Are you feeling financially secure? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Are you feeling financially secure? 

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In this issue:
» Who's to blame for rising global temperatures
» Britain's poison pill for greedy bankers
» Move on companies, now countries are in deep debt trouble
» Jim Rogers on the dollar's immediate future
» ...and more!!


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00:00
 
The stock markets have doubled over the past nine months. And you must have recovered all of your portfolio losses of the last year. The economy is showing signs of recovery. And you must have felt that relief in seeing lesser number of people around you losing their jobs.

So, things seem to be getting back to normal again you might think.

But is all this making you feel financially safe?

We believe it is not the amount of money you have that makes you feel financially safe. Rather, financial security is about knowing and feeling safe that whatever and whenever disaster arrives, you know you will not have financial trouble.

And to know this, you need to ask yourself if you are prepared for the next recession, or the next financial downturn? You need to ask yourself what will happen to your finances if you lose your job today? And most importantly, you need to ask yourself what will happen to your family if you passed away suddenly?

Of course, these are serious thoughts. But answers to these will define how financially safe you are. You will then also be clear about how much of your surplus money should you risk on speculation and how much on serious, long-term investments.

Your speculative instincts (if you have any) might earn you good returns in the short term. But if this backfires, you will be putting your and your family's financial security to a big risk. On the other hand, sensible long term investing will go a long way in helping you reach you financial goals safely.

01:07  Chart of the day
A blame game is currently on between the developed and developing countries on who is responsible for the global warming spectre that the world faces. Now while the western world (led by the US) maintains a high rate of carbon dioxide (CO2) emission that is the biggest cause of this warming, developing countries led by China are now closing in the gap. China in fact recently became the biggest polluter in the world, contributing to around 22% of global CO2 emissions. While India's share in global emissions has doubled in the last four decades, it still stands at a miniscule 4%, though still higher than Brazil's 1%.

Data Source: BP Statistical Review 2009

01:35
 
The financial meltdown was caused by several factors. Bankers had the wrong reward structure. Banks were too interdependent. Risk was underestimated. Regulators did not do their job properly. Nobel laureate Joseph Stiglitz believes that enough hasn't been done to prevent another crisis. His solution - make banks smaller. Wherever the banks remain large, increase the regulation. Impose special taxes and greater capital adequacy requirements.

In our view, banks are meant to serve the real economy. But given the money and prestige this business involves, bankers innovate to a point where the dangers exceed the intended benefits. The subprime crisis isn't the first time this has happened. As long as the incentives remain, it won't be the last time either.

02:02
 
In what UK bankers are calling a 'poison pill', the British policymakers have levied a 50% tax on bonuses that banks pay to their employees until April 5, 2010. This seems a good move in curbing the predatory tendencies of banking employees who have survived the financial crisis on taxpayers' money.

However, how relevant will the tax be is doubtful. This is considering that many of the large banks have already announced their bonuses that will not be covered under the new tax norm. But then, as per an October report by the Centre for Economics & Business Research Ltd., a London-based research firm, UK financial firms were preparing to set aside as much as 6 bn pounds in bonuses for 2009, 50% more than 2008. The new tax will certainly act as a demoralizer for them!

Are the huge bonus payouts by banks and institutions like Goldman Sachs justified? Share your views

02:41
 
When the crisis started one stark fact that was brought to the fore was the extent to which companies were leveraged. Many companies were saddled with huge amounts of debt and the weak economic environment meant that servicing and paying off this debt was becoming a problem. Now this problem has shifted to a much bigger arena.

This is because various countries themselves are beginning to look over-leveraged as a result of which their sovereign rating are seeing downgrades. Dubai was the first to see its skeletons come out of the closet. The latest to have this dubious distinction is Spain. Ratings agency Standard & Poor's has revised its outlook on Spain to negative and has warned that the country faces a risk of a debt downgrade in two years if the government did not take tough action.

In a bid to bail out battered financial institutions, governments across the world have injected massive doses of liquidity into their respective economies all of which is beginning to take its toll on finances. Cleaning up this massive mess is going to require some herculean effort indeed!

03:23
 
An era in personal mobility will come to an end by the time the next fiscal dawns. Bajaj Auto, the company responsible for putting scooters at virtually every nook and corner of the country has decided to come fully 'in sync' with the latest fashion in the geared two-wheeler industry - motorcycles.

