Impact of QE3 on Indian Equity markets

Let's Pray my monetary works this time.... 3rd time lucky!!

The world has spent most part of the last 2-3 years gripped in fear of a meltdown in the Euro-zone and its eventual breakup and a sustained slowdown in economic growth in the US. This has had its impact on equities market and other risky asset classes over the past couple of years. But the world leaders have been making all efforts to ensure no such financial catastrophic events occur. Quantitative Easing (QE) and bond purchase has been their most powerful weapon in this effort. The most recent round of QE which has been coined as QE3 and the simultaneous Bond purchase announced by ECB last month, would have its impact on the risky asset classes in the near to medium term for sure. Below i have put down my thoughts in the form of a Q&A session to make it sound interesting. 

What would you advise investors and advisors in light of the recent QE3 and ECB action?

With the ECB determined to do whatever it takes to preserve the euro and the Fed promising to buy securities in the open market until the US economic recovery accelerates, a substantial amount of downside risk to markets has effectively been removed. Given this unusual degree of support from the major central banks, we recommend advisors and investors to take a more constructive position toward risk and equities.

With the global growth environment expected to stabilize in the next few months, sizeable forthcoming liquidity injections by central banks are likely to lift risky asset prices to new highs, and investors should take advantage of that by moving out along the risk curve. This move is not being driven by valuations, but rather by extraordinary monetary policy support. For the rally to sustain in the longer term, an improvement in global economic growth would be required in the next few quarters, and hence we would recommend investors to also time their exit from the risky assets at the right time when valuations look stretched and not get caught on the wrong foot incase global growth falters in the next several quarters. However, that is not the story for this year as a new cycle of monetary support is just beginning, cyclical sectors continue to operate at low levels, and valuations are not overly stretched in a number of risky asset classes.

How would QE3 impact the economies of emerging markets and India?

Though QE3 and its liquidity flows into emerging equity markets would be welcomed by all but it would have an inflationary impact on the asset prices in these countries. Inflation has already been giving sleepless nights to the central bank of India and other emerging economies. Rising commodity and property prices would lead to a bubble sort of situation in the longer term. Inflation in food prices would hurt the larger part of the Indian economy stakeholders. However this liquidity flows would also lead to appreciation in the currencies of the emerging economies which would benefit the import bill of these countries. We believe the investors should capitalize on the near to medium term buoyancy in the markets till the liquidity pumping continues.

What is the outlook for Indian markets keeping in mind the other factors that our economy is faced with?

The deterioration in the fiscal position of India has left the government with little space to mitigate the ongoing economic downturn. IIP and GDP data have been on a downhill trip since 2010 and is yet to pickup. Furthermore, the government has been weighed down by a political environment that has curtailed efforts towards reform. The central bank has also made it clear that, with elevated inflation, it remains reluctant to reduce policy rates.

However, there are signs that things are starting to open up on the policy front. The recent actions to increase diesel price, reduce withholding tax on foreign borrowing, and to allow FDI in retail, aviation and other sectors have been important steps forward and could potentially mark an end to the policy stalemate. However, this has precipitated a political backlash including the withdrawal of support for the government by the Trinamool Congress. Reform initiatives are thus at an important juncture. Although there are risks of some backtracking in the face of political opposition, if the government can withstand the political upheaval unscathed we could see a relatively better dynamic evolving in the coming months where policy crisis diminishes, some progress is made on fiscal adjustment, growth picks up, and the currency recovers ground.

After seeing the steady flows into Indian equities, how do you see the trend ahead?

Flows into emerging market equity funds soared to $4.3 billion in the week ended Sept 19, from a meager $447 million the previous week, according to fund tracker EPFR Global. That drove these funds' assets under management up 0.6%, marking the second largest weekly inflows for the year. Indian equities have seen FII inflows in 2012 of around $15.9 billion till the end of Sep’12. This is one of the highest inflows ever seen and I believe we would close the year better than that seen in calendar year 2007 when we had $17.5 billion of FII inflows in Indian equities.  Previous rounds of QE1 and QE2 are associated with a weaker dollar and gains for higher-yielding assets, such as global equities and emerging market bonds and currencies. Similar expectations will now drive more capital into emerging market assets in the near to medium term.

Amazon founder's unconventional thinking leads to 10,000 year clock

Jeff Bezos, the founder and chief executive of Amazon has some out of the box ideas which have from time to time helped his company to take another leap over its competition. This time around he has thought of an unconventional idea which redefines the word 'Long Term'. 

INSIDE a remote mountain in Texas, a gargantuan clock is being pieced together, capable of telling the time for the next 10,000 years. Once the clock is finished, people willing to make the difficult trek will be able to visit the vast chamber housing it, along with displays marking various anniversaries of its operation. On a website set up to track the progress of this “10,000-year clock”, Jeff Bezos, who has invested $42m of his own money in the project, describes this impressive feat of engineering as “an icon for long-term thinking”.

That description applies just as much to Mr Bezos himself. The founder and chief executive of Amazon has often ruffled investors’ feathers by sacrificing short-term profits to make big bets on new technologies that, he insists, will produce richer returns for the company’s shareholders in future. He laid out this philosophy in his first letter to shareholders, penned in 1997, which was entitled “It’s all about the long term”.

Some of these gambles have paid off handsomely, transforming Amazon from an online retailer of books and other physical products into a technology behemoth with $48 billion of revenues in 2011 and strong positions in fields from cloud computing to tablet devices. They have also enhanced Mr Bezos’s reputation as a technological seer. “In the last few years there has been a re-acceleration of the rate of change in technology,” he says. His impressive ability to identify and profit from the resulting disruptions means he is widely seen as the person best placed to fill the shoes of the late Steve Jobs as the industry’s leading visionary.

Mr Bezos’s willingness to take a long-term view also explains his fascination with space travel, and his decision to found a secretive company called Blue Origin, one of several start-ups now building spacecraft with private funding. It might seem like a risky bet, but the same was said of many of Amazon’s unusual moves in the past. Successful firms, he says, tend to be the ones that are willing to explore uncharted territories. “Me-too companies have not done that well over time,” he observes.

