World of Brrowers - Will Aliens be Lenders?

Dear Readers,

We all know how markets in India celebrated the return of Manmohan Singh headed UPA in power. FIIs bought like there is no tomorrow and retailers jumped the bandwagon as well. Although there are talks about this fierce up move in stock markets owing to the "announcement" of Sensex 100,000 by some Elliottist on CNBC, the fundamental reason for market up move was linked to the so called "ability" of team Manmohan Singh to restart growth of economy. The investors argued that this new govt has the required power to start reforms as Left Parties were out and silent. What reforms? The reforms in subsidy, FDI and disinvestment in public sector undertakings (PSUs) mostly. The talk on street was UPA will sell PSU stakes and use that money for fiscal stimulus (infrastructure spending). Then came the surprise in Budget 09-10, last week. Pranab Mukherjee, the "experinced" Finance Minister presented the budget with bang surprise! It did have massive fiscal stimulus plans but not funded by disinvestment of PSUs and instead through borrowing. Markets refused to digest the record deficit planned in the budget and crashed.

UPA had the best chance to do the required (although I do not approve of ANY govt intervention in economy). Left parties can't be happier! I have this feeling that if we had Left rule in Center, they would have opted for disinvestment route themselves!!! But, the govt decided to borrow instead of selling stakes in PSUs.

So, now we have a clearer picture of world. US of Socialist A borrowing massively, Europe countries borrowing massively, Japan borrowing massively and so other countries of Aisa and now India borrowing massively! In other words all of world plans to borrow massively!!! Very well and nice! But, if all governments are looking to borrow that heavily then who is going to lend? According to some estimates this amount required by world may be around USD FIVE TRILLIONS!!! Please look at the following pie-chart which I found on internet (source: http://www.investorsinsight.com/)-

As you can see the US wants the biggest and more than half its share :)
where will the money come from? And, that too at a time when the world is in a deflationary Depression!!! When the entire system is deleveraging!!! If we had friends on Mars or some other planet then I'd not be that worried but there ain't any Aliens who'd fund the Earth.

Intersting Times!!! Indeed.

The New Bubble

Dear Readers,

I had been off for sometime and so there was no post. In the meantime you witnessed so many things - rallies fading, investors being in doubt etc etc. Apart from these "not so interesting things" , there are advices coming out from various sources on what could be the "next big thing". Speculators are digging it real hard to find out the next "investment" story as quickly as they can and many have come with interesting conclusions. Some advise buying energy (read crude) as they think its going to be scarce in the future. Some advise buying defensive stocks. Then, some advise buying natural resources like Uranium, some say buy "alternative" energy and some say buy agricultural land. Gold advisers are commonplace (including myself). But, whatever is right investment can be the potential "bubble story" in future. Bubbles are looked at with contempt from common people but speculators shout yum yum if they find one. Today, I tell you what is my take on The Next Big Bubble.

Let me start with basics. What is the basic requirement of a person? or say a living thing? its FOOD. Yes, we all need food and water for basic survival. Yet, recent industrial growth has made growing food as a non-appealing business. Farmers have been out of fashion for long and its today's high food prices that make many economists and speculators think about growth and earning potential in this field. Rising world population and decreasing arable land has made it even more appealing to start looking at Agriculture as next big investment. I think the logic is very good and we can safely assume that in order to fulfill demand for food there is going to be a big up move in agriculture and related investment.

Bubble? how? Well, I am very convinced that this is going to be next big bubble. Its true that demand for agricultural and farm products will grow with growth in population and prosperity but I have few reservations (doubts). First, I think the demand is nearing its peak (it may take some time for this peak to materialize). Why the peak when population is still growing significantly? My answer is - we may be overestimating future demand. Today we consume food in a way that we waste a lot of resources during processing. We have developed a dustbin culture and waste too much of food as our comfort level dictated. However, if economic conditions continue deteriorating in near future, we may change our eating styles and manners. We may start using lesser ingredients and we may restart "backyard garden" culture once prices of basic food items like vegetables become unaffordable. This is human nature to find ways to make things easier and simple (though we tend to over-complicate them in prosperous times).

I think this is going to happen - we will see a lot of people "trying" their luck at agriculture as demand rises and then when its at the peak, mother nature will be quick to turn things around - how? no one knows for sure but my guess is there may be few potential causes - epidemics that shrink global population, global warming, wars... anything. I don't know what will be the exact cause but I am very sure some or other cause will cause global population to stall or may be reverse!

