Be prepared for a crisis of even bigger proportions... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Be prepared for a crisis of even bigger proportions... 

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In this issue:
» India is positive on employment prospects
» Indian stock markets lack depth
» US$ 1 trillion of dirty money left emerging nations
» Shale gas will not compete with Gulf oil for now
» ...and more!

Some of the most noted economists and investors such as Marc Faber, Jim Rogers and company had predicted the subprime meltdown and the global financial crisis of 2008 before it took place. In the years before that, record low interest rates and massive borrowings led to the formation of a bubble that finally burst in 2008. This time too, these very people are sounding alarm bells on the state of the US economy and the meltdown it is headed for. Can one then be 100% certain that a crisis is just around the corner? Maybe not. But that does not mean that these warnings cannot be taken seriously at all.

As reported on the portal, Marc Faber, author of the Gloom, Boom & Doom report has stated, "we are again in a massive financial bubble in bonds, in equities, in other asset prices that have gone up dramatically."

Jim Rogers has warned that people need to be prepared for a crisis of even bigger proportions because of much higher levels of debt and large-scale money printing by central banks of the developed world. Others have talked about a big crash in 2014, as markets are riskier than what they were in 2008 or early 2009.

We know that the global financial crisis of 2008 was a product of loose monetary policies, encouraging consumption and a borrowing culture among Americans, building up of massive debt and a general perception of this exuberance lasting forever.

The scenario today is ominously similar to the years before 2008. The central bankers have responded to the global financial crisis by doing the same thing on a much bigger scale. So there have been massive bailouts which have only bloated government debt rather than trigger any meaningful economic recovery. And the developed world has been caught in a vicious money printing cycle. Since the rise in asset prices has been fuelled by more money sloshing around, the moment the Fed turns off the tap, there is bound to be a crash. And because the Fed does not want this to happen, it is continuing its quantitative easing plan.

It is quite obvious that such state of affairs cannot continue for long. One cannot be certain when this crash will take place. It could happen next year or it could happen two years down the line. No one can be too sure. But if money printing is the only tool on which the fate of the global economy rests, then it is a very worrying and dangerous trend indeed.

Do you think that we should be prepared for a global crisis of even bigger proportions? Let us know your comments or post them on our Facebook page / Google+ page.

01:26  Chart of the day
When the economy slows down, one would assume that employment prospects also become dim. But that does not seem to be the case. As reported in the Economist, as per Manpower, an employment services firm, quite a few of the employers expect the employment outlook to be better early 2014. India is one of them. This is despite the fact that the economic growth of the country has considerably slowed down. The US expects the situation to remain almost status quo. Indeed, this is another indicator of the fact that Fed easy money policies have not done much in terms of significantly improving job prospects.

India has a much positive outlook on employment

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Do you know what the biggest tragedy of the Indian stock markets is? It is certainly lack of sufficient retail participation. To see one of the fastest developing economies with possibly amongst the fastest growing companies lack sufficient small investors is indeed sad. What this leads to is overdependence on foreign investors. And their fickleness is certainly well documented. Recently, a study conducted by Assocham too came to the same conclusion. It argued how the Indian markets lack depth and are excessively dependant on FIIs. It also lamented the damage caused to the Indian rupee due to sudden inflows and outflows of hot money.

Well, this is not the best use of Assocham's time and effort as per us. It would have been much better served had they highlighted some measures to improve retail investor participation. As far as our understanding is concerned, this severe lack of investor interest can be attributed to two main things. Lack of awareness and also a lax regulatory framework. We believe investors need to be educated enough that equities are meant for the long term. And if done in a sensible manner, can provide fantastic inflation adjusted returns over the long term. Besides, it is also the duty of regulators like SEBI to come down heavily on wrongdoers. This is necessary in order to win the trust and confidence of small investors. Dealing strongly with these factors alone will go a long way in bringing retail investors in to Indian stock markets we believe.

Imagine this! For every dollar that comes in, in the form of economic development assistance, about US$ 10 goes out in the form of dirty money. This was the situation across 150 developing countries across the world. Now multiply this by 100 billion and this gives you the real picture. That's right! A whopping US$ 1 trillion of dirty money left emerging nations. And believe it or not, this figure - which is higher by about 14% from the previous year - is of 2011 alone. This data has been reported by a Global Financial Integrity (GFI), a group that exposes financial corruption. As put by the president of GFI, the illicit underworld is thriving at a time when the global economy is passing through difficult times.

Over a ten year period, illicit flows accounted for about US$ 6 trillion, of which Asia contributed to about 40%. China had the highest share in this. India was the fifth largest exporter of illicit money with total outflows of US$ 343 bn in this period. In 2011 alone, the figure is estimated at US$ 85 bn, third in the overall list. Tax evasion is the biggest component of underground economy, which leads to illicit outflow of capital. With the government being desperate to up its revenues and meet fiscal targets, it is high time it works towards cracking down the wrong doers.

