Thursday, December 22, 2011

What's Going On With Gold?

There is a striking similarities between today's situation and what happened back in 2008. 

Specifically, we're referring to the liquidity crunch that jolted the financial markets in the period that led up to the collapse of Lehman Brothers.

At that time gold was one of the last remaining sources of liquidity - and so it is today, which is why the yellow metal has been under such intense selling pressure lately. And this is happening even though all the fundamentals would suggest it should at least be retaining its value, if not be rising in price.

Gold was an important bellwether at that time, and again, so it seems to be now. Beginning in March of 2008, gold declined by about 15 percent while the S&P 500 moved sideways. Then it rallied briefly before falling once more along with stocks - which declined much more percentage-wise before bottoming.

Gold lost a third of its value during this episode, before recovering and heading steadily higher. But stocks declined by more than 50 percent at their lows, and to date have yet to surpass former highs.

Coming back to today, we see that despite the ups and downs of this past very volatile year, stocks have essentially traded sideways. Gold, though, has now fallen more than 15 percent from its previous highs and, as we pointed out two weeks ago, the gold shares far underperform the Midas metal.

Thus, we see how this price action may once again be signaling a sharp selloff in stocks in the near future. At the very least, gold and stocks could remain mired in a trading range for a time, at least until the ECB (most likely joined by our own Federal Reserve) take concrete steps to resolve the situation.

The shape of such a favorable resolution is likely to be a clear and definitive policy of easing by the Europeans, possibly accompanied by a QE3 from our own Fed.

That would help to light a fire under the stock market, which by and larger are trading at very reasonable levels relative to sales, cash flow and earnings. Moreover, the prospects for gold will then involve a rebound that should take the metal far higher than its 2011 highs.

Courtesy: Stephen Leebs

Moody's upgrades India's Sovereign Debt Ratings

Upbeat finance ministry to announce supporting measures for boosting foreign investment by December-end.

At a time when sluggish growth and impending slippage in fiscal deficit target, intertwined with an atmosphere of policy paralysis, has been dampening economic spirits across the board, Moody’s on Wednesday changed the sentiment in India by upgrading the country’s sovereign debt ratings from speculative to investment grade.

The upgrade immediately injected adrenaline into the government machinery, especially the finance ministry.

Officials, now brimming with optimism over the shift in the foreign investors’ outlook for the country, have indicated announcement of steps soon after the close of the ongoing Parliament session — in the government’s efforts to boost foreign investment in the country.

INDIA’S REPORT CARD What rating agencies say about the nation
 Foreign currency long-term debtLocal currency long-term debt
DBRSBBB (low) stableBBB (low) stable
Moody’sBaa3 (investment grade)Baa3 (investment grade)
FitchBBB- (stable outlook)BBB- (stable outlook)
S&PBBB- (stable)BBB- (stable)
Source: Rating agencies

The measures likely to be announced by December-end include relaxation in the lock-in and residual maturity norms for investments in the infrastructure sector, according to an official. “Also, there can be a hike in investment caps, wherever necessary.”

The lock-in period and the residual maturity are expected to be reduced to one year for all infrastructure investments.

The government says this will enthuse FIIs to look at India as an attractive investment destination. “The upgrade will have an amazing effect on sentiments in the short term,” says Thomas Mathew, joint secretary, capital markets.

Moody’s Investor Service upgraded the rating on long-term government bonds denominated in domestic currency and long-term country ceiling on foreign currency bank deposits, both, from Ba1 to Baa3 — speculative to investment grade. 

Year 2004 was the last time Moody’s upgraded any Indian long-term sovereign debt instrument from speculative to investment grade.

In addition, the rating agency has also upgraded the short-term government bonds denominated in domestic currency from NP to P-3, again from speculative to investment grade. The rating has been upgraded in this case for the first time since it was assigned in 1998.

The upgrade follows a meeting last month between the representatives of the rating agency and finance ministry officials. The officials, led by R Gopalan, secretary to the department of economic affairs, impressed upon Moody’s to upgrade the country’s rating to Baa1 — two notches above its current rating.

The ministry, under a planned strategy for strongly presenting the India growth story and seeking better ratings, provided a detailed, data-based “India factsheet”, wealth in the public sector undertakings, and a cross-country comparison of long-term economic, fiscal and financial indicators to the rating agency.

