CONVENTIONAL economics says a crash is bad. In reality, however, it’s a boon. A real estate crash is an economic blessing for billions of people and the country.
Two years back, no one would have imagined that real estate prices could crash by 50 per cent. Today, it’s a fact. Compared to peak prices of 2008, you can expect a correction by 70 per cent in the coming years. Despite that a lot of properties will be lying vacant as there is a huge oversupply – in India and all over the world.
Many builders and brokers will probably send me hate mails for saying this but the fact remains that a 70 per cent crash is a good time for them to create much more wealth and to tap a large market. This crash is excellent for home buyers, businesses, and the entire economy.
Reason: A lot more cash is available for more productive activities in the economy such as building roads, electricity, etc.
How is that?
Let us say earlier a property you wanted to buy was being quoted at Rs 1 crore. To get money to buy this, you might have to scour your entire life savings and take additional loans. You and your family might have to slave for at least 20 years to pay off the EMIs to banks. A lot of your savings gets sucked into unproductive assets like real estate.
Today cost of construction per square foot is only around Rs 600. Based on this a 1000 sq. ft apartment should cost not more than Rs 6 lakhs to construct. Just imagine a flat that cost barely 6 lakh to construct is being sold for Rs 1 crore. A few might argue – that we need to consider land costs.
Land cost is artificially inflated across the country – India has an abundance of land all across. Just move out of the major cities and you will see thousands of acres of vacant land.
Now imagine if that same property is available for Rs 20 lakh, which is the fare value for such a property. Now there is an additional Rs 80 lakh available in the economy for more productive uses.
What happens to this surplus of Rs 80 lakh?
Previously, only a small minority of builders enjoyed this surplus of Rs 80 lakh but now it can be invested to boost consumption.
Roads, factories and new service industries can boom if each family uses this Rs 80 lakh more productively. Electricity, roads, water, health care and education will get a huge boost from this money. No amount of interest reduction or artificial stimulus package can have the same effect as this.
When property prices go down, automatically the ‘black cash’ element would disappear. People would not see the need to find the back alleys to pay Rs 20 lakh.
The question, you should ask!
Today, a place like Dubai, which has sunk billions of dollars into unproductive real estate, is on the verge of collapse. Had they utilised this money for better use, the economy would have been much better today.
A lot more to a crash that is excellent for the economy. The real estate crash has not yet happened in India and is still to come and will probably surprise a lot of people.
India has a bright future ahead and millions of new jobs are going to be created. A lot of new capital also is going to be used productively thanks to this global economic crash. I’ll once again stress that this is one of the best opportunities in history to create immense wealth for all those who are armed with knowledge and have a little bit of patience.
Source
Showing posts with label Recession. Show all posts
Showing posts with label Recession. Show all posts
Wednesday, March 25, 2009
IT Industry and fraud
Recession. Slowdown. Companies across sectors praying for customers. Contrast that with information technology and business process outsourcing firms, where customer count was always a recurrent boast. Before Satyam, that is: investigators into the Satyam scam are now trying to find out, among other things, if the IT major at all had the large customer base it used to claim before promoter B. Ramalinga Raju was caught with his hand in the till.
Among the other things Satyam inflated or is suspected to have inflated: earnings and employee headcount. For the authorities, regulators, investors and industry brethren, the Satyam case has raised a red flag over the entire IT industry and its numbers. The nature of their products make physical verification almost impossible. Conventional methods are more geared to checking how many tables, chairs and equipment exist and not for an equivalent audit of, say, how many customers it has, who they are and what their order size is.
Observers feel that IT companies and their auditors need to devise foolproof ways to measure customers, employee numbers and orders/ sales, even though industry insiders say this is a time-consuming job in a sector traditionally in a hurry to declare quarterly results. The trade-off is between doing things thoroughly and doing things quickly. Apart from land in the Indian context, people form the asset base of an IT company. The focus has been to attract and retain people by “paying more” and offering a campus life that is the envy of other sectors. In IT, the ability to earn revenues is entirely dependent on the headcount, which is akin to plant capacity in manufacturing. One of the first questions emerging from the Satyam scam—till the time the new board members clarified—related to headcount. Did the company actually have as many as it claimed, or was money being siphoned out in the name of fake employees?
The metric system
Then, the metrics, or numbers relating to billing rates, utilisation, dollar size of clients and man-months billed. IT is the most metrics-driven sector across industries—and there lies another danger. Consider what analysts at Edelweiss Securities point out: “Back in 2000-01, when Infosys was the first in the IT sector to make public operating metrics such as billing rates, utilisation, client metrics and man-months billed, little did we know that this consistent and tireless action on the part of Infosys was to usher in a metrics-driven information revolution.’’
Soon enough, other IT companies followed suit. No one questioned the metrics, even though they are self-reported and certainly not audited by external auditors. The Satyam scam will cast a cloud over the metrics claims of all IT outfits, till may be there is an audit in place.
