Friday, June 17, 2011

My Dear RBI Governor,





My dear Subbarao,
I have special respect and regards towards RBI governor as he was from the town in Andhra Pradesh where I was graduated in commerce and built my aspirations towards financial markets . But by his movements I know one thing , that he knows increasing interest rates other than nothing! . He increased interest rates 10th time in a row in last 16 months , since inflation is very high and all the emerging markets were grappling with the same problem. RBI governor is relentlessly working towards tame the inflation . I firmly believe monetary policy which regulates the flow of money in the country lost its control on the economy in the last 10 years because of the excess flow of un accounted money in the country , this unaccounted money flows makes every asset class toinflate and dance! especially real estate which has became integral part of India’s growth corrupted story . RBI completely lost its authority and control on food prices as they do not come under regulatory control & purview of RBI , where pricing mechanism of most of food articles are regulated by local bodies and state governments , even Central government also don’t have required proper control , RBI governor can’t control the price of tomato you pay but try to control the quantity with variations in interest rates.
If we remember Mr Governor in September 2008 when the world was reeling under recession , Lehman brothers collapse and financial crises , in India high inflation excess of 10% YOU reduced interest rates in line with your fellow Central Bankers across the globe , after 36 months for the same inflation problem Your increasing interest rates !!.
You should know a Simple law SIR , nobody in the world eats excess bread 6 times in one day if they have some excess money in their valet.
Simply commercial Banks are fooling you sir , by not lending to priority sector in the required quantum.Rural credit have taken a big hit because of securitization of debt, every bank is buying debt from Micro finance institutions to meet their rural credit targets which is a time bomb kind of debt and will burst balance sheets of banks after some time.
Due to integration of financial markets and globalization of world economies Central banks across the globe just became Money printers .
Inflation targets varies from economy to economy , for example Euro zone which consists of 19 European nations monitored by European Central Bank (ECB) inflation comfort level is 2% as its a low growth trajectory and they can pump more money inline with inflation . Finally the Money Printer ,originator of inflation and author worst monetary policies Mr Ben – Benjamin Bernake Chairman of US Federal Reserve Bank , He knows only one thing Print and Pump Money into the world which is causing global high commodities prices .
RBI don’t have any control on global commodities prices especially crude oil and local food inflated prices. So your team have to do their job as high profile bureaucrats ,one thing they knew raise or decrease rates that’s what they are exercising powers . If this situation prevails for prolonged time it creates dire consequences on middle class which accounts 40% of country’s population ( as per Mc Kinsey global ). Encourage lending towards basic agriculture infrastucture ,food storage and for farming , if you keep on increasing interest rates for every up move of inflation your adding fuel to fire .Please stop debate on super regulator sir , first focus on priority lending and un accounted money flows in the economy to strengthen RBI’s role.