Eyebrows were raised, for example, when Amazon moved into the business of providing cloud-computing services to technology firms—which seemed an odd choice for an online retailer. But the company has since established itself as a leader in the field. “A big piece of the story we tell ourselves about who we are is that we are willing to invent,” Mr Bezos told shareholders at Amazon’s annual meeting last year. “And very importantly, we are willing to be misunderstood for long periods of time.”

More recently, financial analysts have grumbled about the company’s wafer-thin margins and the hefty investment it is making in its Kindle range of e-readers, the most advanced of which, the Kindle Fire, is a fully fledged tablet computer. Amazon’s move into hardware with the original Kindle, launched in 2007, was another unexpected move. The devices have proved wildly popular, but Mr Bezos has kept details of sales figures and profitability secret. The assumption is that Amazon is trading short-term profits in order to establish its dominance in the booming e-book market. But nobody really knows. “Investors are paying a lofty premium for a company whose investment cycle is going to extend a decade and which offers limited visibility,” says Colin Gillis of BGC Partners, a brokerage firm.

Such remarks do nothing to sway Mr Bezos, who is convinced that rapid technological change creates huge opportunities for companies bold enough to seize them. “There is room for many winners here,” he says. But he believes Amazon can be one of the biggest thanks to its unique culture and capacity for reinventing itself. Even in its original incarnation as an internet retailer, it pioneered features that have since become commonplace, such as allowing customers to leave reviews of books and other products (a move that shocked literary critics at the time), or using a customer’s past purchasing history to recommend other products, often with astonishing accuracy.

The view from the garage

Amazon’s culture has been deeply influenced by Mr Bezos’s own experiences. A computer-science graduate from Princeton, he returned to his alma mater last year to give a speech to students that provided some fascinating insights into his psychology as an entrepreneur. He explained that he had been a “garage inventor” from a young age. His creations included a solar cooker made out of an umbrella and tin foil, which did not work very well, and an automatic gate-closer made out of cement-filled tyres.

That passion for invention has not deserted Mr Bezos, who last year filed a patent for a system of tiny airbags that can be incorporated into smartphones, to prevent them from being damaged if dropped. Even so, in the 1990s he hesitated to leave a good job in the world of finance to set up Amazon after a colleague he respected advised him against it. But Mr Bezos applied what he calls a “regret minimisation framework”, imagining whether, as an 80-year-old looking back, he would regret the decision not to strike out on his own. He concluded that he would, and with encouragement from his wife he took the plunge as an entrepreneur. They moved from New York to Seattle and he founded the company, in time-honoured fashion for American technology start-ups, in his garage.

This may explain why Mr Bezos is so keen to ensure that Amazon preserves its own appetite for risk-taking. As companies grow, there is a danger that novel ideas get snuffed out by managers’ desire to conform and play it safe. “You get social cohesion at the expense of truth,” he says. He believes that the best way to guard against this is for leaders to encourage their staff to work on big new ideas. “It’s like exercising muscles,” he adds. “Either you use them or you lose them.”

Amazon’s unexpected move into cloud computing is a good example. The company had developed ways to allocate computing capacity flexibly in order to deal with the mountains of data being generated by its retail operations. This led to the idea that the same know-how could be used to solve similar problems at other companies, too, and Amazon Web Services (AWS) was born. It is now used by hundreds of thousands of firms, ranging from start-ups such as Spotify, a music-streaming service, to established companies like Ericsson, a Swedish telecoms giant. The firm does not break out AWS’s revenues, but Gartner, a consulting and research outfit, has estimated that they exceeded $1 billion in 2011.

Mr Bezos is coy about where he might place more big bets in future, but there have been persistent rumours that Amazon might launch a smartphone, possibly as soon as this year. With Amazon’s video-streaming and music services, Mr Bezos clearly has Netflix and Apple in his sights. And in recent weeks there has been speculation that Amazon is toying with the idea of opening a bricks-and-mortar shop to promote sales of the Kindle, by letting customers try it in person. The success of Apple’s hugely profitable chain of retail stores shows that even in the era of e-commerce, there are some things people prefer to buy the old-fashioned way.

If Amazon does one day move into bricks-and-mortar retail, it would not be the first time that Mr Bezos had taken a leaf from the book of Jobs. Like Apple’s visionary leader, he has a strong sense of showmanship, which was on display at the carefully choreographed launch of the Kindle Fire last year. Mr Bezos can also be an intense and demanding manager. But most importantly, he shares with Mr Jobs an innate understanding of the importance of thinking about high-tech products from the customer’s point of view.

Keeping it simple

During the design of the original Kindle, for example, Mr Bezos insisted that the e-reader had to work without needing to be plugged into a PC. That meant giving it wireless connectivity. But he also wanted it to work everywhere, not just in Wi-Fi hotspots, and without the need for a monthly contract. This prompted the Kindle team to devise a new business model, striking deals with mobile-phone operators to allow Kindle users to download e-books without having to pay network fees. The ability to download books anywhere does not simply make life easier for users; it also encourages them to buy more books. The Kindle is an e-reader, but it is also a portable bookshop.

Similarly, with the Kindle Fire, Mr Bezos recognised that a tablet computer designed chiefly for consuming entertainment content is no use unless there is plenty of such content available. For many other tablet manufacturers, the question of getting content onto their devices seems to be an afterthought; but Amazon, like Apple, has assembled an ecosystem of books, apps, video and music to accompany its device. Moreover, Amazon can use cross-subsidies from the sale of digital content to keep the price of the Fire down, something that rival tablet-makers who do not sell content cannot do. Once again, Mr Bezos is playing a long-term game in the hope of establishing the Fire as the main rival to the iPad.