As an Edelweiss report notes: “In theory, metrics such as utilisation, billing rates, onsite-offshore split can be manipulated so as to provide consistency and assurance with the reported revenues.” The report is captioned: “Weighing Consequences of Satyam on Indian IT and India Inc.”
Exports: Zeros & Ones?
After numbers and metrics, comes the biggest black hole: the product or service exports that form the very basis of an IT firm’s revenues. IT exports are not like physical items such as automobiles, garments or ore that can be counted, weighed, valued or even seen by customs and tax authorities as they are shipped. IT exports are software, complex and customised code that travels over broadband to the buyer.
There are checks and balances and IT companies do need to fill in a Software Export Declaration (Softex) form with the Software Technology Parks of India. But there is no way of checking the value, when value lies in the eyes of the buyer, or input costs, when inputs are intellectual. Debanjan Banerjee, Partner at the law firm Fox Mandal Little, says: “In spite of these controls, there are cases of fudging… then the artificial figures of sales and receivables and inflated profits push up share prices, and benefit the promoters as they sell or pledge their shares.”
“The ‘software products’ of IT/ITES firms are predominantly intangible in nature, and, therefore, it is difficult to make an assessment of the price. There are no checks and balances if a firm decides to sell similar packages to different customers at vastly different prices. There may be wide variation between price points depending on the nature of the product, the service provider and the end-customer,” he points out.
Accounting Standard X
That leads to the question of accounting practices and standards. Take a simple case of cost of completion method of accounting where, if you start recognising revenues but do not book all the costs or do not book the real costs, you could constantly have inflated profits. As Tushar Chawla, Partner, Economic Laws Practice, a law firm, says: “The most common malpractice observed in IT companies seems to be the reporting of inflated figures, done by booking fictitious income, i.e., income from nonexistent customers or inflated income from existing customers.”
He cites a multinational IT major that had inflated revenues by booking sales of software licences that were actually transferred to a related distributor. Satyam seemed to have gone a step further by showing fictitious cash and bank balances. So, why should an IT company do all this—book fictitious exports, inflate income etc? Money laundering. “A lot of IT companies are merely incorporated as shell companies that are actually laundering money,” says Chawla. According to him, a nexus has emerged between the export earnings of IT companies and money laundering transactions, with a large number using hawala for showing export incomes.
Without naming any company, he says this could be driven by the fact that, with export earnings and earnings per share shrinking, promoters are more likely to show inflated income either to get good finances or to exit. This again, Chawla says, would not be happening in big companies but in small ones with revenues of $10-100 million. Listed entities, especially. “This also allows the promoters to convert their cash into official export income at a low premium without paying any income tax,” he says.
However, Indian IT does not mean just the Big Four or Big Five. According to NASSCOM’s recent strategic review 2009, the Indian IT-BPO export industry has seven players with revenues over $1 billion each. They accounted for over 47-48 per cent of software and services exports in fiscal year 2008.
Then come 75-80 mid-sized players (revenues $100 million-$1 billion) who account for 35-37 percent of total exports, and 300-350 emerging players (revenues $10 million to $100 million) with a 7-8 per cent share, and over 3,500 small and start-up companies with revenues less than $10 million who account for 8-10 per cent.
Rivers of cash
As Banerjee of Fox Mandal Little says: “The IT sector is export-oriented and very cash rich. Naturally, the cash and receivables management takes a key role. …It makes it easier for the companies to move the liquid cash from one company to another, especially through various investment vehicles and structures.” “There are possibilities of overand under-invoicing and cross border fund mobilisation and movement,” he says. Because of the rapid expansion of the sector and its export-earning capacity, the regulatory system and accounting practices are often not fully operationalised.
“That keeps loopholes for informal movement of currencies through several devices,” he says. Auditors stress the need to be very careful in making an invoice and tracking work-in-progress as well as receivables. Are the IT companies doing so? Four months ago, who knew what was happening at Satyam? There is good reason, therefore, that B.V.R. Mohan Reddy, Chairman and Managing Director of Hyderabad-based Infotech Enterprises, an IT solutions provider, says: “The systems and processes we have at this point are good enough but there has only to be a rigour in following them.” Banerjee points out that the IT majors have “a high degree of internal checks and controls and people like compliance officers, risk assurance officers and revenue leakage assurance in place to ensure that accruals of revenue are genuine and accurate.” Also, it is not as if companies are free from external checks, says Banerjee. IT companies are not totally tax-free.
As the IT sector waits for the Satyam report card, it is ironic that a company whose founder believed in speed and detailed metrics finds itself stuck in netherland. There is no Raju to preach his favourite metrics: the 6 Ps (people, process, product, proliferation, patent and promotion), 5 Rs or the service outcome attributes (faster, better, cheaper, larger and steadier) and the various indexes. The abstract defined. The definable abstracted.
