Are we in a worse position now than back in 2008? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are we in a worse position now than back in 2008? 

A  A  A
In this issue:
» Global economy slows in the Sept 2013 quarter
» More Japanese households now have no savings
» New banks to lower returns of existing players
» Two divergent ratings on the Indian economy
» ...and more!

The seeds of the global crisis in 2008 were sown by the cheap money policies followed by the Fed since 2003. Interest rates were quite low during that period and this fuelled widespread consumption across the US. Indeed, credit soared and people borrowed more to consume more. The bubble finally burst in 2008. And the housing market, to which lending was done indiscriminately, bore the maximum brunt. Policymakers and governments of the developed world scrambled around to 'put things in order.' They were intent on ensuring that a crisis of such a scale was not repeated in the future.

The intentions were in the right place. But have the means to achieve this made any sense? Not really. The umpteen rounds of quantitative easing, not just by the US Fed but also by the European Central Bank, were meant to kick start consumption and bolster growth. Not surprisingly, that has hardly happened. Most of the developed world continues to report weak growth. The excess liquidity in the financial system, instead of pulling economies out of the slump, has raised the spectre of another bigger crisis. Indeed, Marc Faber, editor of The Gloom, Boom & Doom Report, is of the view that today there is much more credit as a percent of the economy than what it was in 2008. So the global economy is in a worse position now than what it was back then.

What also makes matters worse is that the problem seems to be more widespread now. Indeed, considerable surge in lending in China has resulted in an increase in worldwide credit. As reported in an article in Moneynews, China's credit as a percent of the economy has increased by around 50% in the last four and half years. Rise in household debt in many of the Asian countries is also a cause for concern. Infact, what also differentiates the 2008 crisis from the situation today is the growth in emerging economies. Back then, emerging economies bounced back strongly and reported good growth even when the developed world was down in the dumps. That is not the case today. Most of the emerging economies such as China and India are in the throes of a slowdown. And the cheap money policies of the central banks have only made their position worse as money has found its way into asset classes forming bubbles there.

For whatever reason, the central bankers appear to be in no mood to see reason. But, it is obvious that the current state of affairs cannot continue for long. At some point of time in the future, the bubble is bound to burst. It only seems a matter of 'when' rather than 'if'.

Do you think the global economy is in worse position now than it was in 2008? Let us know your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
There is no doubt that GDP growth both in India and China has considerably slowed down. In India, growth in FY13 was the lowest in a decade . And the subsequent quarters have not seen any recovery either. But when compared to their peers in both the developed and the emerging world, they have still done better. Having said that, as today's chart shows, GDP growth for both the developed and the developing world has been tepid in the September 2013 quarter. Growth in the developed world still remains weak and it will be a while before there is a recovery. China and India are beset by their own set of problems. As a result, they cannot really be relied upon to rebalance global growth as was originally envisaged. Issues such as inflation, government debt and formation of asset bubbles have become all the more pronounced in both these countries.

GDP growth in the September 2013 quarter

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In November 2008, the US Federal Reserve commenced its quantitative easing program. This ultra-easy monetary stimulus was an unprecedented experiment to revive the flailing economy. We're in November 2013 now. The QE program has been going on for 6 years now. And the results are evident. It is simply not working. The US economy continues to remain weak. Unemployment levels remain stubbornly high. Now, the central bank is in a very precarious situation. It cannot afford to carry on QE endlessly as it is mounting the debt burden on the US. But the central bank is finding it tough to even taper down the bond buying program. Any pullback in QE would destabilise the global financial markets. So it's just a question of crisis now or a bigger crisis later. Policy makers prefer the latter option so as to avoid a crisis during their own terms. Bernanke has done exactly that.

Now, any fifth grader would conclude from this that QE is indeed a dangerous monetary gamble. But not Japan. The Japanese central bank announced QE program in April 2013. With asset purchases of US$ 1.4 trillion in two years, the Bank of Japan would double the monetary base. This is resulted in rising stock markets, sharp depreciation in the Japanese yen and increasing import prices. And how about people's savings and income levels? As per an article in Zero Hedge, Japanese households with no savings have increased to all-time high. Falling income levels have forced people to use up their savings. Wages have been declining for 16 consecutive months. As a result, Japan now has 31% households with no financial assets as against 26% a year earlier. This is indeed a very worrying sign for the Japanese economy.

Private banks have been the flavor of the season. Regardless of higher inflationary risks or subdued growth, foreign investors have been betting on private banks for quite some time now. And this is fairly evident in the increased foreign institutional ownership in many private banks. This is because any upturn in economic cycle is expected to best benefit these private banking players. Well, the increased institutional interest for private banks does not come as a surprise. The staggering stock returns for over a decade and the impeccable return ratios have always enticed investors.