Tuesday, May 17, 2011

"Marriage system " Asset of India




Last week former Californian governor Arnold scharzenegger separated from his wife Maria after 25 years of married life !. Finally prince William tied the knot to his very old girl friend Kate , I pray for her it should not be Diana's story again.
Recently BRICS Nations including South African premieres conveyed a meeting for mutual cooperation and challenges among the emerging BRICS Nations , A term coined by Goldman Sachs in the year 2000 and succeeded in selling Nation's story and every one rejoiced and participating in the India's so called domestic growth story . As I interact with various investors across the globe , they are exuberant about India's robust growth than citizens of India. I was perplexed with variety of views .Finally I started analyzing the strong key points behind India's domestic story , it is amazing to know simple but powerful bullet point i.e. Our marriage & Family planning system , powerful asset of India . You are absolutely reading accurately our marriage and family system is the key strength of India's growth story .
The success of any economy depends on Human capital – how an economy efficiently using its human capital for development and providing employability referred as demographic dividends. And every one talk about India's demographic structure as key strength this strength is derived from the Marriage system in India.
We have to get educated to gain knowledge and wisdom , from wisdom , we derive the solutions which leads to revenue generation which translates as savings and spending for self well being and family prosperity this is the ultimate theme of majority of folks .For an economy people are key and their productivity is the lynch pin to run the economy . In the key financial planning of any individual your family will play a vital role which reflect in the economic development of the country .
Let me envisage the demographics of various nations. Chinese their average age is 37 years and 72% of population is in between 15 to 64 years and China also one of the aging population . Why Chinese household consumption so extraordinarily low , in part , it is because Chinese house holds can't rely on the traditional old age safety net in Asia namely children , As a result of government single child policy in past 30 years in China increased number of people above 45 years and indicates less productivity of nation and in a family of 5 every one depends on one young earning child .In USA because of increasing divorce rate and social system 50 % babies born in USA are born to unmarried girls and as per U.S state department statistics every year more than one l lac girls under 17 are diverted towards sex traffic .which will destabilize the nation over period of time . In Japan 25% of population is above 65 years and average age of Japanese population is 44 years which clearly indicates less productivity and consumption indicates clear threat to the nation . In Euro zone nations because of child delivering costs are very high , average European stopped giving birth and birth rate and population growth is very low almost it is zero which is impacting the Euro zone Economy . Very recently Russian Economy is very proactive to spur demand , it announced good number of schemes and incentives to its people who ever give birth to 4 children and above , if you want busy next 5 years migrate to Russia and enjoy the romantic life! .
Family instability too , is harder on poor children , poor less well educated couples are more likely to break up and when that happens the economic consequences are more severe than for the well off , the cost maintaining two establishments ,shuttling children between the two parents income , leaving less for the basic necessities , let alone counseling and remedial tuition to help devastated children cope with the breakup . Divorce therefore affects the children's health , hygiene and schooling far more in a poor family than in a rich family . In equality tends to further perpetuate it self through the social environment. To the extent that it is caused by significant part of the population is not being able to improve themselves because of lack of access to quality education it signifies tremendous inefficiency.
Father of Economics Adam Smith says that while population growth might increase the total wealth of nations but only improvements in productivity could make a nation richer on peer capital basis , it is not how much capital country has that makes it rich .It is how productive that capital is and according to Economist Solow the key to productivity is technology.
United states and other western nations countries did not became rich because of lucky endowment of natural resources or because of capital falling like manna from heaven . Rather they became rich through a virtuous cycle in which technology improvements led to capital became more productive , which in turn led to more capital investments, without technology growth , capital would grow in proportion to population and wealth per capital would simply level off.
The dynamics of economy and life changes for every decade, for example in 1970 civil engineering is demanding profession ,in 1980 banking was revolution and demanding profession in 1990 Media, and tele communication was in demand , in 2000 software engineering was demanding .2010 financial services is in demand . So I believe when your planning your family give greater gap between the children for greater diversification and you can't effort to have your children every one in the same industry , education and age group as dynamics of the economy changes . The greatest gift you can give to your children is education , of course every one endeavor is same but demanding education is crux . I encourage every married parent to educate your child in Chinese language , this is going to be the best gift you ever presented to your children . As we progress 70% business deals happens from China in future and this is going to change their business life.

If your single don't slew your life ! (Of course I am still bachelor) ! Get married or committed to be celibacy , adopt orphan and assist them for their brighter life . Those are married don't restrict for single child, with a long gap minimum 8 to 10 years give a birth to another child , this will help the economy to stimulate the workforce problems and later will help you in your old age
Your decision for marriage or break up and having kids and desiring for their prosperity will have significant impact on the nation as whole .
Don't take for granted since Indian population is young the opportunities will follow us ! Administration should plan well to stimulate population growth ! Or else one day India will face dire consequences like Japan or China.

Tuesday, April 12, 2011

War Times ...!


War Times ..! History: A collection of crimes, follies, and misfortunes of mankind – Voltaire.