Source
Among the other things Satyam inflated or is suspected to have inflated: earnings and employee headcount. For the authorities, regulators, investors and industry brethren, the Satyam case has raised a red flag over the entire IT industry and its numbers. The nature of their products make physical verification almost impossible. Conventional methods are more geared to checking how many tables, chairs and equipment exist and not for an equivalent audit of, say, how many customers it has, who they are and what their order size is.
Observers feel that IT companies and their auditors need to devise foolproof ways to measure customers, employee numbers and orders/ sales, even though industry insiders say this is a time-consuming job in a sector traditionally in a hurry to declare quarterly results. The trade-off is between doing things thoroughly and doing things quickly. Apart from land in the Indian context, people form the asset base of an IT company. The focus has been to attract and retain people by “paying more” and offering a campus life that is the envy of other sectors. In IT, the ability to earn revenues is entirely dependent on the headcount, which is akin to plant capacity in manufacturing. One of the first questions emerging from the Satyam scam—till the time the new board members clarified—related to headcount. Did the company actually have as many as it claimed, or was money being siphoned out in the name of fake employees?
The metric system
Then, the metrics, or numbers relating to billing rates, utilisation, dollar size of clients and man-months billed. IT is the most metrics-driven sector across industries—and there lies another danger. Consider what analysts at Edelweiss Securities point out: “Back in 2000-01, when Infosys was the first in the IT sector to make public operating metrics such as billing rates, utilisation, client metrics and man-months billed, little did we know that this consistent and tireless action on the part of Infosys was to usher in a metrics-driven information revolution.’’
Soon enough, other IT companies followed suit. No one questioned the metrics, even though they are self-reported and certainly not audited by external auditors. The Satyam scam will cast a cloud over the metrics claims of all IT outfits, till may be there is an audit in place.
As an Edelweiss report notes: “In theory, metrics such as utilisation, billing rates, onsite-offshore split can be manipulated so as to provide consistency and assurance with the reported revenues.” The report is captioned: “Weighing Consequences of Satyam on Indian IT and India Inc.”
Exports: Zeros & Ones?
After numbers and metrics, comes the biggest black hole: the product or service exports that form the very basis of an IT firm’s revenues. IT exports are not like physical items such as automobiles, garments or ore that can be counted, weighed, valued or even seen by customs and tax authorities as they are shipped. IT exports are software, complex and customised code that travels over broadband to the buyer.
There are checks and balances and IT companies do need to fill in a Software Export Declaration (Softex) form with the Software Technology Parks of India. But there is no way of checking the value, when value lies in the eyes of the buyer, or input costs, when inputs are intellectual. Debanjan Banerjee, Partner at the law firm Fox Mandal Little, says: “In spite of these controls, there are cases of fudging… then the artificial figures of sales and receivables and inflated profits push up share prices, and benefit the promoters as they sell or pledge their shares.”
“The ‘software products’ of IT/ITES firms are predominantly intangible in nature, and, therefore, it is difficult to make an assessment of the price. There are no checks and balances if a firm decides to sell similar packages to different customers at vastly different prices. There may be wide variation between price points depending on the nature of the product, the service provider and the end-customer,” he points out.
Accounting Standard X
That leads to the question of accounting practices and standards. Take a simple case of cost of completion method of accounting where, if you start recognising revenues but do not book all the costs or do not book the real costs, you could constantly have inflated profits. As Tushar Chawla, Partner, Economic Laws Practice, a law firm, says: “The most common malpractice observed in IT companies seems to be the reporting of inflated figures, done by booking fictitious income, i.e., income from nonexistent customers or inflated income from existing customers.”
He cites a multinational IT major that had inflated revenues by booking sales of software licences that were actually transferred to a related distributor. Satyam seemed to have gone a step further by showing fictitious cash and bank balances. So, why should an IT company do all this—book fictitious exports, inflate income etc? Money laundering. “A lot of IT companies are merely incorporated as shell companies that are actually laundering money,” says Chawla. According to him, a nexus has emerged between the export earnings of IT companies and money laundering transactions, with a large number using hawala for showing export incomes.
Without naming any company, he says this could be driven by the fact that, with export earnings and earnings per share shrinking, promoters are more likely to show inflated income either to get good finances or to exit. This again, Chawla says, would not be happening in big companies but in small ones with revenues of $10-100 million. Listed entities, especially. “This also allows the promoters to convert their cash into official export income at a low premium without paying any income tax,” he says.
However, Indian IT does not mean just the Big Four or Big Five. According to NASSCOM’s recent strategic review 2009, the Indian IT-BPO export industry has seven players with revenues over $1 billion each. They accounted for over 47-48 per cent of software and services exports in fiscal year 2008.
Then come 75-80 mid-sized players (revenues $100 million-$1 billion) who account for 35-37 percent of total exports, and 300-350 emerging players (revenues $10 million to $100 million) with a 7-8 per cent share, and over 3,500 small and start-up companies with revenues less than $10 million who account for 8-10 per cent.
