Dollar may continue to be reserve currency for decades

It was not very long ago when pundits had written off the US dollar as the world's reserve currency. The problem, they argued, lied with the incessant money printing and the trillion dollar debts that Uncle Sam had buried itself under. However, as things stand today, the greenback is still going strong. It has not only survived but is touted to be the safest currency around. So, what changed? Well, it isn't that the fundamentals of the US dollar have improved a great deal. The improvement is mainly because its rivals, aka the Euro and the Japanese Yen have fared even worse. Thus, in what looks like a very bad neighbourhood, the US dollar seems the only safe house.

But how long will this trend last? If an analyst at UBS is to be believed, US dollar's status could be safe for another 50 years. Quite simply because as per him, nothing in the world is as liquid and as widely held as the US dollar. Besides, the dollar also benefits from the military protection the US offers to many reserve holding nations. Well, the analyst's theory does have pretty strong legs to it. And dollar may well remain the reserve currency for many more years to come. However, what we are pretty certain about is the fact that the dollar's devaluation is here to stay. Thus, it will not be a bad idea to keep piling on to that yellow metal called gold.    

Will India have to sacrifice growth for curbing inflation?

The Reserve Bank of India (RBI) has traditionally stood apart from its peers. It is therefore hardly surprising that its monetary policies should follow a contrarian route as well. Not just the US Fed, Bank of England and the ECB, but even the Chinese central bank has eased liquidity in recent months. All in the chase of higher growth rates. However, for RBI, the focus has been on curbing inflation. In the past, it did make an attempt to balance inflation and growth rates. But eventually that became impossible. Especially with the government unwilling to cooperate on the debt control front. Hence, the RBI has now decided to let the axe fall on growth rates. Governor Dr Subbarao has emphasised on the necessity to sacrifice growth to tackle inflation. What it means is that the government and the central bank are on tangential directions when it comes to steering the economy. Only time will t ell, which of them will succeed in liberating the economy's growth from inflation contagion.    

China's loss could be India's gain

What is China's loss could be India's gain. And this is in none other than rare earth minerals. At present, China accounts for about 95% of the global output of rare-earth minerals. These are used in a range of electronic equipment. However, China in recent times has restricted the export of these minerals through export quotas and taxes. This has pushed up the prices of these minerals. Further, China has set a condition that access to these minerals would be possible if manufacturing facilities are set up in the country. This is where India can step in. It is currently the world's second largest producer with large deposits of rare earth minerals. However, when compared to China, production is paltry. Indeed, in 2010, when China's production stood at 130,000 tons, India's was a measly 2,700 tons. Further, India has other problems in the form of corruption and red tape in the mining sector. In the past, even US produced these minerals but China became the undisputed le ader on account of its low cost advantage. Now with prices rising, there is incentive for other countries including India to bolster production. But whether our country will be able to do so remains to be seen. 

How do share markets function in the short to medium term?

One of Benjamin Graham's most famous quotes goes thus: "In the short run, the market is a voting machine but in the long run it is a weighing machine." That is indeed so true. In the short to medium term, share markets may witness wide irrational swings. But in the long run, share market valuations tend to reflect the true fundamentals. 

How do share markets function in the short to medium term? It is important to understand that stock prices usually reflect the future expectations of market participants from the real economy. It may so happen that a bull run commences months before earnings actually show an improvement. Similar, markets may start falling even before earnings show any deterioration. Of course, it is impossible to determine the lead and lag time in such cases. Moreover, the market expectations may not always translate into reality. On many occasions markets are prone to false anticipation. 

Do you know one crucial factor that plays an instrumental role in all market rallies and collapses? The answer is financial liquidity. When there's a lot of money into the financial system, bubbles can build up. The opposite is also quite true. A liquidity crunch can bring down markets even when economic fundamentals are strong. But in a globalised world, it is difficult to judge liquidity. FII (foreign institutional investors) money can pour in and flee away at the drop of a hat. A remotely unrelated event in some other part of the world could have an impact on the domestic bourses. 

With such wild swings in the share markets, what should investors do? In our view, the value investing technique followed by the likes of Benjamin Graham, Warren Buffett, Peter Lynch, etc. is the best approach to long term investing. Buy fundamentally strong stocks at a discount. Forget where markets are headed. Period! 

But it is also true that value investing may not help you in timing your investments too well. And you may also miss out several profitable opportunities in the short to medium. To remedy this, many investors prefer to complement their value investing approach with techniques that help understand market trends and time entry and exits. 

US prefers renting houses than buying them

Say an average middle class individual wants to buy a house. Which is the one most crucial factor that will determine his decision? The answer is future job security. This is because buying a house normally means borrowing long term funds.

An unusual trend is evolving the US right now. People in the age group of 20 to 34 years are very wary of buying houses. They are more comfortable renting apartments instead. But it's not just about houses. They are wary of making any big purchases. So much so that they are even willing to rent cars and clothes!

This is very telling of a country that is bracing the deepest recession after World War II. The jobless rate has been persistently above 8% since 2009. On the other hand, another time bomb in the form of US$ 1 trillion in student-loan debt is ticking away. The bleak economic outlook and the excessive sovereign debt are likely to weigh on the future prospects of the American youth. Their attitude towards making big purchases is a clear indication of their future job and income insecurity.

