USA is now competing against Greece - US Debt level is approaching 90% of its GDP while Greece Debt level is 120% of its GDP. Some studies have pointed out any debt burden exceeding 90% GDP is a long term growth deflator in view of the interest burden and repayment commitments.
Well Greece is accused of being spending too much and taken to task in international forums. It may be noted that the ultimate burden of the debt is felt on common people who lose jobs and face other economic hardships.
Let us see how US has built up this much debt
1) During Bush era, the costly Iraq and Afgan war commenced. Both cost about 2-3 trillion dollars and still bleeding. It is true that some of the American (oil) companies made big money in Iraq, but very little has been given to the US Govt in the form of taxes.
2) 2008 Financial Folly of "great American financial innovators' mixing toxic assets with good ones created one of the spectacular financial fireworks (crashes) in the human history. US Govt had to intervene, after the initial hesitation (that resulted in Lehman bankruptcy) which cost more than 2 trillion dollars.
3) Obama Administration's idea of extending social benefits of free health care etc also added a few trillions more.
4) Then there is the financial stimulus to kick start the economy also resulted in a few trillions to the US Debt
Overall it looks US policies were as good as Greece's! Hope US won't come work with 'financial innovation' or 'financial engineering" similar to the one that brought about the 2008 Credit Crisis.
There is no doubt that the US should cut its debt. The common sense says that it can be achieved by raising taxes and reducing expenses. But Republicans do not want to raise tax while Democrat (&US President) do not want to cut expenses.
Now there is every effort to increase the debt level with minimum tax increase and little cut in expenses. Such actions are meaningless. Without an effort to bring it down (which won't be easy) means the problem just gets postponed! US must take negative growth and unemployment for a few years rather than risking a 'debt crisis' in the future. The way it goes now, a future US debt crisis is a 'white swan'.
Will US debt crisis become a global crisis? Well, there are many who say that it could be a global problem. However there are a few who says it need not be. But it will accelerate the predictions (UN and IMF has already published papers) about the unavoidable move from US dollar as the world trade reference currency in global trade. A debt crisis by US will erode confidence in US$. Then China and India will buy oil from middle east and minerals from Africa in rupee and Yuan which will find acceptance from the exporting countries. Or they may prefer Euro. USD decline - which is their own making - is now not unavoidable, if any only if, US stop acting like a banana republic.
It is pertinent to note that Sterling was the global currency till 1950s. About 87% of the global reserves were in Sterling in 1947. After India got decolonized, the US dollar started its journey to become the reserve currency replacing Sterling. One of the reasons for this was the preference of former colonies to have non-Sterling currency as the reserve currency. Moreover US role in the global arena increased as they had great leaders like Roosevelt, which seems to be extinct in the current generation of US.
Well for investors, these are tumultuous times. It is better to trim down the exposure to the USD denominated assets.
Monday, July 18, 2011
Thursday, July 7, 2011
Nasty Experiment called EURO (Part II) & Other Issues
On 27 Nov 2010, the topic by this blog was Euro and the imbalances it causes. The article was concluded saying that as long as Euro exists, there could be troubles. We stand vindicated. Greece issue has re-emerged with vengeance. All those who are involved are in state of confusion. Whilst French banks take a realistic view of part write offs, Moodys and S&P says it will be a default - first sovereign default in Europe since the second world war. (During June 2011,both Moodys and S&P have downgraded Greece to almost default status, is causing upheavals in markets, world over.) A default will have serious issues for Euro.
Third time during the last 20 months (Apr 2010, Nov 2010 & June 2011) the world's markets were rattled by Euro problems.
Europe is likely to be hit the hardest among major economies by a potential global slowdown in 2012. Europe faces the most bleak future among major economies, in part because the sovereign debt crisis in some euro zone countries (say Greece, Ireland, Portugal, etc) is unlikely to end soon, casting a shadow over the euro's future.
The domestic market in Europe is not recovering very fast, so most likely Europe's economy is driven by external demand (but exports are also increasingly difficult - ask China). Strong economies in Europe like Germany is also facing shrinking population resulting in lower economic activities and overall Europe is not a growth story at all, even in long term.
Moreover, the global economy is slowing led by the largest economy in the world. Definitely US is not recovering fast as predicted - if not going back into recession. Many economies (including USA) will have to stop stimulus and others tighten policy. The recent squabble among US politicians on raising debt levels show that US does not much options left.
As to the challenges facing the emerging economies , many has changed their pro-growth policies (due to concerns on inflation), hurting economic performance. India and China have been constantly increasing the interest rates during 2011. More hikes are expected. Overall, emerging markets is expected to continue to raise interest rates and allow their currencies to strengthen, causing a slowdown in economic growth in those countries.
In addition, oil supplies will likely be interrupted by the unrest in North Africa and the Middle East, resulting in high oil prices, which will further dampen the economic recovery of the world.
Be ready for more problems for Euro & rest of the world, which could adversely impact the world's financial markets.
