What they don't tell you in corporate media.

Monday 17 November 2014

Price slide continues. RBI under pressure to drop rates.

Oil price, both Brent and WTI falling again today after a brief rise on Friday. Oil price is at a four year low and falling and expectations are of further fall. Reports said earlier that Russia is preparing for a big fall in oil all the way to $50 a barrel.

With it is falling our Indian inflation too. With Consumer Price Inflaion down to a little above 5% now in India, we now have a real positive interest rate. At 8%. CPI at 5+% is now below Rajan's 6% target he wanted to achieve in 2016.

As per RBI data now, deposits growth is increasing in India and loan growth is slowing due to high interest rate.

Growth in aggregate deposits accelerated to 12.3 per cent in September 2014 from 11.5 a year ago whereas gross bank credit decelerated to 9.5 per cent from 15.1 per cent during the year. This acceleration in aggregate deposits as well as deceleration in gross bank credit was broad based and observed across all population groups.

With slowing Europe, China and Japan now in recession, the deflationary forces are now in India too.

RBI will be very hard pressed to justify not reducing rates. I guess they might reduce rates in next meeting if oil price world wide continues to slide.




Rajan himself said earlier that his actions will be data driven. Now that data is all down, pressure on him to down the rates are up.

Expect bond holders to gain and bank and other credit dependent stocks to rally when that happens.

Saturday 15 November 2014

Alan Greenspan: Gold better currency than Dollar(or Rupee)

Now this man, Alan Greenspan is a former US Fed chairman and if anything, he certainly would know about money more than a lot of other people. And this is what he said few days back in a meeting in Council on Foreign Relations with Gillian Tett of Financial Times.

"Look, remember what we're looking at. Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it. And so that the issue is, if you're looking at a question of turmoil, you will find, as we always have in the past, it moves into the gold price.

Intrinsic currencies like gold and silver, for example, are acceptable without a third party guarantee. "
I can't agree with him more. Gold is not an investment. It is money itself. So don't compare gold to stocks, real estate or bonds. But compare it to other currencies like Dollar, Euro, Yuan or Rupee.


Fiat currencies like Rupee have no intrinsic value. They are trusted by people because of the monopolistic power on violence by government. When govt. ceases to exist, the only thing you can use or store your wealth is in gold and silver.


If you think govt. ceasing to exist is almost impossible, just look at Syria, Iraq, Ukraine, Somalia etc. now.

Not only that, gold and silver saves you not only when govt does not exist, but it also saves you when govt does exist and has gone mad. Look at Zimbabwe or Argentina.


Here is the link to the CFR trascript.

Low interest rates create income inequality.

Axel Merk of Merk Investments said something very interesting in this video. With all the talk of income inequality increasing in the Western countries, he said that low interest rates allow already rich people with assets and capital to "gear up" more or leverage more to get further rich. In contrast, the poor who don't have assets or capital and can not get easy loans, fall further and further behind.

Not only that, those who can gear-up with easy money drive asset prices such as houses higher and that pushes the poor even further out of the market.

It seems like a logical observation. Here full video.

start from 17:50 for this topic.





Saturday 8 November 2014

Long term Equity Investment gives good returns. Really?

For something to be true, it has to be true in all circumstances. Especially the popular notion that in long term stock market investment is very profitable. Is it really always true? Also, how long is "long term"?

Here, when it is not true. Below is chart of Japanese Nikkei  index since early 80s to 2014. Japan was a booming economy in 60s to 80s except during a brief period in 70s during the world Oil crisis. Suppose an imaginary person, lets call him 'Nobita', born in post world war Japan in 1960s enjoyed the boom time economy of Japan and followed the usual "long term go to equities" mantra.

Lets say he joined the labor force in early 80s and ended up enjoying a great stock market boom all the way till 90s. Since early 90s when Japanese stock market peaked, it's been going down for 25 years now. That is a long time. Does this qualify as long term?