Not all of his bets succeed. Who remembers Amazon Auctions, for example, or Amapedia, Amazon’s attempt to build a Wikipedia-like user-generated product directory? Even more numerous are the bets that Mr Bezos has placed on new initiatives that have yet to prove their worth. Amazon has branched out into own-brand products, has set up specialist e-commerce sites in several premium markets and is dabbling in movie-making and television production.

Perhaps his most outlandish bet is that on spaceflight. Blue Origin is one of several start-ups aiming to open up space travel to paying customers. Like Amazon, the company is secretive, but last September it revealed that it had lost an unmanned prototype vehicle during a short-hop test flight. Although this was a setback, the announcement of the loss revealed for the first time just how far Blue Origin’s team had advanced. “So little was known about Blue’s status that the amount of progress it had evidently made further enhanced its reputation,” says Mike Gold, an executive at Bigelow Aerospace, another space start-up. In a post on Blue Origin’s website, Mr Bezos said the crash was “not the outcome that any of us wanted, but we’re signed up for this to be hard.”

Staying on top in the fast-changing world of technology is hard, too. Mr Bezos is bound to be the target of more criticism as his company’s hefty investments in new areas continue to put a dent in its bottom line. His next move could be into smartphones or a video-streaming service that competes with Netflix, but it is just as likely to be something entirely unexpected. By being unusually patient, he hopes to create businesses that rivals will find harder to assail. As the investments in both Blue Origin and the 10,000-year clock show, it is the challenge of reaching for distant horizons that really makes Amazon’s boss tick.

Austerity measures failing as expected

In my earlier blog, why government austerity measures are a bad idea , I had mentioned how Austerity is a bad idea because it puts a spanner in the economic growth. Austerity alone does not deliver the rewards it is meant to and the threats of stunted economic growth and recession remain high in the Euro zone even today. Case in point is Portugal, a country that had taken the austerity route and followed all the rules but was still struggling with its debt problems.

There is a risk of that; look at Portugal, it has done all the right things, it has stuck to austerity, it has stuck to the programs set by the EU and others and yet Portugal's bond yields are incredibly high today.

The expectation from austerity was that markets reward countries for delivering austerity in the form of much lower borrowing costs and that hasn't happened. Despite the austerity drive, the euro zone was still plagued by talk of default and speculation that it might break up. These things effectively mean that austerity does not deliver the rewards it is supposed to deliver. The consequence is that you are left with countries that have zero growth, possibly recession and interest rates which are painfully high and that combination is unsustainable.

The failure of austerity put fiscal transfer back to the top of the agenda. Germany has been vehemently opposed to direct fiscal transfers from the better performing northern euro zone to the struggling southern countries. If they can't get the rewards from the markets, presumably there would have to be some kind of fiscal transfer mechanism to allow their yields to come back down. This brings the whole issue of what the ECB does, what happens with a fiscal union. It has to help these countries, not just deliver austerity.

Iran-West tension again setting stage for Oil to boil

Oil prices could spiral out of control and potentially herald deeper economic hardship for Europe if the European Union joins the US in banning Iranian oil imports. EU officials said that the European governments agreed in principle to ban imports of Iranian oil. China also suggested it would back US-led sanctions. But several countries within the EU are heavily reliant on oil imports from Iran, and none more so than economically struggling Greece, which currently imports 30% of its domestic oil from the country, according to the International Energy Agency (IEA).

Greece’s economy is already mired in deep recession and could feasibly collapse entirely if the sanctions were imposed. Were that to happen, the Greek economy could take its European neighbors down with it. But the likelihood would be that Greece would have to ignore the import ban and that the EU would have to allow it to in order to avert economic disaster.

Let’s assume the EU is stupid enough to go along with the US in imposing sanctions on Iran. That would only mean 250,000 barrels of heavy sour oil not coming into the EU. But the impact that would have on countries like Italy and Greece would be enormous, and the Greeks are not going to slit their own throats for the sake of an EU sanction when Iran is the only country willing to offer them oil on favorable terms. It would utterly destroy the Greek economy.

Saudi Arabia announced that it was ready to fill any gaps in the oil supply if needed, but market-watchers cast doubt on that possibility. Such a move by the Saudis would use up virtually all of that country’s spare capacity. The last time that happened, in 2008, oil prices climbed to almost $150 a barrel. Saudi Arabia’s continued ability to fill gaps in the oil supply in the future is questionable, considering, that its own domestic oil consumption could threaten its position as the world’s largest oil exporter and consequently pose a threat to the global economy.

Equally inflationary to oil prices—and dangerous for the global economy—is if military conflict breaks out between Iran and the West. Iran has threatened to close off the Strait of Hormuz following the announcement of US sanctions and given the already obvious tensions between the two countries fears over a military conflict have grown. Any such conflict in the Middle East between Iran and the US would have a catastrophic effect on oil prices.

What seems more likely however is an easing of tensions between Iran and the West before the end of the month, which would then feed into oil prices. My sense on the geopolitical situation is it’s saber-rattling on the part of Iran. If it were serious about closing the Hormuz Strait, I suspect it would do it first, rather than tell the world it was going to do it.

That view was reinforced when Iran’s foreign minister appeared to indicate at a joint press conference with the Turkish Foreign Minister that his country was willing to reopen negotiations over Iran’s nuclear program, suggesting the West had possibly won an international game of chicken. Of course, that may have been what the White House had intended to achieve all along. But whether it will have the ability to pull off such diplomatic tricks in the future is far from certain.

Recession? What recession? There is no recession for the Politicians...

It’s no wonder why politics attracts so many people.... definitely there is an urge to do something for society, but in the process they do a lot for themselves!! Though the picture is same everywhere, but here would like to delve into the facts and figures from US. 

Case in point is US Congressmen and Senators. When a Representative (name with-held) was first elected to Congress two decades ago, he was comfortably ensconced in the middle class. Mr. Representative, held $100,000 or so in savings accounts in the mid-1990s and had a retirement pension, but like many Americans, he also owed the banks nearly as much in loans.