But there is going to be a twist in the tale. The bullish mode era of these private players may soon come to an end because of the new bank entrants. The entry of the latter would imply intense competition as they would also chase for a slice of the current and saving account (CASA) deposits pie. At present, existing private players that boast of higher return ratios are benefitting largely from the lower costs of such CASA deposits. But with the entry of new private banks, the cost of funding these low-cost deposits is expected to go up. And this will automatically have a bearing on the return ratios of the banks. 20% return on equity (RoE) might become passe! That said, for the investors and banking customers, it would definitely open a flurry of options to bank upon!

Country ratings indicate the state of an economy. These ratings give a reflection of country's finances, public debt, exchange reserves, fiscal policies etc. Thus, downgrade is viewed negatively by investors. And India is perhaps on the cusp of a downgrade. However, rating major S&P did otherwise and affirmed its long term rating of BBB- with a negative outlook. This has come in the light of poor macroeconomic situation of the country. Public finances are getting burdensome. There are no reforms. Rupee is depreciating. Consumer inflation is also at intolerable levels. In short, the bottomline is that the economy is still in a mess. Hence, S&P held on to its negative outlook.

But this status quo stance was preceded by an upgrade just a couple of days ago. It may be interesting to note that another rating major Goldman Sachs upgraded India very recently citing changes in political landscape of Indian democracy. Thus, there are two conflicting views on the Indian economy by two major rating powerhouses. While diversity of views and opinions are welcome we feel that investors should not attach much weight to rating changes. Remember, these are the same rating companies that gave an AAA rating to junk mortgage debt in US without being able to foresee the risks embedded in such products. Also, there can be a conflict of interest arising in such ratings. We are not saying that ratings don't matter. In fact, stable ratings result in attracting foreign interest. It is just that one has to be cautious when interpreting these ratings.

Now, whatever the rating of India, the fact is that the country is treading in testing waters. Unless the policymakers walk the talk the situation is going to get worse. And if that happens it may well lead to a blanket downgrade across the board.

Barring the US and Germany, major global stock markets ended the week in the red. For the Asian stock markets especially it was a lackluster week. The turnaround that the markets had witnessed earlier following the delay in tapering of the QE program was offset by weak corporate results in the region. The stock markets in China lost 2% over the week despite a strong growth in Chinese exports last month. The stock markets in Japan were down 0.8% over the week due to the yen's appreciation against other major currencies.

European markets also declined as France had to face a sovereign rating downgrade. Further, the positive data on the US economy triggered concerns of an earlier pull back of the stimulus. Among major European stock markets, those in the UK and France were down by 0.3% and 0.9% respectively over the week.

The US and Germany witnessed gains. Indeed, stock markets in Germany gained 0.5% over the week. This was due to exports rising for a second straight month and the trade surplus beating forecasts in September. The US stock markets gained 1.4% over the week on account of a better than expected jobs report.

The Indian stock markets were the second biggest losers during the week as profit taking hit the markets after index set record highs earlier. The BSE Sensex closed the week with a loss of 2.5%.

Performance during week ended Nov 8
Source: Yahoo finance, kitco, cnnfn

04:56  Weekend investing mantra
"There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating." - Peter Lynch
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6 Responses to "Are we in a worse position now than back in 2008?"


Nov 10, 2013

I don't think we are in a worse Position than 2008. Economy is likely to pick up well if Modi comes to power and decision making becomes faster. All current problems are due to delays in decision making, no decisions - and bad decisions.

Like (2)

Ganesh Sastri

Nov 10, 2013

Interest rates are like coiled spring. At some point, interest rates will go into double digits despite efforts by central banks to control them. Lenders have sacrificed a lot during last ten years and their time to make money at the expense of borrowers will come. Will we also see a lot of defaults including those by sovereigns?

Like (2)

Ravindra Merchant

Nov 9, 2013

Excellent practical advice

Like (2)

RK Bali

Nov 9, 2013

It is expected to be worse.

Like (2)


Nov 9, 2013

Indescriminate freebees by the central govt scheme like MNREGA,FSB, DBT, minority all vote fetching schemes will contribute to the inflation and other hardships.

Like (2)

Vipul Ashara

Nov 9, 2013

Looking to the domestic consumption of goods (FMCG)and applicances like TVs, Refregerators and ACs and services like Travelling,Hotel Industry, Internet(online) services penetration, leisure activities like watching movies, DTH, etc. and further growth in these industries holds the faith in the current economy of India. This year overall rainfall is above normal, which may benefit in the next year.
I think the problem should be too serious domestically,
Stop comparing with global economy. We have enough demand here. So far as global economy is concerned, apart from China, europe and US (which may recover before europe)we have South africa and Other African countries, South America (Brazil) and Russia as next developing economies. Better focus on their growth.

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