The man who's making most of current crisis

Nov 4, 2009

In this issue:
» Look who's pumping in billions after billions
» RBI starts accumulating gold
» China risks a Japan like slowdown
» India's stimulus will continue
» ...and more!

-------------- And the winner is... --------------
Congratulations Koodal K Sailappan from Bangalore for being the winner of the Equitymaster Win a TATA NANO Offer!

Based on a computerized Lucky Draw, the results were declared on Nov 2nd at 3.15 pm by Rahul Goel, CEO, Equitymaster, and at the event was Ajit Dayal, our founder. Koodal will be handed over the keys of the Racing Red TATA NANO at a small function in Mumbai.

Our heartiest congratulations once again to him and our sincere thanks to all of you who participated in the Lucky Draw!

While some investors may still be sitting on the fence, the one investor who's making full use of the current market conditions is the Oracle of Omaha, Warren Buffett. In a deal that could make its earlier investments in securities of companies like Goldman Sachs and GE look like peanuts, his cola to insurance conglomerate Berkshire Hathaway has decided to fork out a massive US$ 44 bn to buy the US rail road giant Burlington Northern Santa Fe Corp. This also makes it his biggest deal so far, trouncing the US$ 22 bn purchase of General Re back in 1998. It should be noted that Buffett already owns a small stake in the company. Indeed, as he himself described, the deal is an all-in wager on economic future of the United States.

For a man who wouldn't touch anything that does not have a sustainable competitive advantage, the rail road giant must surely be having something going for it. And if we were to follow his earlier rationale of buying a part stake in the rail road giant back then, he had mentioned that trains had started to become more competitive against trucks in the backdrop of higher fuel prices. Also, since it is very difficult right now for a new entrant to build railroads, the incumbent players can have all the market to themselves. Hmm, now that's some long-term moat, isn't it? Investors could do well to remember the master's recent advice that equities will outperform cash over the next decade, probably by a substantial degree. Thus, while Buffett seems to be following it to the tee, investors in India will not do badly either by investing in stocks with good long-term fundamentals and available at attractive prices.

 Chart of the day
Today's chart of the day is a rather simple one. It shows the top five losers amongst Nifty stocks during the past couple of weeks when the benchmark Sensex is believed to have lost around 11% of its total value during the start of the period. And leading the pack is none other than the troubled wind equipment maker Suzlon that lost more than a third of its market value during the same time period. Apart from the bearish sentiment, perhaps the company's poor showing during the quarter gone by is also to blame for the beating that it has received. Also present in the list are real estate players like DLF and Unitech where the recent RBI directive to banks to go slow on commercial real estate lending seems to have also played a part.

Source: CMIE

It appears as if India too sees a dim future for the US dollar. This was made amply clear yesterday when our central bank - the RBI - bought 200 metric tonnes of gold from the International Monetary Fund (IMF) for about US$ 6.7 bn. This has bulked up the nation's gold reserves by a massive 55%. And the transaction has already been profitable for the RBI, given that gold prices surged after reports came in of the purchase. Gold closed at US$ 1,085 an ounce yesterday as against the RBI's purchase price of around US$ 1,000.

The big buy from India follows months of huge gold accumulation by Chinese authorities and others amid growing anxiety about the viability of the dollar as the world's reserve currency.

Fiscal prudence has become the Achilles' heel for the incumbent government. Having stumbled upon a large fiscal deficit in the last financial year and unable to reduce it to tolerable levels, the government now believes that it would be imperative to come back to the path of fiscal prudence only when the economic circumstances 'permits it to do so'. The fiscal deficit is expected to rise to 6.8% in FY10 from 6.2% last year as the government spending to provide stimuli to the bleeding sectors continues unabated.

To soothe the nerves of worried investors, the Finance Minister has now promised to lower the deficit to 5.5% of GDP in the next fiscal year. This is when pay arrears to government employees will be done with and the introduction of a goods and services tax will boost indirect tax revenue. However, it remains to be seen if the loose monetary policy and generous doses of stimuli will in any way effectively support the economic growth, while keeping fiscal prudence in the backburner. We believe that the high cost government borrowing will leave a baggage on our fiscal balances even after the economic growth problems have been sorted out.