Today, Mr. Representative, a miner’s son and a former high school teacher, is a member of a not-so-exclusive club: Capitol Hill millionaires. That group has grown in recent years to include nearly half of all members of Congress — 250 in all — and the wealth gap between lawmakers and their constituents appears to be growing quickly, even as Congress debates unemployment benefits, possible cuts in food stamps and a “millionaire’s tax.”

Mr. Representative buys a Powerball lottery ticket every weekend and says he does not consider himself rich. Indeed, within the halls of Congress, where the median net worth is $913,000 and climbing, he is not. He is a rank-and-file millionaire. But compared with the country at large, where the median net worth is $100,000 and has dropped significantly since 2004, he and most of his fellow lawmakers are true aristocrats. Just to give a sense of the scale of wealth I am talking about, its in millions of dollars. Congressmen need to disclose their wealth in broad range and many of them have disclosed it in range as wide as $150mn -$700 mn!!!

Largely insulated from the country’s economic downturn since 2008, members of Congress — many of them among the “1 percenters” denounced by Occupy Wall Street protesters — have gotten much richer even as most of the country has become much poorer in the last six years, according to an analysis by The New York Times based on data from the Center for Responsive Politics, a nonprofit research group.

Politics has always been patronized by the wealthy. US Congress has never been a place for paupers either. From plantation owners in the pre-Civil War era to industrialists in the early 1900s to ex-Wall Street financiers and Internet executives today, it has long been populated with the rich, including scions of families like the Guggenheims, Hearsts, Kennedys and Rockefellers.

But rarely has the divide appeared so wide, or the public contrast so stark, between lawmakers and those they represent. When the times are good, the common man would largely not notice such differences in wealth. But with the current economic turmoil that has awaken the people, the difference are too stark to go unnoticed.

There is broad debate about just why the wealth gap appears to be growing. For starters, the prohibitive costs of political campaigning may discourage the less affluent from even considering a candidacy. Beyond that, loose ethics controls, shrewd stock picks, profitable land deals, favorable tax laws, inheritances and even marriages to wealthy spouses are all cited as possible explanations for the rising fortunes on Capitol Hill. But nevertheless the point remains that our politicians do get richer while they serve the poorer common man; something that cannot be explained by plain economics.  

50 experiences to try before you die

A must read and watch by all adventure enthusiasts... Will surely kick up your adrenaline level several notches just by reading it and will definitely inspire you to try a few of them.

http://www.cnngo.com/explorations/play/50-thrilling-experiences-116798

FDI in Retail - A bold move by Indian Government

Overview

In a bold and in all likelihood, a controversial step, the Union Cabinet has finally permitted 51% FDI in Multi-Brand Retail Trade (MBRT) and up to 100% FDI in Single Brand Retail Trade (SBRT) both with Government approval. The existing policy prohibits FDI in MBRT and limited FDI in SBRT to 51%.

The Department of Industrial Policy and Promotion (DIPP) had circulated a draft note to seek inter-ministerial and public views on this politically sensitive issue. Some of the key features of the policy liberalization as stated by the government note are as follows:

MBRT - 51% under approval route (prohibited presently)

The proposal for 51% FDI in MBRT has been permitted under Government Approval route with the following riders:

• Fresh agricultural produce and meat products may be unbranded. The Government has the first right to procure agricultural products. Given that there are significant losses due to poor storage facilities for produce acquired by the Government, this may be a precautionary condition in order to ensure food security;
• Minimum FDI to be brought in is USD100 million. It is important to note that the period over which this amount is to be brought in has not been specified;
• At least 50% of the total FDI must be invested in ‘backend infrastructure’
• The term ‘Back-end infrastructure’ has been defined to include capital expenditure on all activities, excluding that on front-end units; for instance, it will include investment made towards processing, manufacturing, distribution, design improvement, quality control and packaging, amongst others. However, the cost of land and rentals are excluded for this purpose.
• It is pertinent to note that only capital expenditure (excluding front end) is covered in the definition of ‘back-end infrastructure’ thereby implying that the cost of maintenance of such infrastructure will not be counted towards this limit;

• At least 30% of the procurement of manufactured and processed products should be sourced from ‘small industries’;
• The above limits are required to be certified by statutory auditors;
• Retail stores to be set up only in cities with population of more than 1 million. 53 cities presently qualify out of a total number approximating 8000.

SBRT - 100% under approval route (existing 51% under approval route)

In light of the fact that the total FDI in SBRT since 2006 has not yet touched USD50 million, the existing cap of FDI in SBRT has been enhanced from 51% to 100% under approval route. The relaxation is intended to significantly increase the FDI inflow in SBRT. The conditions attached to SBRT are as follows:

• Products to be sold should be of a ‘single brand’ only;
• Products should be sold under the same brand name internationally;
• ‘Single Brand’ product retailing would cover only those brands which are branded during manufacturing
• The foreign investor should be an owner of the brand;
• For FDI beyond 51%, 30% sourcing  would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen.  Other than this rider, the four conditions mentioned above were currently apply to FDI in SBRT.

 Condition of 30% sourcing from small scale sector

• 30% sourcing is mandatorily required from micro and small enterprises with plant and machinery up to USD1 million (SME).
• The stated intent of this requirement is to ensure that the Indian SME sector benefits, including artisans, craftsman, handicraft and the cottage industry. Given this intent, it is unclear why sourcing has been permitted from SMEs anywhere in the world and not just in India.
• This condition is applicable both for MBRT and for SBRT where FDI exceeds 51%.

While the exact impact of the above policy change will take a few years to unfold, the perceived advantages and disadvantages arising from the policy relaxation are expected to be as follows:

Advantages

• Significant employment generation
• Efficiency in supply chain coupled with capacity building and induction of modern technology
• Expected to contain food inflation, at least in the medium term by increasing its supply
• Will help the sector become more organised
• Securing remunerative prices for the farmers by ensuring direct procurement of agriculture produce
• Benefit of lower costs to consumers on account of increased competition

Disadvantages

• Potential labour displacement
• Disintegration of established supply chains by establishment of monopoly of global retail
• Adverse impact on domestic small and unorganised retailers

US Consumerism on Black Friday

The following news report http://www.cnbc.com/id/45428383 on how violence erupted in some stores in US on the occasion of Black Friday shopping day makes one sit back and rethink on US consumerism. 

