Why paintings, racehorses are finding takers... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why paintings, racehorses are finding takers... 

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In this issue:
» Global energy demand is set to rise
» Tata Group has writes down the value of assets
» FM is giving 'innovation' advice to the wrong banks
» Will lower growth in the US become permanent?
» ...and more!

The excessive money printing by central banks around the world only highlight the fact that they have not learnt any lesson from the global financial crisis. Indeed, the financial crisis was a product of loose policies by the US Fed that led to Americans going on a borrowing binge as interest rates remained low. Bubbles began forming and ultimately it burst in 2008.

Since then, the only response of the policymakers has been to do more of the same. They have again resorted to loose monetary policies and massive money printing. Rather than bolstering growth and job prospects, all it has done is concentrate wealth in the hands of few people. As reported in Moneynews, with so much money sloshing around, most of it is finding its way into rather unusual places such as rare paintings, gemstones, racehorses and the digital currency bitcoin. Indeed, the very fact that these assets are finding takers means that there is too much money floating around and the wealthy are looking for all possible avenues to park this money.

In the US, the most inflated prices seem to be in smaller pockets of the markets than they were back then. But one should not be deluded into thinking that consequently there is less risk. Indeed, a series of small bubbles bursting as opposed to a big one can also cause a lot of pain. And as evident from the 2008 crisis, so interconnected are the global markets that toxic assets in one region can erode the value of good assets elsewhere. This is because investors will choose to sell the good assets and raise cash to mitigate losses. The adverse impact of the central banks' easy money policy has been reflected in the global stock markets as well. Most of the markets have soared even though the underlying fundamentals remain weak.

Frothiness has become apparent in the IPO market as well. According to Moneynews, 199 US companies have gone public in the year so far. This is the highest number since 2007. The gains for some of them including Twitter have been big even when the financials have been quite poor. All of this only reinforces the point that liquidity is the single biggest factor driving the rally in the indices and other asset classes.

The US Fed, in the meanwhile, is contemplating easing from its bond buying program in 2014. That seems highly unlikely given that the only possible outcome of such a move will be a resounding crash across global financial markets.

A lot of this money has come into India as well. Indeed, despite the Indian economy slowing down, the rally in the Indian indices in the past few months has largely been the result of liquidity. In such a scenario, it would make sense for investors to take stock of the situation and not invest in asset classes simply because of a sense of immense optimism. And as long as central banks continue to print money, which seems quite likely, it also makes sense to include some gold as part of one's investment portfolio as a hedge against future risks.

Do you think that growing investments in paintings, racehorses etc. are signs that bubbles are forming everywhere? Let us know your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
As reported in the Economist, total global demand for energy is expected to rise by a third by 2035. This is according to the World Energy Outlook, published by the International Energy Agency (IEA). The most significant jump in demand will be seen in countries such as India and China. Consequently, the Asian region which includes both these countries will account for 11.4% of the total energy demand as opposed to 7.4% in 2011. Demand in the developed economies will barely move. This is hardly surprising given that the Asian region has still been growing at a faster clip than the developed world despite the slowdown in India and China. Thus, the impact of this on prices will depend on how supply is able to ramp up by that time.

China, India to see a surge in energy demand

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Just like investors, companies too need to be careful about their acquisitions and investments. Paying too much of an asset could turn out to be a disaster in the long run. And it does not help create shareholder value either. Rather a bad, overpriced acquisition can actually destroy shareholder wealth instead. However, despite all the due diligence that companies conduct, they can still end up over paying for an acquisition. When this happens, the company's management has two choices. The first is the easier one to continue holding the assets as it is on the balance sheets and keep justifying the same.

The second and tougher one is to admit their mistake and write down the assets. This would entail a onetime pain but it is a sign of a more prudent and conscious management. This seems to be the case with the Tata Group companies. As reported by The Mint, the group's Chairman is writing down nearly US$ 15.5 bn of assets. These write downs are related to the acquisitions made by the group companies over the last decade. The move could be inferred as a prudent and ethical corporate practice of the management admitting their mistakes.