As we are progressing into the month of April, beginning of the new financial year for Indian Economy renewed exuberance is creeping into the financial markets and stock markets. I can see a lot of new cars on the roads including mine. As cars are treated to be prosperity and Economic indicators of the nation. This Financial year is crucial for stock markets after the rebound from financial crises. In the world of Investing, there are Truths, there are lies, there are statistics, there are facts. The world we live in is no longer simple, But it is complex. The only worrying factor to me for the Indian economy is not monsoons or corporate earnings nor inflation and corruption but in geopolitics. Yes, everything in the world has to move in a cycle, even the War. As technical analysts on stock markets how they predict the market's support and resistance levels of indices, basing on the previous volumes and trading patterns. Through the war cycle, we can predict the wars to come. Back home UPA Led government is happiest, ever since Indian cricket team winning Cricket world cup especially their victory on Pakistan in semi-finals! Thanks to the cricket world cup and Indian cricket team. The key reason was all the national media attention was diverted towards the world of cricket from politics, telecom 2G issues. Prime minister Mr. Singh went one step ahead and invited rival cousin Mr. Gilani P.M of Pakistan to India to build a hostile relationship with the arch-rival nation. Where there were no concrete and amicable solutions to the issues between the two countries from the last 60 years. I am sure there will not be a solution in the next 60 years also for the same if history is the proof for the future on geopolitical science. United States President Obama speaks about patriotism and human rights in the U.N security council. Patriotism means not invading Iraq or war in Afghanistan or bombing Libya, It stands for sacrifices and I am sure Americans can't afford for the same now !. The only thing they are interested in is printing money till the time Dollar lost its value as a measure of exchange and store of value. The day US Administration desires these formulas won't work and the west financial condition deteriorates the only option to them is to encourage the geopolitical tensions across the globe. For a common man in India, it sounds stupid to think and read about these issues, who are habituated to a comfortable and peaceful life. But if You enlarge your global vision the geopolitical tensions are accentuating at a faster pace. The crux is growth is concentrated in Asia but also the threat. 60% population lives in Asia and India, China, Pakistan, and Korea are Nuclear club counties and in the middle east Iran is trying to book its berth for the club. Geopolitical tensions are going up on a daily basis across the globe, starting from the Ivory Coast, Libya, Egypt in Africa. Middle East countries like Syria, Bahrain, Israel, Afghanistan. In Asia border issues between China, India, and Pakistan.Political tension between Japan and China. Between North Korea and South Korea. If these tensions prevail for a longer period and increases then the USA's war chest and military order book will do well. So they have vested interest in encouraging these geopolitical tensions. The Swiss hate Germans, Germans hate the French, the French hate English and everyone hates Americans. Each of these nationalities carries certain profiles in your head and evokes certain reactions. And all these issues will definitely going to impact prices of commodities like crude oil and base metals and global financial systems and finally our lives and portfolios in India. I encourage investors in India to start paying the utmost attention to the geopolitical issues across the globe which will have a greater impact on financial and stock markets than India's strong domestic story. I am sure and confident growing geopolitical tensions will change the face of financial markets. I believe in war cycle theory, but I am not sure when it will intensify today, tomorrow, or after 10 years, but I am confident we are nearing to the next War cycle. "Reality does not depart even when you stop believing in it." I am not Dr. Doom but try to be optimistic and look for opportunities from these developments.For successful investing is not depends upon the city you lives but it depends on how much attention you pay to the developments and predicting its impacts and interpreting the same.

Wednesday, March 30, 2011

Oh My Japan ! Tsunami




On 9TH of March at 9 pm I got call from my friend, he enquired what I was doing ! watching TV I replied . I was watching NHK global channel where no one understand and most of the people never heard about the same news channel. I have been watching this Channel from past 3 years to know more about Japanese technology and the economy , there are no commercial ads on this channel and no beautiful anchors but wonderful documentaries on world economy. Exactly after 4 days this channel have became world most preferred channel and single source of information on Japan for all media networks across the globe. Thanks to unexpected and devasting earth quakes, tsunami and nuclear radiations. People around the world became panic and investors pressed selling buttons after watching devasting news clips. It was unfortunate time for Japan.My Guru DR MARC FABER have just given a buy call on Japan just a week back before the tsunami and earth quake ! one of the biggest natural disaster in the history of the world. Nikkei plummeted 15% after the calamity its quite natural for a stock market taking gigantic back step .On 19th October 1987 Nikkei was down 14% .During 1989 to 2003 Nikkei lost Nearly 30,000 points. They were in the down trend and for stock market like Nikkei it got habituated to the down tend from past 40 years. Nothing New if you know the history .As lad in stock markets this was second opportunity to me to learn more about natural calamities and its consequences after the man made credit calamity around the world in 2008. We should take a closer look at Germany and Japan neither was nearly poor after world war II . both were bombed and destroyed during second world war .Their people were educated these countries had the blue prints to create the necessary organizations and some of their institutions and infrastructure survived but both had devastated bombed out economies. By 1980 Japan emerge of super power and became the top exporter to the world .but the key problem for Japan in the past20 years has been stagnated growth and its aging population with a average age of 45 years which is constraint to spur the domestic consumption . Japan is the 3rd largest economy in the world with a GDP size of 5 trillion dollars .On per capita income basis Japan is still the second largest economy in the world and second largest exporter to USA .Still China is largest exporter to Japan .Off late Japanese investment have been significantly important in India like Maruthi, Ranbaxy , Hero Honda ,Nomura and week days back by nipper life’s investment in reliance capital. Impact of current natural calamity has been strenuous and it will impact the global sentiment in short term and increase further pressure on current account of Japan. What ever be distraction happened in last week was just below 10% of the loss when we compare with destruction happened during world war II.I am sure and confident Japanese economy will raise as phoenix. key reason was the way they handled the current crises and their execution capabilities and technology advancement but this destruction will increase the demand for steel and others commodities for rebuilding related activities . This rebuilding will be a bigger stimulus package for the living people of Japan to create demand !

