Tuesday, January 04, 2011

We Are Doomed ! Thank You Bubble

To all my readers across the globe I wish a Happy New Year! As we progress into the New Year, we are entering into very unusual times. Due to ultra expansionary monetary policies of Central Banks across the continents in the last decade, the world witnessed a globally synchronised growth, which has caused the price manipulation for commodities, stocks, gold and real estate. Even the art prices and worthless collectable prices have also gone up. Currently every asset class is mis priced and the governments are misleading and confusing people. Key Challenge to the policy makers is to maintain the growth prospects across the economy.
In a Democratic Economy the prime objective of the government is always to keep its majority of the public cheerful. So the head of the administration wants to keep his people happy by taking decisions which will enlarge his image and popularity ratings always to keep his post secure! In today’s politics the economic decisions of most of the governments are short term in nature and the benefits have to be reaped by the end of their tenure only in order to get the credit in their kitty just like most of the our well paid CEOs of the corporate world.
Let’s see how the economy works! It is simply based on demand and supply of goods and services in an economy, which leads to employment, higher consumption, savings and development of the whole nation. Now the challenge to Mr Obama is to increase the demand and derive employment. But the problem is whenever he tries to increase the demand in the US, employment is going up in emerging nations but not in his home country. This is the fundamental problem with his economy because of the policy implications of the previous administrations. The measures he took to salvage his economy were bailouts, stimulus packages and quantitative easing and he loves to continue the same measures with his team of colleagues Tim Geitner (Treasury Secretary), and Ben Bernanke (Federal Reserve Chairman). This elite team led by Bernanke continues to do Quantitative Easing and print money till the time it lost its value as Medium Exchange and by keeping the real interest rates at ZERO which eventually led the currency to lose its key character as Measure of value to force people to spend and on spend!
The Fundamental flaw in the US Economy was that in the past 15 years of transforming the economy from Export led to import led Economy and by focusing and encouraging only a few sectors like financial services, and Technology and Defence. Of course the US made enormous progress in the past 20 years but the progress benefited people like Bill Gates, Wal-Mart or Bankers like Lloyd Blankfein of Goldman Sachs. The Top 1 % of households accounted for 8.9% of income in 1976 but this share grew to 23.5% of the total income generated in the US in 2007. Put differently - for every $ of real income growth was generated between 1976 and 2007, 58% went to the TOP 1 % of households. In 2007 the hedge fund manager John Paulson earned $ 3.7 billion about 74000 times the median household income in the US. This gives a clear picture! That widened the gap between the RICH and the POOR, So US politicians got the Idea to make the average poor American Cheerful who is a major part of the vote bank by building homes! They started lending more to the housing sector Left, Right and Centre.
In 2002 in a speech to the Department 0f Housing and Urban Development Mr Bush said:
“I Believe owning something is part of the American Dream as well, I believe when some people own their own home, they are realising the American Dream. And we saw that yesterday in Atlanta when we went to the new homes of the New Home Owners and I saw with pride first hand the man say "Welcome to my Home!" He didn't say welcome to government's home, he didn't say welcome to my neighbour's home but he said “Welcome to My Home ...He was a proud man. And I want that pride to extend all throughout our country.”
And we all knew the rest of the story whether they are proud or bankrupt? Too many poor families who should never have been lured into buying a house have been evicted after losing their meagre savings and are now homeless; too many houses have been built that will not be lived in. Almost every financial crisis has political roots, which no doubt is different in each case but political. The period leading up to the Great Depression was also time of great credit expansion. Excessive rural credit was one of the important causes of Bank failures during the Great Depression. In the US, economy politics means jobs and job creation, as jobs are the centre of economy and politics.
We all might be wondering how American administrations were funding these massive excess of housing credit. It is very simple. If your a Wealthy Drinker, the Bar owner obviously would give credit to you since you don't have liquid cash! China was buying US treasure bonds and financed the unsustainable consumption of the Rich country United States, as China was one of the key beneficiaries of the US bubble.
In a simple manner both Clinton and Bush molested the US Economy and packed and presented to Mr OBAMA and he is trying to pay remissions for their earlier sins. Now for the US, deficits are piling up day by day from unfunded liabilities like Healthcare, Medicare and social responsible projects.
If things are not coming under control with all these QEs and all, the last resort I am not sure. When this will happen - tomorrow or after 10 years? Eventually they encourage wars and directly get into wars. Economic history shows during war periods it typically leads to the rapid growth of output that temporarily pushes actual Gross National Product above potential GNP. This was evident in 1950 Korean War, 1970s Vietnam War and this might be the reason for war with Iraq and current war in Afghanistan.
All this money printing will give temporary relief but not a cure for disease. The US administration needs to spend on research, innovation mainly to encourage savings to create jobs at their home.
I respect the democratic system and the farmers but luring them is critical. Back home in India , In population 60% are farmers & landlords! Have extraordinary privileges that no other country offers such as no tax on their income but 18 % of income comes from farming to GDP and no government in India at least in our lifetime takes concrete measures to improve their productivity. Mr Cole, professor at Harvard Business School finds that Indian state owned banks increase their lending to the politically important but relatively poor constituencies of farmers 5 % to 10 %points in election years. The recent loan waiver to the farmers is also one of the key reasons of the UPA-led government victory. India is no exception to the US in luring Vote Banks. In India there is no social security for the tax payers. No one is aware of tax payers rights. Small business and Corporates transparency is very less. Government's subsidies on petrol, gas are enjoyed by everyone across the nation. I am surprised A CEO of company gets his subsidised cooking gas and his gardener also get at the same price.
Advantage / Disadvantage for India is that we are neither an Export nor Import driven Economy. We are a Domestic driven economy. If the same type of government politically influenced politics prevails in India without any reforms there won't be any chance to the damage control like the US.
Policy implementation in India is a challenge and we have always people like Rajas, Kalmadies and Radias. You will also find the same characters starting from a traffic cop in the morning when we start our life from home to work place! As for the stock market, only 3 % of Indians investing in Stock markets look at FII flows always. If the US or Europe enters any growth trajectory, money might flow back again which will create havoc for Indian stock markets. The Joker in the pack for Indian markets is crude oil. As long as crude is below $ 100 per barrel market will move smooth. Because of low interest rates overseas, remittances which accounts 5.5% of GDP ($ 55 billion), the highest in the world, flowed back to India in 2010 alone and flooded mainly the property markets which may create a real estate bubble in India, Decades back people perceived homes as shelters; now everyone wants to buy homes to do business which eventually create property and real estate bubble.
By and large Indian's great strength is our young population which no other country enjoys and this young population do not stop consumption and savings. As long as this process is on, we are in a sweet spot and time! This keeps the market momentum on! My urge to the Indian Investors is to save money and invest more in the stock market. Aware of the developments and things creeping back into the economy, we need to be responsible for our financial success and not CNBC or your City gold financial adviser. Learn from this financial chaos or else one day we will be doomed. Since I am not aware of investment nature of individual investor, I don't recommend stocks upfront. Please reach me
kranthi.scb@gmail.com for any stock specific queries.

1 comment:

  1. Good article Mr.Mark.Tell us also about Relationship managers tapping HNI's