NIKKEI


Now our Mr. Nobita has been investing in equities for 35 years now and has been losing money for 25 years. He is now 55 years old and ready to retire and has very little money saved for retirement.

Did our Mr Nobita knew that this is how it would turn out when he started in 80s? No!

So, there goes the "equity good in long term" mantra.

For those who think Real Estate is great, know that before the peak of 90s, Japanese imperial palace was worth more than the entire country of Canada! It has collapsed just like stocks since then.



Japan is a very specific situation. Different countries have different circumstances. India is not Japan. But the "long term equities is good" notion that is peddled everywhere is definitely not true. Mostly you will have time to make only one long term mistake, because if you do, you will not have time to recover or correct that mistake in your rest of productive life time. So be careful in whatever you do with your money. This does not mean that stocks are a bad place to invest. Understanding the circumstances and the risks is very important in anything.

As Mark Twain said, " It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."


Friday 7 November 2014

RBI says no rate reduction soon. But what if they do reduce?


Like I was guessing earlier, RBI Deputy Governor came out today and said that the decline in inflation doesn't seem like a long term thing instead is likely to go up in near future and so rates may not come down soon.

The fall in price of crude oil and other commodities is beneficial to the Indian economy, but policy makers cannot jump to the conclusion that the trend was firmly established. "Inflation still has a long way to go," the deputy governor told the audience at a chief financial officers' summit organised by industry body CII.

There is a fight going between deflation and inflation. Most developed economies are deflating and they are printing currencies and trying to encourage more debt creation there to fight it. While emerging economies like India are having inflation because all that easy money from developed economies are actually coming here.

But what happens when RBI does reduce rates? If they reduce by 1% and you are a retired person living with say 20 lakh savings, then your annual income falls by Rs 20000. So your monthly income falls from Rs15000(assuming 9% interest) by about Rs 1600.

But where does all that money go that so many interest earning retires lose due to interest rate reduction? It goes as interest rate savings to the pockets of younger people who have home loans, car loans etc. It also spurs new borrowing by people who could not afford loans due to higher rates.

Rate reduction is essentially a wealth distribution from the savers who did a life time of work and saved for retirement into the the pockets of new borrowers in economy.

Do the retired people agree to give up their income? No, they have no say in this. Govts and Central Banks will decide how much money they need from you and take it, whether you like it or not.

On top of that, a lower rate will increase inflation and you lose about 7% or more of your savings that way too, whether you like it or not.

Wednesday 5 November 2014

India Growth down, Sentiments High and Stocks Highest


When I hear non-financial papers like Times of India post stories that sensex is at record high of 28000, it always feels as a good time to sell. Besides, these record high valuations are bad for investors in the sense that it is now too risky to invest. No one can say for sure how much more the markets will rise fulled by easy money from abroad through FIIs.

Economictimes as usual prints stories like "Sensex on track to 30000". As if Sensex is a train and next station is 30000 or reaching there will be an accomplishment like building a new bridge in Himalayas.

Personally I like it when I read record lows or market collapse type of news. Because that is when it is likely that you will find good stocks at decent valuations.

Meanwhile, India's growth is slowing. Service sector growth stalled in October. HSBC Composite Output Index — that maps the manufacturing as well as the services sector output — stood at 51, down from 51.8 in September, indicating that growth of private sector output in India eased to the weakest in five months.

Also, housing sector is slowing. Launch of new homes dips by 21% in top eight cities in July-September.

But the sentiments are high. Everybody thinks business will pick up soon, perhaps in early 2015. May be Mr Modi's govt will deliver some dazzling new reform in next budget.

These reforms, if they happen, will take time to implement and then even longer to show up as profit in company earnings. Will stocks keep rising until then? Probably not.

Stocks are just front running the future actions. They always do. But nobody knows future. When something surprising comes that doesn't look "bullish", valuations just fall to where you could actually buy.

Tuesday 4 November 2014

Is the next "Stimulus" on the way?