Rivers of cash
As Banerjee of Fox Mandal Little says: “The IT sector is export-oriented and very cash rich. Naturally, the cash and receivables management takes a key role. …It makes it easier for the companies to move the liquid cash from one company to another, especially through various investment vehicles and structures.” “There are possibilities of overand under-invoicing and cross border fund mobilisation and movement,” he says. Because of the rapid expansion of the sector and its export-earning capacity, the regulatory system and accounting practices are often not fully operationalised.
“That keeps loopholes for informal movement of currencies through several devices,” he says. Auditors stress the need to be very careful in making an invoice and tracking work-in-progress as well as receivables. Are the IT companies doing so? Four months ago, who knew what was happening at Satyam? There is good reason, therefore, that B.V.R. Mohan Reddy, Chairman and Managing Director of Hyderabad-based Infotech Enterprises, an IT solutions provider, says: “The systems and processes we have at this point are good enough but there has only to be a rigour in following them.” Banerjee points out that the IT majors have “a high degree of internal checks and controls and people like compliance officers, risk assurance officers and revenue leakage assurance in place to ensure that accruals of revenue are genuine and accurate.” Also, it is not as if companies are free from external checks, says Banerjee. IT companies are not totally tax-free.
As the IT sector waits for the Satyam report card, it is ironic that a company whose founder believed in speed and detailed metrics finds itself stuck in netherland. There is no Raju to preach his favourite metrics: the 6 Ps (people, process, product, proliferation, patent and promotion), 5 Rs or the service outcome attributes (faster, better, cheaper, larger and steadier) and the various indexes. The abstract defined. The definable abstracted.
Source
Saturday, March 14, 2009
Blame economists, not economics
Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks - at least those used in advanced courses - are fine.
As the world economy tumbles off the edge of a precipice, critics of the economics profession are raising questions about its complicity in the current crisis. Rightly so: economists have plenty to answer for.
It was economists who legitimised and popularised the view that unfettered finance was a boon to society. They spoke with near unanimity when it came to the 'dangers of government over-regulation.' Their technical expertise -- or what seemed like it at the time -- gave them a privileged position as opinion makers, as well as access to the corridors of power.
Very few among them (notable exceptions including Nouriel Roubini and Robert Shiller) raised alarm bells about the crisis to come. Perhaps worse still, the profession has failed to provide helpful guidance in steering the world economy out of its current mess. On Keynesian fiscal stimulus, economists' views range from 'absolutely essential' to 'ineffective and harmful.'
On re-regulating finance, there are plenty of good ideas, but little convergence. From the near-consensus on the virtues of a finance-centric model of the world, the economics profession has moved to a near-total absence of consensus on what ought to be done.
So is economics in need of a major shake-up? Should we burn our existing textbooks and rewrite them from scratch?
Actually, no. Without recourse to the economist's toolkit, we cannot even begin to make sense of the current crisis.
Why, for example, did China's decision to accumulate foreign reserves result in a mortgage lender in Ohio taking excessive risks? If your answer does not use elements from behavioural economics, agency theory, information economics, and international economics, among others, it is likely to remain seriously incomplete.
The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.
They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks -- at least those used in advanced courses -- are fine.
Non-economists tend to think of economics as a discipline that idolises markets and a narrow concept of (allocative) efficiency. If the only economics course you take is the typical introductory survey, or if you are a journalist asking an economist for a quick opinion on a policy issue, that is indeed what you will encounter.
But take a few more economics courses, or spend some time in advanced seminar rooms, and you will get a different picture.
Labour economists focus not only on how trade unions can distort markets, but also how, under certain conditions, they can enhance productivity. Trade economists study the implications of globalisation on inequality within and across countries. Finance theorists have written reams on the consequences of the failure of the 'efficient markets' hypothesis.
Open-economy macroeconomists examine the instabilities of international finance. Advanced training in economics requires learning about market failures in detail, and about the myriad ways in which governments can help markets work better.
Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigour.
Sadly, in view of today's needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed.
Economics is really a toolkit with multiple models -- each a different, stylised representation of some aspect of reality. One's skill as an economist depends on the ability to pick and choose the right model for the situation.
Economics' richness has not been reflected in public debate because economists have taken far too much license.
Instead of presenting menus of options and listing the relevant trade-offs -- which is what economics is about -- economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favouring one set of social arrangements over others.
Furthermore, economists have been reluctant to share their intellectual doubts with the public, lest they 'empower the barbarians.'
No economist can be entirely sure that his preferred model is correct. But when he and others advocate it to the exclusion of alternatives, they end up communicating a vastly exaggerated degree of confidence about what course of action is required.
Paradoxically, then, the current disarray within the profession is perhaps a better reflection of the profession's true value added than its previous misleading consensus. Economics can at best clarify the choices for policymakers; it cannot make those choices for them.
