in Bangalore has brought to light an important learning. That the government should get an authentic delivery mechanism in place for subsidy payments. The direct cash transfer programme for food and fuel subsidies can be a welcome relief for both the government and the poor. But if executed badly, precious government funds may find their way into the wrong pockets. After the spate of scams that have been unearthed recently, the government would do well to rather be careful about this one.

The recent spate of policy of announcements has brought in some goodies for the real estate sector. Especially the announcement relating to foreign direct investment in the multi brand retail. Because of the proposed move, leasing is expected to bounce back by 20-25% in the next calendar year. And the absorption levels are expected to touch 36-37 million square feet (m sq ft). Absorption level/rate is the pace at which homes/area is sold off in a given time period.

Apart from the policy move, improvement in market conditions also point towards a revival. For instance, the absorption levels during the first 3 quarters of the calendar year have increased sequentially. Also, once the global economy recovers, outsourcing will gain further prominence. As such, the demand for office space would pick up. Revival in the banking and IT sector will also spruce up the commercial real estate lending market. Thus, overall, there are signs that the momentum in the next calendar year is likely to pick up.

The economy has seen a slowdown. Most of the sectors are facing the heat. As a result, it would be natural for employment to see a slowdown too. But this has not really reflected in the employment index which has shot up. However this was just the year's recent quarter trend. Compared to last year, the job market has shrunk. As per a leading daily, the job market has gone down by nearly 20%.

The slowdown is interestingly not due to a hiring freeze in the companies as was seen in 2008. In fact this time around it is purely on account of selective hiring. Given the depressed macroeconomic conditions, companies are careful about whom they pick up. They wish to only go for those people who they think will add to the overall growth of the company. It is no longer about quantity but about quality. However, given the usual cyclicality in the market, the jobs should revive eventually. With reforms being announced, business activity is expected to pick up. And this will drive employment as well. But when would this happen? One cannot really say.

The Indian equity markets were trading weak at the time of writing, with the BSE-Sensex down by about 80 points or 0.4%. While select heavyweights from the capital goods and realty spaces led their respective indices to trade firm, most of the other sectoral indices were trading weak led by the auto, information technology and FMCG sectors. Stock markets in other major Asian economies ended on a relatively positive note with Japan and Hong Kong ending higher by about 0.04% and 0.7% respectively.

04:56  Today's Investing Mantra
"People calculate too much and think too little." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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3 Responses to "From 'super powers' to 'colossal mess'"


Oct 24, 2012

Present day world lack people of vision and noble mission to serve. Every leader worth any name are after quick buck or sticking to the seat of power as long as possible. Therefore all they can think and do is only do is short sighted decision doing more harm than solving the problem. I will not bell the cat let somebody do it. As long as I am there, where I am, let me the good boy. It is very sad and due to this short sightedness the divide of the rich and poor is going wider and wider.
History tells us that every revolution has created a new series of rich and not equality or fair distribution of wealth and overall welfare of the nation.


sunilkumar tejwani

Oct 23, 2012

The U.S. of A dominance over the world is slowly but steadily waning, and the day is not far when it's hegemony over the world politics will come to an end.
It's vested interest politics to meat it's own financial mess is an open secret. What it has to learn is to stop printing fiat money and stop meddling in other countries'
internal matters. And a final advise: stop non sense on the Wall street.


Biraja Shankar Hota

Oct 23, 2012

The US and European economy may move from bad to worse, but do not expect that they will ever be overtaken by 21st century type revolution such as Arab Spring. The ground reality is altogether different in these two regions. The major difference is democracy-dictatorship. Therefore,Arab Spring type upheaval may be possible even in China but not in US, European countries and,for that matter, even in India. The remedy to the downturn in these economy is to make the economy efficient, in the sense that no one could be made better off without making someone else worse off.

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