Let us hope for the best; but prepare for the worst.
Third time during the last 20 months (Apr 2010, Nov 2010 & June 2011) the world's markets were rattled by Euro problems.
Europe is likely to be hit the hardest among major economies by a potential global slowdown in 2012. Europe faces the most bleak future among major economies, in part because the sovereign debt crisis in some euro zone countries (say Greece, Ireland, Portugal, etc) is unlikely to end soon, casting a shadow over the euro's future.
The domestic market in Europe is not recovering very fast, so most likely Europe's economy is driven by external demand (but exports are also increasingly difficult - ask China). Strong economies in Europe like Germany is also facing shrinking population resulting in lower economic activities and overall Europe is not a growth story at all, even in long term.
Moreover, the global economy is slowing led by the largest economy in the world. Definitely US is not recovering fast as predicted - if not going back into recession. Many economies (including USA) will have to stop stimulus and others tighten policy. The recent squabble among US politicians on raising debt levels show that US does not much options left.
As to the challenges facing the emerging economies , many has changed their pro-growth policies (due to concerns on inflation), hurting economic performance. India and China have been constantly increasing the interest rates during 2011. More hikes are expected. Overall, emerging markets is expected to continue to raise interest rates and allow their currencies to strengthen, causing a slowdown in economic growth in those countries.
In addition, oil supplies will likely be interrupted by the unrest in North Africa and the Middle East, resulting in high oil prices, which will further dampen the economic recovery of the world.
Be ready for more problems for Euro & rest of the world, which could adversely impact the world's financial markets.
Let us hope for the best; but prepare for the worst.
Saturday, May 21, 2011
Future Blackswans & Possible Solutions
Once I was watching a programme in Discovery channel on chimpanzees. Like many animals (and humans?) chimpanzees also live in communities. They hunt together, gather food together and warn each other of any dangers. Each community is led by a leader. Any perceived challenge to the leadership is met with brutal attack till the challenger shows the body language of submissiveness. However, one day the incumbent will lose power to a challenger.
Humans are no exception. Human history is full of stories of brutality for the sake of power. Many human societies (called countries) even in the so called modern times of today - recent examples include Libya, Syria, Bahrain - attempt changes to leadership (or preserve leadership positions) through brutality.
But in certain human societies mainly Europe, North America and some parts of Asia, the community leadership changes no longer occur based on brutality. Challengers are given more peaceful means of 'election' to challenge the existing leaders. But we need to remember that not so long ago; Europe also followed the path of brutality to enforce change in leadership.
Interestingly, there are other common elements in the animals living in communities and humans, other than leadership. Interested readers may wish to explore more on this topic. However, the human societies are much more complex and have two distinct elements which animal kingdoms can never boast of - religion and money.
Various religions dominate different regions of the world. In certain communities (or countries) religious leadership takes the role of community leadership. If religion is strictly enforced, the society faces a big problem. Almost all religions do not tolerate challenge against their religious laws. In countries where religion is strictly enforced, the kids are trained only in religious laws. So the community is always forced and brainwashed to think 'within the box' stifling creativity and progress. If the religion is separated from community (state or country) leadership, then at least a few will dare to think 'outside the box' unleashing invention, creativity and progress. That is why countries such as Japan, Korea and West comes out with innovation after innovation. Let us hope the current MENA revolution will do what French Revolution had done for Europeans. However, at this point, when I write this blog, it seems that Egypt (equivalent to French during their revolutionary period) leadership will be taken over by the dominant religion (Muslim Brotherhood) who will force the community to think and act 'within the box' with predictable results & with no hope of creativity or innovation. Egyptians, who want to enjoy the flagrance of freedom, will continue to try to escape to the West. Let us hope Egypt will become a role model for the rest of MENA by electing a non-religious leadership to guide the Egyptian community who may re-create the times of Great Pharaoh's, whose technology (e.g. construction techniques used in Pyramids, preservation of mummies, etc) still amazes the scientific world.
Another distinct element of human society is the use of 'money' as a medium of exchange, which replaced barter system (some studies have pointed out that some animal communities also follow a kind of crude barter system to exchange favours!). It is interesting to note that Russia was able to do survive its economic crisis in 1998 and brush aside any offer of help from IMF as they focused more on barter system. (http://www.richardccook.com/2010/01/10/in-time-of-crisis-barter-works-and-may-have-saved-russia-in-1998/).
However, modern human societies, irrespective of religion and race, hold on to money. Money is a common factor defining purchasing power, status, wealth and it is something all communities tell their kids to aim for. Whilst individual nations have their own currency (money)to facilitate exchange of goods & services within its borders, there is only one global currency -the mighty dollar. But it is heading towards a collapse. China and other nations who stock the paper money called dollar is already nervous and it is a matter of time that they turn against US dollar and seek other medium to store value. Americans are not producing any goods and services to exchange with the rest of the world. But they buy as much as they can and settle them in paper. Once the world stops accepting the valueless paper, American economy is doomed, which will impact the rest of the world too. A dollar collapse will bring in 10x misery to Americans than they experienced with Subprime collapse. Let us hope USA gets its act together and start exporting something really worth, other than its paper currency.