Telcos may find it difficult to get loans

The troubles for Indian telecom companies are increasing day by day. First they are faced with a regulator which cares more for filling up government coffers than their business interests. Second, it is faced by hyper competition thanks to which they are unable to raise rates and are resultantly operating on wafer thin margins (if any). Third, they are already plagued by heavy debt to take care of their operational as well as capital needs, which in turn are increasing day by day. And now they would find it tough to raise more money at least if they decide to approach the banks.

The Reserve Bank of India (RBI) has laid preconditions for financing telecom companies for the upcoming 2G spectrum auction. The guidelines are meant to protect the banks against possible defaults. But at the same time they would make it difficult if not impossible for the telecom operators to get loans. Especially for the smaller operators. The banks would insist on stricter technical evaluations for projects, higher collaterals and current financial strength of the companies. The only way they would be willing to lend to the weaker companies would be if there is a possibility for tariff increase. But here again the regulator is not keen on tariffs going up too drastically. All in all the bad days for telecom operators are far from over.

A rating downgrade after 14 years?

The Indian economy is going through one of its toughest tests at the moment. Despite successive rate hikes in the past, inflation has not come down to the levels that the central bank had anticipated. Meanwhile, GDP growth has slowed down and monsoons have not really taken off leading to droughts in many parts of the country. As if that was not enough, the industrial production contracted by 1.8% in June and has taken many by surprise. This is the third time that the IIP has contracted in the last 4 months and was largely on account of the slump in the manufacturing sector. Further in this, the non-durables output growth contracted 1% meaning that high inflation has played a role in reducing consumption.

As a result, with not much happening on the reforms front and the economic woes only piling on, there is the possibility of India facing a credit downgrade. So far, international ratings agencies have not lowered India's credit rating (which is a notch above investment grade) for nearly 14 years. However, some of them had cut their ratings outlook in recent months following the decline in the country's economic indicators. Indeed, the last ratings downgrade took place after the 1998 nuclear tests.

Ratings of credit agencies could be taken with a pinch of salt. The lack of credibility displayed by major ratings agencies during the global financial crisis is ample proof of that. But that does not take away the fact that India does have a serious problem on its hands. While policy reforms and removing supply constraints would be the obvious answer, it is easier said than done since there are so many difficulties on the political front. The RBI has already done its bit. So all eyes will now be on the latest Finance Minister Mr Chidambaram and how he chooses to tackle these issues. Although it is apparent that some bold steps will be needed to be taken, it is unlikely that the current government will do anything radical that will hurt the sentiments of its voters.

Will this make Indian cities better?

Most cities in India are faced with the challenges of rapid urbanisation. As a result, town planning has become very important. Indeed, there has been a sharp rise in the influx of people in India's leading metros. But poor planning has led to shortage of space and increased congestion. And it is not that the concept of town planning is something new. This was practiced even by the ancient civilizations of Mohenjo Daro and Harappa. Thus, there is an attempt now being made by India's prominent business leaders and academicians to lay the intellectual and financial foundations of the Indian Institute of Human Settlements. Nandan Nilekani and Uday Kotak are some of the names that have already doled out donations to this institute. Of course, there are already many ills afflicting the cities. And the establishment of such an institute may not be able to completely resolve these issues. Also, it could be a while before the institute really scales up as well. But one needs t o start somewhere and this could be the solution that India is looking for from a long term perspective.

China's huge deficit in pension funding

Pension costs. This phrase is giving the Chinese government a headache. With an aging population, the costs became more of a burden for the government. As per a research carried out by Deutsche Bank which was published in the Bloomberg Businessweek, currently around 13% of the population of China is over 60. This is expected to increase to 34% by 2050. The rapidly aging population would lead to a huge deficit in the pension funding. As a result, the central government would be forced to fill up the balance. The government has stated that currently, it has sufficient funds to meet the pension related liability for a while. However, it is unknown as to how long would the funds last. 

Another problem with the entire pension system is the huge inequality. In the rural areas, people are paid as low as 55 Yuan while in the urban areas, the amount is nearly 1,500 Yuan. This means that the people who are earning well continue to earn well even after retirement while those in the lower income group sink further. This has angered the younger working population who has expressed their dissatisfaction of funding the government retirees without having sufficient funds to fund their own retirements. The one possible solution for this is participation by the local provincial governments, but they don't like handing out cash for pensions. As a result, the Chinese government's credibility over sustaining the pension system has come under fire. It would interesting to watch and see how it performs in the future.

Bank bailouts have wiped out privatization proceeds!

Financial Times, the popular financial daily, has come up with a very interest statistic. First, it has taken proceeds of the last 30 years from Government backed privatisations across the world. And then it has compared those with the amount these very same Governments have put into rescuing crisis hit banks. Do you know what the outcome has come to? Well, it so happens that the privatisation proceeds of roughly US$ 1.8 trillion get nearly wiped out by the US$ 1.7 trillion that has been pumped into various banks in order to bail them out. In other words, Governments have nationalised assets just as they have privatised them. 

You would wonder why there haven't been more privatisations despite the efficiencies that the private companies bring to the table. The answer could be had from the fact that whenever political and economic interests have clashed, it is mostly the former that has prevailed. Thus, Governments may have shown a tendency to indulge in more privatisation. But they have backed off at the very first signs of opposition. Besides, the volatility in capital markets hasn't helped either. And as things stand today, there isn't a very strong chance of privatisation edging out nationalisation over the next few years at least.