“American Burger “ 25th February ,2008"

“American Burger “ 25th February ,2008
United states a place most of the people around the world want to visit at least once in their life time ,and its a place they want to send their children for higher studies or for a job assignment , of course certain section of the people are crazy about united states. what makes united states such a crazy destination?. Last few days the print and electronic media were discussing about US slow down ! What is the impact on India if US economy turn into recession ?.
Keeping these questions in mind i analysed financial history of US economy, iam presenting a few insights from my analysis.

United states is the largest economy in the world with a GDP size of 34 Trillion Dollars , and a domestic consumption size of 8 Trillion Dollars . If we compare the size of the US economy with GDP size of other economies in the world , US economy is almost 12 times of China , 10 times of Japan and 34 times bigger than Indian economy. If we analyse the consumption patterns of US, and their consumption is 8 Trillion dollars where as entire Indian economy size is 1 trillion dollars. US consumption is is 20% of entire Europe consumption, 10 times of China's consumption , 17 times of Indian consumption., thats why US consumer is called a Dominant consumer in the world. American consumer is still driver of emerging markets. Worlds `s fastest growing economy china's exports 36 % of their GDP to US. The bilateral trade between India and US was around 5.6 billion dollars in 1990, it was increased to 22 billion dollars in 2007, 70% of exports to US from India consist of IT & IT enabled services and jewelery.
The Genesis of US slow down was trivial , people around the world are skeptic about the equity market because of US slow down and recession. Is US slow down really effect our Equity life in India? . last twelve months and all US dollar got depreciated over all the major currencies in the world , rupee appreciated 12 % over dollar in the last 12 months.
Slow down and recession is not a new phenomenon to the US economy , as a old and largest economy in the world , US economy went through different economic cycles in the last 100 years . If we analyse from January 1926 to December 2006 .
The first leg period from 1926 to 1947 includes both the great depression and the World war II . During the Depression, economy contracted and prices fell , but gradually the country got back on its feet , the war began the economy expanded and the inflation rose, at the end of the war , annual inflation rate was over 10 %. But interest rates trended generally down ward through out this period. So that at the end of the the period prevailing interest rates were well below the inflation, this means that the real yield on fixed income investments was negative. During this period Stocks returned 6.3 % CAGR basis ,compared to a inflation rate of 1.2 percent .
The second period from the end of world war II and through the the early 1960s was period of generally falling inflation .Inflation peaked to 20% immediately following the war and gradually worked its way below 2 % by the early 1960s. But interest rates drifted upward despite the decline in inflation , so that real interest rates i.e ( interest rates -inflation rates ) rise slightly over this period . stocks performed exceptionally well returning 15.7 % compared to an inflation rate of 1.7% during this period.
Between 1960 and 1980 inflation turned upward again this was due to partly government spending earmarked for the war in Vietnam and for broad variety of government sponsored social programs. And then came the energy crises of 1970, when oil prices and prices if gold and other hard assets shot up dramatically . In 1979 and 1980 inflation rate exceeded 10 % and interest rates are moved up with the inflation rate . But remarkably interest rates never delivered any premium over inflation rate. Even when inflation seemed to be totally under control in early 1980, investor in fixed income instruments did not receive any real yield. Moreover the earning yields on equities rose steadily. stocks returned 6.7% during this period slightly below the inflation rate of 6.9 percent.
And so we came to the most recent period from 1981 to 2001 when the general trend in inflation has been down ward not surprisingly the general interest rates has also been down ward. The period from 1981 through 2001 includes the extraordinary bull market that ran from late 1982 into the early part of 2000.During 1981 through the early part of 1989 the driving theme was end of inflation . The Federal Reserve moved decisively in late 1970s to attack on inflation . Inflation came down , interest rates fell and stock prices rose and the financial markets rejoiced even though there was a market crash in October 1987.
The recent environment that includes both tech wreck that began in early 2000 and the terrorist attack of September 2001. the technology euphoria cam unglued in march and April of 2000 .The NASDAQ fell 60.5 percent between April 2000 and August 2001. The stock market formed bottom on September 2001 and performed well into early 2002. Over all the period of 1926 to 2001 US stocks returned about 11 percent annually before inflation and about 7% after inflation.
For economy like United States of America ups and downs are quite natural ,the recent sub prime issue and slow down , recession will not have any great impact on the economy is concern over long term. But there are signs of slow down of growth in short term. Since the world has became a global financial village the impact will be there on the countries which are predominantly depend up on US. But Always good fund flows will chase good growth, which Indian economy is enjoying. we are less vulnerable to US slow down as the bilateral trade is concern with US economy . India's strong domestic consumption will create opportunities to Indian economy but not the growth or slow down of US. Every bearish indication or a dip in Indian equity market is a good opportunity to invest in sound fundamental companies irrespective of market fads.