Should I take this desperation by the citizens of the World's biggest consumer as a sign of Consumer Confidence and rising demand among consumers or does it tell a different story altogether. It could also be that this is a day when retailers pamper consumers with huge discounts and its only on this day that the middle class consumers of US can manage to buy some of these goods which they have been procrastinating for some time in current economic turmoil!!

We all know that jobless rates in US are currently at one of the highest levels in the history of the country in modern times. US has a $ 15 trillion GDP and nearly 55% of that is consumer spending. These very consumers are the ones who are keeping the machines running in far off China and Indonesia and keeping the techie awake in India. What would happen if this massive consumerism gradually declines? 

India and China definitely have 1/3 of the world population, but for them to replace the consumerism of US citizens, its a long way to go. India's GDP is currently $1.6 trillion and consumerism is a small portion of this. To replace the nearly $8 trillion US consumer market from the top spot, is a daunting task. The per capita income of USA is around $46,000. Compare this with the per capita income of China which is at $ 7,500 and India's which is $ 3,400. More importantly the proportion of people who are earning below this national income level is way too high in India and China. The huge disparity in income levels tilts the table all the more. 

So basically it seems the World has to continue to depend on US consumers for a long time till India and China mature enough to shoulder the burden of World Consumerism.

Buffett's Big Move in Shaky Market

It indeed seems, the God of Value investing puts in practice what he preaches unlike most other so-called market experts who make their living out of preaching others about investing. The article summarizes where Warren has been investing amidst all the market turmoil. 

http://www.cnbc.com/id/45259772

Euro zone loses appetite for Italian Pizza!!

The year 2009-10 gave birth to a new abbreviation which increasingly became more and more important for the World economy. That abbreviation is PIIGS - Portugal Ireland Italy Greece and Spain. A pig is generally considered to be a dirty unwanted animal and so is this PIIGS too.  

While Portugal and Ireland managed to get some bailouts and survive in 2010, Greece which was a bigger mess, does not seem to be all that lucky. The EU, IMF and G-20 has asked the Greek government to adhere to the austerity measures imposed upon it. I don't know whether the austerity measures would have any impact on the finances of the country, but it really did change someone's life - the Greek Prime Minister's, who had to resign under pressure. France and Germany with their heavy exposure in PIIGS, were forced to come to the rescue and also form the EFSF (European Financial Stability Facility) and convince G-20 and IMF about the bailout needed for Greece. For the time being it seems Greek default has been averted though.

When the world was taking a breather from the Greek drama over the past few weeks, Italian bonds seem to have given a rude awakening to the World at large. Italy is a much bigger economy than Greece and any run on the Italian bonds would be in effect a test for the survival of the entire European Union. France and Germany are not in a position to bailout Italy. I feel Italy may need to exit the Euro zone and revert to its own national currency to resolve its debt crisis, thereby forcing the break-up of the Euro zone.

With yields on its sovereign debt hovering around the 7% mark, market access may become limited for Italy. A forced restructuring of its debt could help solve some of its issues, but it would not address other issues that hamper the Italian economy such as a lack of competitiveness, a large current account deficit and lower gross domestic product. 

Neither the EFSF nor the IMF is in a position to bailout larger economies like Italy. Issuing more bonds in the Euro zone by the EFSF would lead to a larger pandora's box which would create bigger problems in the years to come. Its like a gigantic leveraged CDO being financed by the better performing nations and large emerging economies. Its a recipe that would leave a bad taste in the mouth. 

As I had mentioned in my previous blog why government austerity measures are not a great idea Italy is facing recessionary pressures on account of the cut in government expenditures. This would definitely make the high sovereign debt unsustainable. The only way to avoid a breakup of the Euro zone would be for the European Central Bank to become a lender of last resort, for a fall in the euro's value in line with the dollar and for fiscal stimulus for the "core" euro zone and austerity in the periphery to take place. Till this takes place, it seems Europe's fancy with Italian Pizza is done for the time being!!

Indian Railways - reminiscent of our past

Few weeks ago I had an opportunity to make a train trip to one of the most beautiful beaches in India. After ruling out lot of options we decided to make the overnight journey by train. I was anxiously looking forward to it as its been nearly thirteen years since I last traveled by The Indian Railways.... over these years as I grew up and graduated, post graduated and got myself more involved in the capital markets, I read a lot of how the dynamic railway ministers like Laloo Prasad Yadav had turned around the Indian Railways for the good. Even Harvard Business School had invited Mr Yadav to give a guest lecture on how he turned around the second largest employer in the World (for those who don't know, Indian Railways is the second largest employer in the World, after Walmart!!!).

But what really prompted me to write here is the fact that nothing seems to have changed in the last 13 years!! Definitely a lot many trains would have been added on newer routes but the quality of service and train journey remains the same. You still see the cockroaches in the cabins, the blankets, pillows and sheets still are not the most hygienic to be used and not to mention the same sorry state of the toilets.

I loved the food that used to be served in the trains in my childhood days as it gave me a feeling of an adventure outing, a change from the healthy home food. The menu hasn't really changed much in these 13 long years!! You still get the cutlet bread with butter and sauce for veggies and omelette bread for the non-veggies. The ubiquitous idli-vada sambhar chutney also has not lost its place from the menu options. The chai-chai-chai monotone immediately takes you back to your childhood days when the sound of bottle opener being swiped on cola bottles used to immediately lighten up the eyes knowing the cola man was coming...

In a way I feel the Railways have definitely preserved our past for the generations to come ahead. In our fast paced life when we don't think of any other option other than taking the flight in order to save time, I think one should make a train trip once in a while to feel the roots and also see the country side of the heartland. But nevertheless I think the government should take up a separate project to modernize the Indian railways. High speed trains like the ones that are a common sight in Europe and even our Asian neighbours of Japan and China should be introduced here. Heritage railways should be preserved separately!!