By saying what I've said in no way means I "want" that. In fact, I think the natural cycle of restoring balance will find some way to contain over growing population. I wish if we could manage to grow for eternity without any obstacle but mother nature may disagree. So, prepare for The Next Big Bubble.

Changing Trends - Changing Fast?

Dear Readers,
I had been maintaining that markets in most part of world are in uptrend and then came May 6 and I posted my WARNING on seeing some interesting developments on charts. The levels for S&P 500 and Nifty Futures (929 and 3730 respectively) I posted that day remained not even touched and unbroken. But, then came Monday, 18 May. There was this BIG DRAMA in Indian Equities markets and a new chapter in history was written - First time ever in Indian history of equities there was a circuit up! The ostensible reason was "central election results in favor of a stable govt". That day what happened took almost everybody by real surprise. All pundits were expecting anything but a clear mandate to Manmohan Singh and Soniya Gandhi led UPA. What was real surprise was that Indian National Congress party had more seats than expected, giving it the power required to do what they want, rather than so many small allies having constant pressure on day to day work of govt. While there was no real fundamental change in economy on that day, the very expectations of stable next five years (read hope or greed) led to that kind of historic day in Indian Markets. If something of that magnitude happens then no chartist can have real explanation...

This unnecessary drama in Indian Markets has washed out all signs of "oversold" conditions on even long term charts and now we see Indian Indexes almost 50% recovered from last year's fall. Remember, the historical upper circuit on Monday could be a dangerous sign - how many times did you see such big moves on the upside during bull market? as my friend Abhijit says - Bull Markets have circuit downs and Bear Markets have big up moves. The historical circuit up only worsens the situation and whatever positive outlook I had in Indian Markets has been washed for the time being. This can be a preface to a long scary story.

On the other hand S&P 500 once again tried to conquer my 929 level last week but it failed again. I have so far been proved right about it and I strongly hope that my advice of "top formation" did help my readers, so far. It also bounced from 870 odd level which my important support and if it managaes to break down below that, then this bear rally will be history.

Now let me take this opportunity to bust the myth of greener pasture that Indian "investors" have. They have jumped to the conclusion that this election result has paved way for Manmohan Singh to kick start economic recovery and worst is definitely over as there are no left parties to threaten development. The above conclusion is not my imagination but a result of conversation with some clients of our brokerage as they started calling me on Sunday the 17th and asking for how they can buy on Monday morning so that they are not left out. I told them there was virtually no possibility of buying on Monday as the Euphoria was expected to hit upper limits. Also, I told them even if they can, they should not. My reason was simple - euphoria don't last long enough to make you any good profit. Those who had gambled on Friday and had open positions did benefit tremendously but you can't praise gambling even if it made you rich.

Coming to the reality, there has changed NOTHING that justifies a possibility of strong growth returning in at least next two years. This crisis in global economy can not be "cured" by an economist Prime Misnister of India alone. If it were a usual cyclic downturn then govt could do few things to manage but this time its truly global with systemic meltdown! The entire economy of world is in danger of being torn apart due to massive leverage and the deleveraging process has only started! This chart from www.investorsinsight.com shows what is the state of Global Trade!


India, however strong, can not post those 9% GDP growth figures in such circumstances.

Then comes the govt plans of massive infrastructure expenditure (fiscal stimulus). Somehow people forget that real money is required for any project even if it is funded by govt and govts anywhere in the world except US can not run deficits beyond certain limits. US exception owes to the reserve currency status of Dollar but even they can not run massive debts forever, at least when the system of "US buying Asian products, paying them dollars and Asians buying US debt with those dollars" is collapsing. China, which is the biggest buyer of US debt is "concerned" and already showing signs of pulling out from this "burden" (buying gold and signing agreement with Brazil on future trade in their currencies instead of US Dollar). Germay, Japan and UK, the big economies are down 14, 15 and 8 % this quarter! How can one imagine India returning to past growth rates ? I will be pleasantly surprised if India can grow even by 6% in next two years at least. And this scenario does not make any case for investing in Indian Equities at such high PE ratios.

Markets try to be rational but the fact is they are not. They are run by emotions more than true fundamentals as people usually think. They try to discount future but exaggerate some times and prove wrong other times. That is the reason we look at charts for trading rather than looking at fundamentals but what this week has done is a good distortion of charts to the extent that we will need at least one more week of stabilization in price pattern so that charts restart functioning properly.

Let us hope the masses do not remain out of sense for long...