Hi Sanjana.
Thanks for the link. Actually I have been thinking a lot about deflation - any major recession (and this is definitely one) has a component of deflation. Frankly I find it difficult to get a handle on deflation because it is only the depression which serves as example in reasonably modern times.
But what is it that deflates?
I think only two things deflate.
1. Industrial commodity prices like copper, coal etc
2. Wages deflate accompanied by unemployment i.e. some services deflate.
Everything else inflates relative to a deflating purchasing power of lower middle and middle class. What inflates most are the essentials of life. Which means
1. Food
2. Clothing
3. Transport - bus, train, flight, taxi, ferries, ports
4. Education costs/competition for professional courses
5. Lower end servants like daily maids, drivers
6. Rent
7. Real estate costs both commercial and residential
Do the rich really benefit? They will find it easier to get many servants. But the bottom will drop out of most of the luxury markets. So luxury housing, yachts, bentleys will all drop in value.
Most of the wealthy derive their wealth from the stock market and high end real estate. Most will lose serious wealth. It has already happened in USA.
Some of the effects can be:
1. Losing values in art, stamp and collectibles market
2. Lost value in liberal arts and other "useless" degrees - and concomitant loss of jobs for university professors in these "useless" subjects
3.Loss of perceived value in luxuries. Most of the rich revel in the fact that upper midle class yearn after what they have. With everyone dismissing these luxuries as wasteful, there will be diminishing returns from exclusive clubs and social circles. They will also result in reduced networking and money making opportunities
4. Biggest loss of value will be in high end luxury properties. They need a continuous source of neuvo riche to maintain continuously increasing prices. With stock markets and cpmpanies not creating value, these will become white elephants and every sale will have to be a distress sale.
I could go on but the bottom line is this - in deflation the rich lose a lot. Because they have a lot to lose, they suffer less than middle class (who are wiped out). But the rich do suffer.
They suffer in real terms.
They also suffer in perceived life values - this hurts the most.
The rich also lose money assymmetrically. So some rich get wiped out while others suffer less. But as a class, the wiped out rich weigh on the minds of those who suffer less.
We have seen all this before. In England after the Napoleanic wars, in England in the 1850s, in 1890s, in 1900s in both England and USA, in 1929 all over the world, in England of the 1950s.
In all these times, there was churn in who is rich and who is poor. Rich lords of England were rendered poor as the economics changed. Literature is full of these stories.
Deflations are real bad things and only common thing is this - the world comes out changed completely in ways unimaginable.
In the 1850s, came the factories of Birmingham and the victorian population and productivity explosion. The Victorian susercycle came true for England.
In the 1870s came the improved connectivity of railways, telegraph, phones and the Rockefeller oil wells in USA. In the 1890s came the rich American and canadian commodity millionaires and the start of the American supercycle.
In the 1920s came social upheaval and movies and social revolution changing the entire world order - which collapsed soon in 1929 (just as our internet age has collapsed within 10 years). And also came high rise cities and their efficiencies. So you can say massive efficiency gains are invariably followed by a destructive cycle. Same thing has happened recently also - with Chinese manufacturing efficiency and internet services efficiency - the old world had to collapse.
In the 50s came the baby boom and the massive productivity rise with new mechanisation and technology. And the second US+Europe+UK supercycle started.
Every one of these transitions was also marked by really bad wars - with Napoleon, with Germany THRICE, with USSR.
This time around, too - I am sure of two things.
1. WOrld will change in unpredictable ways
2. Wars will come
So I dont think anyone would welcome the deflation - not the rich (become less rich), not the middle class (become poor), not the poor (starve or start revolution with carnage), not the politicians (all will be thrown out), not the armies (they will have to earn their salary now).
Deflation is good for nobody. But deflation is staruing at us in the face. USA and Europe are headed for deflation for sure (they cant print more than they already have - not much).
India is headed for worse - no deflation here - we will get stagflation. Whatever little money we have will keep buying less and less.
Monday, July 23, 2012
Monday, July 16, 2012
On Indian IT sector
IT is now a mature industry. It should be valued for dividend yield - like a utility. It is not a growth sector.
There are only some 5 million Indians who have the intelligence to do IT coolie work - even they churn out the buggiest software in existence.
Of them some 2.5 million are already in the industry. Rest are doing everything else in the country.
Now that the 30 years worth of underemployed Indians have been found employment in IT, the rest newly educated Indians lack intelligence to do even cyber coolie work. They can only become low end BPO workers - if that - many cant even do BPO. Only a few tens of thousand Indians with sufficient intelligence graduate every year - maybe 2-3% of the existing IT workforce. It cannot fuel growth.