It would seem so, if you see the continuing oil price collapse due to slowing demand and US shale oil boom. Oil prices have been falling for almost six months now. It is almost a four year low. The same goes for gold price. I will write a post on oil and gold co-relation in future.





Then, European Commission cut the growth forecast for EU region as shown below. They have been cutting this for a long time now and it generally to the downside which suggest they are always more optimistic than they should be.

In its autumn estimates, the EU executive said the euro zone's economy would expand 0.8 per cent this year, 1.1 per cent next year and by 1.7 per cent in 2016 - a level the Commission said six months ago would be achieved next year.

Then, after the initial jump in Nikkei in Japan due to "stimulus", the stock growth is faltering.

How long before another stimulus comes? Probably not long.

Should you get into stock market in India? If you want to do speculation then yes, but of course after the slight dip that will come right before the stimulus that will push the central banks to do something.



The fact however that is coming to the fore is that even with all the stimuluses since 2008, real economic growth is not happening in advanced economies. But that is unlikely to stop them from doing more of it. Since the new money mostly goes into stocks and the Govts and Central Banks want it that way, this will take stocks to higher values. But this is a purely speculative adventure.

Monday 3 November 2014

Governments stimulate stock market.

An article in Economictimes said today that the recent jump in stock market after Japanese central bank announced a big dose of stimulus, the next jump is expected from European Central Bank. This is quite true and is quite possible.

But what is a stimulus? It is central bank buying bonds, including Govt bonds by printing new currency. This is creating new money. Does this increase sustainable profit growth of someone who manufactures a car or someone farming rice? No! So what does it do? The receivers of the money come to stock market(in this instance) and bid the prices up so the P/E ratio rises.

So how much can the P/E ratio go up without the growth in company earnings to match it? I don't know. People will still buy stocks even at P/E of 50 or even 100 expecting to sell it after sometime to another person who believes in the same logic. Eventually though the whole thing will correct itself. It always does. Govts and Central Planners can't keep printing unlimited currencies to "stimulate" the stock market. If they do, it might cause confidence in currency to collapse and that will be a bigger event than what they try to fix.

The next problem with "stimulus" is that it is not free. It is debt, either at private or at govt side. How adding more debt to an already big debt problem will solve it, is a big mystery too.

And here some contradicting information from Economictimes again.

Here "experts" are saying sensex will reach 54000 and another saying 20-30% gain in next 3-4 years.

Here shows company sales growth slowing down.

3-4 years is a long time. We could very well reach there if the "stimuluses" continue.

Here is the current P/E of the whole sensex.



At 19, it is already quite high and individual companies in sensex could have P/E even higher. But we have seen P/E in sensex peak at 22 before. Can it reach there? Hard to say. But I would like to wait for a decent correction of say 20% before buying anything at these high valuations.

Saturday 1 November 2014

Rising Rupee

For last 1 year, due to high interest rates of RBI to fight inflation and loose monetary policy of other central banks around the globe, Indian Rupee has been rising against a whole bunch of currencies.

Here are some charts for 1 year against some.

INR/Canadian Dollar



INR/Euro




INR/Japanese Yen



INR/IMF Special Drawing Rights




INR/US Dollar



With all the talk of rising dollar after the QE3 end by the US Fed, even though dollar went up, we see rupee is slightly up against even mighty US dollar in 1 year period.

Even though we have a current account deficit and a bad fiscal deficit, this is due to the low rates abroad of almost zero in the West while we have around 8% rates.

With commodity prices like Oil also down a lot, inflation is going down in India. Recent citibank report showed that we are one of the few countries in Asia with positive real interest rate which is nominal rate adjusted for inflation.

Will RBI cut our rates now that inflation is down and rupee is up and the rising rupee might hurt exporters? Probably not in near future unless consumer inflation falls below 7%. But if this continues there will be pressure from govt on RBI to cut rates to boost growth.

This also explains why Gold is down in terms of rupee.

