In this issue:
» Mark Mobius' candidates for the 'Next Dubai'
» Autos on a tear
» Gold could touch US$ 2,000 per ounce, says turnaround specialist
» PSU Banks have written off a lot of money
» ...and more!!

Poor Dubai. Ever since the news that one of the investment arms of the Dubai government has sought an extension for loan repayment broke out, the Emirate kingdom has sort of become a favorite whipping boy of the financial media. But the fact remains that there are plenty of 'Dubais' lying hidden around the world right now, especially in places, which are awash with liquidity. And if Mark Mobius, the famed emerging markets' guru is to be believed, some areas in China and right here in India could well become the 'next Dubai'. Talking to Bloomberg, Mobius asserted that given the liquidity in the two Asian nations, there could be isolated pockets of disaster on account of over-spending and over-leveraging. However, he also added that it may not happen tomorrow but with the kind of money supply that's coming in and with the IPO activity that's underway, a Dubai like situation is definitely on the cards.

We couldn't have agreed more. The last time the Indian equities touched their all time highs back in January 2008, bubble formation was clearly being seen in select pockets like real estate and power sector stocks. Infact, it would not be out of place to say that the entire equities market looked like a bubble with valuations going ahead of fundamentals. So, have the Indian stock markets started to resemble a bubble again? We do not think so for the valuations do not seem way too out of whack with fundamentals. However, other asset classes like real estate in places like Mumbai and Pune do look like they have entered bubble territory. Hence, they seem like strong contenders for being the 'Next Dubai'.

00:52 Chart of the day
Today's chart of the day is another reason why we think emerging markets are the next candidates for a sighting of asset bubbles. It is being believed that public debt (the debt that the government of a country owes to its creditors) in developed economies could keep rising well into the future, forcing them to keep interest rates artificially low so that interest costs could be kept at minimum. Hence, investors in search of higher yields could flock to growth economies like the emerging markets where not only would public debts be lower, thus allowing government to spend more on productive activities but the GDP growth could also be higher.



Source: IMF

01:24

Barely did the dust settle on India's excellent economic performance for the quarter ended September 2009, India's auto sector also seems to have come out all guns blazing. Maruti and Hero Honda, market leaders in their respective segments, have witnessed record shattering sales for the month of November 2009. While sales at Maruti were higher by an impressive 60% YoY in the domestic market, Hero Honda recorded its best November monthly sales ever, with volumes witnessing a strong growth of 31% YoY.

Besides being market leaders, sales at both these companies are also good indicators of where the rural demand is headed given their well entrenched rural presence. Thus, if the numbers are anything to go by, rural demand also seems to have come in pretty strong for both the companies. And this does bode well for India's economy as there are concerns that following drought like situation in certain pockets, rural demand may not hold up during the third quarter. The latest auto numbers must have surely gone some distance in putting those concerns to rest.

02:01

The yellow metal Gold is really finding a lot of backers these days. Latest to join the bandwagon is the billionaire investor and turnaround specialist Wilbur Ross. Ross is of the opinion that with top investors increasing their gold related holdings, the precious metal could keep rising to US$ 2,000 an ounce. However, Ross has not based his arguments on the demand supply theory. Instead, he believes that gold is more of a psychological commodity than an industrial commodity and hence, it is a momentum trade on a global scale rather than anything that has intrinsic value.

While Ross may be true that the intrinsic value of gold is not readily ascertainable, it should be noted that even the intrinsic value of a currency cannot be determined with a great degree of accuracy. One can only have a fair degree of confidence that it will not get significantly devalued. But that confidence is being increasingly shattered these days by governments who seem to be on a reckless money printing spree. And since unlike currencies gold cannot be printed, people are seeking the relative safety of gold. Thus, while on an absolute basis gold may not have any intrinsic value, on a relative basis, it seems far safer than its alternative, the paper currency.

02:45

The attempt by PSU banks to clean up their books in a hurry does not seem to have gone well with investors and the media alike. Writing off bad debts with the help of treasury profits has not been a first instance this time. The same ritual was followed in the previous low interest rate cycle (FY03 - FY04). However, many believe that the one-time settlement (OTS) scheme is being used by banks to collude with willful defaulters. A leading business daily reports that as per the Finance Ministry, PSU banks have together written off recoverable assets worth Rs 250 bn since 2007.

The same should have been lower considering the annual recovery rate. However, readers must view these numbers in the light of loan waivers and settlement schemes announced by the government. Further, storing the 'doubtful' assets in their books and not providing for them would anyways not reflect the outstanding risks. Thankfully, defaults in credit cards and personal loans are not yet a sizeable proportion of PSU banks' NPAs. What remains is largely agri and corporate loans. Here, whether it is the bank or the government colluding with the willful defaulters needs to be answered.

