:(

Stupidity has no bounds. Am I too harsh here? Just read (red) this article about Bain and TPG's tryst with Lilliput. Something about numbers being fudged and blah blah. This is related to my earlier post which was satirically named; PEs, even though they seem to be here for the long haul, tend to eye rapid deal closes.
How did established funds with 'intelligent' managers miss Lilliput's supposedly fudged numbers? India is a certain way and may be Lilliput is in the wrong, but that does not permit the author of the above mentioned article to say ridiculous things about investing in India.
True, PE firms have not garnered the returns they wanted but it reminds me of a maxim: One doesn't get returns just because one wants them
Good investment firms with good heads (anatomical and figurative) who refuse to overpay for potentially stupid businesses (and/ or) tend to make money. Therefore, Warburg Pincus investing in Kotak Bank in 2003 made sense but them investing in Moser Baer, believing in the CD (Compact Disc (For people from the future, a CD is a portable storage device which even now (in 2012) is hardly being used)) business, was ridiculous (hindsight?).
I have used too many brackets here (For Americans, we South Asians call parenthesis, brackets).

Coming back to the topic at hand. All PE funds need not make money just because India was deemed to be a 'hot' destination for funds. Almost everything has a price, and just because one has money doesn't mean one should spend and/ or overpay for assets.

BTW, mouth watering valuations visible in the Indian market right now... if S&P is reading this, please downgrade India so that more money flows out :P
dum fuks

There's a road...

We're off to see the wizard... the wonderful wizard of Oz!!!

The China story is beginning to unravel, or so it seems and so I hope :)

To me, it's a bit like a mini-Dubai (or a maxi-Dubai?) - city folks have a standard of living higher than they ought to or may be I'm just envious :P

Massive fund flows in the near future; the volatility of 2008/09 may have been the trailer to the movie. I wonder...

On another note, the FM of India said something about austerity in India. I had to laugh. Austerity? In a country with millions homeless, and millions living in just above poverty levels and close to a billion having to suffer the wrath of inflation with no good quality government service? 

Ha.

F-in' Ha! 

Waiting for the next capitulation

Ha! This article is brilliant. It is what Chanos has been saying for so long now... here, here and here.
Chinese banks are fragile and are hiding non performing loans; sure, they will be covered up by the Chinese government soon enough, but when that happens, investors will be forced to flock away due to distrust. Or so I hope.
I have not been able to figure out the repercussions of what is, in effect, loans made by the government itself to companies which don't deserve loans. Eventually, they would be NPAs/ NPLs but does that affect the printing machine?

amzn

So here we are, the next revolution? Amazon starting its own fashionable product line :)
Quite cool. I wonder how it could potentially affect suppliers from Asia. Not to mention other retailers...

Don't take tension ;)

Never know how one thing leads to another. I read only one article from today's Mint and that was by V Anantha Nageswaran. That led me to this post and a wonderful comment by someone who seems to be Japanese - MisoHakimi (If you're reading this, I was too lazy to sign up for FT, but well done). The dude said it well... PEs can be really lazy, especially some of the funds which have opened shop in India with their parent/ brother/ sister PEs operating abroad. For all the wrong that is said about India right now, we will wait for them to flock back here when this country will continue to remain one of the fastest growing large-ish economies in the world.
For all of India's annoyances, the people are tremendously resourceful. And this has changed for the better in the last 15 years or so with more Indians coming back from the US and Europe after gaining significant social and business experiences there. There is a new breed of Indian companies which is trying to work well and well within ethical boundaries.
As far as the FT post is concerned, I know that there are just too many PEs out there chasing Indian deals when the smarties came in long ago when nobody really cared about India i.e. pre 2003/ 2004

As an aside, India is a crazy country and we function in our own weird ways. We have to deal with a culture that has been developed and influenced over 5000 years; it's like an entire Europe functioning like one country and trying to adopt Chinese as their common tongue :D
We are like this only :)

KO

WB started buying KO shares in 1987/1988
They were approx USD38-42 a share
EPS was about USD 2.45-2.88
Rationale: Competitive advantage, underpriced shares and good cash flow with good management

http://www.scribd.com/doc/34149986/KO-1988
http://www.berkshirehathaway.com/letters/1989.html

Odd
Lovely

The Bubble

Another brilliant post by Bill Gross. There is a credit bubble out there; when it tried to deflate and implode, the Fed had to step in and prevent it from imploding. Upon doing so, it breathed life back into the inflating bubble. Recently, the ECB and E-Zone created money through the LTRO and breathed life into the European peripheral banking system. The Fed is currently in the midst of Operation Twist wherein it buys longer term g-bonds.
Oddly, Bill also has a simple chart where he shows the stock market's movement juxtaposed against the periods where the different forms of QEs had been conducted, and at each time frame when the Qe had been ended, there was a sharp fall in the market.
He goes on to say something that was taught to me by Mr. Chidambaram when he was Finance Minister here... low rates usually mean inflation in the future.
However, this time we have the eurozone and China to deal with. Spain is now regularly in the news and somehow, nobody cares about Greece or the UK. Yes, the UK.
The current 'happy' sentiment in the market will leave us soon and come back another day. I hope the hiatus is not for too long...

Figures don't lie, but liars figure

Jim Chanos is still short quite a few Chinese banks and continues to believe that the rebalancing needs to happen. I still believe that China will be another Japan, where, after a sharp drop in nominal GDP, it will continue at a 0-2% type rate for a long long time. It is difficult to stimulate an economy that is not innovative.
Today I read this wonderful post based on some analysts who visited China. I hope they write some more stuff soon. The problem, as I have seen it for a while now, is that it is difficult to find liars because unlike corporations which are subject to audit, shareholder activism and regulatory bodies, countries are not liable to speak out similarly. If a bank doesn't call an NPA and NPA, there won't be any NPAs; but there will be a reduction in income. If these NPAs are backed by more loans through the central mechanism, it will cause inflationary pressures down the supply chain.
If the PBoC were to lend money directly to a corporation to build a cement factory, and if the cement factory were idle and if the PBoC decided to overlook this by just lending some more money to more corporations, the repercussions of such activities would build up in inevitable and disastrous ways. I wait. 

Google

This is a follow-up to this post. Google is magnificent. As I write this, it has a market cap of USD 206 Bn. Sure, it's not FB but it has tried its hand at Google Circles which I find really neat even though I don't use it. It has a captive email audience and that audience can connect with each of its address book peeps. It's not about now, it's about where social networking is going.
Social networking started off as getting in touch with long lost people and staying in touch with people one cares about. It evolved to sharing information such as hobbies, videos, pictures, travels, etc.
Google seems to be taking the next step. Apparently, the company still tries to remain small in the entrepreneurial sense...
Project Glass: http://www.youtube.com/watch?v=9c6W4CCU9M4&feature=share
Loving it. This should be where society will be at 10 years or so from now.
The other day as I was walking to my iMac I wondered whether I would be walking to my computer 10 years from now. May be the computer would be in my head. Or on my glasses.
300 cheers for Google. May it be the enterprise of the future today.

1994 Krugman

Thanks to M Pettis I cam across this article by Paul Krugman from 1994. Fascinating stuff. I like how he tries to educate the readers about the concept of growth and breaks it down into productivity increases and input increases. He made a reference to Singapore's growth miracle and explained how beyond a 40% investment in physical capital and after educating a large chunk of the population, further 'stimuli' to the economy cannot be created. For a country to break into the next bout of growth, innovation and productivity increases are required.
He also makes a reference to China and explains how even that model cannot continue endlessly. One fascinating topic is that of Japan. Remember, that in 1994, there were still many 'analysts' who believed that Japan will find its way out of its 1991 recession - it hasn't stepped out of it yet.

