Crude Shocks keep India in Smiles

“The economics of oil have changed. Some businesses will go bust, but the market will be healthier,” says the Economist (December 6, ’14). Is this the beginning of cheap oil regime or just an interlude between two big bumps?

2013, in retrospect, had turned out to be the strongest year of recovery, with growing US Economy and stabilizing Chinese economy. Commodity prices were projected to remain flat with an up-side risk due to unexpected supply-side shocks.

Enter December 2014 and all the projections seem little more than wishful thinking. IMF went on record recently: “the global economic growth may never return to pre-crisis levels” ! All the Quantitative Easing (QE) from the US (3 till now – totalling over $ 4 trillion or, twice that of the entire Indian economy) which was supposed to push cash to banks ended up just in increased valuations and stock indices accompanied by higher prices of gold and other commodities. Emerging economies like India had to contend with high inflation. Some even said: it is ‘US Fed exported inflation’!

Now we’re in a scenario where

Skill and Non- Skill, Real Money Games

New Venture Research - Skill and Non- Skill, Real Money Games

The problem I am trying to address is two faceted, with a solution that eliminates boredom through thrill and entertainment and create money making avenue to skilled game developers and card game lovers. The opportunity identified from the problem would benefit game developers who lack capital and resources to market their games. Bringing these developers closer to those set of people who would pay for their gaming activity is the course of this solution.

Like Zim Ride in the States, Zinghopper in India ?

Latest on easing transport issues is a website that offers online coordination of carpools. Zimride, the latest fad in cost-effective commuting, beautifully blends the best of facebook and google maps to help coordinate carpools. Tactfully eliminating the anxiety of not knowing the driver, the single greatest concern while carpooling, Zimride has received mammoth funding. The success of Zimride is doubted by many industry veterans. Though massively funded, they need colossal user base to emerge triumphant.

Understanding the basics of National Debt

A recent article in economic times caught my eye...it was about increasing levels of India's public debt. Considering that this, along with inflation, is quoted to be the primary reason of money flowing out of the country, I thought let me put a few points together to put this in a little more perspective for those who don't understand these terms well.

Consider this:

India's GDP is approximately USD 1.5 Trillion (that's USD 1,500,000,000,000)...almost equivalent to the monetary base of the US Federal Reserve (i.e. amount of money floating with the public in US + commercial bank reserves with the central bank). This amount is what all the products and services produced in India within 1 year are worth.

India's Public Debt, or total government debt, is approx. USD 636 bn, which comes to roughly 40% of the GDP. This is the amount the Indian government has raised to finance its projects, and the difference between its revenues (through taxes) and expenditure (salaries, infrastructure, etc.), also known as the fiscal deficit. Every year, some of this debt will come due (mature) and government will decide whether to take on more debt or not depending on its requirements from deficit. Also, every year, Indian government will need to pay interest on servicing this loan, pretty much similar to our EMIs. Any economy that's not growing at all, will have to service this interest burden by either printing more money, or by taking on more debt equivalent to the interest amount. In such a scenario, it becomes almost imperative for the countries to grow just to avoid the debt trap.

Just to put this in perspective, here is a list of some other countries where the public debt is at fairly high levels:

• Japan - 200%
• Greece - 144%
• Iceland - 123%
• Italy - 118%
• Belgium - 102%
• Singapore - 102%
• Ireland - 98%
• France - 83.5%
• Portugal - 83.2%
• UK - 76.5%
• Germany - 75%
• Brazil - 60%
• US - 64%

US GDP is approx. USD 14.7 trillion, which puts their public debt at over USD 9 trillion....or nearly 6 times of India's GDP! The total amount that US would have to pay as interest just in 2011 is over approx. USD 3.5 trillion...and some people even say that by 2020, whatever US earns as revenue, the entire amount will go into paying interest on the debt ! An interesting website to look at for knowing and understanding these figures is the usdebtclock.org.