03:23

The future has a way of catching people by surprise. That makes forecasting a tricky business. So, little wonder forecasters have to be a little tricky themselves. Most forecasts seem to be exercises in hindsight rather than acts of any great vision. Take one of the most popular forecasting exercises in economics - predicting the GDP. After India's surprising 7.9% GDP performance in the second quarter, there is a rush of economic forecasts by financial institutions. Nomura has upgraded its FY10 GDP forecast to 7%, up from 6%. Morgan Stanley upped its estimates from 6.4% to 6.7% for FY10. We find it amazing how precise forecasts tend to be and how authoritative they sound. As Benjamin Graham said, "The demand (for forecasts) being there, it must be supplied".

03:48

"My money is on both", says another admirer of both India as well as China. "I do not think the question is India or China", he goes on to add, "I think there is a really good chance that it could be India and China. These are different models, different systems, different challenges, and the stars are in pretty good alignment for both of these huge economies provided they deal with some of their structural issues." The man in question is none other than Stephen Roach, one of the world's pre-eminent economists. Speaking to a leading daily, Roach also observed that rising job losses, unemployment and shrinking incomes meant that Americans were wary to resume their consumption binge. This is why Roach believes consumption in the US will take a long time to recover.

Talking of India, what makes Roach optimistic is that the micro story is still good. The country has a large collection of world class companies and a well educated English speaking and IT enabled workforce. Relatively stable financial institutions and a world known democracy are added feathers in India's cap. He has also lauded the independence of the RBI and believes that India can realise pretty impressive growth rates over the next 3-5 years barring any political shocks.

While all of these factors do receive a thumbs up from us as well, we believe that there still a lot of obstacles that need to be overcome if India has to come anywhere close to challenging China, let alone the USA. Foremost among these would be infrastructure and education. Thankfully, the intention is there but it remains to be seen whether the execution follows suit or not.

04:41

Meanwhile, the Indian markets were trading rather volatile at the time of writing and the Sensex was seen positioned slightly above break even. While banking and real estate stocks were seen lending strength to the indices, software and FMCG heavyweights were pulling it in the other direction. Asian stocks closed strong on yet another occasion whereas strength is also being witnessed amongst European stocks currently.

04:55 Today's investing mantra
"One of the greatest pieces of economic wisdom is to know what you do not know." - John Kenneth Galbraith

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

I wish gold falls by -50% to Rs 9,000 per 10 grams.

Now, don't get me wrong: I own some units of the Quantum Gold ETF (QGOLDHALF is the scrip code on the NSE) and have no plans to sell it in the near future. And I think that Chirag and the team at Quantum AMC are doing a fabulous job as the fund manager of the Quantum Gold ETF and keeping you informed of their views on gold via The Golden Truth

So, you may ask, I am "long" gold - and yet I wish that the price of gold declines by -50%?

Yes, that is correct. I want the value of my investment in gold to fall by -50%.

Why?

Because if gold declines in price, it will mean that the world is a safer place to stay invested in.
This means that the value of my investments in the Quantum Long Term Equity Fund could appreciate steadily over the long term.

And since I have some 70% of my investments in stock markets, a price appreciation in stocks will offset the sharp -50% decline in the value of my relatively smaller gold holdings.

An agitated reader asked me why I only write about the price of gold increasing.
Why don't you write that gold could fall to Rs. 10,000? - the reader wanted to know.

Well, the way the central banks of the world have behaved over the past few years it seemed logical that people would lose faith in paper currencies and turn to gold.
So, that is why we wrote about gold being a good place to park some of your savings.

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But, yes, the agitated reader is right: I should write why and how gold can fall to Rs 9,000 - even below the Rs 10,000 level that he suggested!

So, here is my case for the price of gold declining by -50%.

What will make gold fall in price?
Let's say there is an election in India next month and we are all asked to vote for one of two candidates.

Candidate Dreamer tells us that - if we vote for him - we will all get free water, free food, free power, and free schooling.
And to make his promises even more real and tangible he will promise us nice air-conditioned buses and trains to travel on - with a high degree of safety.
And our taxes will be lower.

Candidate Realist tells us that - if we vote for him - we will have to pay more for water, more for food, more for power, and more for schools. And even after we pay more, he cannot guarantee that we will actually get all the stuff we paid for.
There are too many people that need the government's help and so those of us who have a lot - will get a little less.
And there may be fewer buses and trains for us to use, warns Candidate Realist.
Oh, yes, and everyday that you leave for work, hug and kiss your family as if it is the last time you will see them. No, it is not the swine flu or malaria or Al Qaeda or LeT that will get you - there is no guaranty that you will survive the bus and train rides.
And, just to ensure that you really cast your vote correctly, Candidate Reality promises you that he plans to increase taxes.

The efficient Election Commission - the unsung heroes of India's democracy - organise the electronic voting machines for the 440 million votes that are cast.

Guess who wins?

Candidate Dreamer, naturally.

A vote to print money
So what does the new government run by Prime Minister Dreamer do?