The way people spoke of the USSR in the 60s and Japan in the 70s and 80s and the Asian economies in the 90s, this is now happening with China in the 2000s.

In other news, M Pettis has a bet with the Economist. Look here.

China is the new Japan?

Michael Pettis rocks.
He wrote:

By definition more savings and less investment mean that Japan’s trade surplus must rise.  Japan, in other words, is planning to move backwards in terms of rebalancing.  Remember that until 1990 Japan had the same problem that China did: its rapid growth was largely a function of policies that transferred wealth from the household sector to subsidize growth. 

These policies – an undervalued currency, repressed interest rates and low wage growth, which of course are the same as China’s – restrained consumption and encouraged debt-fueled investment.  This investment, we now realize, was wasted on a massive scale and the eventual government absorption of all the bad debt caused government debt to rise.

After 1990 Japan began the slow rebalancing process, but rather than privatize assets and transfer wealth directly to the household sector, the Japanese did it by having the government assume private sector debt.  This was politically much easier than privatizing and removing interest rate and capital allocation distortions, but it also meant much slower growth and burgeoning debt."

So, there we go. Laid out very nicely that this entire China growth story ought to end up with some rebalancing which could stretch out many years. I still await low GDP numbers and possibly a negative real number. 

Also, another post by another blogger, here; can't seem to be able to copy the picture, but have a look. Do note that the 2009, 10 and 11 are massive. But so are the prior years... RMB 3.5 Tn is around USD 500 Bn is around INR 2,500,000 Crore. 

ONGC 5% stake sale

The GoI has done something that can be considered highly immoral and/or unethical. This link shows how LIC was kinda the sole institutional bidder for ONGC's shares, the sale of which was conducted haphazardly for the government's 'fiscal picture' benefit. LIC bought 377.1 shares of the 420.4 million shares which were eventually sold last Friday, the 2nd of March.
So, LIC, which takes money from people as, primarily, a life insurer, bought shares of a company - 5% worth - that nobody else really wanted. ONGC is a kind of dead beat company. Point: Irrationality has consequences even if they take decades to pan out.

Defense

I love this month's post by Bill Gross. It's all about defense and how strongly he believes in this particular tactic being more important now than in any time in the recent past. He talks of how it is the big hitters and headline grabbers who win prestige and fame; and how, people who keep their heads low - like Ray Dalio, Seth Klarman, WB (and Bill Gross) - win the accolades by the time they retire/ die. Well, I believe that is what he hints at anyway. I believe Buffett's latest plays have been based on accepting that corporate growth in the future is going to be sub-par - hence the Burlington N and IBM and Lubrizol; fantastic competitive advantages with insignificant upside room. I wonder if the new economies of India and China do hold any promise...
Oh, and yes. Recently, there was a post by Buffett (also part of his yearly letter) about the demerits of gold. You can fondle it all you want, but it wont respond. And just a few days ago, there was an excellent rebuttal by a relatively unknown - here. Both of them are missing the point may be... Gold is not an excellent investment. It is, however, an excellent speculation dependent on the effects of monetary expansion and competitive currency deleveraging globally. One ought to get out after global printing subsides. 

Buffett

I had never waited this way for a Buffett letter as I did this year.
1. I think it might be Ajit Jain who will succeed Buffett. Tony Nicely might be a runner-up choice.
2. He is so optimistic about recovery - interesting
3. IBM is the next KO?
4. First time that an Indian JV/ association/ venture has been mentioned - some Kundalia family

The Euro Crisis

The current crisis in the Euro Zone is odd because we have never had to contend with a monetary union (at least, of this size) before. Hence, regulators and officials are trying to delay the inevitable and they are successful at doing so because of various mechanisms.
I red this interesting article yesterday which talks of how Iceland was able to begin its path to recovery by defaulting, and simply, this is how entities get past their bad phases... by defaulting or by committing to an accusation, etc. When entities try to tide over difficult times by bluffing and pretending, one eventually faces a ponzi or a scam or a massive shake-up of the system, as was the case with Olympus or the US or China in the near future.
Coming back to Europe, Greece's GDP has reduced by 16% since 2007, unemployment is at 20% (1 out of 5 unemployed officially) and we now have austerity measures which will likely sell stakes in some Greek companies and reduce the wages of government employees. Meanwhile, youngsters who are fresh out of college are confused because they don't know what they did or can do... let's think of the newest batch of graduates who will hit the job floor by May/ June/ September, how are they going to find work when people are cutting back on expenses?
All of this sounds scary but remember, there is a price for everything - I am referring to a floor for this economy's deterioration. By defaulting and moving back to the Drachma, Greece is apologizing and saying that they are going to mend their ways.

Another takeaway from a video I saw on Bloomberg yesterday is that private debt holders will have no recourse in case of Greece because Greece issued debt through Greek law - hence, this can be changed. However, many other nations, such as Portugal, issued debt through UK law which will be nigh impossible to change... the future looks very interesting.
I do have an ethical issue with the use of LTRO because, that would not allow any of the larger nations to default. It is similar to how the US is paying little on its long term debt even though the value of the respective currencies is being destroyed.

How the economy works...

A follow-up to my previous post, I just finished reading an excellent paper - may be the best I have read yet - by Ray Dalio. He does a brilliant job of explaining how he believe the economy works. He creates a distinction between recessions - which are a part of a normal business cycles - and deleveragings - which happen rarely but have enormous corrective consequences. Chart 3 on page 10 and the table on page 19 are profound, they have made me think in new ways.
Sadly, a topic on China has to be a part of every frikkin' post I make eh? US and the world in 1929, Japan in 1989 and the US and the world in 2008 - this is what we have so far. Next in line is, China (and the world?) in 2012/15. I am saying this based on his outline of how credit growth always creates an illusion of prosperity; the prime reason is that during a massive credit growth period like Japan in the 1980s, people start believe that they are wealthy based on the 'wealth' that their assets hold. Sadly, people like to forget that they have outstanding liabilities against those assets.
When a turning point finally arrives, and when a larger proportion of the community decides to cash in on their wealth, that is when that supposed wealth dissolves. It is similar to how he (Ray) explains the distinction between money and credit. Most of us confuse wealth or credit with money - an example, if we believe that our house is worth INR 15 Mn, we feel better and spend better. When the market value of that house or that stock portfolio or gold increases, we believe we are wealthier just based on how much we could potentially get when we eventually do sell it. However, when we turn to sell it (which for the market as a whole) is in times of stress, that is when the assumed value starts eroding. This, my friends, is what will happen to the Chinese economy soon enough.

Do have a look at page 19 of the paper and see how long the increase in fed rates continued when it last touched near zero, which was in 1932. 251 months. The US has only recently touched zero.

On an semi-related note, two of the reasons I believe that the US will still emerge as the superpower of the world:
An episode of Undercover Boss where the CEO of Baja Fresh was of Korean descent. He went to his stores where he interacted with people of four 'races?' - Philippines, Jordan, Mexico, American. All of them were rather american and when I saw the size and the quality of the organisation that Baja Fresh presented itself as, I saw why the US will continue to excel.

This video shows how the US has evolved, and why it will continue adapting to a changing world.

Bridgewater Associates

I enjoy reading and getting to know new things. Today, I saw this interview of Ray Dalio by Charlie Rose.  Ray Dalio is the founder of Bridgewater Associates which is one of the largest and strangest hedge funds in the world.
By watching 11 minutes of this guy I can already see how sincere and brilliant he is. I loved this guy's humility when he said that the culture of the firm is focused around the fact that we can be wrong, so let's discuss this.

Talking about global issues, he breaks it down succinctly -

Developing creditor nation has an emerging credit bubble because of its economic model.
Developed debtor nation has low growth, unemployment, deleveraging and limited stimulus power, hence there are chances of social friction.
The eurozone has the capacity to print money and write off debt with social and economic consequences.