Higher taxes for Wealthy Americans

There is news that US President, Barack  Obama would be proposing what is being called as "Buffett Tax" on people earning more than $1 million a year as part of his deficit-cutting recommendations to the US Congress.

The purpose for such a tax is to bring the tax rates of the wealthy Americans in line with that being paid by the middle class Americans.  Warren Buffett had once famously said that he thinks that he, and other super-wealthy Americans, don't pay enough in taxes. He said his tax rate is 17.4% whereas most middle class Americans pay 30% or more in income tax. It’s really an irony that cannot be explained by simple economics!

No wonder Capitalist America took it so long to realize as to who needs to be taxed more and who less. Taxing the rich and leaving a little more extra cash in the hands of the middle class could definitely change the dynamics of local consumption significantly. It’s vanilla economics, that the marginal utility of a few thousand dollars in the hands of a middle class is much more than that in the hand of billionaire!

In his weekly radio address Obama said that Americans need to be ready to "pay their fair share" to narrow the U.S. deficit, previewing his proposals to Congress. Obama has repeatedly argued for the wealthiest Americans to face higher taxes with fewer loopholes and exceptions as part of the effort to ensure the U.S. debt-load remains in control. In addition to floating the idea of more taxes on the rich, he is also expected to propose companies getting some tax breaks.

It’s no wonder that the Republicans, who have raised the volume on Washington's fiscal problems as the November 2012 presidential election nears, see higher taxes on the wealthy as a problem for jobs, given that entrepreneurs and companies would be strongly affected. It’s really an unfair world where the rich would go to any length to arm-twist the government in preserving their wealth whereas the middle class has difficulty in even building a cushion for tough times.  

Why Government austerity measures are not a great idea

The current global crisis has given governments a new weapon to tackle the precarious situation being faced by them - Austerity measures. Financial times lexicon defines Austerity measure as "An official action taken by a government in order to reduce the amount of money that it spends or the amount that people spend". But doesn't classical economics teach us that in order to come out of a recessionary economy there needs to be increased spending and consumption demand in order to stimulate industrial activity?

US President, Barack Obama announced a $ 447 bn package that would create jobs in the economy through infrastructure spending and government spending. This is definitely a step in the right direction, unlike what governments in Europe are resorting to. Cutting down government spending, pensions and salaries would see its repercussions over a longer period of time. It needs no economist to tell you that these activities would lead to lower local consumption, lower industrial activity, more job cuts and the cycle would get more painful with time.   

What really is needed is a change in habits of the people. Though a difficult thing to ask but then difficult times need difficult measures. This change in habits is something that would come with time. The concept of savings and spending within your limits is something the Europeans need to learn from the conservative Asians. Leverage and Debt is the single most important cause of all problems that the world is faced with now. Asians are known to be conservative investors and that has definitely helped them to sail through the current turmoil. Indians in general have a very high savings rate of 33% of their earnings. I think its not asking for too much if one is advised to spend within their limits. 

By austerity measures, governments are punishing the common man for the wrong doing of the politicians and the financial market culprits. People could also vent their anger through protests and strikes like the ones seen in Greece recently. These cannot be suppressed for long and has the power to topple governments. Instead of passing the buck of austerity on the common man in Europe, it is important to bring the bankers and financial engineers under some sort of regulation wherein a check must be kept on the leverage these guys are taking on their banking assets. Greed for higher returns and commissions has rocked the ship earlier and would do so again in future unless there is some check to keep these in limits. Investment bankers and Wall Street bonuses which defy gravity even in recessionary economy is a clear indication that the very systems which run and govern the Zillion Dollar global banking and financial markets have inherent flaws that is working in favour of a few and against the majority.

Deutsche Bank CEO Just Gave A Terrifying Speech In Frankfurt

http://www.businessinsider.com/josef-ackermann-euro-banks-speech-frankfurt-2011-9

Air India - a sick unit being kept alive on glucose

Every country has a national airline which projects the image of the country to the rest of the World. Some of the national airlines of the likes of Singapore Airlines, Swiss Air, etc have set benchmarks in customer service and quality of flight experience which many private airlines find it difficult to match up. But when it comes to the national carrier of India, we Indians shy away from even travelling in it, leave alone feeling proud of it. Once Air India and Indian Airlines were the only airlines and we didn't have a choice. Currently Air India and Indian Airlines combine have a market share of meager 15%. I don't think air travel in the country would be impacted if we really close down this ailing airlines. The private players would surely be more than happy to serve a larger customer base.

Both Air India and Indian Airlines have come a long way from their glory days. Now with both of them having merged, the mess this combined entity has got into is even bigger. Thanks to an extremely inefficient and bureaucratic way of running business, the national carrier of India is nothing more than a money guzzler. Never in the last decade or more, have I heard that the airline is not in some financial crunch! The airline made some aggressive purchases of new aircraft running into billions of dollars when it did not even have the capacity to repay any time soon. There has been a stage when the earnings from the running of the airline is just sufficient to pay the interest on the huge debt the airline has on its books. Every now and then the airline faces problem in even paying salaries to its employees.

Over the last 3-4 years, Air India has hired numerous consulting firms to advise them on how to "Turn Around" the sick giant. Interestingly the consulting fees paid by Air India for these assignments ran into several crores of Rupees without any meaningful implementation and impact on the fortunes of the airline. The people at the helm of the carrier seemed the least interested in making the unit profitable because the airline was more profitable for their personal gains. I don't want to delve too much into the personal integrity of anyone because sooner or later I am sure investigations would start into the dealings of the senior management of Air India.

Recently the government approved an additional capital infusion of some Rs 6600 cr! This is just one of the many events when huge cash was dolled out to the airline in the hope that things would turn around. But I feel, this is not an easy job to do as the Airline is run with the mindset of an old bureaucratic system.

