The world, at least by our reckoning, is now officially in recession.The news in general is a lot worse than I have expected, and a lot earlier than expected. This is going to be a deep, dark recession. The next ten years are going to be extremely tough. For India too. I think it's time to tighten up and ride it - and it will take a long long time. If we are lucky, in India, we'll see only a three to five year downturn.The downturn has three strands. In the United States, the subprime housing collapse triggered a liquidity crisis. In Europe, the American liquidity crisis triggered a much broader and deeper banking crisis. And in Japan — and the rest of East Asia — the enervated demand in the United States and Europe is now triggering an export crisis. Three very different but interlinked recessions have now formed something that the world has not seen since 1975: simultaneous recessions throughout the developed world.
Other data certainly confirm the prognosis. Shipping rates on major container ships have, by some reports, fallen 98 percent (demand for shipping mirrors demand for Asian exports). The 13-week U.S. Treasury bill now bears a 0.005 percent payout — technically not zero, but considered effectively zero by most reporting methods — indicating that everyone is shifting holdings into the lowest-risk assets. And a spare glance at 401k accounts or their equivalents will inform anyone who has been in a coma for the past few weeks that the markets — American, European or otherwise — have been pummeled.
The bottom line is that the global economy is in a situation where countries are going to start cracking. Iceland, actually, has cracked already — but with only 330,000 inhabitants, it conceivably could have gone down in flames without being a harbinger of things to come in the rest of the world.
Archive for November, 2008
World Recession Is Here
The Starbucks Theory
...I propose the Starbucks theory of international economics. The higher the concentration of expensive, nautically themed, faux-Italian-branded Frappuccino joints in a country's financial capital, the more likely the country is to have suffered catastrophic financial losses.The idea is that anyone paying $5 for a cup of coffee is in the middle of a bubble. America has a gazillion, the UK 256, Spain 48 and uhem, Dubai 46. China has over 200.
And India: Zero.
But that doesn't help. Pakistan and Iceland have zero too. It's only the ones with a large number that need to be worried I guess.
On a purchasing power parity basis, I think we have a reasonably high concentration of Coffee Day (Rs. 40) and Barista (Rs. 55) outlets. Maybe a smaller bubble for us...sometimes too much caffeine can be bad for your economy?
Sell Indian companies our dollars; get rid of "reserves"
Minister of State for Industry Ashwani Kumar said the government will consider Tata Group Chairman Ratan Tata's proposal of setting up a special fund in select banks to help domestic companies repay foreign loans.Effectively this is about using our forex reserves to help the Tatas and other Indian companies pay off their existing debt abroad. These companies aren't getting dollars easy, so there....
Tata, in a letter to the Prime Minister, has proposed the creation of a fund in select banks to help creditworthy corporations with funds in meeting exigencies.
Besides difficulty in rolling over the existing debt and fresh funds drying up, the depreciation of the rupee against the US dollar has further impacted the domestic companies with the increased cost for servicing overseas loans.
So why not give them our ridiculously maintained forex reserves, in return for some extremely short term debt? Say 1 month duration, at an interest higher, by say 100 bps, than the G-Sec yields? And that are traded in the bond market, so the government can get out at any time? Roll over the debt as long as possible with a caveat - minimum interest paid is the first interest amount - can increase, but cannot decrease. (This ensures that in a lower interest rate and better credit market scenario, companies try to raise debt from the market and pay back the government which shouldn't have been involved in company debt in the first place)
First, I think the companies will object, saying that boss, the government receives next to nothing for the dollars anyway. The counter-argument is: Dude, I'm paying 7.5% for the money I borrow. You pay me at least that, and for my effort, pay me 100 bps more. Sure I don't get anything for the dollars I borrow, but I just made 20% in the rupee depreciation no? At least, 20% more rupees. And the credit squeeze has driven US T-Bill prices up so more moolah for me. Since you take away that benefit (and yes, perhaps the downside too, but risk is risk) please pay me at least what I would expect from others.
Second, the government is loath to give up dollars. This is a ridiculous position. In a currency of a country that is literally breaking down, there is no forward value - best to use up the reserves in whatever way possible and convert them to INR. Great time now, because in a 20 year view, the dollar in its current shape will weaken against the rupee. And it doesn't matter if it does - the very act of our companies paying back external debt in full increases external confidence, and more dollars will eventually flow in, strengthening the rupee.