And that, ladies and gentlemen, is why we are in a soup today. When Charlie asked him whether he is optimistic or pessimistic, he sharply said that he is 'concerned'. This is the same view that I have had for a while now. It is troublesome to see the pretense going on without remedial action by the involved nations - the problem is, we are going to have to face our next crisis soon.

FIASCO

I just red FIASCO. Wonderful book - dated (1990s) but oddly still very relevant. Substitute some words and we could be describing the 2008 crisis.
The author, in 3 short years, went through a lot of the Wall Street jazz and it's sorry how books like this are ignored so easily. It clearly outlines some of the basic reasons why people make mistakes
They don't know what they are doing
Leverage
Mis-selling
And yet, institutions and people never learn. As soon as we get the opportunity to receive 14% p.a., we flock to that security being marketed by wealth managers... I was going through a list of large global trading losses and didn't find even one on India. So, either we are hiding them very neatly or the big one is yet to come.

Interesting that my 100th post is about China :)
Michael Pettis has finally written a very simple article talking about why we are near the brink with respect to new government action by China.
The crux is that a real estate bubble can be witnessed- prices are falling already. An infrastructure bubble can't be witnessed. It can only be seen when planned infrastructure is left idle, is left unmaintained, or when it lies desolate.
His main point is that cheaper loans as allowed by the central agency affects household consumption through it being a smaller portion of GDP, money being 'transferred' from savers to borrowers (look up 'subsidized loans') and, according to me, through inflation.
He also says that one won't see defaults because the centre will come to the rescue yet again, as it did in 2008 and in early 2000s. We will see debt being serviced through, what can be called, the printing press or the mint.
Eventually, which is not too far off, we will see China's GDP growth slowing down dramatically because fruitless investments in infrastructure are unsustainable. Debt needs to be serviced. Read the article.

Scoggin Capital

Nice mini-interview of Scoggin Capital co-founders.
Today is more about behavioral finance than hard finance or analysis. Lots of unrest globally. And US's pension fund, medicare, medicaid debacle will be tomorrow's front page news.

AOL, Time Warner, Buffett

History is magnificent. It makes us grow in lollapalooza ways.
In the year 1999, a book was published named 'The Warren Buffett Portfolio'; I am currently reading this book and it is a very good read. I expected it to be just another Buffett book, but the author has done a brilliant job of editing the material.
One of the chapters speaks of Bill Miller's Legg Mason Value Trust fund and how he runs (then) a value + growth fund, how he is able to buy into growth stocks and stay put. There is some hoopla about Cramer accusing Bill of buying into growth stocks like Dell and AOL and calling them value! Bill Miller shoots off a letter to Cramer and says something that should be remembered.
He says that he bought into AOL in late 1996 at USD 15 per share and into Dell in 1996 at USD 4 per share. Sadly, I don't have the historical numbers. As some may know, AOL merged with Time Warner in 2000. At the time of the merger, AOL was at around USD 73 per share (link) and valued at USD 163 Billion. The combined entity was estimated to have a value of USD 350 Bn.
The year was 2000, and this deal marked what could be the brink for the IT bust :D

In 2009, Time Warner decided to spin off AOL. AOL was being valued at USD ~ 6.3 Bn. Read the prior paragraph again :D
Possibly, this could be the equivalent of a share price of USD 2.8 after 10 years or so.

Point:
Bill Miller may have made money but eventually he was proved wrong when he estimated a value of USD 110 to USD 175 per share for AOL stock. Please refer pages 101-103 of the book I cited above.
Why was he so off the mark in terms of valuation, when he was an acclaimed investor?
He was an acclaimed investor because the market served him well then. He also got into these companies at very good valuations but somewhere down the line, he lost focus - he began speculating. "Just a little bit more money!"
When one forgets the principles, one will have to pay the price.

Am happy that I have seen this bit of history :)

Of course, in the course of 10 years or so, the management may have destroyed the company's (AOL's) value, but that does not justify the 95%+ difference from peak to trough.

Doomy

Finally! Finally Gross comes out with a doomy prediction, and I'm loving it.
The summary is that even 'New Normal' is going to be difficult because the people in 'power' are refraining from taking decisions. Things are going to be 'Ab', 'Para' or 'Sub' Normal. He talks of fat tails.. the one on the left is about deleveraging which would be good for the US because everyone would flock there. The one on the right is inflationary which would possibly steam roll most things in its way... He says that 2012 could be the year of a major financial upheaval.

The fundamental ideology is that one cannot keep funding debt with debt. Somewhere, this Ponzi scheme is going to stop. "It's only when the tide goes out that one realises who has been swimming naked."
I, however, believe that he has overlooked the China equation. It could well be that China will play a major role in pulling the tide away, the way it is done before the onset of a tsunami. Feel free to read my last two to three posts about China. 

Singled out

Jim Chanos is certain about what's going to happen in China... See this video.
Economics needs to be balanced with psychology and it's important to be independent and contrarian; oddly, being independent is equivalent to being contrarian.
Chanos is being singled out, well there's Pettis and some others too, for being short on China's future. Towards the middle of the video he points out how the much touted 9% growth can just plummet to a 0% number. I have spoken about this earlier too.
In times like this when it is rather certain that Chinese companies are venturing abroad on the back of cheap loans and a crazy amount of forex reserves against sharp drops in home sales, slowing construction activity and slowing exports - mind you, Jim points out that net exports are only 5% of China's GDP, a large chunk is investments in fixed assets - one has to wonder whether one can depend on the sustenance of a value-oriented investment strategy. One also has to wonder whether staying in cash isn't that bad an idea.
It is integral to think independently and be wrong at times. Increasing rationality is a moral duty?

Going on... this is another video (1 of 2 parts) with Stephen Roach v/s Chanos (Roach playfully calls Chanos an 'ignorant slut' - love that!). One thing Roach talks about is a rural to urban migration of 10-15 million per year... Now, how does one sustain migration without ingenuity, creation of new companies and new ideas? Also, who owns the places these guys decide to live in? Is it the banks or the shadow banks?
Chanos talks of an impeding reverse-migration.
Jim Chanos has also spoken of how China's housing market is only 12 years old because that is when people were (supposedly) allowed to own homes. So, the market has not yet seen a bust and the growth has been too sudden and stupendous.
The official rural population in China is 800 million; how does this number sustain a USD 6-7 Tn economy? Then again, is there an appropriate way of assigning a number to the size of an economy?
Jim goes on to speak about how the US is still the best place in the world to innovate and create new enterprises and products, how a country without trade rights and legal protections cannot go on for too long.
I am horrible at penning notes down from a video for my blog. Apologies to myself (me being the only reader here).

The curse of idleness

An idle mind is a devil's workshop. Christianity? Eh. Hmmm.
Point is: when one has nothing to do, one forces oneself to do something. Quite ridiculous.
Today, I point to this article about Olympus' downfall. So here is a great Japanese company ('Icon', as called by a few) which has recently revealed a fraud. Seemingly, the company had become so good that beyond a point it kept asking for more avenues. By 'it', I mean the top managers whose interests are not aligned with those of the real benefactors, i.e. the shareholders. Supposedly, it overpaid i-bankers for financial transactions which did not generate any real value for the company. The number doing the rounds is ~USD 1.7 Bn. The problem is not the quantum but the sheer ass-ness of what one does with one's time. This lethargy is what has ruined Yahoo! For now, Apple has not succumbed to it - with USD 75 - 80 Bn of cash on its books, managers would be tempted to burn some of it away and my guess is that it will.
Not taking a decision is a business decision. At times, it is important to sit by and watch others shuffle about; I believe it is an important part of one's growth.