So no more growth. But the industry will continue to exist at current levels. Russians, poles, Czechs etc write much better quality software for much less salaries, but there are only another 5 million people in East Europe with sufficient intelligence to do IT work - and who are under employed.
So IT wages will stagnate and reduce to adjust. Peak has been reached. At current salary IT cannot grow. IT grew when salary in India was one tenth of US salary. Now it is half to one third US salary - and the workforce is poor quality and doesnt deserve better salary.
So Indian IT will persist as a mature industry. IT needs about 20 million new workers overall. IT will be the biggest employer in USA and world for new jobs. There is insufficient trained manpower in USA also to meet this need. The best Indians will still get good jobs in IT.
But every Pappu from NIIT cannot do the work. It is not easy - it is not BPO work where with basic training you can provide customer support for a non-IT internet or phone customer.
It is more likely that Rupee will depreciate to a level where our software makes export sense. And the IT salary levels will become less as compared to US salaries in dollar terms. Similarly, Indian RE prices in dollars will make sense when Rupee depreciates. And our balance of payments will make sense when we cannot afford to import so much - whether oil or gold - because we cant afford the dollars. WIth 7.5% inflation, annual 7.5% depreciation of Rupee HAS TO BE THERE!!!!
So for all that ails India, the only way out is for the Rupee to collapse more. Long term it is inevitable.
And in a globalised world, everyone with same capability and out put will earn the same.
No labour arbitrage possible
There are only some 5 million Indians who have the intelligence to do IT coolie work - even they churn out the buggiest software in existence.
Of them some 2.5 million are already in the industry. Rest are doing everything else in the country.
Now that the 30 years worth of underemployed Indians have been found employment in IT, the rest newly educated Indians lack intelligence to do even cyber coolie work. They can only become low end BPO workers - if that - many cant even do BPO. Only a few tens of thousand Indians with sufficient intelligence graduate every year - maybe 2-3% of the existing IT workforce. It cannot fuel growth.
So no more growth. But the industry will continue to exist at current levels. Russians, poles, Czechs etc write much better quality software for much less salaries, but there are only another 5 million people in East Europe with sufficient intelligence to do IT work - and who are under employed.
So IT wages will stagnate and reduce to adjust. Peak has been reached. At current salary IT cannot grow. IT grew when salary in India was one tenth of US salary. Now it is half to one third US salary - and the workforce is poor quality and doesnt deserve better salary.
So Indian IT will persist as a mature industry. IT needs about 20 million new workers overall. IT will be the biggest employer in USA and world for new jobs. There is insufficient trained manpower in USA also to meet this need. The best Indians will still get good jobs in IT.
But every Pappu from NIIT cannot do the work. It is not easy - it is not BPO work where with basic training you can provide customer support for a non-IT internet or phone customer.
It is more likely that Rupee will depreciate to a level where our software makes export sense. And the IT salary levels will become less as compared to US salaries in dollar terms. Similarly, Indian RE prices in dollars will make sense when Rupee depreciates. And our balance of payments will make sense when we cannot afford to import so much - whether oil or gold - because we cant afford the dollars. WIth 7.5% inflation, annual 7.5% depreciation of Rupee HAS TO BE THERE!!!!
So for all that ails India, the only way out is for the Rupee to collapse more. Long term it is inevitable.
And in a globalised world, everyone with same capability and out put will earn the same.
No labour arbitrage possible
Saturday, July 14, 2012
On global wealth
[QUOTE=sheeshu;478678][url]https://infocus.credit-suisse.com/data/_product_documents/_shop/323525/2011_global_wealth_report.pdf[/url]
[url]http://www.unep.org/pdf/IWR_2012.pdf[/url][/QUOTE]
Hi Sheeshu, thanks for providing these 2 links. I went through both of them, dry reading though they were - but I am traveling and had little to do.
The credit suise report is based on household income with WB report on GDP growth being added to produce a fairly simple estimate. It is highly suited for asset management companies to target customers and is very successful in doing this - it is clear that its 3 authors must have been well paid and provided with finance pro staff to crunch numbers, generate some slick presentations and must have spent a fair amount of time to do this.
The other report is a mixed bag of all kinds of thought processes of various economists trying to publish their theses on how to calculate wealth. Much of it seems to be by left of center economists and environmentalists (I tend to hate them).
Both are classic examples of missing the wood for the trees (though Credit suisse like the humans in the movie Avatar - is bang on target with the one tree it is interested in - which it wants to cut for its own). I would still prefer to use my own rule of thumb calculations since it produces an actionable result for all kinds of investment related analysis.
Simply put,
1. Total wealth is 10 times global GDP. So if GDP is 40 trillion, wealth is 400 trillion
2. 50% is intangibles (you can use the contribution of services sector as a guide to how to value for every country). Overall you can say 50% of 400 million i.e 200 million is in infrastructure, natural resources and human capital). (Those 100+ economists probably measured this).
