Inflation or deflation?

Dec 26, 2008

In this issue:
» Are we heading for deflation or inflation?
» Bailout bandwagon rolls on
» Communists show a flicker of capitalism
» Is decline in port traffic indicating something?
» ...and more!!

Experts say we are heading to 2% inflation in the next few months, from 6.6% currently. And they have the right reasons for saying so - slackening demand, sharp decline in commodity and manufactured goods prices. Base effect - of higher inflation in the beginning of this fiscal - is also expected to play a role. We appreciate this reasoning.

But our heads turn on reading - "Think 7% fiscal deficit. It's in sight" - on the front-page of a leading business daily. Proponents of deficit spending (government spending or investing more than its income; especially true for developing countries' governments' that have few resources and tend to borrow to spend) believe that a slowdown like this requires massive government spending. And we believe, to push growth, it is desirable to an extent. Pushing spending (on infrastructure and other developmental projects) is in fact a classical remedy to combat the downturn.

But how much is too much? By spending way beyond its means in troubling times like these, the government might do some good for economic growth in the medium term. But in effect, it is sowing seeds of high inflation in the long run.

Our point is that when a government controls financial decision-making of businesses, no one ends being better off. This is because the spending (via stimulus) is generally aimed to provide money to businesses/sectors that have failed (or about to fail). In such cases, uncompetitive spirits rule roost - like real estate companies in India or failed banks in the US.

While stimulation is the goal, higher inflation might be the result. We keep our fingers crossed!

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The bailout bandwagon rolls on. As reported by Financial Express, the All India Motor Transport Congress has called for an indefinite nation-wide strike from January 5, demanding the government for a bailout package. Issues like high costs of diesel, tyres, and permits are on the top of the agenda list. Truckers are also asking for an increase in the tenure of loans for trucks and carriers so that they get more time to pay back the loans.

Considering that almost 70% of the entire transport in India is by roads, the government will have tough time soothing transporters' nerves. Are we looking at another round of rising prices of necessities as transporters' strike can delay supplies from factories?

We have no idea about other sectors but the central government's first round of stimulus is definitely having a positive impact on the passenger car industry. As per a leading daily, sales of small cars have picked up in what could be termed as a very quick response to price cuts announced by all the major car manufacturers. In fact, sales are likely to go up by 20% to 25% as compared to December last year, giving the car companies something to cheer about in what has turned out to be a rather disappointing year, especially towards the latter half.

We believe that the cheer is likely to be a short lived one, if one believes in car makers who have gone on record to state that 2009-10 is likely to be one of their sternest tests ever. We hope they change their mind a bit after considering the December numbers. However, it is hard to argue against their case. Although price cuts have helped, the fact of the matter is that interest rates are still high and economic environment still uncertain.

"Retailers went from 'Ho-ho' to 'Uh-oh' to 'Oh-no'," says Mary Delk, a director in the retail practice at consulting firm Deloitte LLP. This is the changing tune of retailers with change in growth prospects of the US economy. Even in India, despite offering early discounts and steep mark downs, retailers are facing drop in footfalls and lower sales as compared to last year. Time to go shopping for bargains?

Satyam's mess has its first casualty. An independent director on the company's board (for around 17 years), Ms. Mangalam Srinivasan, has resigned while taking moral responsibility for voting in favour of the controversial acquisitions of Maytas Infra and Maytas Properties. Satyam's independent directors have already taken a lot of flak for their approval of the conflict-ridden announcement.

Ms. Srinivasan's resignation can now increase pressure on other independent directors to quit. Notable among them are Harvard Business School professor Krishna Palepu and Vinod Dham, the brain behind Intel's Pentium chip. Satyam's board is meeting on 29th December to consider a share buyback.

In India, we have rarely heard of managements getting penalised for short-changing minority shareholders. We believe a strict penalty for Satyam's management for persistent failures on corporate governance matters might bring some sanity.

The communists are finally showing a flicker of capitalism. Wait! We are not talking of any change in habit amongst Indian communists. We are talking of the Chinese ones. As reported in the Wall Street Journal, China is harbouring dreams of making the Yuan an international currency. The fact that it has US$ 1.9 trillion in foreign exchange reserves means that the Yuan has become acceptable in certain quarters.

Another reason for adopting this stance is the volatility of the US dollar and the fact that it is expected to weaken going forward given the amount of dollars the US Treasury is printing these days to spend on correcting the liquidity crisis. Given that Chinese exporters have taken a severe beating due to this, receipts in Yuan are expected to do away with the volatility in revenues to some extent. Now that's like going the reformist way. Think of our communists!

If you are a traveler to the US, get ready for some bargain hotel rates. As per Smith Travel Research, for the first 11 months of the year, occupancy levels in US' hotels are down 4% YoY. Even the revenue per available room has declined by 13% YoY. The scene for Indian hotel companies is almost similar. Hit by credit crisis and then terror attacks (Mumbai), occupancy rates in the past few weeks has declined by as much as 25% to 30% in some cases. Hotels are selling corporate travel packages at huge discounts of about 30% to 50%.

Talk of good times amidst overall slowdown and the film entertainment sector tops the list. This is true at least of the last few weeks that have seen block-buster movies being released in theatres across India. After the stellar release of 'Rab Ne Bana Di Jodi' and 'Ghajini', multiplexes will end the year on a happy note. Both the movies have received superb response in terms of bookings.

The industry, which was reeling under recession and back to back failures of big budget movies (Yuvvraaj, Drona, Love Story 2050) finally has something to cheer. While 'Rab Ne..." got fabulous response in its first week with business of around Rs 410 m, Ghajini has rocked the box office, raking in 100% collections across the country on its opening day.

Stocks in India closed weak today, with the BSE-Sensex closing 240 points down. This was unlike the rest of Asia where key indices closed with gains or, in some cases, very marginal losses. Some markets like Hong Kong were closed for trade today.

Traffic at Indian ports has recorded its second straight month of decline in November 2008. The 12 major ports in India handled a total of 42.6 million tonnes (MT) of goods during the month, down 5% compared to the same month last year. The traffic had declined at a similar rate in October as well. Ports are a major economic consideration given that a country's international trade is handled from here. Ports are also used for the support of economic activities in the hinterland, because they act as a crucial connection between sea and land transport.

Decline in port traffic can therefore be seen as an indicator of a prolonged slowdown in India's trade with other nations. However, unlike other Asian countries that depend a lot on exports for their economic growth, given India's low dependence, port traffic will not be one of the key indicators that spell economic troubles ahead.

Today's investing mantra
"Market values are fixed only in part by balance sheets and income statements; much more by hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless causes impossible to be listed without omission." - Gerald Loeb (The Battle for Investment Survival)

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