This brings me to another article I read today which is an interview of a 'spiritual leader'. Sadhguru Jaggi Vasudev. This man had once said, when referring to India's economic development, "The urge to pee is greater than the urge to pray. We need more toilets and better sanitation." Something to that effect.
The article speaks of the odd evolution of human society where instead of making things simple, things have become more complex. He says that Indians, in general, still don't care about world affairs; we care a lot more about monsoons, domestic infrastructure, food prices and nature. I had addressed this issue, tangentially, a while ago, here. Something has gone terribly wrong with the way human society has developed. Capitalism has become all-consuming and we are near or have begun moving towards one extreme of capitalism.

The next superpower

It is interesting to see my progress through this blog. May be it is time that I refine my opinion. Even though I quite firmly believe that a massive, unprecedented (since the GD) slowdown is upon us, I believe that US will still emerge as a leader afterwards. I say this because I believe in the resilience of America, the ingenuity of its inhabitants and a wonderful, progressive legal system it possesses. I had written about this 2 years ago, here. The US will refine its financial system and the entrepreneurial activities that that country fosters will give rise to something new once again. I write this because I envy what the US is capable of; the key to Indian success over the next few decades would definitely be a more functional legal system.
As a partial aside, one has to think of how important a role bankruptcies play in a capitalistic world. I am reading Security Analysis and even in the 1930s/ 1940s a corporation in the US could undergo a restructuring. Related progresses are of the commercial debt market, access to cheaper financing for new enterprises, scrutiny of new businesses, correctional advice by wiser entities, etc.
To end, "Conventional wisdom is a much loved oxymoron."

1931 - 1932

I covered this in my last , but I feel like putting it out again. When global markets capitulate at the news of China slowing down, may be by then the eurozone will have metamorphosed, there is going to be a massive flight to cash. Is it possible that the pessimism that controlled markets in 1931 and 1932 after the great crash of 1929/30 is going to resurface? I can just see the cash rich enterprises calling back all its loans in fear.

The odd thing is that equity markets can't be called 'expensive'. The other odd thing is that this is the first time that various countries have borrowed money and the entire market is going to ask whether this debt is going to reduce. The funny thing about borrowings by countries is that there is no legal remedy as such, it's only a matter of saving face. To say the truth, not that it is required, I am very confused right now at this lull before the storm.
Oh, and the upcoming news from China is already here.

GD 2

I just finished reading The great crash of 1929. The book is rather alright, just that it gives one an insight into the 1950s when this book was written. John Galbraith basically says that contrary to suppositions, there wasn't much leverage in the system; the primary issues with the lofty heights of 1928-29 were related to holding companies, investment trusts and the madness of people (with some leverage of course). The last factor was primarily responsible; people stopped focusing on their real work and started speculating in the market. 
What followed was a massive capitulation - so (and this is my understanding) it wasn't the extremely high values of stocks, rather, it was the ferocity with which people just wanted to get out of the market once the joy ride was over. The "Times" industrials (the benchmark in those days) fell from 452 on Sept. 3, 1929 to 224 on Nov. 13, 1929 - crazy, right?
But wait. On July 8, 1932 this benchmark reached a value of 52.
In times of carnage a large monetary force is required to bring sanity to the market in addition to corrective steps. 


In 2008-09, only the first thing happened. The corrective steps have been largely missing.
And now George Soros comes out and says that the global financial system is in a self-reinforcing process of disintegration. Tough words but I fear he might be right. We are currently in the midst of a global slowdown and the fear of what's happening in the Eurozone is growing. 
The reason I started this post with the GD is that the crash of 1929 should not have continued through to 1932, but it did. Gloom gave rise to gloom and production slowed down because demand slowed down and thus the cycle continued. I am afraid of China. There is a big difference between inflation and the GDP deflator - please read the post by Michael Pettis. Link to link here. The reduction of demand from China is going to throw corporations worldwide into a tizzy because they have plausibly build their respective infrastructure and plans on global demand, much of which is now coming from China. My last post kinda says why I am so scared. 
The question is Will this be a 2008 kinda downturn or a 1929 kinda grind-down?
GD2?

China, Europe and the US

It's odd how most news articles nowadays revolve around these 3 regions. Here are two posts - the first by Michael Pettis where he is as bearish as ever. His primary point, which has been the same for a while now, is that the Chinese growth model is investment oriented and that for the past many years the marginal return on capital investment has been diminishing. In this post however he goes on to explicitly mention some of the things that have bothered me.


"But I think there are more formal reasons to believe that China is misallocating capital. Common sense suggests that when there is massive investment with

• very little accountability,
• severely distorted prices,
• an incentive structure that concentrates the benefits of investment in specific jurisdictions and over a short time period while spreading the costs throughout the national banking system and over the debt repayment period (which can be decades),
• no or very limited budget constraints,
• factional and regional conflicts, and
• shifts in responsibility as the instigators of the investment are promoted (often because of the positive impact of their own investment initiatives),

it would be a rare system in history that did not tend towards substantial capital misallocation."

The second post is the transcript of an interview with Stephen Roach. He simply says that big guns can only stall a meltdown/ crisis and can give a floor for panicky financial markets to start functioning. This is what happened in 2008 when the US intervened on an unprecedented scale. This time however, the Eurozone is ill-equipped because of the fundamental flaw in the structure of the single currency economic region. 

The problem with predictions is the timing of it all. 

"The world is going to be invaded by aliens. When? I don't know." 

Through all this it seems quite apparent that the global economy is going to slow down and the 'boom' that we have been witnessing for the past 2-3 decades may not be the way ahead. My question is, do underpriced stocks still make sense for the long haul?

You can't even spell China!

Jim Chanos has been short on the China story for quite sometime now and he has been lambasted for that view. In this video Chanos speaks of deteriorating conditions in China as I had read sometime ago. He goes on to speak of the 'strength' of China's foreign reserves and how they are not as easily usable as people make them out to be. Assets have corresponding liabilities he says ;)

Another good point he makes is that he himself doesn't need to go to China to understand his judgment and as long as his analysts make their way there it is good enough. He says that until 3 months ago nobody spoke of any 'landing' for the Chinese economy and now people speak of a soft landing.
The rolling stone is gathering snow, dirt, poop and dust. Beware!

What makes a great organisation?

Exxon Mobil may be one of the largest companies in the world and Walmart is the largest retailer in the world. Gigantic companies do not make great organisations. Apple Corp. comes to mind. Game-changing creations have been made by that company... The iPod changed the way the world thought of music and listened to music. No other mp3 player stood a chance. They made computers cool. Super cool. Then came the iPad - the next generation of personal computing - laptops had gone on for too long. The iPad still needs work as it is not as friendly and productive.
Apple changed the way people saw gizmos. Most of their products tend to be single pieces, i.e. difficult to dis-assemble. It is truly revolutionary. But when I think for a while I realise that Apple is = Mac comps, iMac, Macbook Pro, Air (Ohh...!! that is so lovely!!!!), iPod, iPad, iTouch and that is about the end. It is a tech/ gizmo company. An excellent one but that is about it.

This brings me to Google. Now, Google is the organisation of the future, the GE from the 1930s - if I can make so bold a prediction. (Pardon the last few years for GE please - stupid GE Capital!!)
Google changed the way people used email. O so friendly, so much space and all free!
It captured the ad marketing space on the internet in an unheard of way... For the longest time, and may be even now, many people didn't know how Google made money. But they sure knew how it spent money.
On people and brains.
Let's make Google Earth! ""We should allow the world to see the, uh, world! Get rid of your atlases and your stupid google search for maps!! Not very sure how we will make money off of it though."" I remember the first time I installed google earth... craziness!!! I just couldn't believe it. Of course, we now have Google Maps
Google translate - Translates stuff from one language to another. One of the most demanded things in the world... if I have a friend in Germany and I want to say something in German, or if I have received a document from a Spanish Exporter and I want to translate it; now I can at the princely sum of ZERO.
Google transliterate - A genius invention. One can write things in english phonetically, and the 'site' will change that into a language script you know.
Google Android - They want the world to use an OS for their phones. They want people to use it for free.
Gchat - Instant messaging device as part of Gmail, but wait, you can make video calls and/ or audio calls for free using the internet. So why should people use cellphones?
I could go on (well, may be I couldn't - I don't have much patience for such things...)