3. Rest 50% is in financial assets i.e. listed companies (market cap usually =annual GDP), unlisted companies, real estate and gold.
4. Wealth grows at annual global GDP growth rate (I really do not believe that credit suisse report which says that India's wealth likely to grow at 8.4% - they havent thought about productivity at all - currency depreciation as seen recently has already put paid to that anyway - India probably contracted last year in USD)
5. Wealth depreciates at about 2% per annum, regardless of how much it grows
6. Gold cannot be more than 10% of financial assets (i.e it cannot be >10% of 200 trillion i.e. 20 trillion
7. Value of real estate, listed stocks, discounted cash flow of private companies etc can gyrate wildly but total wealth represented by these together cannot decrease or increase by more than 30% in short term and in long term (>15 years) will change by +/- the global annual GDP growth rate i.e. +/- 5% only asuming 5% GDP growth (since by then the 2% per annum depreciation would amount to 30% depreciation and catch up i.e. RE prices can drop to 70% and stay there for 15 years and catch up with the expected depreciation).
8. Everything depreciates including bonds (by inflation reducing value), stock/company book value (depreciation of its assets), gold (making and remaking ornaments, dead end for velocity of money - two ways to destroy gold wealth), real estate (obvious depreciation of its utility).
9. Recession causes reduced wealth. Stagnation same. Inflation same. Valuation falls are also same.
10. Our interest in all of this crap is only for valuation - figuring out an assets right value so that we can make money from it. Rest doesnt matter
Simplicity works.
Thinking more and coming up with complicated methods will not help in right pricing of an asset by more than 5% (statistical error is anyway 5% being accepted). You can ignore the specifics and go by the rule of thumb. I plan to do so.
Main problem with both analysis methods in these links, in my mind was this - one was finance pros and knew little of economics, other was economist and knew little of finance and neither kept central banking in mind.
None of them were trying to generate data to base financial investment decisions. Even the finance pros were trying to find customers to sell their wealth management and to project growth of their business.
Common problem this - people are not all encompassing and comprehensive, forcing simple people like me to come up with simplified back of the envelope calculations and rules of thumb.
Of course I might be wrong - totally wrong. But I am putting my money based on these thinkings. These two groups are earning their living based on their writings - if they are wrong they dont care, they get their fee income.
If I am wrong, I lose money. And the first rule in investment is - dont lose money. It doesnt matter if you dont make it - but dont lose it.
Risk is to be reduced. That is the main aim - if two assets seem likely to give same reward, chose the one with less risk.
Again - I repeat - I might be totally wrong.
[url]http://www.unep.org/pdf/IWR_2012.pdf[/url][/QUOTE]
Hi Sheeshu, thanks for providing these 2 links. I went through both of them, dry reading though they were - but I am traveling and had little to do.
The credit suise report is based on household income with WB report on GDP growth being added to produce a fairly simple estimate. It is highly suited for asset management companies to target customers and is very successful in doing this - it is clear that its 3 authors must have been well paid and provided with finance pro staff to crunch numbers, generate some slick presentations and must have spent a fair amount of time to do this.
The other report is a mixed bag of all kinds of thought processes of various economists trying to publish their theses on how to calculate wealth. Much of it seems to be by left of center economists and environmentalists (I tend to hate them).
Both are classic examples of missing the wood for the trees (though Credit suisse like the humans in the movie Avatar - is bang on target with the one tree it is interested in - which it wants to cut for its own). I would still prefer to use my own rule of thumb calculations since it produces an actionable result for all kinds of investment related analysis.
Simply put,
1. Total wealth is 10 times global GDP. So if GDP is 40 trillion, wealth is 400 trillion
2. 50% is intangibles (you can use the contribution of services sector as a guide to how to value for every country). Overall you can say 50% of 400 million i.e 200 million is in infrastructure, natural resources and human capital). (Those 100+ economists probably measured this).
3. Rest 50% is in financial assets i.e. listed companies (market cap usually =annual GDP), unlisted companies, real estate and gold.
4. Wealth grows at annual global GDP growth rate (I really do not believe that credit suisse report which says that India's wealth likely to grow at 8.4% - they havent thought about productivity at all - currency depreciation as seen recently has already put paid to that anyway - India probably contracted last year in USD)
5. Wealth depreciates at about 2% per annum, regardless of how much it grows
6. Gold cannot be more than 10% of financial assets (i.e it cannot be >10% of 200 trillion i.e. 20 trillion
7. Value of real estate, listed stocks, discounted cash flow of private companies etc can gyrate wildly but total wealth represented by these together cannot decrease or increase by more than 30% in short term and in long term (>15 years) will change by +/- the global annual GDP growth rate i.e. +/- 5% only asuming 5% GDP growth (since by then the 2% per annum depreciation would amount to 30% depreciation and catch up i.e. RE prices can drop to 70% and stay there for 15 years and catch up with the expected depreciation).
