Are we on the cusp of a major bull run?

In this issue:
» India has amongst the highest central bank staffers
» NRIs are pouring money into real estate
» Japan is still reeling from the slump
» FM wants to do away with oil bonds
» ...and more!!

If everything goes well, in a few weeks from now, we may have sown the seeds of a major bull run. We say so because a new wave of stimulus money is most likely to be unleashed in the biggest economy of the world, the US. Sensing that the current efforts are not keeping more people employed at their work, President Obama has called for a major new burst of federal spending. "We avoided the depression many feared. Our work is far from done," Obama thundered in a recent speech. He further added that he wants to spend new money for highways and bridge construction and for ensuring adequate social security net for the US citizens, especially to the unemployed. And the figure that is being talked about is in the region of US$ 170 bn.

Of course, given the kind of fiscal mess that the US is in, spending more would have meant going further down the path of suicide. But what has given some government authorities hope is the unexpected windfall that the government is likely to make from early repayment of bank bailout funds. With the same likely to fall in the vicinity of US$ 200 bn, much of the fresh stimulus money could be spent from it without further endangering the fiscal health of the US economy. Thus, it looks like the US economy will get another shot at trying to bring its GDP to respectable levels and reduce the current record unemployment. And since the US is still the growth engine of the world, this could also mean a great opportunity for the global economy as a whole to finally put the crisis behind it. If it does indeed lead to desired results, this could be one more reason why we could be on the cusp of a major bull run.

01:03 Chart of the day
The fact that government organizations in India are to some extent overstaffed is a well documented fact. As today's chart of the day shows, when it comes to the number of central bankers per 100,000 people, India (read RBI) emerges amongst the highest. While there is not much to choose between India and the US in absolute terms, the former's central banking staff will far outweigh that in the US due to India's population being very high. This highlights that India needs to make its government organizations including its central bank leaner by doing away with bloated staff costs. Having said that, despite having more staff than necessary, in the current global financial crisis, India's central bank certainly deserves plaudits for the way it has handled the build up to the crisis as well as its aftermath.



Data Source: The Economist

01:47

This is one of the biggest ironies we have come across so far. The economic downturn in the US, Europe and the Dubai debacle - all had only one factor to blame. A bubble in real estate prices and mortgage loans! But it seems the trend is that of greed feeds greed. With NRIs from the West and the Gulf wanting to relocate to their home-country, the real estate market in India is seeing a never-before rally. The dollar-earning NRIs are willing to pay higher than market prices. Banks and mortgage lenders are all too willing to help their high ticket purchases with attractive interest rates. These funds are therefore feeding an asset bubble in Indian real estate, which was relatively less impacted by the global meltdown. A business daily reports that an estimated 25 m NRIs living in 130 countries have remitted US$ 52 bn to India so far this year. Most of it has directly come to real estate. Further, the current tight liquidity situation across US has enticed NRIs to mortgage loans in India. We do not see this as a very healthy sign as Indian real estate players and bankers have to be very careful about whether the high prices and risky loans are sustainable.

02:25

It has been called the country with the 'lost decade' and the recent GDP figures released for the third quarter of 2009 do not paint a rosy picture either. As reported on Bloomberg, Japan's GDP rose at an annual rate of 1.3% lower than what had been estimated by experts and economists alike. Japan is yet to shake off the crippling effects of the global financial crisis and the data shows that Japanese companies are cutting down on capex for building plant and machinery as they want to protect earnings. As a result, there are concerns that the economy is already under the threat of deflation. To make matters worse, the country which is dependent on exports, is already reeling under the impact of a rising yen. The Japanese government, on its part, has come up with a new stimulus package and has pumped in US$ 81 bn into its beleaguered economy.

Since the Japanese economy is dependent on how its developed peers of the US and Europe are doing, it seems unlikely that there will be much headway in terms of growth unless the US and Europe come out from the slump. It is expected that the scenario is likely to be much better in 2010. But whether that actually turns out to be the case is anybody's guess.