Point: Google rocks! It's a nimble organisation made of smart geeks aka super geeks :P and the Company just knows how to serve humanity in a very odd way. It may well be the greatest CSR initiative one might see from a Company. Just today, as I logged onto my gmail I saw a new look and with that a video from Google. Companies don't do that!! Google does!

Ummm.. Leverage, and here's some more money

Felix Salmon has written two nice posts about the Euro deal - here and here. In sophisticated words, this is all poppycock. This is not a solution to the issue; the 50% haircut does not solve the problem, even if it is accepted by the creditors. Frankly, I don't understand the mechanisms well at all. I do know that the EFSF can now be expanded to EUR 1 Tn. Who will contribute to it, I don't know...
The way I see it, the inherent problem is that debt had somehow been assumed to be a permanent source of capital. With slowing/ de-growing economies, certain countries are going to find it difficult to service their debt. Logically and historically, this leads to a debt default. No way this is changing.

GD2

Pretend. Things have become foul in a way that there seems to be no escape from this dump. In India, RBI increased the repo rate once again to 8.5%. Europe is struggling with its woes... France might suffer from a downgrade. Italy needs a better plan. Spain was downgraded again recently. It's all very amazing. It so happens that I have begun reading this book - America's Great Depression - by Murray Rothbard. The book, for now, seems a little to theoretical for me but Mr. Rothbard speaks of something quite simple; in plain words he says that things should be allowed to take their own course. It is a classic case of Keynes v/s Austria :D

Keynes said that the economy should be stimulated from time to time and Austria said that stimulus cant be the magic pill. This current 'global crisis' which we have been a part of since 2007/08 is going to be great fodder for economists once we are back on course... You see, the global economies tried stimulating their respective countries and some succeeded, only to be unfounded by Europe, currencies, commodities and (China which is a fake fake fake faker!!) and the US.

The basic idea here is that monetary stimulus can go only so far - even Bill Gross referred to the same idiotic policy followed by the US in this month's investment outlook. Deflation is what the Fed is trying to stay away from, but deflation is exactly what is needed. Why are goods so much cheaper in the US than in Europe? Why is it an implied right for an American to own a home? Why are traders and bankers paid so much money? Why can a Company located in China avail of extra cheap finance, when a similar company located in Germany has to fight for profits?
A correction is required to sort these things out. Holding long-term interest rates down (Refer Operation Twist and QE2 by the Fed) is not a solution, it is a comma.

One of the fundamental reasons that the deflationary spiral was so bad was that the money supply was linked to gold prices (which were stagnant). When FDR broke the gold price peg in 1933, that broke the back of the deflationary spiral and what ensued was a knee-jerk jump in prices. Difficult to say what could possibly break a potential deflationary spiral in the future but the dangers of hyperinflation are manifold compared to deflation or a glut. Hyperinflation just mauls everybody... the motive of people changes from productivity to consumption because people try to buy as soon as possible; it robs the economy of productivity.

The problem with my posts is that I tend to go in many directions almost simultaneously. The gist is that the correction needs to happen - it need not be a falling stock market, may be it is realignment of real industries (may be from China to Turkey or Vietnam or India or the US), may be it is the re-valuation of currencies, a break-up of the Euro is essential because it is a clearly flawed model. We will see a grinding halt to the global economy - not for too long, but it should be a bit of a thud.

Inflation

Data has made the world a chaotic place. "OMG, inflation is 8% / 10% !!". If inflation numbers were never published, or even published only yearly, people's behaviour would be vastly different. Real GDP growth is, weirdly, a derivative of nominal GDP growth; therefore, official inflation numbers can swing real GDP growth rates - funnily enough, real GDP growth is often spoken of independently. 
The other effects, amongst many, of so much data bombarding us is quite possibly our growing restlessness, shortsightedness, and attention deficit. 
"Lethargy bordering on sloth remains the cornerstone of our investment style". WB said that in his 1990 BRK letter. May be, lethargy bordering on sloth needs to be the way we function during many periods of our days.

GDP and Wealth

People confuse GDP with prosperity. Wikipedia is amazing (I donated, so should you. It is one of humanity's treasures.)
"Gross domestic product (GDP) refers to the market value of all final goods and services produced in a country in a given period."
In a given period. There is no reason for a country's GDP to never substantially and rather permanently decline. China's GDP was somewhere around USD 6 Tn in 2010. The absurdity of denoting GDP of China in USD with a questionable exchange rate between CNY and USD is appalling. Nonetheless, there is something interesting that occurred to me today; and of course, since I am not some fancy economist, as soon as I say this people will say, "O of course, that is quite evident." As an aside, this should be a good thing to look at some years from now.
Without pulling out GDP growth rates, I can assume that Japan's GDP since 1990 has rarely been lower than USD 5.5 Tn. That is 20 years or so of USD 5.5 Tn. Even without compounding - and well, we can't compound GDP - that is  USD 110 Tn. I am trying to put a point across.


A country need not 'grow' its GDP in order to be largely prosperous. For everything that is said about Japan's GDP growth rate, people forget that the GDP is largely sustained. This adds wealth to an economy and to its people. That wealth improves prosperity and puts a country's enterprises in a position to foray overseas. Japan is still a strong economy. Large Japanese corporations are spreading themselves globally - Mitsubishi, Toyota, Honda, Tokio Marine, Hitachi, Nissan, Sony, Panasonic, Toshiba, Dai-ichi Life, Mitsui Group, Sumitomo Group. These are quite large names, globally. 


If China stops spending on infrastructure its USD 6 Tn economy is going to take a nose-dive. One cannot refute this statement. That said, let me name large Chinese companies.
Sinopec, Petrochina, Stategrid Corp. of China, China Mobile, China Railway ..., China Life Insurance, ICBC,  Ag Bank of China, CIC. Most, if not all, are state-supported. So were many Japanese companies (indirectly).


But let's compare Japanese companies to these Chinese companies. 
Japan is technology and insurance.
China is energy, commodities, infrastructure and banks. 
Very different in their trajectories. The future for Chinese companies seems bleak - they don't seem to have real competitive advantages unless one calls cheap/ free land, cheap/ free energy, subsidies and cheap finances competitive. The world is going to use China as a case-study a few years from now.

BRK in BAC

Name an excellent brand. Berkshire Hathaway. It invested $5 Bn in a new issuance of 6% preferred BAC stock and warrants of 700 Mn at $7.14 on conversion. It's amazing what Buffet and Munger have created; "Hey... I don't think people like you guys, but they love love love us! So, we have $5 Bn for you guys on my terms. Do you want it?"

"Umm... Berkshire Hathaway? Hell ya!!!"

It's a classic problem of a lack of confidence. One needs a brilliant name to sit by. Wonder what BRK will be once Munger and Buffet leave.