Says an official, who was part of the presentation process: “We told them to analyse their India ratings in the last two decades and the country’s performance during the period and showed them that they didn’t match. 

Despite problems, India growth story has remained intact since 1991.”
Mathew says the government will ask for similar upgrades from other rating agencies now. “Moody’s should revise its ratings further two notches upwards,” he adds.

Moody’s has now recognised that the “diverse sources of Indian growth” have “enhanced its resilience to global shocks”. The present slowdown in growth rates “could reverse some time in financial year 2012-13, as inflation cools from current 9 per cent levels”, it says in its report. The structural drivers of India’s growth momentum will not be damaged by the present cyclical downturn, it says
Moody’s also expect that growth, supported by savings and investments, will revive over the medium term. “In terms of economic size, diversity, growth as well as saving and investment rates, India is stronger that baa3 rated peers,” it notes.

The rating agency has, however, pointed out that India’s weak “fiscal metrics” remained a constraint for the nation’s rating as government debt levels were higher than similarly rated nations.

“Improvement in government finances, coupled with enhancements to the investment climate and a reduction in infrastructure bottlenecks, could lead to the rating being considered for an upgrade from current levels,” said the agency in its report.

Still, a sustained rise in debt or “continued worsening of the balance of payments well beyond the period of current global uncertainty could trigger a downgrade”.


Thursday, December 8, 2011

Germany's History in Short.

The Germans' strict opposition to the monetary financing of governments isn't just petty legalism -- it's a bedrock principle, based in history, which was purposefully built into EU treaties and Bundesbank policies.
It's worth revisiting why the memory of hyperinflation has seared itself into the minds of many Germans, and how it's shaping their thinking and the future of the euro itself.
Imagine yourself among the wealthiest people in the world in 1914, holding 4.2 billion marks (then about $1 billion) in safe government bonds. Those bonds would have been nearly worthless 9 years later -- easily payable with, say, a 50 billion-mark banknote signed by Reichsbank President Rudolf Havenstein. Of course, you would need 45.8 billion marks in change, which illustrates one of the great ironies of hyperinflation: Everyone was always short of cash in the midst of a blizzard of paper.
Havenstein justified the continuous purchasing of government debt on the grounds that there was little choice given the national emergency. Havenstein thought the real sources of inflation were the legislature’s inability to balance its budget and the burden of reparations placed onGermany by the Allies at the end of World War I.
Despite millions starving, the demobilization of millions of soldiers, and a near civil war in the Ruhr, inflation creeped till 1919, then “galloped” until mid-1922. Then, in late 1922, it spiraled into hyperinflation as Germany refused to continue payments on the 132 billion gold marks levied on it at the London Ultimatum of May 1921.
Because Germany halted reparation payments, France decided to confiscate goods in kind and occupied the Ruhr, the center of German coal and steel might, in January 1923. In response, the Germans began a campaign of "passive resistance" that all but destroyed the mark. Havenstein felt that he had no choice but to continue printing money to support the Reich.
Hyperinflation wreaked havoc on Germans. People on fixed incomes suffered terribly. One poor elderly woman, whose life savings in Deutsche Bank were wiped out, later discovered that the bank didn't inform her because the stamp would have cost too much. The propertied middle class lost their savings after suffering deprivation throughout the war. Many sold possessions to raise cash for increasingly expensive "real goods" such as bread or meat. Housewives stood outside factories to collect their husband’s pay and spend it as quickly as possible. Businesses needed sacks of cash to pay workers. Famous photographs show money being carted in wheelbarrows; one possibly apocryphal story has a robber stealing the wheelbarrow rather than the money.
Eventually, industrialists gave up paying in marks, sometimes creating their own substitute scrip or paying workers in “three breads.” Cities and organizations also created their own monies. Retailers had to continually adjust prices, which gave considerable room for misunderstandings. The response was sometimes violent. In November 1923, mobs attacked Jewish shops around Alexanderplatz in Berlin. Similar attacks occurred across the country.
“Speculators,” bankers, and black-market dealers came in for particular criticism. One small savings bank organized a swap meet for buyers and sellers to eliminate the dishonest profiteers. As one eyewitness, quoted in Gerald D. Feldman's "The Great Disorder," put it:
A walk through the small salesroom with its tables and glass cases is heart-rending. There lie spread out so many lovely things so pleasing to the eye ... everything in short that once decorated a house is assembled here ... There is some old piece, a picture, a porcelain dish, a vase, which appears to the loving but unskilled eye of the owner as a true rarity and who, if she must part with it, wants to receive as much as possible. One now has to tell her that it has neither material nor artistic value, and the sick, embittered souls are always inclined to take this as a personal affront and bad will ... A look out the window -- there slides by the restless life of the metropolis, the fine silk stockings and expensive furs, there sit autos with the fat figures of profiteers, and here inside, in the quiet room, an impoverished Germany quietly and painfully weeps in its silent misery.
The hyperinflation also fomented a new and dangerous activism in German politics. The prime minister of Bavaria declared martial law. In October 1923, federal troops marched into Saxony and Thuringen to depose radical communists from government. Then, in November, Adolf Hitlerand General Erich Ludendorff attempted a Mussolini-like march on Berlin, in what's now known as the Beer Hall Putsch.
The putsch failed miserably, but Hitler continued to seize on the prevalent economic despair. He was briefly sent to prison where he wrote "Mein Kampf." Although he didn't gain power until January 1933, the link between reparations, financial crisis and the destruction of the mark proved ready rhetorical fodder.
Hyperinflation didn't lead to the rise of Hitler, but it undermined the legitimacy of the democraticWeimar Republic.
Millions of disaffected middle-class voters soon drifted to various splinter parties on the right. The center hollowed out, and subsequent coalition governments ruled on a tolerated-minority basis. German politics never really regained its balance in the mid-1920s, a time of relative economic stabilization -- and then came the Great Depression, government austerity packages and, ultimately, the rise of the Nazis.
Never again, the thinking goes today. And rightly so. But the fate of the euro zone depends on which historical lesson one draws from this episode. Are there circumstances in which monetizing government debt is appropriate -- or not?