8. Everything depreciates including bonds (by inflation reducing value), stock/company book value (depreciation of its assets), gold (making and remaking ornaments, dead end for velocity of money - two ways to destroy gold wealth), real estate (obvious depreciation of its utility).
9. Recession causes reduced wealth. Stagnation same. Inflation same. Valuation falls are also same.
10. Our interest in all of this crap is only for valuation - figuring out an assets right value so that we can make money from it. Rest doesnt matter
Simplicity works.
Thinking more and coming up with complicated methods will not help in right pricing of an asset by more than 5% (statistical error is anyway 5% being accepted). You can ignore the specifics and go by the rule of thumb. I plan to do so.
Main problem with both analysis methods in these links, in my mind was this - one was finance pros and knew little of economics, other was economist and knew little of finance and neither kept central banking in mind.
None of them were trying to generate data to base financial investment decisions. Even the finance pros were trying to find customers to sell their wealth management and to project growth of their business.
Common problem this - people are not all encompassing and comprehensive, forcing simple people like me to come up with simplified back of the envelope calculations and rules of thumb.
Of course I might be wrong - totally wrong. But I am putting my money based on these thinkings. These two groups are earning their living based on their writings - if they are wrong they dont care, they get their fee income.
If I am wrong, I lose money. And the first rule in investment is - dont lose money. It doesnt matter if you dont make it - but dont lose it.
Risk is to be reduced. That is the main aim - if two assets seem likely to give same reward, chose the one with less risk.
Again - I repeat - I might be totally wrong.
Friday, July 6, 2012
The Double your money in 2 years opportunity
You need a combination of very long term indicators. Right timing comes once in 5-7 years only.
2004 was one.
2009 was another.
You need the following to happen:
1. Lowering of interest rates by RBI by more then 1.5%, ideally 2% over 2 years (6-6.5% short term rates in current scenario)
2. Stock market should have risen 20% or more and there should be buzz about a bull market - with hype of reforms and optimistic press - especially if it comes after some 2 years of bear market
3. FD rates below 7% in current scenario (historically it happened higher in 1970-2000 years)
4. Oil low for 1.5 - 2 years (say below 70$ in current situation) with sudden recent uptick
5. Good growth in China and USA with Europe at least reversing recession
6. Recent rise of commodity prices after 1.5- 2 years of low prices.
7. RE coming out of a period of stagnation with maximum activity in IREF and other discussion sites being in "crash" and "bubble burst" for 1.5-2 years i.e. oversold market with pessimist turning into optimism. Especially if many builders have collapsed and most people are scared of property
When all these indicators come together the first person who overcomes the fear of property and shifts money from stocks to RE will make 40% per annum for 2 years from plot investment
2004 was one.
2009 was another.
You need the following to happen:
1. Lowering of interest rates by RBI by more then 1.5%, ideally 2% over 2 years (6-6.5% short term rates in current scenario)
2. Stock market should have risen 20% or more and there should be buzz about a bull market - with hype of reforms and optimistic press - especially if it comes after some 2 years of bear market
3. FD rates below 7% in current scenario (historically it happened higher in 1970-2000 years)
4. Oil low for 1.5 - 2 years (say below 70$ in current situation) with sudden recent uptick
5. Good growth in China and USA with Europe at least reversing recession
6. Recent rise of commodity prices after 1.5- 2 years of low prices.
7. RE coming out of a period of stagnation with maximum activity in IREF and other discussion sites being in "crash" and "bubble burst" for 1.5-2 years i.e. oversold market with pessimist turning into optimism. Especially if many builders have collapsed and most people are scared of property
When all these indicators come together the first person who overcomes the fear of property and shifts money from stocks to RE will make 40% per annum for 2 years from plot investment
Thursday, July 5, 2012
On 2014 US default
Thanks rovingeye for some excellent reads.
Re: Libor, the banking sector is amazing - 5 years after bear stearns and still skeletons are stumbling out - normally most skeletons are out in 1 year - Lehmans was within a year of Baer Sterns and everyone thought the worst was out. Even in depression the worst was out in the open within a year and a half.
This time the secrets are amazing and of National Levels of multiple defaults all over. In such situations normal types of analysis will surely fail.
One can only be maximally diversified and wait out the rest of the decade.
Sanjana, US default is confirmed by 2014 or so. No more twisting also possible - there is no twisting out of this mess. But the effects will be paradoxical and unusual. Difficult to be very sure but let me make a try.
What if the US economy doesnt recover adequately by 2014?