Gold

'Analysts' are predicting prices for Gold. I find it ridiculous. There is possibly no way of 'predicting' gold prices. Supply and Demand mechanisms will determine price movement higher or lower. One of the earliest times I wrote about Gold, which was in December 2009, it was at ~$1150 per ounce. It is now at $1850.
My point is simple. Fools who say that Gold is headed for $2000 and $5000 and the likes, are stupid. There is no way of ascertaining a price target. I am waiting for the next trigger in the markets which will make people panic.
Gold, largely, is not an investment unless you act like an Indian and buy it every year during Diwali (October-ish) and never have an inclination of selling it. Gold is a speculative commodity for most and the sooner we realise that we are banking on a behavioral play, we will be better off. Gold could head south for a while, but I firmly believe that the next trigger will make Gold go berserk. Only about $9.5 Tn worth of Gold available - much of which is hoarded.

The next trigger(s)

The US got downgraded to a AA+ from a AAA. This has been very big news. Does the US deserve a AAA?
I will try answering this (after reading something that Felix Salmon had posted) by saying that a nation can default if it is unable to meet its obligations. It is unable to meet its obligations if it cannot (due to currency/ liquidity related woes) or if it chooses not to. What happened a week ago was that the US was on the brink of a default because its political system was on the verge of choosing not to meet its obligations.
The US can never default because of the former reason because its debt is in its own currency. By continually debasing its currency, it is reducing the appeal of its paper held by outsiders - but the US will always be able to pay its creditors in USD whenever the need arises; unless politics or legal mechanisms intervene.

That being said, the US could deserve a AAAA (as Warren Buffet remarked), or a lower than AAA because its political will is eroding.

So, the downgrade by S&P was one of the triggers that caused the next phase of the Great Downturn to start... the triggers which will follow this are:
1. Another country being bailed out in the EU, or Germany's refusal to allow a bailout, or a country leaving the currency union. I would club all of these outcomes as one trigger.
2. China disclosing data. This could be related to its correct inflation, its correct NPAs, its cross-holdings of national assets through international conduits, its steady diversification of money into real assets or into gold.
3. Unrest due to unemployment, economic stagnation, food shortage, or the like. We have witnessed that in the Middle East and surprisingly, most recently in the UK!

Currencies

If a Company's share price moves up 20%, it has strengthened 20% relative to the currency it is trading in. This 'pairing' is something that many investors overlook. For example, if it moves up 20% in rupee terms, it may move more or less than 20% in USD terms because the USD/ INR has changed.

Going ahead, for a currency to strengthen, another currency has to weaken. In today's world many of us are of the opinion that the USD ought to weaken in conjunction with the EUR. Add to that the CHF being artificially weakened and the Yen also being artificially weakened through different mechanisms. Add to this an already very strong AUD and a strong CAD. Add to this the illiquidity and unavailability of RMB, and add to this a relatively strenghtening INR and a Norwegian Kroner (NOK), one has to wonder how these currencies are going to move in the near future. It seems to me that currencies like the INR, AUD, CAD, NOK, CHF will strengthen further primarily based on the countries' inherent resilience, but wait.. AUD, CAD and NOK are primarily resource based economies... will a global downturn ruin these currencies' strength? That leaves us with the CHF and the INR.

I include the INR perhaps because of my bias to India. 

I do not believe in the China story and the JPY, I believe is heading for a critical depreciation when investors, who are now flocking to the JPY, realise that the Japanese economy has sustained itself on the back of its technical and export oriented competitiveness.

I foresee that the massive liquidity that global economies have amassed will move to physical real assets such as  agricultural land and commodities which are more dependent on supply shortages than demand downfalls. 

I don't know where gold is headed but I see that October should allow us to see $2000 + on gold. It is $1750 right now. 

We are moving towards the dissolution of the USD as a reserve currency. Bring on the gold system. 

The Bretton Woods failed because it was a very strict peg with Gold prices in USD. What is we come up with a monthly review of gold prices based on global liquidity which in turn is based on liquidity provided by the major currencies?

This also brings me to the EUR. The EUR cannot survive. Period. Austerity measures will soon be adopted by Italy and France and Spain; austerity measures will surely cause consumption to decrease in these 'developed' economies. A highly productive Germany and Austria will not prop up other countries just because they (the former) rely on export competitiveness through the weak EUR.

We live in interesting times my friends. The second decade of the second millennium will mark the end of the 'US only' era.

Hypothesis :)

As regular readers of my blog, you might remember my post on Soros selling his gold holdings. Back then (May 2011), I said that it could very well be because he sold etfs and bought the real asset, or it could be a structural issue. I was (very) partially correct.

Soros shut his fund down and returned money to all the investors, which explains why he sold out of the ETFs. Since then we don't know if he bought back through another vehicle :)
$1520 is now at $1710
But this is the weird thing about analyzing data or understanding rationales - very little is visible unless ex-post.

Interesting Times

So the ball has started rolling... The US got downgraded to a AA+. Felix Salmon is one who said it well.. about time :)
The downgrade happened after market hours, I think. Monday ought to be super fun but then, the way markets have the ability to function it might be a non-event. The odd thing about this downgrade is the very real possibility of the US not getting back its AAA in at least the next five years or so. It feels nice to see the mighty US being shown that other countries don't appreciate what it is doing. But that is the odd thing about our interesting times; the US doesn't seem to have two options... Let go of the stimulus and let the economy find its grounds again or provide a stimulus which in essence is not one. The income disparity along with the qualitative disparity amongst people has changed the way economies function. It is time for the US to re-base itself. I firmly believe that China does not stand a chance in the world economy with its subdued minds and oppressive policies.
The global economy is about to see its slow grind to a halt where exchange mechanisms are re-assessed. Resource shortages and income/ well-being inequalities will sour relationships. A significant war is at hand.

Eww-phoria

Dropbox might have a USD 5 Bn valuation :)
Jubilant Foodworks, which holds the exclusive franchisee rights for India and other neighbouring countries for Dominos (364 stores) in addition to a new contract with Dunkin Donuts (0 stores), is valued close to Dominos' valuation (The US owner of Dominos Pizza) (USD 1.24 Bn vs USD 1.6 Bn).
Netflix is valued at USD 15.7 Bn on revenues of USD 2.4 Bn and a PAT of USD 0.188 Bn.
Facebook and Linkedin are valued at absurd levels (I hate linking every damn thing!!)

Point?

Understandings and beliefs tend to manifest themselves into eww-phoria. It is amazing how the 'promise' of growth overshadows rationality.
Jubilant Foodworks for example, is valued at USD 1.24 Bn or INR 55.8 Bn on revenues of (here) INR 6.78 Bn and a PAT of 720 Mn. The story is that Dominos is the largest pizza player in India with a 50%+ market share; the company's cash flows are wonderful due to a negative working capital which keeps growing and the new Dunkin Donuts brand will work wonders.
There is a difference between a good company and a good valuation. People tend to forget that.

Wild prediction; the stock is priced at INR 865 odd. I see the market cap eroding to at least INR 25 Bn, implying a share price of INR 385. Even if we don't reach 385, a short play ought to make sense methinks. The price is quite irrational.

This post wasn't about me giving a stock view; rather, it was about pointing out the vagaries of the market and how there are grossly mis-priced assets in many places :)
So the next time you think that the African story is a better bet than the Indian story, remember that BRK still invests primarily in the US.

China is the next great story - not

30 billion sq. ft. of commercial space under construction in China (May 2011). That is, as Jim Chanos explains, 5x5 sq. ft. for every person in China (1.2 billion people) Approx.
This video is wonderful, absolutely brilliant. He says it simply, slowly and articulately. He says that there is clear evidence of diminishing returns in China, China is preparing for the future but the GDP growth cannot be sustained and domestic consumption is not existent.
One thing he said very well was (to the effect) : "Normally, economic activity increases or influences GDP growth. In China, it's the other way around. Investments in fixed assets is spurring economic activity."
Jim Chanos does a great job of showing what is happening, why it is happening and where it ought to lead to... we, of course, don't know when whatever is going to happen.