Wednesday, November 23, 2011

Short Term - Gold will again loose its shine.

On Oct-18, I had posted that gold will be loosing its shine for the short-term. There was 3-4 day of capitulation and 20-Oct was the lowest for gold. 

Gold has again raised it head and is at a all-time high of around 30K. Even though I am bullish on gold till Mar 2013 (Thanks to the FED announcement of keeping low interest rate regime till mid-2013). Its quite possible that gold may be stuck in a range for next 1 year with an upward bias.

But in next few days or weeks(before 15-Dec), I would expect another capitulation in Gold. Lots of Hedge Funds may have to liquidate their gold position in coming days/weeks. So folks who are still out expecting the gold to come down can load some of their truck with gold at 25K and lower.

There is another interesting, trade for the long term(3-years plus) and that's Silver. But I still don't have a good way to invest in Silver in India other than holding Silver in physical form. For US-folks its 'iShares Silver Trust (ETF)'. Silver price will be lot volatile in next 1 month but can be bought at dips (every month/week) as per your averaging strategy. 

GOLD ETF is still my preferred way to invest in Gold in Indian Markets. 

Sunday, November 20, 2011

Land Deals from developers in India is still Risky.

Buying Land in India have always been risky. Lots of developers have started emerging in Pune who are selling Agriculture Land to retail customers. The only hurdle is you need come from a farmer background. 

Definition of ‘Farmer background’ is your paternal side (paternal uncle/dad/grand father) should hold a farm land.

Here is the business model that these developers have come up with.
Farmer’s Deal:
1. Create a Legal MOU with a farmer saying they will sell their land and will pay the farmer a fixed amount once they have sold the land.
2. Create a valid Search Title Report. There may be minor discrepancies with the report.
3. Create a Fancy Pamphlets promising plot fencing, street lights, etc.
4. Try to rope in customer with those fancy Pamphlets.    