Everyone seems to be talking about the US and the lost decade that it faces a la Japan. But what about the comparison between the present day China and Japan of the 1980s when it was in rip roaring form. Just as China, Japan was then a hugely surplus economy and was countering any slowdown that happened in the domestic economy by going on a credit binge. The end result? The surplus liquidity found its way into the country's stock and real estate markets and the latter became so overvalued that at one point in time, the grounds of the Imperial palace in Tokyo had a greater value than the entire US state of California!

While a bubble of similar magnitude may not have taken shape in China just yet, the fact remains that residential real estate in China are trading at lofty multiples to the underlying income and this certainly points towards some sort of a bubble building up. Furthermore, equities are not very cheap either. Hence, amidst all the euphoria, China could do well to keep in mind the example of its East Asian counterpart, who's crumbling under a mountain of humungous debt that has the excesses of the 1980s era written all over it.

There may be a debate raging in the US about how effective the gargantuan stimulus package introduced by the Obama administration has been but the one person who vociferously supports it is none other than the Nobel laureate Paul Krugman. Infact, he has gone one step further by saying that while the government's stimulus plan is working, the deficit spending was way too small to have a significant long term impact on the US economy. One positive outcome of these stimulus measures has been that the economy has not witnessed a 'freefall' like it did post the Lehman collapse and has to some extent stabilized, if not become better. However, Krugman believes that the stimulus was far too small given the scale of US' economic problems. He is of the opinion that unless something changes drastically, the US is looking at many years of high unemployment. Thus, what Krugman advocates is another round of massive fiscal stimulus. However, given the controversy that surrounded the first stimulus package itself, it is doubtful whether the policymakers will be in any mood to humour him.

You don't always have to commit a mistake to learn that something is bad for you. You can learn from others who have committed them in the past by heeding their warnings. But the sad fact is that investors have long had a history of not learning even from their own mistakes, let alone mistakes of others. What has been happening in the last few months is a case in point. Even though the mistakes that have directly led to the credit crisis are common knowledge now, we continue to commit them. Letting banks be too big to fail is one of them. But many banks remain 'too big to fail'. Large rating agencies that awarded toxic instruments an investment grade rating, continue to exist unreformed. The 'hands off' regulation of markets too continues. Seems like we just can't ever get enough... of both bubbles and crashes.

Meanwhile, Indian stock market are trading extremely strong today with the benchmark indices making up for most of the losses in the previous session at the time of writing. Almost all the major Asian indices have also closed in the positive and Europe has also opened on a positive note.

 Today's investing mantra
"I constantly see people rise in life who are not the smartest -- sometimes not even the most diligent. But they are learning machines; they go to bed every night a little wiser than when they got up. And, boy, does that habit help, particularly when you have a long run ahead of you." - Charlie Munger

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "The man who's making most of current crisis". Click here!

10 Responses to "The man who's making most of current crisis"


Jan 7, 2010

Interesting & informative article & the comments too.



Nov 8, 2009

Its a superb. I found this article are making me more aware and more thoughtful regarding the market and the other news of the businesses are concern. These articles are giving the way to think the financial activities around me in a complete different way.



Nov 6, 2009

i am buy idea cellular 100@rs51.20. what adout idea in monday trading. pls your tips.


Pratap Rane

Nov 6, 2009

Reg : RBI Purchasing GOLD

With whatever limited knowledge I have of economy, I do not see this as a prudent move because:

1. GOLD is at its highest rate at Peak
2. Over the target rate of 850 $ by IMF we have paid more than 1000 $ per Ounce
3. The $ rate in India is also at peak though all over the world it is falling which means we have paid highest rupee price for the GOLD.

Why every time when their is an opportunity for Indian people to show the world that they can take prudent and winning action, we find India mistakes exactly like in the Cricket we miss the big wins!


pushpendra malhotra

Nov 5, 2009

this is most wonderfull article that i am read so far like ;gagar me sagar



Nov 5, 2009

in the article of gold (written at 01:38 hrs) price of gold purchased by RBI is Rs.1000 or US$ 1000 per ounce.



Nov 5, 2009

i have unsubscribe many times still i am being send your reports......why??????



Nov 4, 2009


this is the most wonderful best article that I have read so far.Like " Ghagar me Saagar:


Darius Doctor

Nov 4, 2009

Today's Investing Mantra was Great.


Manish Balsara

Nov 4, 2009

The drastic change America requires to curb unemployment is to start doing things which they would like to outsource from China and India. In countries interest one should be productive rather than being cost effective.

Equitymaster requests your view! Post a comment on "The man who's making most of current crisis". Click here!