Just yesterday we wrote about how FM Chidambaram has cited his preference for 'innovative banking models' . In the run up to the issue of new bank licenses, the FM wants to leave no stone unturned to encourage innovation. More so to facilitate financial inclusion in the unbanked regions in the country. However what seems to have escaped his notice is that more than a dozen odd PSU banks in the country already have the network to cater to the unbanked regions. Nevertheless, government ownership has offered them very little leeway for 'innovation'. In fact toeing in line with the government's wishes has led to most of them being saddled with low profitability and high non-performing assets (NPAs).

Now, the FM seems all keen to allow the new banks to get innovative instead of being alike the existing entities. Instead, encouraging the existing PSU banks to adopt a more depositor and shareholder friendly model could have been a faster and profitable route to financial inclusion. As an article in Firstpost rightly says, the FM needs to free the caged parrots! However, we will not be surprised if most of the PSU banks continue to remain silent sufferers.

Anyone who thinks the recovery in the US is sustainable and that it is actually leading to greater prosperity across all sections of society, they could do well to listen to Marc Faber. Writing for thedailyreckoning, Dr Doom opines that wealth creation in the US in recent years has been totally lopsided. Thus, while the top 1% in terms of net worth has seen most of their wealth go up by 2%, the bottom 50% are still down more than 40%!

If this is not enough, here's something even worse. The same bottom 50% have actually increased their debts meaningfully post 2007. In other words, they are more indebted than they were in 2007. And thus it is this higher indebtedness that must have caused whatever little improvement there is in the US economy and must have taken corporate profits higher. But now what? The debt levels of the bottom 50% cannot go on increasing forever. Besides, there is also a limit to which the Governments can support them. As a result, long term US economic growth much below its trend line does look like a strong possibility.

Much of what is written about the US economy often focuses on the short term scenario. Short term growth rates... Short term employment data... and so on... Many policymakers and Wall Streeters seem convinced that the current slowdown is only cyclical. And that the US economy would soon bounce back on its growth path.

But once in while some long term thinkers do pose a valid question. Can the US economy really grow the way it did in the past? Are the problems in the US economy more structural in nature? As per an article in Business Insider, several economists have significantly cut down their long term growth forecasts for the US economy.

The 2008 financial crisis marked the end of an era for the US. In the aftermath of the crisis, policymakers have been making desperate attempts to revive spending and investments in the economy through their ultra-easy monetary policies. But the economy is showing no sign of revival. We believe that the US economy is likely to remain subdued for an extended period. And this period could actually be several years.

What happens in Saudi Arabia can have a significant impact on oil supply dynamics across the world. The OPEC nations have a reputation of manipulating supplies so as to get the maximum benefit. Many of them have been blamed for keeping production deliberately low to keep supplies limited and command high prices for crude.,

However, as consumption of oil across the globe is surging, Saudi Arabia, one of the largest OPEC member is keeping pace to some extent. Infact, the higher supplies from the region have resulted in the recent slip in the Brent crude price. This is despite the fact that the kingdom's own need of oil is on a rise to meet power and travel needs. Not inclined to lose on the export revenues, Saudi Arabia is replacing crude oil with fuel oil to meet internal needs. It is even planning to focus more on the usage of gas.

But can we predict anything about the oil prices based on such developments? While higher supplies have eased crude prices for now, with so many variables affecting crude prices, it is hard to tell where prices will head from here.

In the meanwhile Indian stock markets are trading strong. At the time of writing, the benchmark BSE Sensex was up by 54 points (0.27%). Capital Goods and Realty stocks were the biggest gainers. Most of the Asian stock markets were trading lower led by Japan and China. The European markets opened on a positive note.

04:56  Today's investing mantra
"A company will be successful if it offers good products and services at a fair price while being run by honest, capable managers. Over the long run, such companies tend to appreciate and go up in value." - Warren Buffett
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1 Responses to "Why paintings, racehorses are finding takers..."


Nov 19, 2013

The backlash of the loose monetary policy that is driving money into exotic assets like paintings, horses etc. is the Great Divide that it will bring about in society, namely, the rich getting richer and the poor getting poorer. This will make people loose faith in a Capitalist economy leading to re-surfacing of socialism in all it's ugly forms. Already, people have started showing their angst against crony capitalism.

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