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