These two features of human society - religion and money - have the potential of unleash future blackswans in the medium term. If MENA region slips into further religious and political leadership turmoil, then oil price could go through roof, unsettling many economies in the world. If the dollar collapses, then only history can tell us what will happen to the US economy and all economies linked to it. Many economies are significantly dependent upon on USA as it is their major consumer market - e.g. Chinese products, Indian IT and Arabian Gulf Oil. Given the impact of dwindling population of many western economies, they also look to US markets for exports.
Given the possibility of a black swan lurking around, you may wish to protect your portfolio against a disaster scenario. Well, I think stock options may be one of the answers. For those who are not familiar with stock options, broadly it can be defined as a form of insurance, especially Put options. It may be worth to expense off cost of options while waiting for the black swan, which could in fact unleash a profitable opportunity, which actuarially could repay the cost of options many times over. Or you may explore a combination of options, wherein you place a structure by selling and buying call and put options.
Let us hope for the best, but prepare for the worst.
PS. A Word of Caution/warning: The risks involved with trading stocks, options and other securities may not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. Also See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf).
Humans are no exception. Human history is full of stories of brutality for the sake of power. Many human societies (called countries) even in the so called modern times of today - recent examples include Libya, Syria, Bahrain - attempt changes to leadership (or preserve leadership positions) through brutality.
But in certain human societies mainly Europe, North America and some parts of Asia, the community leadership changes no longer occur based on brutality. Challengers are given more peaceful means of 'election' to challenge the existing leaders. But we need to remember that not so long ago; Europe also followed the path of brutality to enforce change in leadership.
Interestingly, there are other common elements in the animals living in communities and humans, other than leadership. Interested readers may wish to explore more on this topic. However, the human societies are much more complex and have two distinct elements which animal kingdoms can never boast of - religion and money.
Various religions dominate different regions of the world. In certain communities (or countries) religious leadership takes the role of community leadership. If religion is strictly enforced, the society faces a big problem. Almost all religions do not tolerate challenge against their religious laws. In countries where religion is strictly enforced, the kids are trained only in religious laws. So the community is always forced and brainwashed to think 'within the box' stifling creativity and progress. If the religion is separated from community (state or country) leadership, then at least a few will dare to think 'outside the box' unleashing invention, creativity and progress. That is why countries such as Japan, Korea and West comes out with innovation after innovation. Let us hope the current MENA revolution will do what French Revolution had done for Europeans. However, at this point, when I write this blog, it seems that Egypt (equivalent to French during their revolutionary period) leadership will be taken over by the dominant religion (Muslim Brotherhood) who will force the community to think and act 'within the box' with predictable results & with no hope of creativity or innovation. Egyptians, who want to enjoy the flagrance of freedom, will continue to try to escape to the West. Let us hope Egypt will become a role model for the rest of MENA by electing a non-religious leadership to guide the Egyptian community who may re-create the times of Great Pharaoh's, whose technology (e.g. construction techniques used in Pyramids, preservation of mummies, etc) still amazes the scientific world.
Another distinct element of human society is the use of 'money' as a medium of exchange, which replaced barter system (some studies have pointed out that some animal communities also follow a kind of crude barter system to exchange favours!). It is interesting to note that Russia was able to do survive its economic crisis in 1998 and brush aside any offer of help from IMF as they focused more on barter system. (http://www.richardccook.com/2010/01/10/in-time-of-crisis-barter-works-and-may-have-saved-russia-in-1998/).
However, modern human societies, irrespective of religion and race, hold on to money. Money is a common factor defining purchasing power, status, wealth and it is something all communities tell their kids to aim for. Whilst individual nations have their own currency (money)to facilitate exchange of goods & services within its borders, there is only one global currency -the mighty dollar. But it is heading towards a collapse. China and other nations who stock the paper money called dollar is already nervous and it is a matter of time that they turn against US dollar and seek other medium to store value. Americans are not producing any goods and services to exchange with the rest of the world. But they buy as much as they can and settle them in paper. Once the world stops accepting the valueless paper, American economy is doomed, which will impact the rest of the world too. A dollar collapse will bring in 10x misery to Americans than they experienced with Subprime collapse. Let us hope USA gets its act together and start exporting something really worth, other than its paper currency.
These two features of human society - religion and money - have the potential of unleash future blackswans in the medium term. If MENA region slips into further religious and political leadership turmoil, then oil price could go through roof, unsettling many economies in the world. If the dollar collapses, then only history can tell us what will happen to the US economy and all economies linked to it. Many economies are significantly dependent upon on USA as it is their major consumer market - e.g. Chinese products, Indian IT and Arabian Gulf Oil. Given the impact of dwindling population of many western economies, they also look to US markets for exports.
