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.