Customer’s Deal:
5. Once a customer is interested in the site. They are asked to pay around 20% amount as a booking amount and the documents are provided to the customer. If there are any discrepancies in documents the amount will be refunded. If you need a refund, even if the documents are correct, around 15% of the booking amount will be deducted.
6. The Customer is expected to verify their documents from an advocate.
7. Now the Customer's advocate will come out with the problems related to incomplete documentation.
8. The builder will delay the documentation.
9. The builder invests the booking amount and tries to delay the processing for incomplete documentation for 3 months.
10. The customer has 2 choices:
               a. Buy the land since the developer does not agree with the incomplete documentation.
               b. Worst case the developers will cut 15% of the booking amount and return the money to customer.    

The concept is really good. Developer is making money without any major investment. Extreme innovation in Indian Real Estate is picking up.

I think this should soon pick-up in Listed Real Estate entities who have lots of land banks.

Saturday, November 19, 2011

TechM Results Q&A

BT’s share has come down from 80 per cent a few years ago to 37 per cent. Do you think this will be the level for BT?
When BT contributed to 80 per cent of our revenues, it accounted for less than $100 million. At current levels, BT’s contribution is around $450 million. So, while the percentage of BT in the overall pie has come down, we have been able to increase our share of business with BT. We have also been able to grow business from other telcos.

But BT has called for re-tendering. What will be the impact and would the stake sale of BT impact business?
I suppose as a percentage, BT will go down, but not in absolute numbers. That is what we hope to achieve. As for the re-tendering impact, we had a $6-million fall in revenue. That was the amount of reduction we had in the business from BT. But since the re-tendering, we have got more than what we were already working with BT. In the IT deal, we have got a larger chunk, except that the pricing that we have got is at a lower level. The BPO business with BT has grown and continues to grow. We will try and optimise the BT account by moving away from pure outsourcing work to more transactional work. The BT stake sell will impact our business with them.

How has the 2G scam and expose impacted your business with Etisalat?
We are very satisfied with our deal with Etisalat. We have been serving them and we have been compensated on time. So, from the business point of view, everything is the same.

With all the legal hurdles and issues solved, by when will the merger with Mahindra Satyam happen?
We hope to complete the process of merger by next year.
There are tax issues, but we are contesting them. As for the share swap ratio between the companies, it will be decided by the bankers.

Can you give us some details about the pending US SEC cases and when do you see a possible solution in Satyam.
Nayyar: That issue has been resolved. We have agreed to delist and the process is on. It will be completed by end of February.

On the class-action cases in the US, the federal court judge had accepted the settlement, and orders to that extent had been passed. But one case related to Abardeen, a particular investment fund, is on. And we will see how it turns out.

How many payment obligations do you have at present in Satyam?
Nayyar: About $125 million for class-action, $70 million for Upaid and $10 million for SEC have been paid .

At what stage is your battle with the Income Tax department that you are currently waging in Satyam?
Nayyar: Our statements have been very very open. We believe that the demand on that fictious income is unreasonable. At this stage, I can only say that it is sub judice and we are currently presenting ourselves. I don’t see this dialogue (with I-T department) getting resolved pretty easily.

A Short History of Assam.