Given the possibility of a black swan lurking around, you may wish to protect your portfolio against a disaster scenario. Well, I think stock options may be one of the answers. For those who are not familiar with stock options, broadly it can be defined as a form of insurance, especially Put options. It may be worth to expense off cost of options while waiting for the black swan, which could in fact unleash a profitable opportunity, which actuarially could repay the cost of options many times over. Or you may explore a combination of options, wherein you place a structure by selling and buying call and put options.
Let us hope for the best, but prepare for the worst.
PS. A Word of Caution/warning: The risks involved with trading stocks, options and other securities may not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. Also See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf).
Thursday, April 14, 2011
Confusing Times of 2011
Like many other investors, I too sometimes worry about the prospects of 2011. Well 2010 was reasonable for many emerging markets with double digit returns. Even matured markets fared relatively better.
How will 2011 perform? Will it dip impacting my portfolio? Should I hedge? What are the derivative strategies to follow? The dark clouds at the horizon are many i.e.
1. Oil prices above USD 120 p/b.
2. Inflation is a threat in many economies, partly thanks to high oil prices
3. Interest rates go up, partly due to inflation
4. Lesser credit off take, thanks to higher interest rates
5. All of the above can lead to lower economic activity
6. Many people criticize massive US deficits and China surpluses
A calmness of a Zen monk descended on me when I read Financial Times (FT) on 12Apr2011. In the page 3, it carried an article titled "IMF sees steady economic recovery'. IMF in its recent report stated that world GDP will grow by 4.4% in 2011 and 4.5% in 2012 and optimism was expressed on advanced economies. IMF did not ignore the sovereign debt problems of Europe or the Middle East unrest. Despite such instances, they said that it was now more certain about its forecast than in Oct2010. They said that double dip threat is receded with more sustainable global economic activity. Of course, at last good news!. Respectable FT carries a news article that says things are looking better despite all troubles. I felt calm and happy.
But it did not last long. The page 11 of FT of the same date (12Apr2011) had another article title "Tighten seatbelts; 2011 could be worse than 2010". It said that the macro economic risks are now higher because of Arab Spring (Middle East political changes), Japan's earthquakes, slippage in US growth estimates, tightening of US fiscal policies, etc. It says that if the oil price increase continues, it will impact the growth. Well some of my worries returned with vengeance.
In New Testament, Roman Governer (of Palestine) Pontius Pilate asks a question to Jesus "What is truth?” The apt religious answer to this question is also given in New Testament. (Those who want to know this truth may read the New Testament or seek the help of a biblical scholar). However the truth I seek now is more of financial in nature. Which of the above two views expressed in a respected financial newspaper is the truth?
Do you think FT is sending out a confused message? FT is not alone. Even the chairmen of reputed supra-national mutual funds are also confused. One of them recently remarked that despite all the issues, emerging economies like India will attract investments and said that India is a growing market of around 8% growth in real terms. This should translate into corporate earnings growth of 14%-18%. Hence there is no way that anyone investing can ignore India.
After a few days, the same person said that high crude prices (which possibly could hit USD 200 p/b), lacklustre industry data, scams, interest rates etc are not good for Indian economic growth.
As I write this today, Indian market sharply shot up on its last trading day by 2.2%. A paradox?
It is clear that FT is confused. Same is the case with MNC Mutual Fund gurus. Among these troubles, Warren Buffet seems unconfused or probabily not worried about the current investment climate. No doubt half a century of experience and skills would help him. Recently he acquired Lubrizol and was in India seeking investing opportunities.
Let us turn to the master investor for some clue how to handle situations like this. He is basically a long term player, although he has his own type of short term bets. His long term focus proved to be a very powerful approach to manage a portfolio, which helped through market ups and downs. His company has seen several crisis – 1973 Oil crisis, 1987 stock market crash, 1991 Gulf war, Dot com crash of early 2000 and recently 2008 Global crisis. The portfolio of investments, comprising listed and unlisted companies, performed satisfactorily, despite all these troubles.
If you are convinced that the stock market would do well over the long term, you can win by limiting the downside of the portfolio during bear markets. This is one of the important guidelines of Warren Buffet (often mentioned in his letters) as his focus seems to be on limiting the downside to his portfolio. For him a performance of (–)10% of the portfolio vs. (-)20 % of an Index (say Dow or FTSE or Nifty or Nikkei) is better than a +20% portfolio performance vs. +10% of an Index.
How will 2011 perform? Will it dip impacting my portfolio? Should I hedge? What are the derivative strategies to follow? The dark clouds at the horizon are many i.e.