If we observe from past 10 years every fund that invests in Asia pacific Region comes as conditions as Ex Japan . Japanese economy has been ignored in the past 20 years as a investment destination and Japanese founds flows have been key funders to the debt of major countries this will definitely make the global liquidity stagnant for a while. It is premature to assess the immediate impact of Japanese natural crises on Indian stocks markets and liquidity flows. But this crises will increase the importance on alternative energy resources like solar energy, wind, and tidal energy as renewable energy. As the growing threat for nuclear power energy and its consequences from the past 15 days.

I also watch Russia Today channel more and ‘‘Pray for Russia’’

Tuesday, March 01, 2011

Inside Steel Sector

At Wealth Mills I am dedicated to enrich the continuous flow of Investor education . Today I am going to envisage on Iron & steel sector . The dynamics of steel sector are completely different when we compare with any other sector .Steel is considered as commodity and commodities will always move in very large cycles . The nature of steel sector is cyclical this represents consumption of steel moves on long cycles means it goes up and again comes down. In the Exhibit -1 you can observe the commodity index CRB Index which tracks the major commodities and how commodities prices moves over long term. Steel is the base metal and basic raw material for manufacturing, infrastructure and construction sectors which are integral part of any economy .For a simple fact 80% of Auto sector raw material is steel. In India the per capita steel consumption I mean usage is at 38 Kgs per head which was 29 kgs in 2006. Let us analyze how steel sector works !
Steel industry is highly capital intensive industry and it requires huge amount of capital to start a steel industry approximately billions of dollars for a midsized production capacity as it requires superiors technology to enhance the profit margins .
Gestation period to start a steel mill varies minimum from 7 to 10 years from the erection to start the production. Key concerns for steel industry are raw material and environmental clearances , we can observe World’s 3rd largest steel producer POSCO from past 4 years struggling to get environmental clearances for its plant at Odisha state in India . Basic raw material for steel industry is iron ore and the procurement of same is very crucial , across the globe iron ore reserves are completely regulated and restricted by the governments, as iron ore mines considered to be national assets & reserves. These are the vital entry barriers for steel industry and helps the existing players to reduce the competition in the industry. Still Steel Industry is highly fragmented industry which means Nobody in the world controls the production capacity as market share which reduces the pricing power of the producers .Even the largest Steel tycoon Arcelor Mittal controls less than 10% of world Steel Production which produces 90.6 million tones. Where as in India the largest producer Tata steel have production capacity of 6.8 million tones per annum.
There are different Investment strategies an investor can follow while investing in stock markets , one of the foremost and primary strategy is BUY & HOLD for long term and let the investments grow . But while investor choosing steel sector and stocks for long term investments , since the nature of the sector dynamics are cyclical so the investor need to be very much vigilant on the sector developments and stock specific updates and stock prices. In Indian stock market context Steel is considered to be growth sector and consumption of steel growth is stable and consistent until unless there is massive expansion of infrastructure , industrialization and housing boom . Globally steel is marked as stable sector in terms of growth.
As production of steel is limited to set capacities profit growth is challenge to the producers and growing input costs always put pressure on profit margins .This is the crucial reason Steel stock valuation are cheap comparatively to other sectors and always available for single digit price to earnings multiple valuations . Tata steel PE ratio is always on single digit where as banking & Information technology sectors always enjoys highest price earning multiples.
I advocate & encourage every investor to well aware the basics and industry dynamics and how it will be perceived in the stock market’s eyes is very important before taking investment decisions. Don't expect multibagger returns from steel sector in normal market environment but your capital is more secured in this sector.
Basing on the industry & sector dynamics steel sector large cap stocks are perfectly suitable to beginners and risk averse stock investors. At wealth mills I will endeavor my efforts to foster the Investor’s Investment Quotient.