A lot has been written about how a shale gas boom in US is likely to make it the biggest exporter by the end of the decade. Theories are floating around that Gulf regions might be robbed of their supremacy because of the shale boom. However, as per the renowned rating agency Standard & Poor's Ratings Services, there is no such risk to Gulf oil producers in the present. This is because before shale gas exports compete with Gulf oil exports, there has to be a huge infrastructure in place which is missing as of now.

Secondly, the ability of Gulf countries to redirect natural gas exports from US to other regions will cushion them from any such shocks. However, the argument discounts the threat that exists in case other regions also consider tapping their own shale energy resources once they get access to technology. As far as India is concerned, such developments will be positive as huge supplies are likely to keep oil and gas prices in check.

Over the week, major global indices remained jittery over the possibility of the US Fed announcing the tapering of its QE program. The Fed's Open Market Committee (FOMC) is expected to meet on the 17-18th of December and a decision may be taken in this regard. While recent positive employment data from the US has only heightened this possibility, whether the Fed will actually announce a taper remains to be seen. The US markets ended the week down 1.7% while most European markets ended the week down about 1.8%.

Back home, the markets saw a big jump on Monday after the election results from five states were announced. However, global factors weighed heavily on sentiment as the week progressed. The Indian stock markets were finally down 1.3% for the week. Barring Japan, all leading global equity indices closed weak this week. The biggest fall was seen in Chinese stocks with the Shanghai Composite down 1.8% and the Hang Seng down 2.1% for the week.

Performance during the week ended 12 Dec 2013
Data Source: Yahoo Finance

04:56  Weekend investing mantra
"The best way to think about investments is to be in a room with no one else and just think. And if that doesn't work, nothing else is going to work. The disadvantage of being in any type of market environment like Wall Street in the extreme is that you get over-stimulated. You think you have to do something every day." - Warren Buffett
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
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8 Responses to "Be prepared for a crisis of even bigger proportions..."

Rajeev Maheshwari

Dec 16, 2013

I agree with Mr Brij that borrowing money is a common phenomenon for housing, home appliance, automobile by new generation. Secondly inflation is eating your old saving drastically and its earning. Pensioner/old people are dependent on their earlier saving and eating too. Poor is going poor and richer are going to be richer day by day.So lot of frustration is growing all across nation.
So how crises affect common person except Asian country.
America is already have trillion USD debt. So who will suffer China or USA?
Earlier small rise in price govt is changed and now our Congress President,Prime Minister and Finance Minister are looking to whom they make scapegoat for such inflation.
So let old MPs and Politician should be retired and let new generation come in to the Politics. let age limit should be fixed in politics too.


Kirandeep Atwal

Dec 16, 2013

What is new in their ideas? Very long ago, Karl Marx has given very persuasive arguments about the collapse of capitalist economies. But, be aware of these arguments. Just because these arguments are very persuasive, it does not mean that these arguments do not contain any logical fallacies. History proves that the capitalist system is the best system in the world.



Dec 15, 2013

Retail investor participation is low, due to the following:-
1.Insider trading
2.FIIs have Government-level contacts and get news early.
3.Retail, investors like penny stocks.The recent SEBI rule, on many penny Stocks has reduced their participation.
4.Scam after Mega-scam, involving the UPA itself, has shattered the confidence in ethical functioning of "everything",in India.
5.There is a feeling that the UPA is ruled over by the IMF,G-20,USA and the Globalist Elites,from 2004.
6.The Stock Market seems to be a medium for recycling Blackmoney.
Please google for:-
Globalist Elites and One World Totalitarian Government



Dec 15, 2013

In anticipation of crisis, the central banks will continue printing the currency and prefer to embrace inflation rather than crash. It has become a point of no return to all nations,the respective governments followed unfair economic policies to come to power and then retain the power.



Dec 14, 2013

Though not in bigger proportion, crisis is a head which will be tackled in a suitable way.



Dec 14, 2013

Today people are living on borrowed money/ credit cards and saving very little for their future resulting in the scenario predicted


Dr.Veeranna Doddipatla

Dec 14, 2013

The process of printing money is certainly very dangerous. Quantitative is a temporary measure to save the economy, but if it is not simultaneously followed by hard measure to control the flow of money is ly dangerous leading to long term financial catastrophe. Bailing out large corporation without proper control of deployment these easy money will be long term disaster. The easy money printed by the central banks have been deployed less in lending to businesses and to consumers and more in purchase of assets, including stocks, commodities, real estate and derivatives which leads to asset bubble in real estate and stock markets. In spite of very slow recovery in US economy, the stocks are trading at highest levels. This certainly leads to stock market bubble sooner than expected. Probably trading in derivatives one of the major reasons for these asset bubbles.
The innovative financial instruments are introduced the market based the theories. The test is on the worldwide markets with disastrous ramifications. In spite of proven record of disasters, more and more new instruments are introduced which benefit only high net worth manipulators. If understand the media reports correctly, RBI is planning to introduce interest derivatives adding one more to the already existing derivatives (gambling).


Pankaj Ajmera

Dec 14, 2013

Superb. Only Equitymaster can highliht such Honest Truth.Proud to be associated withn you as Life Member.

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