1. Oil prices above USD 120 p/b.
2. Inflation is a threat in many economies, partly thanks to high oil prices
3. Interest rates go up, partly due to inflation
4. Lesser credit off take, thanks to higher interest rates
5. All of the above can lead to lower economic activity
6. Many people criticize massive US deficits and China surpluses
A calmness of a Zen monk descended on me when I read Financial Times (FT) on 12Apr2011. In the page 3, it carried an article titled "IMF sees steady economic recovery'. IMF in its recent report stated that world GDP will grow by 4.4% in 2011 and 4.5% in 2012 and optimism was expressed on advanced economies. IMF did not ignore the sovereign debt problems of Europe or the Middle East unrest. Despite such instances, they said that it was now more certain about its forecast than in Oct2010. They said that double dip threat is receded with more sustainable global economic activity. Of course, at last good news!. Respectable FT carries a news article that says things are looking better despite all troubles. I felt calm and happy.
But it did not last long. The page 11 of FT of the same date (12Apr2011) had another article title "Tighten seatbelts; 2011 could be worse than 2010". It said that the macro economic risks are now higher because of Arab Spring (Middle East political changes), Japan's earthquakes, slippage in US growth estimates, tightening of US fiscal policies, etc. It says that if the oil price increase continues, it will impact the growth. Well some of my worries returned with vengeance.
In New Testament, Roman Governer (of Palestine) Pontius Pilate asks a question to Jesus "What is truth?” The apt religious answer to this question is also given in New Testament. (Those who want to know this truth may read the New Testament or seek the help of a biblical scholar). However the truth I seek now is more of financial in nature. Which of the above two views expressed in a respected financial newspaper is the truth?
Do you think FT is sending out a confused message? FT is not alone. Even the chairmen of reputed supra-national mutual funds are also confused. One of them recently remarked that despite all the issues, emerging economies like India will attract investments and said that India is a growing market of around 8% growth in real terms. This should translate into corporate earnings growth of 14%-18%. Hence there is no way that anyone investing can ignore India.
After a few days, the same person said that high crude prices (which possibly could hit USD 200 p/b), lacklustre industry data, scams, interest rates etc are not good for Indian economic growth.
As I write this today, Indian market sharply shot up on its last trading day by 2.2%. A paradox?
It is clear that FT is confused. Same is the case with MNC Mutual Fund gurus. Among these troubles, Warren Buffet seems unconfused or probabily not worried about the current investment climate. No doubt half a century of experience and skills would help him. Recently he acquired Lubrizol and was in India seeking investing opportunities.
Let us turn to the master investor for some clue how to handle situations like this. He is basically a long term player, although he has his own type of short term bets. His long term focus proved to be a very powerful approach to manage a portfolio, which helped through market ups and downs. His company has seen several crisis – 1973 Oil crisis, 1987 stock market crash, 1991 Gulf war, Dot com crash of early 2000 and recently 2008 Global crisis. The portfolio of investments, comprising listed and unlisted companies, performed satisfactorily, despite all these troubles.
If you are convinced that the stock market would do well over the long term, you can win by limiting the downside of the portfolio during bear markets. This is one of the important guidelines of Warren Buffet (often mentioned in his letters) as his focus seems to be on limiting the downside to his portfolio. For him a performance of (–)10% of the portfolio vs. (-)20 % of an Index (say Dow or FTSE or Nifty or Nikkei) is better than a +20% portfolio performance vs. +10% of an Index.
Monday, March 7, 2011
Black Swans
MENA region was taken for granted. Whilst some countries had namesake elections for presidents, others were ruled by monarchs. Some of the monarchs are better than acclaimed democracies in the world. The best example is UAE where the governance is much better and where both nationals and expatriates live side by side and enjoy living standards better than in the western world.
However, not all of the MENA is like that. Many are poor and corrupt with exploding population due to large families with five or more kids, who fought from childhood for chances of betterment of life against intense competition for limited opportunities available.
Overall comparable to the situation in France in 1789. Such frustrated population, if enlightened by non-religious thinkers speaking fearlessly about ‘Equality, Liberty and Fraternity’ is capable of making a radical change. French revolution was aided by the technology of that day, i.e. printing machines. Once the French decided to revolt, Europe was never the same again. The revolutionary ideas resulted in the separation of state from the religion, which enabled the free thinkers to explore ideas with new inventions and theories, without fearing the backlash of ‘traditionalists or religious extremists’ who dwindled away as the new thoughts and ideas took root in the minds of population and new generations.
I don't know about any such non religious thinkers in MENA region; however a revolution did take place in Tunis late last year. It is reported a poor frustrated fruit vendor when his fruit cart, which was his only livelihood, was confiscated by the police, in the moment of desperation, he set himself on fire. The rage of frustration that gripped the population was unleashed and spread like wild fire across the region, of course partly technology – i.e. social media. Like in French revolution the army sided with the people and turned against 'monarchs'. It was repeated in Egypt. It looks like it may repeat in Libya and who knows who is next. Let us hope this revolution will bring in 'Equality, Liberty and Fraternity’ into MENA region. Also hope that MENA region will produce free thinkers, new inventions and theories, without fearing the backlash of ‘traditionalists or religious extremists’.