Friday 31 October 2014

Mr. Modi wants to stop wasting money and Nomura says bad for Growth


Economictimes reported yesterday that PM Mr. Modi wants avoid wastage of money as shown below.

The finance ministry issued a circular today instructing government departments to cut discretionary spending by 10 per cent. As part of these measures, it banned first class travel by government officials, meetings in five-star hotels, purchase of cars and froze new appointments.

It was for the following reasons as they are expecting more money infusion needed in broken state banks.

Government is looking at an additional capital infusion of upto Rs 11,000 crore into state-run banks, this could be undertaken with an eye on additional spending needs, it said. "Overall, these measures reaffirm the government's commitment to fiscal consolidation and its ability to meet the budgeted target of 4.1 percent of GDP in FY15," it said.

The Japanese Financial Company Nomura however thinks its bad. Bad because if govt spends less then it is bad for our economic growth.

It is not that our govt has any budget surplus that it is not spending. Our govt is already spending more than it earns and is in deficit. But Nomura thinks if govt borrows more and spends, it is better for economy. Of course no one cares what happens to the debt afterward.

The crux is that if govts and to a great extent everyone including you and me spend the money we don't have, by borrowing then it is good for the economy. It doesn't matter, as per Nomura, if the money is spent in a productive activity like building a factory whose goods are in demand and which will earn an income for the investor or babus flying first class in flights and doing meetings in five star hotels or you and me buy a flat screen TV with borrowed money.

It is a twisted world now. We always thought savings when used for capital investment helps growth in economy. Now 'spending' is the new 'saving'.

Reminds me of George Orwell who said in 1984: "WAR IS PEACE, FREEDOM IS SLAVERY, and IGNORANCE IS STRENGTH".

Here original economictimes report.

21st century worldwide financial experiments on the way.


October 2014 issue of Foreign Affairs magazine, published by Council on Foreign Relations(CFR), calls for a bold new financial experiment. CFR is the premier political think tank in US and where anybody who is somebody in the western world is a member including Federal Reserve chairs as well as high ranking politicians. Even our PM Modi gave a speech there during last visit to the US.

It basically says the money printing bond buying program of central banks since 2008 financial crisis hasn't been effective. This has created income inequality and banks who received the new money aren't loaning it out.

We now have slowing growth in EU, USA, Japan and even China.

So this is what the authors of the article suggest.

"Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality."

This seems not like a radically new idea. In history many empires have tried this before to grow by printing more money. I wonder if govts could print money and give it to the people, and everybody becomes well off, what would be the need to do any work? Anyway, here is what FA goes on to say further.

"Ideology aside, the main barriers to implementing this policy are surmountable. And the time is long past for this kind of innovation. Central banks are now trying to run twenty-first-century economies with a set of policy tools invented over a century ago. By relying too heavily on those tactics, they have ended up embracing policies with perverse consequences and poor payoffs. All it will take to change course is the courage, brains, and leadership to try something new."

If you understand how important CFR is, you would know what is coming in future.

Here is the full article.

Wednesday 29 October 2014

US Fed ends QE3. Effects on India


1. Dollar rises and rupee falls.
2. FII money slows down in India. Growth in stock prices in India may be limited.
3. Gold price may not fall much in rupee terms as both rupee and gold fall in terms of dollar.
4. RBI may not reduce interest rates to avoid rupee falling further.
5. Due to global slowdown, oil prices may stay low and with our 8% interest rate in India, inflation may fall or not go up.
6. When Fed talks of raising rates in US in 2015, rupee may fall even further and our FM Mr Jaitley may stop asking RBI to lower rates to avoid fall in rupee further.
7. Stock market volatility will increase. With already low central bank cheap money and high valuations in stocks, we may see lot of swings. If Fed does decide to raise rates in 2015, we may even see dramatic collapse in stock market.
8. If you are a retired person with fixed return investments, it will be good for you. If you are younger and are in stocks, then not so good.

But, I doubt Fed and other Central Planners can really allow stocks to fall badly. They may then reduce the rates again or announce another bond buying program or QE4. We will see.

