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One of the longest recessions in the US?

Dec 2, 2008

In this issue:
» Paul Krugman gives thumbs up to fiscal stimulus
» Vulnerability of luxury hotels
» Teva challenges patents and earns billions
» Liquidity is the biggest worry
» ...and more!

If anyone was in doubt as to whether the US had really stepped into the tailspin of recession, the National Bureau of Economic Research (NBER) has confirmed the same. The agency has also stated that the current recession is one of the longest downturns since the Great Depression of the 1930s. The last two recessions (1990-1991 and 2001) lasted 8 months each, and only two of the 10 previous post-Depression downturns lasted as long as 16 months. However, according to the NBER, the current recession started from December 2007 itself and has been in progress for 11 months already. While there is a widespread belief that a recession is defined by two consecutive quarters of economic activity declining, such a phenomenon has yet to take place this time.

The fall of housing prices from peak levels reached earlier this year cut deeply into house construction and purchases. This also caused a sharp rise in mortgage foreclosures, which in turn resulted in losses of hundreds of billions of dollars among the nation's leading banks and a tightening of credit. The loss of jobs only made matters worse. According to CNN, employers have trimmed payrolls by 1.2 m jobs in the first 10 months of this year. Also, economists have predicted that the government will report a loss of another 0.3 m jobs for November.

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While these statistics seem to be giving no indication as to when the current recession is likely to end, what is certain is that it will need a couple of more stimulus packages to stop it from becoming one of the worst in history.

Post World War II recessions Duration
November 1948 - October 1949 11 months
July 1953 - May 1954 10 months
August 1957 - April 1958 8 months
April 1960 - February 1961 10 months
December 1969 - November 1970 11 months
November 1973 - March 1975 16 months
January 1980 - July 1980 6 months
July 1981 - November 1982 16 months
July 1990 - March 1991 8 months
March 2001 - November 2001 8 months
December 2007 - ?
Source: CNN Money

Given that the US economy is in complete disarray, the US Fed and Treasury have probably tried every weapon in their monetary arsenal. But the US consumers as well as its firms look in no mood to oblige. It seems that they have finally realised the virtues of saving. But this is not going to help as the economy needs someone to spend so that jobs could be created and capacity utilized. Presidential elect Barack Obama reckons 'that someone' could be the US government. Monetary stimulus has already been tried; it is now time to unleash the fiscal stimulus. Obama wants the government to spend billions of dollars towards creation of infrastructure like roads and bridges so that 2.5 m jobs could be created in the US over the next couple of years. However, for a certain section of the economists, who are already fuming at the bloated budget deficit, this seems like a final nail in the coffin of the long term health of the company.

But not Paul Krugman. The latest economics Nobel laureate and one of the most influential economists of our times has given his thumbs up for the fiscal stimulus. Arguing his stand in an article published in The New York Times and reprinted in one of India's leading business dailies, he has gone on to say that US risks falling into the 1930s like depression or the Japanese depression of the 1990s if it does not undertake the fiscal plan.

On budget deficits, he opined that although he is not a big fan of perpetual budget deficits, these are extraordinary times for the US economy and hence, a high budget deficit could be risked in the short term. Furthermore, according to him, infrastructure that will be created by the fiscal stimulus plan will be good for the competitiveness of the US economy in the long-run. Obama will most certainly welcome this point of view.

While the recent terror attacks in Mumbai have left the country in a state of shock blocking out all else from the mind, the global recession has just gotten worse as can be evinced from the rising count of the unemployed. So far in the US, deepening recession has axed 1.2 m jobs and this is spilling over overseas as well. Further, with the labour data scheduled to be released this week, it is expected that the jobless rate in November will soar to a 15-year high of 6.8% and that employers will reduce payrolls by 320,000.

But this gloomy picture is not restricted to the US alone. As reported on Bloomberg, globally, the jobless rate may rise above 7% by 2010 after remaining between 5% and 7% for two decades. Given increasing globalisation, the slowdown in the US has considerably hampered prospects in other nations as well. As was aptly summed up on Bloomberg, "The US once exported jobs. Now, it is exporting unemployment."

The days of just walking into a luxury hotel, sitting in their magnificent lounges or dining at some of the posh restaurants are probably over; for the time being at least. The vulnerability of five-star luxury hotels was amply demonstrated in the recent audacious terror attacks on Mumbai, when the both the Oberoi Trident and the iconic Taj Mahal Palace hotels ended up as prime targets of the terrorists.

In the aftermath, while beefing up security seems like the most obvious solution, things are not as simple as they look. This was reiterated by Mr. Ratan Tata who despite having received warnings of likely attacks could only do so much. Attacks on luxury hotels have not been confined to India alone. The JW Marriott in Pakistan also bore the brunt of attacks this year. Hotels have a tough decision on their hands. Unlike airports where security is of the paramount importance and the inconvenience is something that passengers just have to deal with, security in hotels is a different ballgame altogether.