If you talked about such events will take place 6 months ago, no one will believe you. Such events have all features of 'black swan' theory developed by Nassim Nicholas Taleb. The theory ridicules the belief that today’s 'normalcy' will continue into the future and hence predictions are possible. It says that the high-impact, hard to predict, rare events shape the history, science, finance and possibly anything human. Nassim goes on to say that once such rare and unaware events happen, the human nature find explanations for its occurrence, and wonder how they missed it i.e. makes it explainable and predictable.
Well, based on the events in MENA the prediction gurus are out there forecasting possible oil prices beyond USD 250 p/b and the problems and opportunities it could bring in. Whilst every one agree that the normalcy of MENA is upset with 'outlier' events, the financial markets in the world more or less still behaves in 'normalcy standards'. Although the oil prices have moved up significantly, which will impact automobile manufacturers to transportation to energy based manufacturing companies and almost all players in the oil based global economy, the world economy tries to behave as if 'normalcy' continues.
The recent past when the oil price touched USD100 p/b was in the early 2008 (due to demand > supply?) and peaked in July 2008 at USD 147 p/b. However, when world of finance crashed along with Lehman, oil price also crashed. Now the oil prices are back at USD 100/- plus due to entirely different reasons.
Many investors are now worried about their investments, which is quite right. What should be the risk appetite? Should they sell now and place them in fixed deposits? Or since many markets are down in double digits already during this year, is it not the time to buy? Best example is India. Again should not we buy into the possible rally of economies coming out of recession in style with several positive indicators on the horizon? The best example is USA.
What will be the oil prices after one year? Answer to this question will solve the concerns about the future performance of many stock markets in the world and hence consequently several portfolios. Of course you can try to predict the oil prices and can have an investment or portfolio strategy depending upon your views.
But be aware of the 'black swan' that could be lurking somewhere out there.
However, not all of the MENA is like that. Many are poor and corrupt with exploding population due to large families with five or more kids, who fought from childhood for chances of betterment of life against intense competition for limited opportunities available.
Overall comparable to the situation in France in 1789. Such frustrated population, if enlightened by non-religious thinkers speaking fearlessly about ‘Equality, Liberty and Fraternity’ is capable of making a radical change. French revolution was aided by the technology of that day, i.e. printing machines. Once the French decided to revolt, Europe was never the same again. The revolutionary ideas resulted in the separation of state from the religion, which enabled the free thinkers to explore ideas with new inventions and theories, without fearing the backlash of ‘traditionalists or religious extremists’ who dwindled away as the new thoughts and ideas took root in the minds of population and new generations.
I don't know about any such non religious thinkers in MENA region; however a revolution did take place in Tunis late last year. It is reported a poor frustrated fruit vendor when his fruit cart, which was his only livelihood, was confiscated by the police, in the moment of desperation, he set himself on fire. The rage of frustration that gripped the population was unleashed and spread like wild fire across the region, of course partly technology – i.e. social media. Like in French revolution the army sided with the people and turned against 'monarchs'. It was repeated in Egypt. It looks like it may repeat in Libya and who knows who is next. Let us hope this revolution will bring in 'Equality, Liberty and Fraternity’ into MENA region. Also hope that MENA region will produce free thinkers, new inventions and theories, without fearing the backlash of ‘traditionalists or religious extremists’.
If you talked about such events will take place 6 months ago, no one will believe you. Such events have all features of 'black swan' theory developed by Nassim Nicholas Taleb. The theory ridicules the belief that today’s 'normalcy' will continue into the future and hence predictions are possible. It says that the high-impact, hard to predict, rare events shape the history, science, finance and possibly anything human. Nassim goes on to say that once such rare and unaware events happen, the human nature find explanations for its occurrence, and wonder how they missed it i.e. makes it explainable and predictable.
Well, based on the events in MENA the prediction gurus are out there forecasting possible oil prices beyond USD 250 p/b and the problems and opportunities it could bring in. Whilst every one agree that the normalcy of MENA is upset with 'outlier' events, the financial markets in the world more or less still behaves in 'normalcy standards'. Although the oil prices have moved up significantly, which will impact automobile manufacturers to transportation to energy based manufacturing companies and almost all players in the oil based global economy, the world economy tries to behave as if 'normalcy' continues.
The recent past when the oil price touched USD100 p/b was in the early 2008 (due to demand > supply?) and peaked in July 2008 at USD 147 p/b. However, when world of finance crashed along with Lehman, oil price also crashed. Now the oil prices are back at USD 100/- plus due to entirely different reasons.
Many investors are now worried about their investments, which is quite right. What should be the risk appetite? Should they sell now and place them in fixed deposits? Or since many markets are down in double digits already during this year, is it not the time to buy? Best example is India. Again should not we buy into the possible rally of economies coming out of recession in style with several positive indicators on the horizon? The best example is USA.
What will be the oil prices after one year? Answer to this question will solve the concerns about the future performance of many stock markets in the world and hence consequently several portfolios. Of course you can try to predict the oil prices and can have an investment or portfolio strategy depending upon your views.
But be aware of the 'black swan' that could be lurking somewhere out there.