A takeaway from all this, for me, is that deflation, suddenly, seems to be a very real possibility. Chinese 'centralized' consumption is going to reduce dramatically; this ought to put significant pressure on commodity prices and global manufactured goods demand. However, monetary expansion in Europe, US and China seems to conflict with what I have written above. For me, this points to a great grinding stagnation of the global economy.
"Alright! Let's just stop international trade, unless I am comfortable with my trade partner."

US public debt outstanding

I enjoyed Rolfe Winkler's posts.  He used to post for Reuters before he moved to WSJ. One such post is this - reproduced below (without Rolfe's permission). Hope he doesn't have an issue.

$6 trillion: February 28, 2002
$7 trillion: January 15, 2004 (22.5 months)
$8 trillion: October 20, 2005 (21 months)
$9 trillion: August 31, 2007 (22 months)
$10 trillion: September 30, 2008 (13 months)
$11 trillion: March 16, 2009 (5.5 months)
$12 trillion: November 16, 2009 (8 months)
$13 trillion: May-June 2010 (6-7 months)


That is where he left it.
$14 trillion: January 2011 (6 months)


I hope I can keep updating this post. 
For the millions who read my blog, this link might be useful.

Mayhem

I have written about the upcoming mayhem in the past; there have been many proposed causalities.
Please read (or pretend to click on) here (Nov. 2010), here (Nov. 2010), here (Feb. 2010) and here (Nov. 2009).

The end of QE2 is approaching us. This shall be marked as a turning point in history. (Let's ignore the European debt rollover game for now). Somebody has to buy US treasuries if the US is to sustain its long-maturity yield-easing policy. A grinding of the world economy is approaching us where global trade should falter, but as said by many intellectuals in the past, 'there is a price for everything'. Russel Napier from CLSA came up with this new Doomy report called Solid Ground and predicting that the S&P500 can reach 400 soon enough. I will stick my tongue out (yes, tongue) and say that that is too crazy... I do see a crash and a massive unwinding of foreign exchange and carry trades. Napier isn't just picking this number outta thin air (well, he kinda is) but he is basing it on a large shortfall in demand for low-yielding US treasuries at even significantly higher yields from creditor nations. This is not a new theory, it has been proposed in the past indirectly by a few and directly by me *gloat* and a few others.

I don't know how this is going to play out in the equity markets, but I do know that the time for value investing is approaching us. Awaiting Mayhem (as I have been for the last 1.5 years or so). That's the problem with predictions you see, very difficult to arrive at a time period for events panning out.

The concept of fx reserves

The presence of more than insignificant foreign exchange reserves with a central bank itself implies that the domestic currency is undervalued. Typically, the foreign exchange would have flowed into the domestic economy which would have caused the local currency to appreciate thereby reducing chances of prolonged monetary inflationary pressures.
However, a state-run company exporting goods and earning foreign exchange changes the equation; this is because the earnings belong to the state and need not 'flow' into the local economy. The middle-eastern oil exporting nations are a good example of this - these countries can use this 'ammo' to import things they need/ want.

However, when an India starts accumulating foreign exchange, in effect depriving the local economy of the foreign exchange, it retains its export competitiveness - however, this would lead to inflation in the local economy which would counter-balance the prior benefits. Over a longer horizon export competitiveness would be neutral; to this, the government might interfere and offer subsidies which would become a drag on the entire economy (in terms of household consumption strength) but would be very fruitful for certain sectors.
In order to battle inflation, the government/ central bank would make borrowing more difficult through rate hikes. Artificially low interest rates would definitely cause borrowing to soar, finally altering the consumption power of the local economy, thereby spurring inflation.

Now, if I were to rename India as China in the above paragraph, something goes wrong. China's reserves are at extremely high and unprecedented levels (currently above USD 3 Tn) which would imply that the currency is significantly undervalued; however, at current levels of 6.47 Yuan = 1 USD people do say that 'OK, I believe we are alright."
Why do they say so? Because Chinese export competitiveness has deteriorated due to wage-inflation and domestic inflation. Exporters in China complain that their margins are wafer thin and without government benefits are even lesser. Many Chinese companies (I have heard and read) have borrowed at sub-market interest rates. The weird thing, though, is that inflation has been very low. It has been near the 3% levels, and the world is panicking because it is now 'high' at 5.5% odd levels.
My response to this, for a while now, has been... how has inflation remained so low?
The problem here is management. the computation of inflation numbers (unknown to me) are plausibly manipulated through 'errors' and/ or allocation towards nonsensical baskets.
There is something incorrect about China's current status, especially the last 5 years or so. China's resilience has defied logic and the country is now on the brink of faltering. It is an investment propelled economy with many examples of ghost towns, ghost buildings, ghost trains, etc. As long as a country keeps building more 'stuff', GDP shall grow, but a country cannot endlessly pursue this path.

Growth

There is a limit to which we can grow. Our bodies grow for a certain time period and our minds grow for a certain time period - both at varying rates. Companies do not grow endlessly. Only 5 of the current 30 Dow Jones Index companies existed in one form or another prior to 1950.
However, it has been assumed that countries will grow endlessly. Refer 'Terminal Growth'.

Japan is a fantastic example of a Country which has been 'de-growing'. Demographics and saturation play crucial roles towards the real growth of any region/ country. The concept of a country growing endlessly was addressed by me earlier, but now I want to question the growth of developed economies.
If immigration into industrialized countries is reducing and if these industrialized countries are quite saturated in terms of their infrastructure and demand for goods, can we expect them to grow as they did 20 years ago?
An acquaintance-ish friend from France explained to me that France has enough electricity and transportation systems whereas India and Indians still suffer from an energy deficit. Adding to this, if income disparities are increasing in developed countries where the relatively poor people have stopped demanding goods with the same tenacity as earlier, surely their country's growth will suffer.
The story about how global growth will be propelled by developing economies' needs to become more prosperous is known so I will not get into that.

However, the possibility that developed countries' growth will suffer isn't bad at all. The GDP of a country reducing is not concomitant with the prosperity of its peoples reducing. Steps taken by responsible fiduciaries would allow disparities to reduce.

The point behind this post was just to question the need for positive GDP growth. Another takeaway from this is, if currently owed debt is believed to be sustainable based on a fallacious GDP growth trajectory, where are those countries heading?

Myopia

I was thinking of why it is so difficult to make money from assets when it is rather easy to understand companies and financial statements; a few things come to mind.
1. Stupidity
2. Ignorance
3. Myopia
4. Haste
5. Shallow comprehension abilities

No. 5 is important because I believe many investors tend to see objective data and base decisions on them - quite ridiculous because that is not how an entrepreneur or a CEO runs his business.

No. 3 is explained well in this post. Our endeavours, in whichever field tend to be short-term in nature with results expected quickly. May be farmers are the best counter-argument to this case :)
Post-investment, downturns, price movements, and investors' sentimentality make decisions short-lived. It is rather important to stay put and trust one's or another's decision(s).

There is a 6th point which I believe is most important. Discipline. I will not elaborate on this point.

Soros sells Gold

So, Soros (the fund) sold most of its gold holdings, approximately 99% of its total holdings. Does that mean he is bearish? It's important to understand data and for a while I thought of why such a big gold bull would sell so much of his holdings...
And then I read this paragraph, "Money managers who oversee more than $100 million in equities must file a Form 13F with the Securities and Exchange Commission within 45 days of each quarter’s end to show their U.S.-listed stocks, options and convertible bonds. The filings don’t show non-U.S. securities or how much cash the firms hold."
So if Soros has decided to hold physical gold inside or outside the US or some other non-US gold security, he wouldn't disclose it. There are inhibitions towards an ETF holding gold which I ought to own, and there are merits to holding gold in physical form. Absolute certainty to the value of physical gold.