When economists disagree, the world gets exposed to legitimate differences of views on how the economy operates. It is when they agree too much that the public should beware.
Source
As the world economy tumbles off the edge of a precipice, critics of the economics profession are raising questions about its complicity in the current crisis. Rightly so: economists have plenty to answer for.
It was economists who legitimised and popularised the view that unfettered finance was a boon to society. They spoke with near unanimity when it came to the 'dangers of government over-regulation.' Their technical expertise -- or what seemed like it at the time -- gave them a privileged position as opinion makers, as well as access to the corridors of power.
Very few among them (notable exceptions including Nouriel Roubini and Robert Shiller) raised alarm bells about the crisis to come. Perhaps worse still, the profession has failed to provide helpful guidance in steering the world economy out of its current mess. On Keynesian fiscal stimulus, economists' views range from 'absolutely essential' to 'ineffective and harmful.'
On re-regulating finance, there are plenty of good ideas, but little convergence. From the near-consensus on the virtues of a finance-centric model of the world, the economics profession has moved to a near-total absence of consensus on what ought to be done.
So is economics in need of a major shake-up? Should we burn our existing textbooks and rewrite them from scratch?
Actually, no. Without recourse to the economist's toolkit, we cannot even begin to make sense of the current crisis.
Why, for example, did China's decision to accumulate foreign reserves result in a mortgage lender in Ohio taking excessive risks? If your answer does not use elements from behavioural economics, agency theory, information economics, and international economics, among others, it is likely to remain seriously incomplete.
The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.
They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks -- at least those used in advanced courses -- are fine.
Non-economists tend to think of economics as a discipline that idolises markets and a narrow concept of (allocative) efficiency. If the only economics course you take is the typical introductory survey, or if you are a journalist asking an economist for a quick opinion on a policy issue, that is indeed what you will encounter.
But take a few more economics courses, or spend some time in advanced seminar rooms, and you will get a different picture.
Labour economists focus not only on how trade unions can distort markets, but also how, under certain conditions, they can enhance productivity. Trade economists study the implications of globalisation on inequality within and across countries. Finance theorists have written reams on the consequences of the failure of the 'efficient markets' hypothesis.
Open-economy macroeconomists examine the instabilities of international finance. Advanced training in economics requires learning about market failures in detail, and about the myriad ways in which governments can help markets work better.
Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigour.
Sadly, in view of today's needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed.
Economics is really a toolkit with multiple models -- each a different, stylised representation of some aspect of reality. One's skill as an economist depends on the ability to pick and choose the right model for the situation.
Economics' richness has not been reflected in public debate because economists have taken far too much license.
Instead of presenting menus of options and listing the relevant trade-offs -- which is what economics is about -- economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favouring one set of social arrangements over others.
Furthermore, economists have been reluctant to share their intellectual doubts with the public, lest they 'empower the barbarians.'
No economist can be entirely sure that his preferred model is correct. But when he and others advocate it to the exclusion of alternatives, they end up communicating a vastly exaggerated degree of confidence about what course of action is required.
Paradoxically, then, the current disarray within the profession is perhaps a better reflection of the profession's true value added than its previous misleading consensus. Economics can at best clarify the choices for policymakers; it cannot make those choices for them.
When economists disagree, the world gets exposed to legitimate differences of views on how the economy operates. It is when they agree too much that the public should beware.
Source
Tuesday, March 10, 2009
Recession to last till 2010-end
Be it living rooms or public transport, the one question that's on top of everyone's mind is the magnitude of the economic crisis and how long it will last. Some of these queries were answered on Friday by Nouriel Roubini, a leading economic forecaster and Prof. of Economics at NYU's Stern School of Business, at the India Today Conclave 2009.
Roubini, who had predicted the collapse of the US housing market and global recession three years ago, believes that all's still not well with the world economy even though the US has been in recession since the end of 2007. But unlike most other recessions, this one will be a protracted one, which is slated to last for a good 36 months.
With the world's largest financial institutions having collapsed last year, the world's financial system has suffered a cardiac arrest and the global economy is in a semi-comatose state. Despite billions of dollars being spent via stimulus and economic packages, the health of financial institutions is not getting better because US economic losses have touched almost $3.6 trillion, he said.
According to him, while the good news is that the International Monetary Fund is committed to not letting other large financial institutions go the Lehman Brothers way, the bad news is that the credit losses are so huge that it will be rather difficult for any upswing to result in a credible turnaround anytime soon. At present, $1.43 trillion will be required to recapitalise the ailing banking sector of the US, he said.
And if the policy responses are not coordinated and cohesive, the recession could well be L-shaped in nature and the pain could be protracted. The slowdown in emerging economies like China, Korea and India has conclusively proved that the decoupling theory is humbug. The world today is connected by trade, capital and financial channels. This is evident from the slowdown of both the capital and trade flows in these emerging economies. No wonder, their growth has declined from 7 per cent to 3 per cent; these countries have hard-landed already.
