Drink and get more drunk! - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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30 NOVEMBER 2011


The global stock markets were up sharply on Monday, November 28th. The key reason for this happy celebration was the fact that US consumers were spending. According to an article in www.Bloomberg.com, "U.S. retail sales during Thanksgiving weekend climbed 16 percent to a record as shoppers flocked to stores earlier and spent more, according to the National Retail Federation . Sales totalled $52.4 billion, and the average shopper spent $398.62 during the holiday weekend, up from $365.34 a year earlier, the Washington-based trade group said in a statement today, citing a survey conducted by BIGresearch."

The Thanksgiving weekend flags off the Christmas season shopping extravaganza. Just as we buy gifts for all our relatives and friends in Diwali, the Americans go shopping for their Christmas presents. Not that the Americans don't go shopping otherwise.

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Buying is a habit - a bad habit

The Americans are compulsive shoppers. A country with a USD 600 billion trade deficit - about 5% of their GDP - is basically importing more junk than it can pay for. And the US has done this for decades. This means that the US government has printed US Dollar bills - which it gives to the Chinese and other exporting countries - and gets plastic toys, furniture, and clothes in return. Once in a while the Chinese send the Americans counterfeit parts for their billion dollar defence programme!

Two years ago, the savings rate of American households had turned negative. Their annual income was not enough to match their consumption. Not only were they busy buying Chinese goods, they were busy buying homes to put all those goods in and now they had a mortgage debt to repay.With jobs shipped offshore unemployment is north of 9%. Furthermore, salaries in the US have not increased over the past decade - with the exception of salaries of the financial sector and the lawyers, amongst others.

If you have visited a typical American home, the first impression that you will get is: Wow! These guys don't need to buy anything for the next few lives! Yet, the mall is where you need to be - or maybe the online version of it. The in-flight magazines in US planes are full of junk that you never need, but feel that you should buy. The US consumer breaks the myth espoused by advertising gurus who believe that "advertising does not create a want, it merely fulfils a need". No sensible person would need most of the products advertised in the in-flight magazines, yet the promotions create that "want".

The first day of shopping is traditionally the day after Thanksgiving, which is always observed on the last Thursday of every November. To make it easier for the ever-consuming Americans to consume, many stores began their "Black Friday" on Thursday itself. People stood in queues and camped in tents for hours to be able to buy more. "Black Friday" allows you to buy limited products at some pretty good discounted prices for a limited time. (As an aside, we have our own version of "Black Friday" in India except that business groups get to buy national assets like coal, gas, iron ore, spectrum and assorted paraphernalia at discounted prices on a daily basis! The astute Indian buyers don't stand in queues and pitch in tents, though. The well-connected Indian buyer just makes the right phone calls and gets it done.)

Drink rationally, invest rationally

The point is that the solution to an out of control drunkard is not taking him to the bar again and serving drinks on sale. The Americans need to save. They need to pay down their debt. A recent report by the Federal Reserve states that US household debt is USD 11.7 trillion - it declined some 0.5% over the past 3 months. But delinquent payments - people who are paying late or cannot fully pay their debt - have increased and nearly USD 1.2 trillion of loans would be in this category. The good news is that people are buying fewer homes - and renting more. Disillusioned by the myth that home prices can only increase and by the difficulty of getting mortgage loans due to subdued salary levels, the US consumer is renting.

But this is only the beginning of a long, secular trend in the US: there is a need to repair their personal - and national - balance sheets. The US - and European - consumer is dead for all practical purposes and cannot be relied upon as an engine for economic growth for the next 3 years. That music died in 2008. The drunken consumer has already been in a rehab clinic for the past 2 years with muted bursts of activity.

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But the media and the stock markets are happy and are celebrating the continued drunkenness over Black Friday. But encouraging consumption at this stage is a dangerous game. This increased spend can only be matched by an increase in debt - and not by higher incomes. The hangover will only get worse. The pain will only be lengthened. The US Dollar - and the US economy - will be set for a longer and steeper fall. And jittery traders will make the stock markets yo-yo more than it already does.

So, despite the news of the chirpy Black Friday - and the surge in the global and Indian stock markets - recognise that the world has not changed. The US, Europe, and Japan are in trouble. China has its own economic issues and bubbles to deal with. India has its challenges. The markets will continue to jump around in all directions based on silly news and new silliness. Don't let these daily, wild gyrations scare you - or enthuse you. Focus on the fact that you are investing for the long haul. For a belief in the long term GDP growth rate of India and the earnings of India companies. And don't forget to understand your own needs and your ability to take risk. Invest rationally - and let the western consumers continue to drink irrationally.


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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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5 Responses to "Drink and get more drunk!"

Nirmal S K

Dec 2, 2011

Well , The Indian Goverment is helping the Americans in their bad time , Our Nuclear Policy, INR Depreciation and the Retail FDI are steps in helping the U.S. cause.

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Hasit Hemani

Nov 30, 2011


I remember a joke - - One day Socrates and his disciples went to a Super Market. They were quite in awe of what they saw there. After some time one of the disciple asked the great teacher what you think about all the articles and gizmos on display ? The sage replied, amazing . . .! What's so amazing Sir ? The Great Guru said, How we are still so happy without all these ?

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r v iyengar

Nov 30, 2011

I am told that a lot of Americans don't even understand that the cost of delayed credit card payments is exhorbitant. They only know that the minimum amount payable is to be paid to keep their cards intact for the time-being. In that sense perhaps the trillion dollar credits that many have collectively taken is just the figure that one arrives at, taking the excessive interests payable into calculations. If all such people realize their folly and resort to immediate clearance of their credit card dues, and shun additional purchases till old dues are cleared the figures bandied about will come crashing down.
The market will suffer for a while , but after a delay the people will regain their liquidity and the purchasing power as well.

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girish shah

Nov 30, 2011

DEAR AJIT , what if the US consumer *(or the govt ) says my dear friend( ALL THE LENDERS) you know i just cannot pay back all your debt so take a 5% of your money and lets start a new account ----PERIOD

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chandrakant

Nov 30, 2011

The honest truth is very true!!!

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