But the problem is not just with the US, the entire continent of North America has an average of 62% public debt, and a close second is Europe with an average public debt of around 56%. Asia, Africa, South America and Oceania regions all have an average under 45%.

From the look of it, everyone is in a worse situation than the other one, and unlike in EU, most others still have the flexibility to print their way out of their mess. US being the world's largest economy, is also dealing with far larger figures on every front - so a mere 0.1% increase in unemployment makes huge waves in the financial circuit.

As for India, the debt and inflation are high, and so is fiscal deficit at over 5.2% of GDP, but three major points supporting India are growth, demographics, and ability to print money. Moreover, a majority of the debt is payable internally, and terms and conditions with internal parties can be negotiated without bringing in IMF into account in the worst case of sovereign default.

Given this, to me, the fall in the markets, the flight (outwards) of the money, looks like a temporary phenomenon, which is probably also a very good (even last!) chance of buying the lower levels in the market. And as for Gold, till US is printing money, I wouldn't care much about its fall, its primary trend will remain up.

Crude Awakening

It's indeed a crude awakening for Qaddafi, Libya's leader for the last 42 years...and given that Libya supplies nearly 1.6 mbpd (mmn barrels per day), or nearly 2% of world's oil demand, it is literally so too for the rest of the world. Crude prices are on the boil again (touching $ 100 / barrel) after being under control since the 2008 crash. Take a look at the historical crude oil (WTI, NYMEX, in USD / barrel) prices:

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And considering the impact crude usually has on the rest of the asset classes, the whole world is sitting up and taking notice of events unfolding in the African country.

The global markets not impressed, with most markets going down by 2-2.5% in the last 2 days. 

Take a look at the Dow Jones Industrial Average (DJIA) chart for the last 5 days for instance:

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Gold is moving up smartly again, touching $ 1415 / ounce, slightly below its recent multi-year high of $ 1431 / ounce. US treasury prices are moving up, implying that people still consider US T-bills safer during times of global crisis. 

A whole host of other commodities will start moving up too, since this rise in crude oil is going to trigger a rise in demand for bio-diesel (an alternative to crude), which needs, among other things, ethanol...made from sugarcane...sending the prices of sugar higher. Elsewhere in the world, import duty paid to bring in bio-diesel in the country is by-passed by bringing in bio-diesel as blended oil...for which some portion of palm oil is mixed with bio-diesel to pass it off as "blended oil". Later, through some fractionation process, these two are separated, and pure bio-diesel obtained. [That's what I've heard from some of my sources in this industry, can't confirm it though]. So an increase in demand for Bio-diesel also increases the demand and prices of palm oil, and since soybean oil is a good substitute of palm oil (for cooking), that too moves up in tandem...and since soybean oil is derived from soybean seeds, the prices of those  move up as well...and so it goes.

Given inflationary issues in almost all the countries world-wide, with an exception of the US among the bigger ones, this increase in crude prices is going to further aggravate the situation. Already high unemployment in US is going to go further up, as squeezed margins force companies to go even leaner. In India, already another price hike for diesel and petrol is being talked about...and it might come sooner rather than later.

However, at such times, solace comes from such pronouncements as given by an organization, that crude might hit $ 220 / barrel if Libya and Algeria stop oil production / exports. Usually, such "eye-catching" forecasts are given only at the end of a rally...so may be...just may be, the top is near. Let's wait and watch...and yes, in the meanwhile, stock up on cooking oil if you want to save a few bucks.

The silver lining in Chinese Inflation

China has increased its Reserve Ratio Requirement (RRR, the amount required to be set aside by the banks, not to be used for lending) yet again...by 0.5% to mop up an additional USD 54 bn from the market with an intention to reduce liquidity and control inflation. Let's take a quick look at the different problems confronting China:

The Liquidity Problem:

Consider this, Chinese banks lent around USD 1.6 trillion (almost equal to India's GDP) in 2010, most of it for infrastructure, and lent almost around USD 160 bn in January alone (!), a figure that's almost twice that of December 2010.