Roubini said if retail consumption is falling then corporates are saving cash and thereby curtailing capital expenditure and production. Consequently, job losses are mounting and people are not spending in fear. This has resulted in a vicious cycle and to end this, a collective response from the governments is required.
And if this was not bad enough, Roubini said that even if there is a recovery 12-18 months down the line, it will be warped by the supply side shocks. Commodity producers like oil producing countries have already cut down production. So expect oil prices to touch $100 as soon as the world economy begins to turn around. The only thing that can save the day is prudent and timely action by governments.
Source
Roubini, who had predicted the collapse of the US housing market and global recession three years ago, believes that all's still not well with the world economy even though the US has been in recession since the end of 2007. But unlike most other recessions, this one will be a protracted one, which is slated to last for a good 36 months.
With the world's largest financial institutions having collapsed last year, the world's financial system has suffered a cardiac arrest and the global economy is in a semi-comatose state. Despite billions of dollars being spent via stimulus and economic packages, the health of financial institutions is not getting better because US economic losses have touched almost $3.6 trillion, he said.
According to him, while the good news is that the International Monetary Fund is committed to not letting other large financial institutions go the Lehman Brothers way, the bad news is that the credit losses are so huge that it will be rather difficult for any upswing to result in a credible turnaround anytime soon. At present, $1.43 trillion will be required to recapitalise the ailing banking sector of the US, he said.
And if the policy responses are not coordinated and cohesive, the recession could well be L-shaped in nature and the pain could be protracted. The slowdown in emerging economies like China, Korea and India has conclusively proved that the decoupling theory is humbug. The world today is connected by trade, capital and financial channels. This is evident from the slowdown of both the capital and trade flows in these emerging economies. No wonder, their growth has declined from 7 per cent to 3 per cent; these countries have hard-landed already.
Roubini said if retail consumption is falling then corporates are saving cash and thereby curtailing capital expenditure and production. Consequently, job losses are mounting and people are not spending in fear. This has resulted in a vicious cycle and to end this, a collective response from the governments is required.
And if this was not bad enough, Roubini said that even if there is a recovery 12-18 months down the line, it will be warped by the supply side shocks. Commodity producers like oil producing countries have already cut down production. So expect oil prices to touch $100 as soon as the world economy begins to turn around. The only thing that can save the day is prudent and timely action by governments.
Source
Monday, March 9, 2009
There is nothing like recession , its just Rajnikanth started to save money
Rajnikant Special
Rajanikanth makes onions cry.
Rajanikanth can delete the Recycling Bin.
Ghosts are actually caused by Rajanikanth killing people faster than Death can process them.
Rajanikanth can strangle you with a cordless phone.
Rajanikanth can play the violin...... ...with a piano.
When Rajanikanth enters a room, he doesn't turn the lights on,......... .... he turns the dark off.
When Rajanikanth looks in a mirror the mirror shatters, because not even glass is stupid enough to get in between Rajanikanth and Rajanikanth.
Brett Favre can throw a football over 50 yards. Rajanikanth can throw Brett Favre even further.
Rajanikanth does not know where you live, but he knows where you will die.
Bullets dodge Rajanikanth.
A Handicap parking sign does not signify that this spot is for handicapped people. It is actually in fact a warning, that the spot belongs to Rajanikanth and that you will be handicapped if you park there.
Rajanikanth' calendar goes straight from March 31st to April 2nd, no one fools Rajanikanth.
If you spell Rajanikanth wrong on Google it doesn't say, "Did you mean Rajanikanth?" It simply replies, "Run while you still have the chance."
Once a cobra bit Rajanikanth' leg. After five days of excruciating pain, the cobra died.
When Rajanikanth gives you the finger, he's telling you how many seconds you have left to live.
Rajanikanth can kill two stones with one bird.
Rajanikanth was once on Celebrity Wheel of Fortune and was the first to spin. The next 29 minutes of the show consisted of everyone standing around awkwardly, waiting for the wheel to stop.
Leading hand sanitizers claim they can kill 99.9 percent of germs. Rajanikanth can kill 100 percent of whatever he wants.
There is no such thing as global warming. Rajanikanth was cold, so he turned the sun up.
Rajanikanth can set ants on fire with a magnifying glass. At night.
It takes Rajanikanth 20 minutes to watch 60 Minutes.
Rajanikanth once shot down a German fighter plane with his finger, by yelling, "Bang!"
In an average living room there are 1,242 objects Rajanikanth could use to kill you, including the room itself.
Rajanikanth got his drivers license at the age of 16 Seconds.
With the rising cost of gasoline, Rajanikanth is beginning to worry about his drinking habit.
The square root of Rajanikanth is pain. Do not try to square Rajanikanth, the result is death.
