A second wave of crisis is coming...
In this issue:
» The Dubai debt restructuring sends shivers across markets
» Food price inflation highest since 1998
» Recovery could take six years says US Fed
» Short term correction likely in gold says Jim Rogers
» ...and more!
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The developed economies are slowly but steadily recovering from the meltdown. Stock markets have already given their verdict and propelled by massive dosages of liquidity, have staged spectacular recoveries from their shaky lows. Commodity prices are also on their way up. Slowly, but surely the financial crisis is over, right? Not so fast. If the red splashed on stock markets around the world today is any indication.
Debt was fuelling not only the American housing bubble. Closer home, it was fuelling Dubai, which had taken on debt to the tune of US$ 80 bn. Out of this US$ 59 bn was taken by Dubai World, the emirate's corporate arm in charge of its ambitious real estate projects. With the severe correction in real estate prices, these projects have now become the proverbial while elephant.
Yesterday, Dubai asked its lenders to defer its debt repayments by six months. It is also looking towards its oil rich and more financially conservative neighbor, Abu Dhabi, for lending a helping hand. While some help has come it way, it is not enough to completely bail out Dubai.
Bloomberg in fact has quoted Mark Mobius, Chairman of Templeton Asset Management, as saying, "If Dubai has to default, that could start a wave of defaults in other areas. This may be the trigger to allow for the market to take a rest and pull back." Mobius oversees US$ 25 bn in emerging-market assets and has a very good idea on the implications of the Dubai default scare.
These developments show that it is premature to declare that the world economy is out of danger. There could be more countries, especially in Eastern Europe, waiting to be bailed out. The developed economies and especially their banks are still vulnerable. In our opinion, investors would do well to remember that there are substantial risks to the buoyant markets. For every bubble, there is always a needle somewhere. And when they meet, all of us learn some very old lessons.
Food is getting expensive by the day. The erratic monsoon has played spoilsport. Add to that, poor management of government food inventory and the public distribution system. The hike in the prices of food items has been in the range of 12% to 112% in the past year. The food price index is up 16% YoY, the highest since 1998. While the central bank may still be debating about its interest rate stance, the clock is ticking on the inflation radar In fact, as per the economic outlook of the Organisation for Economic Cooperation and Development (OECD), consumer prices in India are expected to remain high in the days ahead. As the chart of the day shows, India is likely to experience among the highest rates of inflation among the emerging economies. Interestingly, the Chinese economy which is expected to grow faster than India's will hardly experience any inflation at all.
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Note: CPI= Consumer price index
Source: OECD Economic outlook, Nov 2009
It has been known for some time now that the global recovery that has begun to take shape will be slow and gradual. But just how gradual? Well, the US Fed is of the opinion that it could be five to six years before the US returns to normal growth. What is more, it also believes that the unemployment rate which is 10.2% at present, will remain in the range of 6.8% to 7.5% through 2012. Corporates are still wary of going on a hiring spree and are instead raising their employees' hours and boosting productivity. This is thus delaying the need to add to their payrolls. Not just that. Companies across sectors are still seeking large cost savings. This means that Americans on an average will not be too enthused on consuming the way they had done in the past. And if that turns out to be the case, then we believe that there may be some truth in the US Fed's belief.
Sample these statements. "I do own more dollars than I did a month ago". "We can have a correction in gold prices." These quotes seem a little out of sync with reality and you could have probably ignored them had they been from a novice investor. But one can certainly not call Jim Rogers a novice investor and this is what he was found to be quoting in a recent interview with BusinessWeek. Rogers opined that at the present moment, there are so many bears on dollar and so many bulls in gold that these asset classes seem ripe for temporary reversal in trends. However, from a long term perspective, Rogers continued to remain bullish on gold and bearish on dollar. Rogers also argued that there are better commodities to buy than gold but one cannot convince central bankers about the same as they currently seem to have gold on their brains. He listed silver and palladium as good alternatives to investing in gold and also kept his bullishness intact for agricultural commodities. As far as the latter are concerned, perhaps no one would know it better than us Indians, who are feeling the pinch of it every single day.
Reality bites. Ask someone who makes a big claim, only to be brought down to earth (reality) by others executing along with him. Ask Suresh Kalmadi, chief of India's Olympic Association. He recently claimed that India would bid for the 2020 Olympics after the successful completion of the Commonwealth Games in New Delhi next year. The sports minister M.S. Gill has rubbished this claim by saying that India is far too poor to even consider this idea!
Gill said, "I am not sure if India should be thinking of the Olympics. Look at the poverty here. China spent US$ 50 bn for the Beijing Olympics. Are you ready to spend that much?" Given the callousness with which Indian organizers have handled the infrastructure for the upcoming Commonwealth Games, Mr. Gill's view does not seem very far from the truth! .
Leveraged buyout firms and commercial real estate in the US are yet to see their fair share of bloodletting. But it will happen. At least that's what ace investor George Soros believes. He recently said that the distress in these two areas which is yet to come will weigh down on the US economy. Consequently, the American consumer will no longer be able to serve as the motor for the world economy. As per Soros’ calculations, given this situation, the global economic recovery is slated to run out of steam soon. And even worse, a double-dip recession may emerge in 2011. With the unpredictability of the large and complex global economy, that is always one of the possibilities. Who knows, with the effects of stimulus wearing off in the next couple of years, we can’t completely rule out a double dip for the world economy.'
Meanwhile, the Indian markets have caught the Dubai flu. In fact, bourses around the world are having a terrible day after the Emirate asked for a debt restructuring from its lenders. At the time of writing, India's benchmark index, BSE-Sensex was trading lower by about 455 points. Index heavyweights across sectors are in the red.
"If the new thing you are considering purchasing is not better than what you already know is available then it hasn’t met your threshold. This screens out ninety nine percent of what you see." - Charlie Munger.