Being the symbol of hospitality and comfort, additional security will only taint the luxurious experience of a five star hotel. But after the recent terror strikes, one will have to just brace oneself for an inconvenience, which while it is likely to be an irritant, will nevertheless ensure safety during the duration of stay.

Stocks in India closed weak today, mirroring the trend in the Asian markets. Software, auto and energy stocks led the fall in today's trade as the benchmark BSE-30 index closed lower by 1%. Other key Asian markets also bore the brunt of intense selling activity as concerns regarding the deepening recession escalated. Key indices - Japan (6%), Hong Kong (5%) and Singapore (3%) - were at the receiving end. Stocks in Europe are trading mixed currently.

It is a well known fact that the severe competition and price erosion in the US markets have led global generic companies to relook at their strategies. This means that the focus has increasingly shifted to niche products and challenging patents of branded drugs belonging to innovator companies. Indian companies such as Ranbaxy, Dr. Reddy's and Sun Pharma have been active when it comes to challenging patents but have witnessed mixed results. The company that really takes the cake is the Israel based and the world's top generics company Teva Pharmaceuticals, which has earned billions of dollars by challenging patents and making 'at risk' launches. An 'at risk' launch means that the challenging generics company launches the generic version of a branded drug on approval by the US FDA even if the outcome of the legal suit is still pending in the courts. The risk in this case is quite high as a loss to the challenging generics company would mean huge damages to be paid to the innovator.

What makes Teva unique is that it has pulled off the 'at-risk' strategy with considerable success (13 times) since 2004 helping it double its annual revenues to US$ 9.4 bn. No other generic drug maker has staked so much of its business on these 'at-risk' launches. Such is its confidence and might that innovator companies whose drugs are being challenged are finding out-of-court settlements a much better option rather than wait for court decisions.

What Teva has in its arsenal is ample resources and astute managers who are not just brash risk takers but have the ability to weigh the risks with the rewards and carry their decisions through. No wonder then that the top generics company in the world is the envy of its peers.

A survey by a leading business daily showed that most foreign money managers see limited adverse secondary effects of the terrorist attacks in Mumbai on India's perception as an investment destination. One of the major reasons being that the recessionary effects facing businesses in many developed countries are forcing them to look at some of India's more attractive qualities. The economy expanded 7.6% in the September quarter, well below the 9% seen in all of FY08. But at the same time well above developed economies most of which are seen as already in recession. Another aspect in favour of India is the country's greater dependence on domestic demand and consequently lesser vulnerability to external factors relative to its neighbour China.

In an interview with Mint, SEBI chairman Mr. C.B. Bhave has hinted at liquidity being the biggest worry for the economy and markets at this point of time. He has however given credit to the RBI for its act of cutting interest rates and releasing additional funds into the system to curb the crisis which has its origination in the western world. Additionally, this is what he had to say on the current situation in the markets - "The worst is over for us as far as the liquidity problem is concerned. But we will have to be alert all the time. We still see institutions, especially in the West, getting into trouble. We do not know the news flow in future and so we need to keep a close tab on all developments. Even though we do not have any worry with regard to our banking system, we are indirectly impacted. If the credit markets in the West do not function, the Indian corporations are affected. So, we cannot relax."

Business functions evolve to their environment. No surprise then, HR (human resources) practices too are trying to adjust to the recent unfortunate events. The HR function at several companies is now paying attention to succession planning. Many top companies already have rules that forbid the entire board of directors from travelling together. Now, companies like HUL, Nicholas Piramal, Dr. Reddy's and Marico are looking at identifying an entire string of leaders as backup as contingency planning. They say, if business continuity plans are used for intellectual property, technology and operations, there is no point in shying away from the human aspect. Especially in times like these.

It was a rather somber looking Ratan Tata, the Head of the Tata Group, who appeared on one of the leading international news channels last Sunday. Quite expectedly, if a normal citizen of India can feel great pain and anguish on watching one of India's most monumental structures engulfed in fire, the grief of the man, whose own great grandfather had so painstakingly built the more than century old hotel can only be imagined.

Mr. Tata used the occasion to whole heartedly praise the valiant effort of his hotel's staff that went well beyond the call of duty to ensure the safety of the people. The courage and bravery of the security guards, who managed to fell the terrorists, also came in for a lot of appreciation. He however expressed deep concern over the poor crisis infrastructure in the city and stressed upon the need to improve the same. On being asked whether the attacks would have an impact on the economy, he opined that although they would indeed have a short term impact, over the long-term the economy will emerge stronger from this incident and there will be a new found unity amongst the Indian people.

Today's investing mantra
"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely" - Warren Buffett

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