In other words, the company will exit the scooter segment by the end of the fiscal to focus exclusively on motorcycles. It is interesting to note that Bajaj was a little late in recognising motorcycles as the future of the Indian two-wheeler industry. Consequently, it went through some rough patch at the turn of the century when it tried to make the transition. However, now that it has made amends, it does not want to miss out on the enormous opportunity that is staring it in the face in the motorcycles space.

In fact, it has made it amply clear that it wants to be the largest bike player in the world. It may not be easy though. A company called Hero Honda has been dominating the Indian motorcycles scene for quite some time now and may not give up its pedestal so easily.

04:13
 
Despite all the bearishness about the US dollar, someone has been busy stocking up on the greenback over the last two months. And that someone is none other than commodity guru Jim Rogers. Let it be clear though that he himself is extremely bearish on the dollar over the longer term. However, there are too many bears on the dollar right now and that's the reason Rogers feels that the dollar may be set for a near term rebound from its beaten down levels.

However, what's most scary is that the renowned investor expects the longer maturity US government bond yields to reach double digits just like they had in early the 1980s. In 1981, 10 year treasury notes' yield had hit a high of 15.8%. It currently stands at about 3.42%. If yields were to indeed move to double digits, the prices of bonds will take a severe beating. With the US dollar making up such a large part of the forex reserves of so many countries around the world, a large decline in bond prices is sure to have a lot of ugly ramifications.

04:42
 
Indian markets traded amidst high volatility today. While the BSE-Sensex opened the day ion the negative, it was trading higher by around 50 points (0.3%) at the time of writing. Other gainers among the Asian markets included China (up 0.5%) and Korea (up 1.1%). European markets have opened the day on a weak note.

04:57  Today's investing mantra
"The individual investor should act consistently as an investor and not as a speculator. This means... that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase." - Benjamin Graham
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37 Responses to "Are you feeling financially secure?"

M.S.P

Dec 15, 2009

not at all.. those who are responsible for the downfall opf banks shouldn't be given bonuses instead the respective employees should be fired. The bank can use the money to cover the lapses created and look forward for further progress of bank.

Like 

krishnan

Dec 14, 2009

not at all. as it is they are all highly paid and dont deserve bonuses

Like 

Capt. Brian Fernandez

Dec 14, 2009

Bankers should be paid solely on the results achieved for the shareholders and the investors. Those who damage the company should not be paid any bonuses. Instead they should be sacked.

Like 

Ramesh Shetty

Dec 12, 2009

Compesetation policies mush have the correct level of motivatng risk taking as well as penalise for -ve effects. In the current system for banks only positve effects are rewarded, but there is not room for penalties when their decissions go wrong. The old method of carrot & stick is useful.

Like 

gaurinder

Dec 11, 2009

i can only call them shameless, incorrigible,seems to be beyond redemption individuals & pray to god to save us from them.

Like 

Jitendra

Dec 11, 2009

It is hard in these time to feel financially secure as kind of time we have moved from it does'nt seem to be safe as taking any step eg. taking a loan will always have a backdrop of this crises. So we ourself need to hedge against such situtions in future by proper divesification and long term investments.

Like 

Abhay Datar

Dec 11, 2009

Different statements made about the banking sector are worrysome. Fortunately in India, we have good regulators, though somewhat conservative. This has, in fact, protected our Banks during the recent meltdown. OUr politicians want small states for better management, but bigger and bigger banks! What a contradiction!

One more poing that always comes to my mind is that 'Targets' given by different employers and cut-throat competition to achieve them was one of the severe causes of meltdown.

Like 

Abhay Datar

Dec 11, 2009

Certainly not, when its particularly with taxpayers' money. It is worth studying whether these employees are 'deserving' such huge bonuses. What great job have they done?

Like 

GOMS.KRISHNA

Dec 11, 2009

INVESTMENTS BANKING SKILLS ARE HIGHLY COMPLEX IN NATURE AND THOSE WHO POSSESS ARE FEW.... HENCE HIGH BONUS/COMPENSATION ARE REQUIRED TO RETAIN THE TALENT...

Like 

MJ

Dec 11, 2009

Awarding of bonus/incentives to bank employees only motivates them to cross sell high fee based products which might not be in line with customer requirement but mainly are sold by bankers to get higher points on their appraisal report card & in most of ocassions this leads to mis-selling of a financial product.

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