I think the airline needs to change its policy of keeping employees till retirement. this builds a lot of complacency in the system. More professional and expert hands are needed to make the airlines competitive. I guess its time the government took a decision that does it really need to keep running a substandard airline because of prestige issues or close it down. If prestige issues really matter, I guess they need to really improve the flight experience and customer service at Air India. For the record, latest report from Aviation sector shows that Air India has the lowest on time flight performance in the entire industry. Whereas Jet Airways leads the pack with 91% on-time flight performance, Air India has the figure at a low 71%!! Analysts said Air India employees were slow in clearing and loading aircraft and conducting passengers to their seat....There is definitely lot of room for improvement and the Airline has a long way to go before it becomes the first choice for travelling within India.

Why gold investment never runs out of fashion

One investment class which has found buyers across all generations and category of people is Gold. Often people ask me whether it’s a good time to buy gold now. There is no definition of “now” as whenever you want to buy gold, it’s a good time. You are buying into an appreciating asset and disregarding the short term price fluctuations in gold, you would never lose money in the metal.

There have been fables and dynasties built on this yellow metal. Gold has attracted the attention of man since the days of the Gold Rush when people risked their lives in the hope of making it big with the discovery of some gold mine. Over the generations, the yellow metal has found a place of eminence among the asset classes on account of its never ending demand. There are some facts which one should know about the metal before they commit there hard earned money on the shiny metal.

Gold is an inert chemical element and is one of the most malleable and ductile metal known. The metal retains its shine and colour even when exposed to air and water and that adds to its value as storehouse of wealth. The supply of gold is limited on earth and unlike fossil fuels, it does not get formed through the chemical reaction of the basic materials (carbon, oxygen, nitrogen and hydrogen). Moreover gold once mined remains above earth in some form or the other…. Jewellery, Gold bars, Coins, industrial machines, etc. Till date around 165,000 tonnes of gold has been mined.

Gold has been widely used throughout the world as a vehicle for monetary exchange, either by issuance and recognition of gold coins or other bare metal quantities, or through gold-convertible paper instruments by establishing gold standards in which the total value of issued money is represented in a store of gold reserves. Gold has been fascinating mankind since ages. Egyptian hieroglyphs from as early as 2600 BC describe gold, which king Tushratta of the Mitanni claimed was "more plentiful than dirt" in Egypt. Gold is mentioned frequently in the Old Testament, starting with Genesis 2:11 (at Havilah) and is included with the gifts of the magi in the first chapters of Matthew New Testament. The Book of Revelation 21:21 describes the city of New Jerusalem as having streets "made of pure gold, clear as crystal".

A recent report ranked the central governments of different countries according to their gold reserves. No wonder, US Govt. topped the list with close to 8900 tonnes of gold reserves. India was ranked 12^th on the list, but when it comes to gold consumption, no country can match up to India as far as the demand for gold is concerned. India consumes nearly 25% of the gold produced each year mainly in the form of jewellery. So if we consider both the government reserves and gold in the form of jewellery with the citizens, I am sure India would top the charts comfortably. It goes without saying how Indians have always realized the true value of gold which many countries are now realizing considering the weakness in the dollar which has been the measure of a government’s reserves.

Gold investment worldwide has grown dramatically in the last five years, but compared with the total stock of financial assets, gold bullion investment is still just a tiny proportion. Several factors are now stimulating gold investment by new pension fund money - as well as by private investors. Sales of gold jewelry across Asia are surging as the local economies boom and private investment grows. China's gold investment demand grew by 20% in 2009, while Indian consumers bought a record 900 tonnes – well over one-fifth of the total world market. Gold buyers in Asia tend to think of their jewelry as a form of gold investment. Prevented from owning gold bullion until very recently, they buy gold to protect their savings from inflation and currency shocks. That's why the most popular form of gold jewelry in Asia – heavy chains and bracelets – is known as "investment jewelry" in the gold industry.

Gold mining companies worldwide have failed to meet the growing demand from gold jewelry and gold investment buyers, pushing the gold price steadily higher. The world's No.1 gold mining nation, South Africa, has seen its annual gold output halve since 1998, and new operations in China and Russia - though growing - have failed to pick up the slack. According to consultants "Virtual Metals" total world mining output has fallen by 4% since 2003. Their gold investment analysts don't forecast an early return to growing output.

The surge in crude oil prices has closely matched the gains in gold prices since 2003, but many people now thinking about gold investment will also want to consider the surge in world food prices, the boom in base metals such as copper, and the current all-time highs in the cost of shipping. Rising demand for better housing and durable goods from Asian consumers is certainly a factor. But many gold investment analysts also point to the huge growth in credit and debt in the West. The money supply in the United States has doubled in the last seven years. In Europe, growth in the money supply hit a near-30 year record in late 2007, increasing the appeal of gold investment as the value of each Euro in circulation threatens to shrink under the weight of new notes and electronic account balances.

Why Manmohan Singh should quit as India's PM

Like a large number of Indians, I too had immense respect for Dr Manmohan Singh and felt India would really emerge under the stewardship of his vision. However this hope soon faded away as we Indians came to realize that he would just be a puppet whose reins would be elsewhere. I would not want to delve too much into this as much of bandwidth has already been spent on this.

My view as to why Dr Manmohan Singh should resign from his current position as the PM of the nation is based on the fact that having been the face of the ruling government which is opposing the Jan Lokpal Bill proposed by Anna Hazare and team, it has become a face-off between Anna and Manmohan. People have come to see it as if Manmohan Singh is not against corruption and he is supporting a corrupt government. The real corrupt politicians have taken shelter behind the PM and are using him as a shield. No where in discussion its being said that Laloo Prasad Yadav, Jayalalita, Mayawati or Sharad Pawar are opposing the Jan Lokpal Bill. When in reality they would ensure at any cost that the bill does not pass as then it would mean nailing their own coffin. On the contrary the fight has become one between two honest and respected citizens of the nation.