1. US bond rates will have to rise to about 8% or more.
2. Inflation in USD will be massive for a couple of years but since short term rates will have to rise, it will be 1) within reason (i.e. not hyperinflation) and 2) part of stagflation which will cause more misery. (In the worst possible scenario, it will be a deflation - which will be bad news for every country in the world - but I already thought about it yesterday, so will leave off)
3. Flight of capital out of USA will be massive as bonds will sell off and bond sellers will invest in other countries.
4. USA will stop growing and contract till end of 2020.
Many of these are actually taken for granted. US is widely acknowledged to not be a place to invest till 2020-2030 and beyond. Trading is something else.
But mind you - THIS IS IMP - US will MAINTAIN CURRENT LEVELS OF INCOME JUST LIKE JAPAN DID. So it will still be a great place to live. And it will still be the biggest economy in the world and will still be the most powerful superpower by far, thanks to 80 years of military investments.
The Fed HOPE is that US productivity will rise and their innovators will recover by the time 2014 comes. All these effects will be much reduced if US recovers well. Fed is giving enough time for its people to jerk out of their complacency and study and work hard. In the best case scenario, US will recover and 20145/6 will be a start of cyclical expansion. There will be inflation but with growth.
DO not underestimate the ability of the White people to innovate and work hard - they are an amazing race.
But all of these effects will benefit India. Except for US deflation, wether one gets stagflation or anemic growth in USA doesnt matter - it will benefit India.
Where will all the capital go? Russia? Brazil? No way - commodity prices will stay steady as long as US/EU contracts and BRICS expand, cancelling each other out. EU is dead for growth (Again will maintain status quo and will be a good place to live)
India and China will grow. After 2014, China will be the biggest seller of USD and investor within itself. Foreign capital will also flow into China seeking growth. This is going to happen regardless of what happens. So it is a good idea to average investments into China fund at these very low Shanghai Composite levels. I am pulling out of latin american funds and moving into Chinese funds regularly (Mirae Assets has a China fund)
India and China will be double decadal growth economies and GREAT place for stock, RE and even fixed income investments. Capital will flow from US to India. I am increasingly realizing that flows matter a lot in currencies in addition to economic competitiveness and productivity. SO while 6 months ago I was a Rupee bear, the last 6 months and many hours of reflection (mostly on IREF posts) have made me realise that as long as India keeps growing, Rupee will be strong. Thats why it was strong from 2001-2008 and steady against dollar DESPITE INFLATION.
The pattern is likely to repeat. So my thinking of long term Rupee depreciation is off the table with a caveat - as long as we keep growing, Rupee will be strong against all currencies. Every growth falter will bring a big depreciation like we saw recently.
India will be a lousy place to live in till 2030 at least. It will take that much tme for the old (not chronological age) to die and the young (modern) to take over. But it is a great place to invest.
Charlie bhai, for short term, ultrashort term fund might be best. Dynamic bond and gilt funds seem too risky and simply not worth the risk.
Rohit bhai - please provide Rohit to English dictionary. Your laconic posts are too valuable to ignore - but also too difficult to understand.
Re: Libor, the banking sector is amazing - 5 years after bear stearns and still skeletons are stumbling out - normally most skeletons are out in 1 year - Lehmans was within a year of Baer Sterns and everyone thought the worst was out. Even in depression the worst was out in the open within a year and a half.
This time the secrets are amazing and of National Levels of multiple defaults all over. In such situations normal types of analysis will surely fail.
One can only be maximally diversified and wait out the rest of the decade.
Sanjana, US default is confirmed by 2014 or so. No more twisting also possible - there is no twisting out of this mess. But the effects will be paradoxical and unusual. Difficult to be very sure but let me make a try.
What if the US economy doesnt recover adequately by 2014?
1. US bond rates will have to rise to about 8% or more.
2. Inflation in USD will be massive for a couple of years but since short term rates will have to rise, it will be 1) within reason (i.e. not hyperinflation) and 2) part of stagflation which will cause more misery. (In the worst possible scenario, it will be a deflation - which will be bad news for every country in the world - but I already thought about it yesterday, so will leave off)
3. Flight of capital out of USA will be massive as bonds will sell off and bond sellers will invest in other countries.
4. USA will stop growing and contract till end of 2020.
Many of these are actually taken for granted. US is widely acknowledged to not be a place to invest till 2020-2030 and beyond. Trading is something else.
But mind you - THIS IS IMP - US will MAINTAIN CURRENT LEVELS OF INCOME JUST LIKE JAPAN DID. So it will still be a great place to live. And it will still be the biggest economy in the world and will still be the most powerful superpower by far, thanks to 80 years of military investments.