Last, there is literally no incentive for anyone to structure such a deal. Banks lose - no more fees on such loans. Companies don't want to pay high. Bond Markets are non-existent so the exchanges don't care. The Government has such a short term view they don't care - because the impact of this is a 10 year thing, not 1 to 5 years, and they can't see beyond their next elections.
What we need is some serious stomach lining. This is perhaps an economic nightmare - but I will say that rupee convertibility has got to happen now, and we need to get rid of those dollar reserves. I want to see rupee reserves in other countries. We gotta get someone else to pay for our debt; now that America's getting off that pedestal.
Excess Power – the next boom, after five years?
Is this how a recession is like? I think it's just the beginning, but then it's always just the beginning until the end. The roller coaster feels the worst after the rapid drop, even if the drop is over.
Yet, some of the most famous businesses we know today have built in recessions. Microsoft was started in the 70s, and built itself through two recessions. Intel, too. Google came through one. The Toyotas and Hondas grew massively through the biggest recession the world has seen: the Japanese recession.
What businesses will succeed tomorrow? I don't know. But I think the answer lies in understanding these successes, the innumerable failures, and in the word "excess".
In the 90s, the dot-com boom brought with it a feeling that the world will eventually become theworld.com. Everything was a dot-com, and I'm sure there even was a dotcom.com. Websites came up: one for pets, potted plant, home deliveries of canned food, and anything you could imagine. To fuel this, there were the infra guys. The folks that decided they would take the internet everywhere, by laying what was then expensive fiber all over the US, and indeed, all over the world. They funded this through venture capital and private equity, typically "excess" capital of the rich and famous who would take extreme risk for what was extreme return.
There was way too much capacity being built. It didn't seem like an excess, because companies were demanding more, hoarding as much as they could get, because if they couldn't use it, they could sell it, for much more than they paid. Everything always goes up, because the demand is endless.
That bubble broke. With it went the valuations, and most of that capital of the "rich and famous" became zero. Along with it went a lot of money of the not-so-rich and not-so-famous, who chased the same dream - but who couldn't quite afford to lose the money. The Nasdaq has not seen those highs since, and most of the high flying companies of that day have gone bust.
Yet, that excess capacity was useful. The fiber was already laid - the cost was sunk. After the companies went bust the people who owned their debt - the bondholders and banks - wanted to just get the hell out. They sold that fiber cheap - even Reliance and VSNL in India managed to get a global network at an extremely low cost.
The cheap fiber made broadband available worldwide - for cheap. You could pay $30 a month and get a gazillion Mbps up that socket fixed in your house. (Note: Why the F hasn't it happened in India?) The cheap, always-on internet fuelled the next boom - the great web 2.0 boom when companies offering videos on the net would get valued at a couple billion dollars. Bandwidth wasn't an issue, so people would come on board. And people brought content. And content brought comments. And all this got indexed in the googles, and that brought in more people, who, because they had unlimited bandwidth, could search for something at 2 AM.
This pattern repeats itself. Capital excesses have flowed to industries like airlines, cars, mainframe computers, toys, junk bonds, banking innovations etc. And post all of them, the big players have died or retired hurt.
But these "retirements" literally caused the market to change - they would spend a lot of money on research and go bust, and suddenly the results were out there for everyone to use. Flying became safe and cheap, despite the bankruptcies. The capital flow to junk bonds made a lot of the "lesser" US finance its infrastructure very cheaply - and that fuelled transport and business chains and all that. The excesses created excess capacity, capacity one thought could be sold for a lot of money - eventually it sold cheap, and on top of that were the next big businesses.
What's the buzz word this time? Energy. This boom has fuelled an enormous amount of money into energy - from research to discovery to exploration to production. There's now solar and wind energy coming up. Nuclear's picked up steam (unintended). In India, coal and gas fired plants are coming up - mega and ultra-mega (who coined that?) power projects. There's investment in distribution and transmission. And most of this has already gone in, in the hope that power will sell for a lot.
Will it? I honestly doubt that. We in India cannot imagine "too much" power. I think that's what we in the cities will have - because no body has yet figured out how to make people in the villages pay, and no one is yet thinking of drawing lines to them. Too much power means it will become cheap - and I mean in five to ten years, not tomorrow.