Thursday, February 10, 2011
India's Industrial Production during first 9 months of FY2010-11 is 8.6%, which is very good
The cumulative growth for the period April- December, 2010-11 stands at 8.6% over the corresponding period of the previous year. Month on Month growth is 1.6% higher as compared to the level in the month of December 2009.
The December industrial output was always expected to show growth but at a moderate level as the Dec 2009 output was extremely strong.(i.e. calculation of the index from a higher base of Dec 2009)
Overall Indian growth story is intact and continues to be Strong
The December industrial output was always expected to show growth but at a moderate level as the Dec 2009 output was extremely strong.(i.e. calculation of the index from a higher base of Dec 2009)
Overall Indian growth story is intact and continues to be Strong
Sunday, February 6, 2011
India's Growth
India is a great nation. No doubt about it. Even its enemies acknowledge it. If you go back to history, you can always see that India was the magnetic attraction of the world. Alexander the Great had only one dream, reach India and he did. He defeated one of the Indian Kings, Porus in a battle, however returned his kingdom and established friendship and went back. That was the respect he had for the king and kingdom.
Romans, Chinese, Arabs and a host of other nations vied to come to India for trade and make money. Migration to India was like the migration to west these days. Parsis, Middle East Christians and Muslims all migrated to India in the past. If you visit Kerala state still you can see the evidence of thriving Jewish culture for thousands of centuries, till Israel is formed, however the way things are going at Middle East, it is possible that some Jews may return. Chinese fishing net popular in Kochi shows the historical connections to the China.
Then the west was desperate to come to India, which they did through Vasco Da Gama, which changed the fortunes of the west for ever. A plague ravaged poor nation of Britain came the mighty nation of the world due to the trade with India. No doubt India has tremendous potential.
Even now, if you go to USA it is acknowledged that the most thriving immigrant community is the Indians. They top the list of non-westerners as the CEOs of Fortune companies and in similarly in all spheres of life,
There is no need to elaborate further, it is beyond any doubt that India has great potential and Indians abroad have established their hall mark.
Indian growth story was strong till Oct 2010 and almost all economists told that India will grow at 10% p.a very soon, possibly in FY2011. Everything changed all of a sudden as we started 2011, now many are busy cutting the Indian growth rate. We don't hear anyone even stating even 10% now. WHY?
This is because Indians are capable screwing up good things. It seems that they dislike good things. As the growth was zooming, the CBI suddenly decided some of the top banks have made 'corruption' in lending huge sums of money to the business world of India. They put the top bankers behind jail. Well I don't justify their action, but has a question. It is well known that there are many corrupt politicians in India. How many of them are humiliated the way the top bankers have been humiliated?
Bear in mind that Indian Bankers are top class and comparable to the best in world. Although they are as talented or even more talented than the rest of the world, their salaries are pittance compared to the rest of the world. A junior associate in Goldman Sachs may be drawing more salary than the CEO of SBI, which is among the Fortune 500 of the world!
What did CBI achieved with this raid? Has the corruption been routed out? No. But many bankers became now afraid to lend after the raid. This has impacted the businesses across India. Somewhere in India, an expansion plan is on hold. Some businessmen are unable to fulfill their growth forecasts and bank officials are gripped with fear. The cumulative effect of several such instances means that growth of India gets affected!
Then came CAG report that an astronomical amount was subjected to corruption in 2G scam. Then some minister came out and said that the assumptions by CAG may not be appropriate. There was a huge argument in the press, diverting attention from the new economic activities that should have been focused by Govt. Even the parliament did not meet peacefully to discuss the country's affairs. Negative publicity is an inevitable consequence.
After this incident many government departments are reluctant to approve projects as the fear grips them. The result is that several Infrastructure projects (road construction, etc) by government departments are put off. Again, the slowdown in such big projects may make a dent in the growth of India!!
India's environment minister seem to enjoy the lime light of the media. Several Projects are denied or made costlier for the promoters by him. The best example is the Lavansa Project, which covered about 20000 acres and would have created truly modern facilities. Imagine the amount of investments flowed into the economy and its multiplier effect and accelerator effect. Remember USA's rejection of certain environmental treaties if it hurts their economic growth. Earth, during its existence, tracable back to millions of years, has already gone through several ice-ages and hot-ages and will continue to do so going forward. Whilst we should care for the environment, it should not be at the cost of economic growth. (With the demand factor high in India, the annual growth rate of 10% is a low hanging fruit).
Now it is the turn of prime minister and finance minister. Recently, the prime minister said that the inflation will affect the growth because interest rates may go up. The rates are already high in Brazil and it grows. Moreover, the rates will not remain high for long. India is planning to import food stuff to curtail the food inflation. These positives were not mentioned! Whilst all agree that Indian prime minister is among the best in the world and highly intelligent and knows how to take India’s growth to 10% or above, he need to be careful when tackling media
Need to learn from Obama and Warren Buffet. When they speaks about the US economy, they are optimistic, however bad the economic numbers may look like. They know that these numbers are temporary. The duty of the commander or a team leader is to be positive and motive the team, not otherwise. When the nation’s leaders are optimistic, the business confidence grows. This encourages more investments, capex, expansion plans, etc which will benefit the economy and brings in the growth.