The Fed HOPE is that US productivity will rise and their innovators will recover by the time 2014 comes. All these effects will be much reduced if US recovers well. Fed is giving enough time for its people to jerk out of their complacency and study and work hard. In the best case scenario, US will recover and 20145/6 will be a start of cyclical expansion. There will be inflation but with growth.
DO not underestimate the ability of the White people to innovate and work hard - they are an amazing race.
But all of these effects will benefit India. Except for US deflation, wether one gets stagflation or anemic growth in USA doesnt matter - it will benefit India.
Where will all the capital go? Russia? Brazil? No way - commodity prices will stay steady as long as US/EU contracts and BRICS expand, cancelling each other out. EU is dead for growth (Again will maintain status quo and will be a good place to live)
India and China will grow. After 2014, China will be the biggest seller of USD and investor within itself. Foreign capital will also flow into China seeking growth. This is going to happen regardless of what happens. So it is a good idea to average investments into China fund at these very low Shanghai Composite levels. I am pulling out of latin american funds and moving into Chinese funds regularly (Mirae Assets has a China fund)
India and China will be double decadal growth economies and GREAT place for stock, RE and even fixed income investments. Capital will flow from US to India. I am increasingly realizing that flows matter a lot in currencies in addition to economic competitiveness and productivity. SO while 6 months ago I was a Rupee bear, the last 6 months and many hours of reflection (mostly on IREF posts) have made me realise that as long as India keeps growing, Rupee will be strong. Thats why it was strong from 2001-2008 and steady against dollar DESPITE INFLATION.
The pattern is likely to repeat. So my thinking of long term Rupee depreciation is off the table with a caveat - as long as we keep growing, Rupee will be strong against all currencies. Every growth falter will bring a big depreciation like we saw recently.
India will be a lousy place to live in till 2030 at least. It will take that much tme for the old (not chronological age) to die and the young (modern) to take over. But it is a great place to invest.
Charlie bhai, for short term, ultrashort term fund might be best. Dynamic bond and gilt funds seem too risky and simply not worth the risk.
Rohit bhai - please provide Rohit to English dictionary. Your laconic posts are too valuable to ignore - but also too difficult to understand.
My rule of thumb
The main principle of investing is this. Poor people have to take risk to create capital. Rich people avoid risk and concentrate on capital preservation - since they already have the capital
(Later having read entire thread)
Sorry rohit, I think you want a different i.e business idea advice - not what I wrote before.
My advice to you is this - for property, timing is everything. This is not the time when property business will give supranormal (20-40%) return within one year. That time was 2010. currently you can expect inflation linked return only.
Rule of thumb is this;
Return on property = rate of inflation + bond rate = 7+8=15% expected
Return on equity = rate of inflation + economy growth rate = 7 + 5 = 12%
Add 10% to equity rate of returns for every 1% lowering of interest rate and subtract 10% from equity rate for every 1% raising of rate.
In property, add 20% to return for every 1% lowering of rate and subtract 5% from property rate for every 1% raising of rate.
This rule of thumb is based on my own experience and is not given in any book
(Later having read entire thread)
Sorry rohit, I think you want a different i.e business idea advice - not what I wrote before.
My advice to you is this - for property, timing is everything. This is not the time when property business will give supranormal (20-40%) return within one year. That time was 2010. currently you can expect inflation linked return only.
Rule of thumb is this;
Return on property = rate of inflation + bond rate = 7+8=15% expected
Return on equity = rate of inflation + economy growth rate = 7 + 5 = 12%
Add 10% to equity rate of returns for every 1% lowering of interest rate and subtract 10% from equity rate for every 1% raising of rate.
In property, add 20% to return for every 1% lowering of rate and subtract 5% from property rate for every 1% raising of rate.
This rule of thumb is based on my own experience and is not given in any book
Monday, July 2, 2012
Amit, I doubt if Rupee will rise much - more likely it might fall back to 57.
I doubt if Rupee will in the short term undergo any more major devaluation. Plus minus couple of Rupees from here is anyway daily occurrence. In the long term also Rupee will be steady only - we need to see how much inflation comes in USA - that is crucial.
Any deflation would be very destabilizing and unpredictable - its hanging in the balance - once the presidential election is over, the real truth will come out and only then we can tell. That is just 6 months away.
Most likely, USA will respond to the second twist and inflate soon.
Otherwise world economy is in very big trouble. Rupee will crash to 65-70 in US deflation condition - so any deflation in USA will coincide with massive stagflation in India with imported inflation running at over 10% and very bad news indeed.
Charlie, I would prefer FMP at this juncture. After 50bps rate cut, expecting any more cuts is not worth it - max another 0.25% cut.
I am keeping my bond/Gilt funds for anoither 6 months - since they are already sitting on some profits. I would not commit anything more at this juncture - rate cuts are already over probably.