Is Hillary Clinton having Communist Ideas?

Recently Hillary Clinton said the following.

"Don’t let anybody, don’t let anybody  tell you that, ah, you know, it’s corporations and businesses that create jobs. You know that old theory, trickle-down economics. That has been tried, that has failed. It has failed rather spectacularly."


She also said the following when talking about universal health care system in America.

"We can’t afford to have that money go to the private sector. The money has to go to the federal government because the federal government will spend that money better than the private sector will spend it."

If she were true Soviet Union would have survived and prospered. Even in India 50 years of our socialist structure would have survived too and there would be no need for opening up of our economy as happened in 1991. Why do all communist regimes collapse, all totalitarian govt controlled economies collapse?



Something to think about considering that all such govt destroy individual freedom where govt decides everything you do from birth to death, what you eat, what you wear, what job you do, who you marry, what you buy, what are the "facts" you believe in, what is best for your children etc and etc.

Sunday 26 October 2014

How our Monetary System works.

This is how our monetary system works. This explains the system in USA but ours is essentially same with slight differences.

One is unlike the private Federal Reserve in US, our Reserve Bank of India was nationalized in 1949. But the all central banks including Fed co-ordinate and have a bimonthly meeting in Bank of International Settlements (BIS) in Basel Switzerland and kind of run a closed banking system and that we are told that RBI is essentially "independent" of Govt of India in policy decisions.

Also consider the fact that most of what we call money is created in the commercial banking sector and not by central banks.

This will also explain why the value of rupee constantly keeps going down.


Friday 24 October 2014

Taking advantage of India's credit fuelled growth.

Here is India's interest rate chart from 1978. As you see, from around 1991 till today we have had a generally declining interest rate. I remember 20 years back, we heard about govt deposit schemes like Indira Vikash Patra that doubled money in 5 years which means they had 15% annual rate.




Low interest rates spur burrowing by businesses and individuals. 20-25 years back the loan industry(home, car, personal etc) wasn't as big as it is today. Considering that each rupee comes to life as debt, more rupees have come to life hand in hand with burrowing. Following is the India M3 money supply chart.



Since 1991, as shown above, M3 money supply has grown exponentially. Assuming the year 1991 value from above as 2000, so far M3 money supply as grown 100000/2000 = 50 times.

Now lets see how far our per capita GDP has grown since 1991.


Assuming 1991 value from above as 1800 and 2014 value as 5300, growth is 5300/1800 = 2.94 times. If you consider salary/wage growth as keeping pace with per capital gdp growth, we see that when money supply has grown 50 times, wealth of individual people has grown only 2.9 times.

We certainly have more millionaires and billionaires now than before but income inequality has increased hugely in India. The reason for that is that the credit growth or loans have gone to people who know how to make more money out of cheap money such as businessmen who are well connected with politicians and can get large loans. Also we have been great rise in asset prices due to large money supply which basically devalues rupee. Such assets are house, land, consumer prices, stocks, gold etc.

It would seem that we are growing by depreciating rupee. However, the rupee depreciation or money supply is far ahead of gdp or wealth growth. Part of the difference goes to asset price increase as well. People who get the initial injection of money or loan are ahead of the curve in acquiring assets.

If you are a poor person with bad credit, no access to loans or uses loans to spend consumer goods rather than acquiring assets then you will fall further and further behind.

Thursday 23 October 2014

Good time to buy Stocks or not?



In year 2000 during dotcom bubble sensex P/E was 22.69. Then it started collapsing all the way till 2003 when P/E fell to 13.74.

Then again it rose to 20.18 just before the US subprime collapse when it fell to 12.68 in 2009.

After that, as per the data above, 2010 peak was 21.05. Since sensex has gone up from about 20000 to 26000 or about 30% more, extrapolated P/E now must be around 21.05*1.3 = 27

Similarly, P/BV now is above 4.

Here is the sensex chart from 1998.