The Inflation Problem:

Inflation in China is already quoting around 5%, according to official figures. I've covered Chinese Inflation issue in my earlier posts, consider reading Betting on China Crash and Understanding China and Japan. Also, while food prices are under control for now, the housing market continues to hog limelight. House prices rose in Jan 2011 in 68 out of 70 Chinese cities surveyed. This, despite the introduction of property tax (though a measly 0.6% to 0.8%) and frequent increases in RRR.

The Currency Problem:

China has been under pressure from various international organizations with sovereign members to let its currency appreciate. Currency appreciation will make its exports less competitive though it might play some part in checking inflation. Currency depreciation will boost its economy but increase the inflation problem. So China has constantly let its currency appreciate, and shows this as compliance to currency non-manipulation to better manage international relations. See the USD Yuan chart below which shows how yuan has appreciated against dollar:

Though the appreciation is there, but its too less, too slow...over the last 1 year, yuan has appreciated by about 4% against dollar.

Soft landing measures:

On the face of it, it looks like Chinese measures are failing to keep both inflation and real estate bubble in check. But just think about it, how difficult would it really be for the Chinese government to dictate terms and functioning to Chinese Banks if they really wanted to curb lending to infrastructure? And please bear in mind, Chinese Banking industry is considered by many investors as fairly opaque and government driven...(part of the reason why Chinese banks don't openly participate (except through proxies) during sale / purchases of various sovereign debt instruments). 

China cannot afford to have a real estate bubble crash now...and they know it pretty well. The introduction of property tax also reeks of a gesture to please foreign investors more than anything else. They're completely abstaining from increasing interest rates to avoid a "Yuan Carry trade" situation (read more about this here) which will further worsen the inflation problem. In essence, all efforts are being made to not shake-up the real estate bubble, which has long assumed the position of "too big to fail".

So liquidity control without raising interest rates is probably the best way they've got. And this they're doing not just by increasing the RRR, but even, to a smaller extent, by acquiring Gold mines outside and simultaneously promoting consumption / investment in Gold / Silver in China. So people are just converting their yuan into Gold / Silver, which eventually will go to the owner of these mines from where the metals are being procured...the Chinese government held companies. [This, by the way, is also helping them control inflation through currency appreciation - as yuan supply reduces, it appreciates against its basket of currencies.]

In fact, so strong has the demand been off late, that even China's appetite for Gold and Silver is making frequent headlines. Here's an article from Zero Hedge giving various news items (most of them recent). The result...take a look at the silver prices:

Now, if this is indeed the case, and encouraging gold and silver consumption domestically is indeed a strategy adopted by the Chinese government, it's only a matter of time before both break their all time high and surge further ahead...Now, that's a silver lining in a dark inflationary cloud...

Random Walk - Econo blogging

Apologies for not writing for such a long time...guess I've been hit by the Writer's Block. Nevertheless, this post is about econo-blogging...and about how some digging into it almost took the steam off my writing...

Came across this website econdirectory through Mish's site. The website gives a huge list of all the blogs which write on economy (and does not include those which restrict to just plain and simple stock tips). It covers some 165 websites, most of which have public page views, and some others which don't. Overall, the top 5 guys in the list take up the major portion of readership...here's a sample of what it looks like...

A massive 61% of all page views are with the top 5 blogs, and a good 54% with just top 4. The rest of the 160 blogs consist of the remaining 39% page views. The page view by the latter segment is small enough for each one to not sustain any meaningful ad revenues. 

The NY Times even listed DIY (Do It Yourself) Macroeconomics as one of the top trends of 2010...in which, says NY Times "ordinary citizens pull apart the data and come to their own conclusions". So while more and more econo bloggers are joining the band-wagon, the pie is not undergoing any major expansions, resulting in traffic being held as captive audience by the top few websites.

Its tough getting into the top 20 list, and like even Mish pointed out, that would, under current circumstances, result in having just 5% of the traffic of the top blog...! But just like they say for Euro zone, there's hope...things could've been worse...