So go with FMP - it is also tax efficient. Only problem is not many open FMPs right now.
Sanjana, dollar weakness from here is unlikely - bonds will sell off soon, but it will make US bonds more attractive and many will settle for it. US bond yields have to only rise from this point on as inflation starts biting. So with rising US yields, dollar will stay steady or might rise against all currencies.
You are right TIPS are the way to go for USA.
FMP for India in fixed income - stocks in India are now attractive.
Gold is dollars is probably finished - but gold in Rupee will follow Rupee depreciation. It is a dicey game - if gold falls in dollars but Rupee also falls, that can wipe out gold gains in Rupees. Probably still a good bit to gain in gold - maybe 35000 seem possible, but volatile ride for sure.
If world economies recover, gold in dollars will collapse very fast. If Indian economy recovers, both Rupee will rise and gold will fall. If both world and India recover strongly, then gold in RUpee will get double whammy - gold in dollars will fall and Rupee will also rise, making losses in RUpee gold much magnified.
[QUOTE=wiseman;471904]Venky,
What if world economy does NOT recover? I doubt Indian economy will recover under those circumstances (by recovery I mean going back to the 8-9% GDP growth rate). The Chinese economy will probably average less than 5% growth in this decade.
Under these circumstances, where would you see gold going (both $ and Re)?
In addition, gold has never crashed until inflation and interest rates turned down and the debt spigot was turned on bigtime.
This time, interest rates cannot go down any further and inflation (at least official rates) are at rock bottom. We have seen plenty of Debt being created and its not having anything but temporary effect.
In addition, increasing number of people and Central Banks are accumulating gold as a last resort to protect their wealth. Central Banks have reported bought around 400 tons in the last year.
So, exactly what phenomenon would result in gold prices crashing?
cheers[/QUOTE]
Difficult question. If anyone knows the exact answer to this, he can become seriously rich. I dont. I only have some thoughts.
Lets see. First there are 2 different questions and not one question in your post.
1st: Deflation. This is again a serious problem which has raised its head. With deflation US will not only keep its short term rates at zero, but even long term bonds will rise to maybe 0.5% yield or even 0% yield. This will make dollar weaker by maximum another 10-15%. So maximum upside for gold is another 10% - 15% plus whatever risk premium is given to gold. So in USD, gold might go to about 2000 or so, assuming a 25% total rise from current levels.
But in India, Rupee will collapse to about 90/dollar or so - since we will be unable to export anything. There will be serious recession. Gold will rise to about 40-50,000Rs or so - but RBI will ban all gold products, there will be import duties and smuggling. Physical PM should be OK in this scenario. If you are in e-gold, one should exit well before these are banned and well before all this volatility
This is an extreme event and probablility should be low (how low/high no-one knows)
2nd possibility: USA lumbers on like a zombie as it is now. Dollar will stay steady till 2014 or so. Gold will move along with Euro. After that Dollar will rise as US rates slowly rise over next decade or so - initially, as US recovers, they will keep short rates low and allow some inflation to take place. So some small return in gold will come with it - but not like the returns with such massive currency printing which we have already seen - maybe 5-10% only.
After that, if USA can absorb the first rate rise without falling back into recession, then - VERY VERY SLOWLY - over maybe 3-4 years, they will raise the US rates by 1-2%. That will make dollar strong and gold will fall.
Net net, gold is fairly valued in dollars.
But this is importan - in this scenario, there will be a dollar carry trade for investment in India. A massive equity and investment boost will come to India. The flow of dollar will raise the Rupee to below 50 and even close to 45. Gold will then fall a lot - maybe 25000 or so is possible.
Later, post 2014 scenario- as dollar rises with raising of US rates, Rupee will fall again and so gold will again rise in Rupees.
Probability of the 2nd scenario is much higher - again imponderable.
Depending on the strength of the Indian recovery, gold will fall varying amounts, depending on the Rupee.
But overall RBI seems comfortable with current Rupee levels and so gold should maintain steady state. Since Indian policies are stupid, a rise of gold to 35000 levels and fall of Rupee to some 60-65 is always a possibility even within this recovery. But not a major collapse of Rupee/ major gold bull market.
Buying gold at current juncture is only to guard against the first possibility. Maybe 5%.
I doubt if Rupee will in the short term undergo any more major devaluation. Plus minus couple of Rupees from here is anyway daily occurrence. In the long term also Rupee will be steady only - we need to see how much inflation comes in USA - that is crucial.
Any deflation would be very destabilizing and unpredictable - its hanging in the balance - once the presidential election is over, the real truth will come out and only then we can tell. That is just 6 months away.
Most likely, USA will respond to the second twist and inflate soon.