This, I think, is the next boom, come 2014 or so. Businesses built on the back of seemingly unlimited power supply - from refrigeration to recreational vehicles - will start to benefit the most. And the biggest will probably come from an area I cannot yet imagine, but I'm sure it will start becoming visible in the next few years
I'm going to keep writing about this once in a while. I think this is a long term thought - with no investment potential today. I mean there's no "call" or even a single company that I think will be the beneficiary of this boom today. The power producers and distributors will become commodities. But the theme I think - excess power fuelling the next boom - will slowly come around, once all this power is available and ready to use.
More thoughts in the next few posts, I know this is all very up in the air but please do comment and let me know your thoughts.
(I just hope the power companies don't go bust BEFORE they produce this power.)
Insider Buying: Not quite bullish
Insider buying, a bullish signal for two decades, lost its prescience this year and now may be a harbinger of a retreat in shares because it signals overconfidence, according to Ben Silverman, director of research at InsiderScore.com, a stock tracking firm in Princeton, New Jersey. The last time officers bought as much was in March 2008, preceding a drop in the S&P 500 a month later, data compiled by Bloomberg show.Isn't this happening in India too? Insiders are buying left, right and center - as noticed in the NSE announcement pages everyday. In companies like Praj Industries, promoters have bought a significant percentage of shares - as I noticed yesterday - but the signs are of ultimate bearishness - the stock's close to 52 week lows and has lost over 70%: it's at 65, versus a 52 week high of 270.``Everyone's drinking the Kool-Aid,'' said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees $160 billion. ``These guys know their companies better than the market, so they think they'll be right. But the economic slowdown has happened much more quickly and has been much deeper than people expected.''
This is interesting - and makes some sense. That employees or founders understand their business well, but not the market. That the market can become unviable is anathema to most promoter minds, and even that of employees - in fact even today, many people in the IT sector believe all in hunky-dory in outsourcing-land.
Some promoters will of course be proved right in buying - but will the vast majority do? I have not seen as much bottom-calling as I have seen last week, which means we still have miles to go?
Citi laying of 50,000?
Citigroup plans to announce a writedown of as much as $24 billion and layoffs that could total as much as 24,000 due to subprime and credit-related losses, CNBC has learned.Wow. Bad times. Alarming news for those in banking, from this Bloomberg article:The plans will be unveiled Tuesday by Citigroup's new CEO, Vikram S. Pandit, after the banking giant reports fourth-quarter earnings. At the same time, Citigroup could also announce that it is cutting its dividend payment by as much as 50 percent.
Citigroup is likely to cut between 17,000 and 24,000 positions over the course of the year through a combination of layoffs, attrition and selling off businesses as part of Pandit's cost-cutting plan, sources said. Previously, it was estimated that the layoffs could reach 20,000.
Financial firms worldwide have axed about 150,000 jobs since 2007, when a spike in U.S. subprime mortgage defaults sparked the credit crunch that culminated in Lehman's September bankruptcy, the biggest ever in the U.S.Moot question, but how bad is the job scene in India? Any data points? I see a lot of small layoffs, nothing big; but I know a lot of banks have cut positions in India too.
IT Earnings outlook is negative on EPS growth (FY 10)
How can the FY 10e P/E be greater than the FY 09e? That means, for the same price, earnings per share is supposed to DECLINE from FY 09 to FY 10? I guess they have allowed for a tax regime to kick in (currently no Indian taxes). But still, to believe that EPS will go down for the big IT companies - and every single one of them - is a major surprise to me.
Note: I don't agree or disagree - I have no estimates of my own other than that life in general will be bad, so why not IT. But this is the first time I've heard of IT earnings outlook being negative on EPS growth.
Pakistan Bailed Out by the IMF
Pakistan agreed to a $7.6 billion bailout loan plan with the International Monetary Fund, to help the south Asian country avert defaulting on its debt with the first such program in four years.I hope they recover, if only to prevent any kind of economic "mayoosi" fuelled war.The loan ``will be used for the balance of payments and to build our foreign reserves,'' Shaukat Tarin, the finance adviser to the prime minister, said today at a televised news conference in Karachi. The IMF will give the loan in installments over 23 months at interest rate of 3.5 percent to 4.5 percent, he said.
Pakistan was forced to seek funds from the IMF after its foreign-exchange reserves shrank 75 percent in the past year to $3.5 billion last week, the equivalent of one month's imports, and a group of donor nations declined to provide funds.
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