I think Dr Manmohan Singh should call it a day at his current role and take up role's which involve less of politics and more of intellect which he is gifted with. We need minds like his to steer the nation towards a developed economy which he cannot do under the shadow of higher power and for always being insulted as the silent PM of the nation. It feels bad to hear when people make fun of the gentleman criticizing his silence. He needs to speak up for himself and protect his dignity which he is losing protecting those people who really don't care for him.

2008 being revisited in 2011

2008 was a year that very few people would forget in their lifetimes. You need not be linked to the capital markets to remember the events of 2008 as almost all across the Globe and across all sectors, the tremors were felt with varying intensity.

Now as we have come to the middle of 2011, the fault-lines are starting to show up again. Indian markets started the year with a strew of negative events - big ticket corruption being unearthed, high inflation, rising interest rates and high crude oil prices. Developing markets continued to outperform the emerging economies as economists went gung-ho about the growth prospects of the shattered developed economies. US was seen as the clear market leader in the global rally. Unfortunately the party on the street has become very short lived.

Unlike 2008 when it was the "Too Big to Fail" banks from the US which were at fault and collapsed, this time around in 2011 its the Sovereign Governments whose neck has been put on the line. Countries which till yesterday figured as the top tourist destinations of the developed world, became the poster boys of Sovereign defaults. These countries made it clear to the world, either the European Union (EU) bails it out or there would not be any EU tomorrow. What initially looked like a European problem, soon raised its head in none other than the mighty USA. With the Debt Limits becoming a national political issue in the US, the world could do little but watch the debt limits being raised to another astronomical figure of a few more trillion dollars!!

Now with fresh concerns of European banks falling, the markets are on tenterhooks!! People are talking of a Lehman type crisis in Europe. Growth rates are being downgraded for the developed and emerging economies and also for the World at large. Where would all this lead to? Has Lehman become the synonym for financial crisis? Before we could lick our wounds from the last crisis, we have been pushed into another one and this time around the wound seems to be quite deep. Governments are in trouble unlike the previous case when governments bailed out the banks. Fed cannot come to the rescue of the US government by running its minting machines overtime. That would be the silliest thing to do.

The problem with the current global economy and more specifically the financial sector is that greed has become the corner stone of its demise time and again. We do not seem to be learning from our past mistakes. We pumped in $700 bn in 2008 and created the current mess. Now debt limits are raised further and stakes are higher. Its no man's guess what the size of the next crisis would be.

The Indian Congress digging its own grave

There is an old saying in Hindi mythology "Vinash kale vipareet buddhi" which means when one's destruction nears he is guided by wrong intelligence. This seems to be the very scenario for the ruling Indian Congress Party (UPA) and its handling of the Anti-Corruption movement led by Anna Hazare and team.

After the first wave of Lokpal Bill movement in April 2011, the ruling UPA government felt the pressure was too intense and it was needed to show to the common man its intentions of fighting corruption and hence accepted to draft the Lokpal Bill which has been lying in the corridors of the Indian Parliament for the last four decades!! Like always, the government felt that this too was a passing phase and soon the steam related to the Lokpal bill would die down and government would come out with a weaker version of the Bill to appease the citizens and pat its back for having made an anti-corruption law. However little did they realise that times have changed and we Indians are not in an era of Roti-Kapda and Makan, but a much more enlightened society. Moreover the people leading from the front in the fight for Jan Lokpal Bill are no politicians whose motives end with the gain of publicity and votes. They are respected citizens of the country who have the least aspirations to be on the political list of any party.

With the failure of the government to pass a strong Jan Lokpal Bill, and Anna Hazare's decision to take on the government a second time, I think the stage is set for the final ouster of the ruling party in the next elections if not before that. The ruling party has lost its support of the citizens which is visible from Bangalore to Delhi and Mumbai to Kolkata. They hit the final nail on their coffin by making the silly mistake of arresting Anna Hazare and his team even before they could begin their fast and peaceful rally in the capital city of Delhi. This act highlighted the fear the government has with the success of the rally. My question is why is the government hesitating and so adamant on not allowing corrupt bureaucrats being investigated by an independent body like the Lokpal? What skeletons is it hiding in its cupboards that it is so scared of any investigation?

Surprisingly ruling party ministers come on television and talk about how the Jan Lokpal Bill is not the solution to corruption problems in the country. They don't realise that we too know its not the panacea for the corruption problem, but then as of now we do not have a better alternative and neither do these so called elected ministers have an alternative other than just degrading the Jan Lokpal Bill. Below I have summarised the difference between the Jan Lokpal Bill and the Draft Bill as recommended by the government of India.

Draft Lokpal Bill (2010)	Jan Lokpal Bill
Lokpal does not have powers to investigate the prime minister.	Lokpal will have the powers to investigate the prime minister.
Lokpal can only probe complaints approved by the Speaker of the Lok Sabha or the Chairman of the Rajya Sabha.	Lokpal will have powers to initiate suo moto action or receive complaints of corruption from any citizen if it deems it worthy.
Lokpal will only be an Advisory Body with a role limited to forwarding reports to a "Competent Authority".	Lokpal will have the power to initiate prosecution of anyone found guilty.
Lokpal will have no police powers and no ability to register a First Information Report (FIR) or proceed with criminal investigations.	Lokpal will have police powers as well as the ability to register FIRs.
The CBI and Lokpal will be unconnected.	Lokpal and the anti corruption wing of the CBI will be one independent body.
Punishment for corruption will be a minimum of 6 months and a maximum of up to 7 years.	Punishments will be a minimum of 10 years and a maximum of up to life imprisonment.

I guess its just a matter of time before the ruling government realises that no one is bigger than the citizens who have elected them and whom they are ruling in a democracy. We are no dictator-run country like Eqypt, Libya or Iraq where there would be civil uprising and riots on the streets. We have a much powerful tool of non-violence patronised by The Father of our nation and we shall surely achieve our goals this time too though a little later because of the quantum of money involved and the level of people who would be under investigation once the bill comes into play.