When you say "no one's perfect", Rajanikanth takes this as a personal insult.
there is nothing like recession , its just rajnikanth started to save money
Rajanikanth makes onions cry.
Rajanikanth can delete the Recycling Bin.
Ghosts are actually caused by Rajanikanth killing people faster than Death can process them.
Rajanikanth can strangle you with a cordless phone.
Rajanikanth can play the violin...... ...with a piano.
When Rajanikanth enters a room, he doesn't turn the lights on,......... .... he turns the dark off.
When Rajanikanth looks in a mirror the mirror shatters, because not even glass is stupid enough to get in between Rajanikanth and Rajanikanth.
Brett Favre can throw a football over 50 yards. Rajanikanth can throw Brett Favre even further.
Rajanikanth does not know where you live, but he knows where you will die.
Bullets dodge Rajanikanth.
A Handicap parking sign does not signify that this spot is for handicapped people. It is actually in fact a warning, that the spot belongs to Rajanikanth and that you will be handicapped if you park there.
Rajanikanth' calendar goes straight from March 31st to April 2nd, no one fools Rajanikanth.
If you spell Rajanikanth wrong on Google it doesn't say, "Did you mean Rajanikanth?" It simply replies, "Run while you still have the chance."
Once a cobra bit Rajanikanth' leg. After five days of excruciating pain, the cobra died.
When Rajanikanth gives you the finger, he's telling you how many seconds you have left to live.
Rajanikanth can kill two stones with one bird.
Rajanikanth was once on Celebrity Wheel of Fortune and was the first to spin. The next 29 minutes of the show consisted of everyone standing around awkwardly, waiting for the wheel to stop.
Leading hand sanitizers claim they can kill 99.9 percent of germs. Rajanikanth can kill 100 percent of whatever he wants.
There is no such thing as global warming. Rajanikanth was cold, so he turned the sun up.
Rajanikanth can set ants on fire with a magnifying glass. At night.
It takes Rajanikanth 20 minutes to watch 60 Minutes.
Rajanikanth once shot down a German fighter plane with his finger, by yelling, "Bang!"
In an average living room there are 1,242 objects Rajanikanth could use to kill you, including the room itself.
Rajanikanth got his drivers license at the age of 16 Seconds.
With the rising cost of gasoline, Rajanikanth is beginning to worry about his drinking habit.
The square root of Rajanikanth is pain. Do not try to square Rajanikanth, the result is death.
When you say "no one's perfect", Rajanikanth takes this as a personal insult.
there is nothing like recession , its just rajnikanth started to save money
Sunday, March 1, 2009
Bear market to end soon !!!
Did I catch you on that ? are you expecting someone would be able to predict that for everyone ?
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
Source
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
Source
Monday, February 23, 2009
Globalization 2.0 in peril
Statements by world leaders strongly advocating open trade every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic.
Several Italian towns ban the sale of kebabs and other foreign food in an attempt to make Italians eat Italian. British workers at their country’s third largest oil refinery go on strike because foreign labour is being used for new construction at the refinery site. Spain is promising to pay immigrants to pack up and head home.
And then there is the more well-known case of the US, where the new economic stimulus package announced by the Barack Obama administration has controversial provisions to buy and employ American.
The war of words between the US and China on how the latter manages its currency, the use of higher tariffs by many countries to protect powerful industries such as steel, bailouts of select companies, the rise in trade disputes—all point to the disturbing fact that protectionist pressures are welling up in many parts of a recession-stricken world.
Note that most of these cases are from the rich countries rather than the poor. Some 25 years after the US and its allies pulled most countries into the global trading system and brought in the second golden era of globalization—the first ended with World War I—it is the original proponents of Globalization 2.0 who are busy trying to protect domestic interests.
It is reassuring that most world leaders continue to swear by open trade. The finance ministers of the Group of Seven (G-7) nations met earlier this month and promised to fight the growing threat from economic nationalism. The larger group of 20 (G-20)—which includes India—made similar promises when it met in the middle of November.
However, that the world’s leaders see the need to make such statements every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic. Declining capital flows and the withdrawal of shaky global banks back to their home bases are other warning signs.
The theoretical case against protectionism is clear: Free trade allows countries to specialize in activities where they have a comparative advantage. For all their famed disagreements, most economists concur that open borders for the movements of goods and services are far better than tariff walls that protect inefficient producers.
If the US, for example, insists on the use of expensive American rather than cheap Chinese steel to build a bridge, it is short-changing one set of citizens to help another.
The empirical case is clear as well: Countries with open borders usually grow faster than those that build barriers to trade. Also, it is widely accepted that the protectionism of the 1930s worsened the Great Depression. It is unlikely that the old mistakes will be repeated, though we may see milder forms of the protectionist affliction in the coming months.