Sunday, February 13, 2011

Financial Extremists


These guys are highly qualified , Wears expensive suits , Lives in posh and affluent localities ,drives expensive cars , Good speakers & presenters , Extremely self motivated people, Look very cool and gives impression as they are relentlessly working for social & investors cause .Derives lot of social respect from society. Their job known as Financial Advisory. They don't carry ammunition or weapons but products more dangerous and powerful than nuclear bombs which create financial destruction to your life. They are least bothered about customer's financial fortunes ,they work for their personnel appraisal and bonuses, prescribes only financial products that only gives highest amount of revenues irrespective of associated risks with respective of products . Unlike communal terrorists they won’t cover their faces with masks but wears neck ties . Their motive is increase their Assets under management and revenue and always assures and talk about doubling of our invested money at a very short span of time.
They won't talk much time once your balance is Zero .They call Customer is KING but not treats at least as a Citizen once your balance is NIL . Financial services firms designates their sales staff as Financial Advisors that they look into their priorities but not the investor priorities while conducting financial planning.
Now especially in India , the Wealth Managers or financial planners or Relationship Managers irrespective of their designations their main motive is earn high revenue for the company. Of course its not wrong practice ,Every one have to work with profit motive , But it should not through misguiding and promoting illicit wrong advisory practices which leads to Investors Financial destructions. , they know they are not married to their companies but Profit with human touch is essential for long term sustainability of Relation & Business.
Customers and Investors are afraid and worried to go to Banks not of robbers , but because some one might do their financial planning !!. In reality these highly respected institutions doing their own financial planning but not customers. Recently one of my uncle asked me in surprise why my wealth managers from a reputed Bank is stopped suggesting Mutual Funds for investment, and only talk about Stock Portfolio Management Services (PMS) , derivative structured products and private equity products (P.E) .For some well known financial advisory firms irrespective of customer's needs & requirements wealth management means only Life Insurance since it gives highest revenue .
I am not against to any of these Financial advisory firms and persons , I have high regards and respect for the profession of financial advisory. But the problem lies in with most of the advisors and their prescription of products . We have clearly witnessed the lacuna in recent Citi Bank Gurgoan case and there are number of issues and instances which won't come to lime light because of illicit financial advisory . A communal terrorist might create destruction to the lives with their explosives and weapons . But the products these financial extremists carry in their bags like Derivative structured and high bandwidth financial products create greater destruction to your financial life and makes miserable if Investors are not educated on the risks associated with the same. Because of wrong advisory the entire life savings of a Investor will be evaporated in a single day .You don't get these destruction stories on print & electronic media as prime news to know .
In India there is no proper code of conduct to regulate , restrict and control activities of this financial advisory services .We have to blame all the financial regulators also for messing and perplexing the entire advisory activities. AMFI , IRDA,SEBI all the monetary & regulatory bodies are failed to construct , develop a standard uniform code of conduct for Financial advisory services . Since we are very well aware how these regulatory bodies acted in recent past
Ministry of Finance should take initiative to develop standard code of conduct for Financial advisory at base level as priority before they constitute Financial Stability and Development Council (FSDC) as super regulator . From Financial advisory firms perspective , they have construct and develop stringent norms to appraise products and stress on strong risk disclosure norms to customers before they distribute and sell Financial Products to prevent this fervid financial extremism & Extremists while advising financial products.