Otherwise world economy is in very big trouble. Rupee will crash to 65-70 in US deflation condition - so any deflation in USA will coincide with massive stagflation in India with imported inflation running at over 10% and very bad news indeed.
Charlie, I would prefer FMP at this juncture. After 50bps rate cut, expecting any more cuts is not worth it - max another 0.25% cut.
I am keeping my bond/Gilt funds for anoither 6 months - since they are already sitting on some profits. I would not commit anything more at this juncture - rate cuts are already over probably.
So go with FMP - it is also tax efficient. Only problem is not many open FMPs right now.
Sanjana, dollar weakness from here is unlikely - bonds will sell off soon, but it will make US bonds more attractive and many will settle for it. US bond yields have to only rise from this point on as inflation starts biting. So with rising US yields, dollar will stay steady or might rise against all currencies.
You are right TIPS are the way to go for USA.
FMP for India in fixed income - stocks in India are now attractive.
Gold is dollars is probably finished - but gold in Rupee will follow Rupee depreciation. It is a dicey game - if gold falls in dollars but Rupee also falls, that can wipe out gold gains in Rupees. Probably still a good bit to gain in gold - maybe 35000 seem possible, but volatile ride for sure.
If world economies recover, gold in dollars will collapse very fast. If Indian economy recovers, both Rupee will rise and gold will fall. If both world and India recover strongly, then gold in RUpee will get double whammy - gold in dollars will fall and Rupee will also rise, making losses in RUpee gold much magnified.
[QUOTE=wiseman;471904]Venky,
What if world economy does NOT recover? I doubt Indian economy will recover under those circumstances (by recovery I mean going back to the 8-9% GDP growth rate). The Chinese economy will probably average less than 5% growth in this decade.
Under these circumstances, where would you see gold going (both $ and Re)?
In addition, gold has never crashed until inflation and interest rates turned down and the debt spigot was turned on bigtime.
This time, interest rates cannot go down any further and inflation (at least official rates) are at rock bottom. We have seen plenty of Debt being created and its not having anything but temporary effect.
In addition, increasing number of people and Central Banks are accumulating gold as a last resort to protect their wealth. Central Banks have reported bought around 400 tons in the last year.
So, exactly what phenomenon would result in gold prices crashing?
cheers[/QUOTE]
Difficult question. If anyone knows the exact answer to this, he can become seriously rich. I dont. I only have some thoughts.
Lets see. First there are 2 different questions and not one question in your post.
1st: Deflation. This is again a serious problem which has raised its head. With deflation US will not only keep its short term rates at zero, but even long term bonds will rise to maybe 0.5% yield or even 0% yield. This will make dollar weaker by maximum another 10-15%. So maximum upside for gold is another 10% - 15% plus whatever risk premium is given to gold. So in USD, gold might go to about 2000 or so, assuming a 25% total rise from current levels.
But in India, Rupee will collapse to about 90/dollar or so - since we will be unable to export anything. There will be serious recession. Gold will rise to about 40-50,000Rs or so - but RBI will ban all gold products, there will be import duties and smuggling. Physical PM should be OK in this scenario. If you are in e-gold, one should exit well before these are banned and well before all this volatility
This is an extreme event and probablility should be low (how low/high no-one knows)
2nd possibility: USA lumbers on like a zombie as it is now. Dollar will stay steady till 2014 or so. Gold will move along with Euro. After that Dollar will rise as US rates slowly rise over next decade or so - initially, as US recovers, they will keep short rates low and allow some inflation to take place. So some small return in gold will come with it - but not like the returns with such massive currency printing which we have already seen - maybe 5-10% only.
After that, if USA can absorb the first rate rise without falling back into recession, then - VERY VERY SLOWLY - over maybe 3-4 years, they will raise the US rates by 1-2%. That will make dollar strong and gold will fall.
Net net, gold is fairly valued in dollars.
But this is importan - in this scenario, there will be a dollar carry trade for investment in India. A massive equity and investment boost will come to India. The flow of dollar will raise the Rupee to below 50 and even close to 45. Gold will then fall a lot - maybe 25000 or so is possible.
Later, post 2014 scenario- as dollar rises with raising of US rates, Rupee will fall again and so gold will again rise in Rupees.
Probability of the 2nd scenario is much higher - again imponderable.
Depending on the strength of the Indian recovery, gold will fall varying amounts, depending on the Rupee.
But overall RBI seems comfortable with current Rupee levels and so gold should maintain steady state. Since Indian policies are stupid, a rise of gold to 35000 levels and fall of Rupee to some 60-65 is always a possibility even within this recovery. But not a major collapse of Rupee/ major gold bull market.
Buying gold at current juncture is only to guard against the first possibility. Maybe 5%.
Subscribe to:
Posts (Atom)