The truth is that India is growing faster than most economies in the world (except may be China, but whose numbers are accused to be fudged) and there is no reduction in its pace. India will continue to grow at even faster rates than at present. If the stock market drops in India, lick your lips and barge in like a kid in a candy store.
Romans, Chinese, Arabs and a host of other nations vied to come to India for trade and make money. Migration to India was like the migration to west these days. Parsis, Middle East Christians and Muslims all migrated to India in the past. If you visit Kerala state still you can see the evidence of thriving Jewish culture for thousands of centuries, till Israel is formed, however the way things are going at Middle East, it is possible that some Jews may return. Chinese fishing net popular in Kochi shows the historical connections to the China.
Then the west was desperate to come to India, which they did through Vasco Da Gama, which changed the fortunes of the west for ever. A plague ravaged poor nation of Britain came the mighty nation of the world due to the trade with India. No doubt India has tremendous potential.
Even now, if you go to USA it is acknowledged that the most thriving immigrant community is the Indians. They top the list of non-westerners as the CEOs of Fortune companies and in similarly in all spheres of life,
There is no need to elaborate further, it is beyond any doubt that India has great potential and Indians abroad have established their hall mark.
Indian growth story was strong till Oct 2010 and almost all economists told that India will grow at 10% p.a very soon, possibly in FY2011. Everything changed all of a sudden as we started 2011, now many are busy cutting the Indian growth rate. We don't hear anyone even stating even 10% now. WHY?
This is because Indians are capable screwing up good things. It seems that they dislike good things. As the growth was zooming, the CBI suddenly decided some of the top banks have made 'corruption' in lending huge sums of money to the business world of India. They put the top bankers behind jail. Well I don't justify their action, but has a question. It is well known that there are many corrupt politicians in India. How many of them are humiliated the way the top bankers have been humiliated?
Bear in mind that Indian Bankers are top class and comparable to the best in world. Although they are as talented or even more talented than the rest of the world, their salaries are pittance compared to the rest of the world. A junior associate in Goldman Sachs may be drawing more salary than the CEO of SBI, which is among the Fortune 500 of the world!
What did CBI achieved with this raid? Has the corruption been routed out? No. But many bankers became now afraid to lend after the raid. This has impacted the businesses across India. Somewhere in India, an expansion plan is on hold. Some businessmen are unable to fulfill their growth forecasts and bank officials are gripped with fear. The cumulative effect of several such instances means that growth of India gets affected!
Then came CAG report that an astronomical amount was subjected to corruption in 2G scam. Then some minister came out and said that the assumptions by CAG may not be appropriate. There was a huge argument in the press, diverting attention from the new economic activities that should have been focused by Govt. Even the parliament did not meet peacefully to discuss the country's affairs. Negative publicity is an inevitable consequence.
After this incident many government departments are reluctant to approve projects as the fear grips them. The result is that several Infrastructure projects (road construction, etc) by government departments are put off. Again, the slowdown in such big projects may make a dent in the growth of India!!
India's environment minister seem to enjoy the lime light of the media. Several Projects are denied or made costlier for the promoters by him. The best example is the Lavansa Project, which covered about 20000 acres and would have created truly modern facilities. Imagine the amount of investments flowed into the economy and its multiplier effect and accelerator effect. Remember USA's rejection of certain environmental treaties if it hurts their economic growth. Earth, during its existence, tracable back to millions of years, has already gone through several ice-ages and hot-ages and will continue to do so going forward. Whilst we should care for the environment, it should not be at the cost of economic growth. (With the demand factor high in India, the annual growth rate of 10% is a low hanging fruit).
Now it is the turn of prime minister and finance minister. Recently, the prime minister said that the inflation will affect the growth because interest rates may go up. The rates are already high in Brazil and it grows. Moreover, the rates will not remain high for long. India is planning to import food stuff to curtail the food inflation. These positives were not mentioned! Whilst all agree that Indian prime minister is among the best in the world and highly intelligent and knows how to take India’s growth to 10% or above, he need to be careful when tackling media
Need to learn from Obama and Warren Buffet. When they speaks about the US economy, they are optimistic, however bad the economic numbers may look like. They know that these numbers are temporary. The duty of the commander or a team leader is to be positive and motive the team, not otherwise. When the nation’s leaders are optimistic, the business confidence grows. This encourages more investments, capex, expansion plans, etc which will benefit the economy and brings in the growth.
The truth is that India is growing faster than most economies in the world (except may be China, but whose numbers are accused to be fudged) and there is no reduction in its pace. India will continue to grow at even faster rates than at present. If the stock market drops in India, lick your lips and barge in like a kid in a candy store.
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