Should you buy stocks now when P/E is around 27 and P/BV of 4? I don't think it's a good idea. Even if you accept the central bank manipulations around the world, the safety band is now too low at such high valuations of the stocks.

Can it go even higher? May be but the risk is too high. Can you find some individual beaten down stock that offers good value? May be, but probably there is a reason why that stock's valuation is so low now even when market is at record high.

But that's just my opinion.

Tuesday 22 July 2014

RBI to swap India’s gold reserve.




Few weeks back we read news that RBI has decided to swap India’s gold for gold in London with bank of England. RBI says that it has some(we don’t know how much) pre-1947 era gold that is supposedly “impure”. So, they will sell that in Indian market where there is a great demand for gold. This also helps our current account deficit position since gold is imported into India. Then, RBI with it’s dollar reserves will buy gold abroad and store it in London with bank of England.  So this new gold will not be in India and we will not get our hands on it.

Does anyone really believe that there is some pre-1947 era gold with RBI that is “impure”? How is it that nobody found out that these are impure until now? This basically means that RBI will sell physical gold and get paper contracts to ownership of gold in London.

This doesn’t sound like a good idea to me not to mention the hard to believe the “impure” gold story. If we have a war with someone in future and the West including UK oppose us, do you think Bank of England will let us use our gold?

We already saw that Germany’s Bundesbank wanted 300 tons of it’s gold bank of New York Fed and they said it will take 7 years. They only got 5 tons or so in 1 year. At that rate it may take 60 years. Does anyone really believe that these central banks in New York and London really are good custodians of our gold?  It is probably realistic to believe that they have sold others gold for which they are custodian. But somehow, RBI and Raghuram Rajan still believe it is better to sell our physical gold and get some paper contracts from London.

We would expect Govt. of India to do something about this but knowing politicians as they are, it is likely that they simply don’t care.

Could it be that other central bankers and BIS(Bank of International Settlements) told Rajan to sell gold to satisfy domestic demand than let imports happen from tight world market? I don’t know.

Is it possible that in a time of severe financial crisis, Govt. will make it illegal for Indian citizens to hold 24ct gold coins/bars and confiscate them or force them to sell in bank for cash? We had a gold control act from 1960s until 1998 I think. So such a possibility is real. In such a scenario, we will lose our financial freedom to an irresponsible Govt. and RBI and will have no say in it. Do most Indians care about this? No. They have better things to do, like Cricket, Saas Bahu serials, World Cup Football, etc etc.


FM Mr. Jaitley says Gold duty to stay.

It seems our finance minister Arun Jaitlet has finally said the inevitable that the duty on Gold that govt. imposes during import is likely to stay. It’s reported here. Current duty is 10% each on gold and silver. After he failed to reduce it during budget or even mention it, I kind of guessed that he may not remove it anytime in near future. Then came the news that RBI is planning to sell some of India’s gold from Nagpur vault claiming that it is “impure” and that London has better gold. RBI says it will buy the “purer” gold there and store it not in India but with Bank of England in London. I don’t know why. I can only imagine what Mahatma Gandhi will say about trusting the British bank with our gold.



Anyway, if you are waiting for the gold duty to fall so you could buy, it isn’t falling in near future, so go ahead and buy now before Rupee falls more or Gold rises more in dollar terms.



India is a trade deficit country that buys from world more than it sells. Since India doesn’t produce gold, it is imported from outside just like Petroleum. This is unsustainable without Rupee falling steadily over time compared to currencies of trade surplus countries as well as dollar. If PM Modi’s plans of making India a manufacturing hub materializes, then that may help to a large extent. But these are long term plans and we don’t know when and how this will happen and may take years. In the mean time rupee will continue to bleed through your pocket, savings accounts etc.



For now though if you want to save your hard earned capital/savings that you want to store and not deploy in risky ventures like stocks/bonds or bank deposits, then gold will do the trick. Remember, gold is not an investment, it is money. It doesn’t give you an interest income but it will retain your purchasing power over long periods of time.