They do what all politicians everywhere in the world have done for 40 years: they go about trying to fulfil some of their election promises.

But that is a costly exercise.
And there are wars to be fought and borders to protect.
And the salaries and expenses of the government bureaucrats to be paid.

But - as promised in the election campaign - taxes have been reduced a bit.
So the government is spending Rs 100 and collecting only Rs 70 in revenues.
Every year.
From where does it get the other Rs 30?

Aha, the government is a magician.
It produces the Rs 30 out of thin air!

Actually, it is a monopolist: it has an agency called a Central Bank which owns something called a printing press which, when placed on special marked paper in special print with special designs, magically turns into currency notes.

Year after year, decade after decade, country after country, continent after continent: every government in the world has resorted to allowing Candidate Dreamer to use the printing presses of the central banks to fulfil a false promise.

And every voter has been guilty of letting it happen,
Sorry - of wanting it to happen.
Of wanting to believe in the dream and not accepting the reality.

So paper money - backed by nothing - circulates around the world and results in inflation.
A Rs 50 note today probably buys you the same amount of goods that Rs 5 bought you in 1980.
A US one dollar note today probably buys you what 50 cents bought you in 1980.
The value of the paper currency is debased.

Gold, meanwhile, cannot be printed by a monopoly printing machine.
You cannot create gold out of thin air.

What do you think it costs the US government to print a billion dollar bond?
Maybe USD 10 for the special paper, USD 10 for the special print, USD 10 for the watermark to prevent a counterfeit, and maybe USD 100 for the depreciation cost of the printing machine (they use it so often, they need to replace the machines very often!).

So, an investment of USD 130 gives the US government a USD 1 billion dollar bond that they can give to China in exchange for USD 1 billion worth of stuffed toys and microwave ovens.
What a racket.
What a scam.
And the US has spread this lie that blondes are dumb!
And we think the Chinese are smart!
The Chinese (and other exporters to USA) just got conned into the biggest Sting in the history of finance - but that is another Honest Truth!

The point is that, while the central banks can print paper, the central banks cannot print gold.
They need to find it.
Then dig it.
And there is not enough gold of it for all the Candidate Dreamers in the world to dig up every year.
And pay for all their election promises.
That is why gold has been a "store of value" over centuries.

That is why when people wake up and realise how they have been conned into accepting paper, they move to buy gold.
That is why the Reserve Bank of India decided to buy 200 tons of gold for USD 6 billion.
At what was considered a "peak price".
And it may be the "peak price".
It may be the worst investment that the RBI has ever made.

Because we, the voters, may finally have become smarter.

And now the case for gold declining to INR 9,000 for 10 grams....

We may finally elect Candidate Realist.
We may accept that we need to have less consumption - and more modest needs.
We may accept that we need to pay more for things that we take as our birthright.
We may accept that promises eventually come back to haunt us.
That, as the economists say, there is nothing like a free lunch: what you get, you need to pay for.
Somewhere, somehow, it comes back to get you.

We all elected Candidate Dreamer and it came back to haunt us - via inflation and the declining value of every rupee or dollar or euro that we earn.

So, yes, I want us all to elect Candidate Realist.
Then the printing presses will not be needed.
Because the government of Prime Minister Realist will not be spending on any false promises.
In fact, they will be collecting more from us in the form of taxes.
They will no longer need to use the printing press.

And, most importantly, all those financial geniuses who use this freely floating paper money to create dangerous financial cocktails that blow up the world will be digging roads with spades for a living.
(Hopefully, I will still be writing these columns in between digging irrigation canals. The more stupid amongst us in the finance field will be given lowly agricultural work.)
We will all need to do some real work and earn a modest income.
No more pushing fake paper to generate even more fake profits of the financial companies.

With the financial geniuses out of the way, companies will be more focused on building profitable businesses.
Businesses with less risk and no casino-like derivative products populating their balance sheets.

Those that succeed will see their share prices rise - and stay up!

Hopefully, the research and investment management process at Quantum Long Term Equity Fund will show some decent returns (past performance is not any indication of future performance and no investor must invest in any mutual fund till they read and understand the Offer Document.)

So, yes, Candidate Realist's election can be a turning point for gold prices.
And I really hope he wins.
As much as I hope we all vote for this realism.
And the price of gold will collapse because paper currencies will finally start to have more value.
The Rs 100 note of the year 2025 will buy what Rs 200 of today's money can buy.

And my investment in Quantum Long Term Equity Fund will increase, so I will offset the decline in my investment in gold.

Do I believe it will happen?
Well, I have one vote: there are billions of people choosing between Candidate Dreamer and Candidate Reality all over the world.

Till I get to know them all and convince them that Candidate Dreamer is not the right person to vote for, I am happy owning some units in QGOLDHALF freely available on the NSE and also traded on the BSE with the Scrip Code 590099.

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

Nice post..keep it up

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MK

keep up the good reading pal! some good stuff there.