03:11

Two wrongs do not make a right. From the Oil Ministry's point of view, price controls on petroleum products is wrong. After all, the finances of state owned oil marketing companies are completely messed up because of the subsidized prices. These companies receive oil bonds from the Finance Ministry. From the Finance Ministry's point of view, oil bonds are wrong. They worsen the fiscal deficit situation. In fact, the Finance Ministry has not given any oil bonds to the Oil Ministry so far for the current fiscal. It might wait up to the next budget. The problem is how does a government increase prices of petroleum products without affecting the economy and its popularity? Especially, if it gets elected on the aam admi plank. In our view, no amount of accounting and procedural jugglery can solve the fundamental problem.

03:32

All is not hunky dory for the Indian economy. Yes, that the Indian GDP has grown by 7.9% in the September quarter is certainly something to cheer about. But the looming threat of inflation persists. What is worrying really is the rising food prices. This was reflected in the wholesale food-price index that climbed to an 11-month high in November.

As a result, the government yesterday sought an approval to spend an extra US$ 6.6 bn. This will partly be used to subsidize food and fertilizers so as to douse rising inflation. The interesting thing to note is that the government's fiscal deficit had soared to 6.2% in FY09. Further, it is expected to remain high at around 6.8% in FY10. With the added borrowings that the government is going in for, it appears that the deficit is set to exceed the estimate for this year. And so, bond yields are also expected to soar to 8% putting added pressure on government finances.

It is obvious that the only other way for the government to contain the deficit is by increasing revenues. Its proposed plan to auction third-generation telecommunications network is expected to bring in Rs 250 bn. But so often in the past, the problem for the government has always been effective execution of plans. Therefore, it remains to be seen whether this will witness a sea of change this time around.

04:16

It has become hard to find even two economists that fully agree with each other these days. Take this pair of 'experts' for example. One of them is in charge of running the biggest economy in the world. The other is a former chief economist at Morgan Stanley. While both may seem to hold respectable positions, their views could not be more radically different. The first person we're referring to is US Federal Reserve Chairman Ben Bernanke. And the second person is Andy Xie, who is said to have predicted as early as September 2006 that the US economy would fall into a recession in 2008.

Mr. Xie said recently, "There is a Chinese saying that one could quench the thirst by drinking poison. Bernanke seems to be prescribing exactly this to the US economy. The slower Bernanke raises interest rates, the bigger the next crisis." Xie strongly feels that while low interest rates may appear to help in the short term, they will ultimately jack up inflation rates in just a couple of years, setting the stage for the next crisis. But Bernanke obviously differs, maintaining that increasing interest rates is not an option until the US economy shows signs of a sustainable recovery. In our opinion, keeping interest rates low or increasing them, both have their fair share of dangers. It's just a matter of choosing the lesser evil out of the two. Well that then is the million dollar question, the answer to which only time will tell.

04:45

Meanwhile, the benchmark indices continued to trade in the red and the Sensex was trading lower by 104 points at the time of writing. Selling activity was witnessed in stocks from the banking and metals sectors. While most Asian markets were trading mixed at the time of writing, European markets are trading lower.

04:58 Today's investing mantra
"Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." - Warren Buffett

-----------------------------------------------------------------
The best way to find yourself is to lose yourself in the service of others.”
Mahatma Gandhi

Quote:

---

Originally posted by gopalpai

01:47

This is one of the biggest ironies we have come across so far. The economic downturn in the US, Europe and the Dubai debacle - all had only one factor to blame. A bubble in real estate prices and mortgage loans! But it seems the trend is that of greed feeds greed. With NRIs from the West and the Gulf wanting to relocate to their home-country, the real estate market in India is seeing a never-before rally. The dollar-earning NRIs are willing to pay higher than market prices. Banks and mortgage lenders are all too willing to help their high ticket purchases with attractive interest rates. These funds are therefore feeding an asset bubble in Indian real estate, which was relatively less impacted by the global meltdown. A business daily reports that an estimated 25 m NRIs living in 130 countries have remitted US$ 52 bn to India so far this year. Most of it has directly come to real estate. Further, the current tight liquidity situation across US has enticed NRIs to mortgage loans in India. We do not see this as a very healthy sign as Indian real estate players and bankers have to be very careful about whether the high prices and risky loans are sustainable.

---

-----------------------------------------------------------------
The cowards never started,
The weak died on the way,
Only the strong arrived.
http://www.youtube.com/watch?v=_yK1i9cLAMM