Tuesday, February 08, 2011

Financial Wilderness



As we are progressing into the Month of February uncertainty creeping into the Economy & Stock Markets. Euphoric and exuberant voices on idiot boxes I mean television sets , were shut from some time . One will say we are in bull market , other will say bear and some other will say , We are already Doomed .
Wilderness is a state where people have to spent time in Forest without any basic facilities , life will be full of uncertainty in despondency without any aim. Wilderness is the period where children of Israel spent 40 years before entering into the promise land of God , after they depart from Egypt. During the same time nevertheless of Wilderness God comforted them .
Because of their Disobedience & Indiscipline ,they got delayed 40 years to pursue the promise land that flow with milk & Honey ,which normally takes 40 days to reach . If we observe the current trend in stock market, we are entering into the wilderness where our patience will be tested . With High inflation Environment ! Hedge funds & Emerging market dedicated ETFs (Exchange Traded Funds) started withdrawing their investments from Indian markets. Markets have taken a U turn from 20K to 18K levels . Retail & HNI investors are confused on to what is going to happen in market thinking that are we going hit all time low again ! Investors just started investing from past 6 months were not able to see their portfolio fizzling . I am not here to time the market which every Investor tend to do every time and I am not going to discuss how many days we will spend in wilderness. But what are the principals one should follow , and discipline to habituate during the course of Wilderness. There is immense exuberance in the Economy , people are not deferring their spending plans , Every asset class in the world is going up except stocks in India .I am not sure how many vegetables you can buy for thousand Rupees ( 22 Dollars) at vegetables stores . But For beginners in Stock Market I am very much confident and sure you can start constructing portfolio of stocks with all recipe of sectors with just one lac ( Two thousand Dollars) ! If you want to build a successful portfolio.
First & Foremost thing one should learn ,avoid timing the market I.e looking for bottoms levels of the market so one can buy stocks at much more cheaper rates . Time is stupendous and key essence of your investments , there is no good or bad times for market , market runs on its own trade cycles and time , where majority of of the people fail predict these Bottoms & Ups. According to one study of the American stock market over a 30-year period between the mid-1960s and mid-1990s, 95% of the significant market gains over this period came in just 90 trading days. That's 90 days out of a total 7,500 trading days – just around 1%. Investors who had missed even one of those days would have lost heavily. In India too, often large gains have come on a single day. The most memorable such day was May 19, 2009, when the Sensex rose 17% on the back of the re-election of the Congress -led United Progressive Alliance government. So, unless you can predict which days will be the big market gain days, the only way to capture them is to hang on for the ride even in the downturn. No stock pundit in the world predict those days .If they predict correct also its just their pure luck.
Its futile exercise spending time to catch the bottoms & Ups in the stock market and always stay invested .
There is always some thing to worry in stock market !! Show me a single day where we had a clear picture in stock market . In 2009 February deflation was the problem , today it turned as inflation .There is no single rule that works always in stock markets . IF one want to be successful in the journey of wilderness they have to be disciplined in investing .
The qualities an Investor ought to have include self reliance , common sense , open mindedness, flexibility , willingness to do independent research , A equal willingness to admit mistakes and ability to ignore general panic and most important PATIENCE. These are the few qualities one should habituate to become a successful investor in all times including Wilderness. The biggest enemy in stock is not your stock broker or company management Its your Emotions .Policy makers should recognise present inflation is not on Demand side But more on Supply side . Tightening interest rates is not a cure for inflation , Its just a first Aid. This is the time bank's lending should go up to priority sector at cheaper rates to control raising prices in long term. Since change of Growth Corridors to west in short term , Markets will be expected to be volatile . Even though some hot money may flow out . India will attract investors interest over longterm because of its intrinsic growth .For My readers in United states Don't worry Our Printing Machine Bernake will come up with one more recipe QUANTITATIVE EASING if Dow falls to 10000 levels.
If analyst says we are going to to touch lows? JUST Rejoice , you can buy chips at much more cheaper levels , use this Panic period as stock sowing time and get ready for harvesting soon . Historically Feb month was a volatile month with renewed anticipation from Union Budget. When Inflation at high levels then Equity market is the best avenue to tide against the inflation , As a growing nation and kind of bureaucratic & political mismanagement inflation and disinflation will be a problem Always in the days to come .Indian Markets will prove its resurgence and resilience at some point of time .
If anyone want to pursue their promise land successfully , then they have to learn and practice the principals to spend time in Wilderness.

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.