The problem now is slightly complicated. Say, country A decides to spend hundreds of billions of dollars to support a weak economy. A large part of this money will naturally go into the coffers of the companies and individuals who get this money. They spend part of it and that gets the economy rolling again—or at least that is what the fiscal stimulus crowd fervently hopes.
But not all the money that a government pours in stays in the country. Some of it leaks out when domestic companies and consumers import stuff from country B. So, the fiscal stimulus in country A partly helps prop up export demand in country B. It is also likely that the fiscal stimulus in the latter helps the former.
What if country B decides not to spend too much money, either out of conviction or because it already has high levels of deficits and public debt? It benefits from what the government of country A is spending, but does not return the favour.
It is in such cases that country A may be tempted to slip in trade-destroying policies that insist on local buying and employing.
Avoiding these traps will require international coordination, where countries agree to keep borders open and spend in unison.
But that will be easier said than done. Recession, unemployment and bankruptcies will almost inevitably make voters put pressure on politicians to protect domestic interests. Some of it could manifest in ugly xenophobia—do not eat kebabs, do not employ Indian techies. This is going to be a tug-of-war worth watching.
What about India? We have undoubtedly benefited from globalization. Growth picked up after the 1991 reforms and poverty levels have declined. The fear of the outside world has subsided as national confidence has grown. For all their posing while in opposition, no major political formation in India has tried to roll back economic reforms.
Yet, let us not be surprised if the old swadeshi warriors polish their armour and step into the battle with renewed vigour this election season.
Source
Several Italian towns ban the sale of kebabs and other foreign food in an attempt to make Italians eat Italian. British workers at their country’s third largest oil refinery go on strike because foreign labour is being used for new construction at the refinery site. Spain is promising to pay immigrants to pack up and head home.
And then there is the more well-known case of the US, where the new economic stimulus package announced by the Barack Obama administration has controversial provisions to buy and employ American.
The war of words between the US and China on how the latter manages its currency, the use of higher tariffs by many countries to protect powerful industries such as steel, bailouts of select companies, the rise in trade disputes—all point to the disturbing fact that protectionist pressures are welling up in many parts of a recession-stricken world.
Note that most of these cases are from the rich countries rather than the poor. Some 25 years after the US and its allies pulled most countries into the global trading system and brought in the second golden era of globalization—the first ended with World War I—it is the original proponents of Globalization 2.0 who are busy trying to protect domestic interests.
It is reassuring that most world leaders continue to swear by open trade. The finance ministers of the Group of Seven (G-7) nations met earlier this month and promised to fight the growing threat from economic nationalism. The larger group of 20 (G-20)—which includes India—made similar promises when it met in the middle of November.
However, that the world’s leaders see the need to make such statements every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic. Declining capital flows and the withdrawal of shaky global banks back to their home bases are other warning signs.
The theoretical case against protectionism is clear: Free trade allows countries to specialize in activities where they have a comparative advantage. For all their famed disagreements, most economists concur that open borders for the movements of goods and services are far better than tariff walls that protect inefficient producers.
If the US, for example, insists on the use of expensive American rather than cheap Chinese steel to build a bridge, it is short-changing one set of citizens to help another.
The empirical case is clear as well: Countries with open borders usually grow faster than those that build barriers to trade. Also, it is widely accepted that the protectionism of the 1930s worsened the Great Depression. It is unlikely that the old mistakes will be repeated, though we may see milder forms of the protectionist affliction in the coming months.
The problem now is slightly complicated. Say, country A decides to spend hundreds of billions of dollars to support a weak economy. A large part of this money will naturally go into the coffers of the companies and individuals who get this money. They spend part of it and that gets the economy rolling again—or at least that is what the fiscal stimulus crowd fervently hopes.
But not all the money that a government pours in stays in the country. Some of it leaks out when domestic companies and consumers import stuff from country B. So, the fiscal stimulus in country A partly helps prop up export demand in country B. It is also likely that the fiscal stimulus in the latter helps the former.
What if country B decides not to spend too much money, either out of conviction or because it already has high levels of deficits and public debt? It benefits from what the government of country A is spending, but does not return the favour.
It is in such cases that country A may be tempted to slip in trade-destroying policies that insist on local buying and employing.
Avoiding these traps will require international coordination, where countries agree to keep borders open and spend in unison.
But that will be easier said than done. Recession, unemployment and bankruptcies will almost inevitably make voters put pressure on politicians to protect domestic interests. Some of it could manifest in ugly xenophobia—do not eat kebabs, do not employ Indian techies. This is going to be a tug-of-war worth watching.
What about India? We have undoubtedly benefited from globalization. Growth picked up after the 1991 reforms and poverty levels have declined. The fear of the outside world has subsided as national confidence has grown. For all their posing while in opposition, no major political formation in India has tried to roll back economic reforms.
Yet, let us not be surprised if the old swadeshi warriors polish their armour and step into the battle with renewed vigour this election season.
Source
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