Creating growth

I read this somewhere, (to effect): If two people scratch each other's backs and pay each other $10, $20 of GDP is created. If 100 people repeat this act, $1000 of value is created. but nothing really happened to the economy.
I create a corollary now: If a country builds a bridge for $1000 but reports inflation through a combination of food prices, housing prices and manufacturing or services' prices, real GDP growth is going to be massive. If that bridge is useless, the GDP is not going to capture it. However, stealthily, monetary inflation will eat into a country's savings and investment rationale.
We ought to question China's actual real and useful growth.

Quantitative Easing

Humility is important; with that in mind I must say that I had misunderstood quantitative easing, and that being said, most people misunderstand QE. QE is not 'printing of money' and QE does not stimulate the economy directly and QE does not increase money supply drastically.

I read this smart piece today which simplifies things.
In essence, what QE enables (in the case of US) is the Federal Reserve (Central Bank) to purchase long-term treasuries from the government through the secondary market. The shorter end of the yield curve is already controlled by the Fed in what can be called Open Market Operations; however, investor perceptions of inflation and future short-term rates can move the longer end of the yield curve.
Today, the longer end (10-year) would have moved beyond 4% yields. However, by purchasing close to 70% of the total treasury issuances, the Fed artificially drives up prices (and reduces 10-year yields). This enables the 'system' to provide cheaper long term credit to companies in the economy and this would help stimulate economic activity (as cheaper money is always good for stimulating consumption).

With a Federal Reserve, implied, assurance of maintaining long term rates at low levels and explicit assurance of keeping short term rates really low, a carry trade allows cheap money to chase assets globally.
This can significantly explain increasing prices of various commodities and other asset classes.

When will the buck stop? Clearly, the Fed cannot risk an end to QE. QE3 will happen, but at what cost? I see that soon, investors will cry foul at the power that America wields over the global reserve currency.

Parabolic

The above term describes Silver's recent move quite well. This page is a very well aggregated source of data.
1 - We can see how crazily silver has moved. In my own dummy portfolio, Gold has delivered 28% in 1.5 years whereas Silver has delivered 160%+ in the same time period.
2 - The page says well how there is ample supply of silver in the real markets and that demand has been sufficing supply in the recent past.
3 - Going forward, silver supply seems conclusive for the next 16 years or so.

Another article is significantly bullish about Silver citing growing demand from China, solar power and new uses.

My (wanting) understanding says that in the last 2-3 weeks, silver shorts have been massively squeezed. On a longer time history horizon, a particular entity has been amassing silver; it could be China, Buffett, a new 'Hunt Brothers' - it is definitely not the market as a whole.

A friend asked me what I think of the Silver: Gold ratio. I said that I didn't care enough about the ratio. It's time that people stop comparing the two scarce natural resources.
Gold is in short supply and has very little real use. Silver is significantly available and has many practical uses (which, going forward might not be economical).

Moving slightly away from this topic, I believe that QE3 is at hand. Wait for June. Volatility is on its way.

The grind

Businesses seem to be doing well; however, I'm not sure about businesses in China. The 'money bubble' of China ought to burst or implode soon - I dislike opaqueness, that will be the reason for the country's downfall or 'slow grind' as suggested by Michael Pettis.
It is interesting being a contrarian because it's difficult being pessimistic when the world craves a recovery or vice versa. I want to believe that people are not ahead of themselves, especially after the deflation of America's consumption bubble and that businesses are doing rather well. What I see wrong now is at a structural level.

America cannot support its own economy without another round of quantitative easing. A pause by June would start a process that will inevitably start later. Bill Gross has outlined easily how America's 'entitlements' will ruin the dollar and American inflation.
I believe that that inflation, due to America's free financial borders, will pour into other countries, to which other countries would erect barriers which could cause a severe grinding pause to the global economy.
China is sitting on idle investments and infrastructure whereas Europe, largely, is quite unproductive. I don't know how this tripod is going to wobble or topple...
I do believe that in the coming months and years it's going to be very difficult to preserve one's value of money.
Do remember that for some reason the world has not imbibed into the financial system, the effects of $120 / barrel of oil.
I grow weary of posts that seem similar to each other

April of 2011

After Greece and Ireland, Portugal has asked for a bailout of USD ~120 Bn.
Prophecies of Euro dominance (as a secondary world reserve) have faded away.

China recorded its first quarterly trade deficit since 2004 - USD 1 Bn. Small drop, but for an entire quarter, one begs to ask whether this is a new trend.
I think not. Higher import commodity prices would fuel a larger import bill. When this supply side inflation ebbs, China ought to get back to its ruinous trade surplus ways.

The US is on its way towards the end of QE2 in June. The Fed has indicated that it will not fuel one more round of easing; skeptics think otherwise. Monetary easing is essential and USA's new debt issuances will require a large supportive buyer (Fed).

Brent is hovering around the USD 120-125 / barrel mark due to Libya and other African/ Middle East turmoil. Hot money combined with food and energy commodity supply constraints is fueling inflation everywhere which makes one wonder why the US is still alright with its inflation numbers...
Cover-up?

Nonetheless, I'm pretty sure that the working American is feeling the pinch in food and energy bills.

I foresee a huge wind-down in commodity positions which would, of course, drive down prices. This would only be after China declares that GDP growth numbers are quite below par and that NPAs are above :|

A person I spoke to said it well, high inflation possible, deflation possible, another recession quite imminent.

We wait again.

Unsustainable

A USD 6 Tn economy is expected to grow at 10% in real terms with inflation of 4-6%. This would imply a nominal GDP growth rate of 14%. This would imply that by 2016, China will be the largest (or close to the largest) economy in the world.
This is a country where 'freedom' or 'rights' have an obscure meaning, accountability is very difficult, extremely cheap loans are provided to companies and is a country which holds a USD 1.2 Tn warchest.
It is also a country which is steadily building its military muscle, is capitalistically colonizing countries in Africa (of course, the other 'developed countries' are much better at that game), discloses very little of its monetary policy and the transparency in its financial system is almost non-existent.

When (not if) this new 'engine' of the world collapses or slows down, what would the consequences be?
Can the US already be scheming for such an occurrence?
Can China be anticipating such a tactic?
If China crashes to a great depression sort of deflationary spiral, how would global markets react?
Would USDs be in demand or would people flee to gold? - because I don't see China going down without inflicting some damage elsewhere. China does seem to be Danneskjold-ish.

Do such thoughts prevent an investor from investing or is it absurd to think of the great crash of 2011/ 2012?

The current financial turmoil

In case aliens are reading this post in 2035, I'm referring to the crisis related to the Eurozone, housing busts, Chimerica, blah.
I believe in an upcoming crisis - something humongous is bound to occur and the Eurozone should see drastic changes; may be a breakup, may be some countries leaving or being forced out...
China, inflation, US, unemployment, leveraged sovereign debt markets, low consumer and business confidence... please join the dots as you please.

I have one issue with this crisis. For the first time, probably, a lot of people are talking about disaster at the horizon.Crises have usually been sudden and unexpected by a large section of the smart public. But this time we have an even-ish pool of people on either side.
Logic tells me about something big happening soon.
My contrarian head says that things shall move smoothly now onwards

Changing reserves

China intrigues me. Today, I thought of finding information on China's growth in forex reserves. For the record, allocation and denomination of forex reserves are not known... what can be assumed is that most of it is in USD; some estimates peg it at 60%

I don't know what to make of this information but the rise, the absolute number and the strength of such a pool of another country's currency is unprecedented - emphasis on the word, unprecedented.
1USD = 6.65 Yuan as on 24th Nov. 2010

This growth cannot continue and if it cannot continue, something new and unprecedented ought to occur.
Waiting.