Sunday, January 18, 2009

Sunday Spare Thoughts

Hi Friends,

Today I got 30 minutes free from my busy schedule and felt obliged to post "at least something" here. Well, actually there are few things lingering in my conscience for quite some time. Today I feel I should share those things with my dear readers.

Scams, Scams and Negative Surprises!!!

In last few weeks we received few shocks emanating from Madoff in US to Satyam and Wipro in India. As Madoff was a person of repute in US (he was former head of NASDAQ ) similarly, both Wipro and Satyam were respected not only in India but throughout the globe. While Madoff and Satyam don't have any direct connection with each other I find a certain amount of similarity. The similarity is not in the "nature of scam" but it is in the "timing".

When economy is in steep downturn, the mistakes of recent past (read bull market madness in every asset class) reveal in the most undesired ways. Its no surprise that we are hearing one scam after the other and I doubt there could be many more in future if economic downturn continues. When everything is going up it was much easier to hide scams but in times like we have today its not easy to hide them for long.

Wipro although not in a scam of the kind of Satyam, has managed to shed its reputation by allegedly bribing World Bank personnel. We all know this is not surprising and almost all companies are involved in such practices , the important thing is once again the "timing" of such incidents. May be the Wipro guys were not able to pay "good fees" this time and so all this drama.

The WORSE scam
Madoff, Satyam and Wipro etc may look bad but what happened with the "first team" of US - President Elect - Obama makes the atmosphere even worse. The person selected by Obama for Treassury Secretary, Geithner, is in trouble for his failure to pay taxes on his income when he was serving with IMF. This is shameful for someone who is supposed to be taking over the job of "VIGILANCE OVER TAX COLLECTION OF THE WORLD'S BIGGEST ECONOMY".

What's Up, Next?
I read this weeks newsletter from John Mauldin and the following para from that letter is something I thought is "must share" thing. Here is what he says about future:

"We are in completely uncharted territory in terms of the economic landscape. Like the USS Enterprise in Star Trek, we are boldly going where no man has gone before. But the captains of our fleet are Keynesians to their core (and they don't have any Vulcan advisors). They don't have any historical maps to guide us back to a functioning economy; they only have theory. The North Star they are guiding us by, for good or ill, is John Maynard Keynes, with a slight nod to Milton Friedman."

The important question is not what govts and central banks will DO? They will do what they know - reinflate the credit bubble with all their arsenal. The question that is actually important is - "Will these efforts by govts and central banks all over the world be able to save world economy?" My answer is pessimistic for the very simple reason - You can't fill in more water in a tank to save someone drawning in that tank. But, I may be wrong. Who knows "they" might have the "skills" to fool one and all once again BUT even if they succeed the most we will receive can be a mere "postponement" of the real disaster. The more it is postponed, the worse we will have to face it. You can safely assume that I belong to the Austrian School and following paragraph sourced from WIKIPEDIA explains my view:

"Economists of the Austrian school challenge the idea that Japan experienced a liquidity trap, contending instead that it suffered from the bust portion of a business cycle brought on by monetary inflation, which could only be cured by allowing the bust to liquidate the malinvestments made during the boom. Austrians contend that busts are necessary corrections to booms and that artificial credit expansion or other government interference will only make the bust longer or delay an even bigger bust. Thus, they blame Japan's rigorous government interference in the market for causing the bust to last throughout the decade."

I see deflation on the prowl and then hyperinflation following. All over the world. (Its not a news that Zimbabwe recently unveiled 100 Trillion Dollar Currency Note !!!). The next reality will be End Of US Dollar as World's Reserve Currency and serious degradation in US Dollar's value. But make no mistake - it does not mean that other currencies will rise against USD, in fact, other currencies will also deteriorate accordingly and so my last sentance is not trading call for selling USD for another currency. If you can derive something from my views - it is GOLD. Yes, gold can be safer bet against all currencies and esp USD.

Let us wait and watch who proves to be right - Austrians or Keynesians. Whoever wins, we should note one thing - ultimately there will be a recovery, however late it is AND then that will be a big chance, not for speculators, but for everyone to grow alongwith new technological breakthroughs in IT, Biotech, Nanotechnology and Green Energy. BUT, the time for that growth is still a good distance away. Anyone investing today for that growth is most likey to suffer before recovering. I will not be an investor in US stocks before I see S&P 500 below 500! And I am sure we will see 400 - 500 range in it sooner than later. Remember - The bull market of past five years was merely a Bear Market Rally!!!

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