Pre-colonial Assam had a feudal economy. The Assamese king was the absolute owner of all land except the royal grants of land to the high officials in the administration and the grants to the temple and Vaishnavite Satras (monasteries). The peasantry had no private property (land). As there were plenty of land available with a sparse population, there was always a tendency of the Assam peasantry to shift their cultivation sites. The mode of business was barter because money was not in vogue. The people were self sufficient and agriculture was the main occupation. Though the kingdom of Kamrupa (ancient Assam) had international trade practice, the Ahom imperial Government did not encourage much trade with the outside world and foreigners were frowned upon. With a self sufficient feudal economy, with no money or coins introduced till the 16th century, with a very low volume of trade with foreign kingdoms, the market system did not develop in pre colonial Assam. There were of course a trading system between the hills and the plain’s people of Assam.
The revenue collection of the Ahom administration was based on thekhel system. The administration did not have a money oriented revenue system. The entire male population with the exception of the artisans, fisherman, gold washers and other non agricultural profession was divided into khel or clans numbering from 1000–5000 men in cash. The system was based on personal service and an article of produce rather than monetary taxes. The khels were then sub-divided into different gots or units. Eachgot consisted of three or four pikes or individuals. The paik was the lowest unit of khel system. These paiks were assigned to different jobs, such as building of roads, embankment etc and had to serve the country or the aristocracy for one third of the year. Except for a small batch of regular army guarding the capital and the royal household, the Ahom imperial administration had a peculiar Army system. During a war ever paik had to take part in war once called by the king. The paiks becomes the army and all the able bodied Assamese males go to war. The whole populace becomes the army. With the repeated Mughal invasion from 1615, the Ahom monarchy established a regular army.
But with the annexation of Assam and the introduction of British revenue rules and regulation of land rights to the peasants slowly disintegrated thekhel system and the paiks were freed from personal labor. The dismantling of the paik system had reduced the Ahom nobility to poverty because there was no body to serve them or cultivate their land. The cultivator of the soil and the aristocracy become the same. The paiks become the ryots under the British system. The British established the cash or money system of payment.
The Wasteland Grand Rules, 1838 was formed to attract foreign capitalists. The Assam Company, the first Indian Tea Company was flouted in 1839 in London and was granted about 33,665 acres under the Wasteland Grant Rules. Later it was modified to suit the British and the European tea planters and they slowly became the biggest land owners in Assam by paying the least revenue per acre land. Many tea planters encroached land belonging to the Assamese people. The ownership of Assam’s land right was transferred from the Ahom king to the British. By 1901, about one fourth of the total settled area of Assam Proper, i.e. about 6, 42,418 acres came under the tea gardens. Though the Assam land and Revenue Regulation of 1868 were introduced in Assam with their best intention of regularizing the land rights to the Assam peasantry who practiced shifting cultivation, the British became the absolute land owner. The dearth of paying land revenue on long term land leases forced many Assamese landless. The pre-colonial system of cultivating anywhere was stopped. The Assamese peasantry was totally confused with the sudden change of the land rights and the mode of cultivation. The Assamese learnt about the value of long term land leases when vast tracts of land were allotted to tea cultivation on one hand and with the land hungry East Bengali immigrants started settling in the chapori belts or flood plains used by the Assamese peasantry for shifting cultivations.
Though Assam was annexed in 1826 and wild tea plants were discovered in 1823 by Robert Bruce, the opium war with China diverted the attention to the newly conquered territories of Assam. Chinese tea was to be imported to England by The East India Company and it was a monopoly trade. The Charter of 1833 stripped the monopoly business of the East India Company but allowed Europeans to hold land on a long term lease outside the Presidency towns which opened the colonial plantation economy in Assam. When Assam tea was auctioned in London in 1839 it created the Assam Tea Mania.
Since 1840’s, the next few decades witnessed a global investment in far off remote Assam in the tea sector which gradually destroyed the Ahom’s feudal institutions and economy and led to the growth of the capitalist economy. The British introduced the monetized economy in Assam. The tea industry identified Assam with the commercial map of the world. The huge capital investment did help to the growth of modern capitalist economy in Assam by the turn of the 19th century. The tea economy not only changed the political and economic scenario, but also environmental changes. The tea plantation required huge plots of land. The tea planters cleared the jungles for tea cultivations. In the process destroyed most of the forest cover in Assam. The tea industry as well as the timber industry was mainly responsible for the rampant deforestation which permanently transformed Assam’s landscape and greatly affected the climate and the culture of Assam in the next century. The forest policy was also introduced to suit the colonial and the tea planter’s needs.
The growth of the tea industry necessarily led to the growth of communication and infrastructure network. The industry which was totally dependent on an external market required the basic routes to and from Calcutta. Building of roads and bridge were taken up. Navigation by the Brahmaputra river was introduced by the Assam Company by a steamer service from 1841. Railway lines were laid from Dibrugarh to Ledo in 1882 by the Assam Railways and Trading Company with the aim of joining the remote tea gardens to the streamer service.
The opening of the frontier land and the global investment led to an economic boom in Assam. European tea planters flocked in Assam by 1860s. The planters had faced difficulties because there was no basic infrastructure apart from the inhospitable terrain and epidemics. The transport and communication was mainly done by the rivers as there were no proper roads. The banking sector was in a very poor state. Though a few banks were set up by Govt. by 1870, there were always storages of coins in the treasuries.
The whole economy evolved around the tea industry even though the coal and the oil industry sprang side by side. From 1847 regular coal mining took place. The first refinery in Asia, the Digboi refinery was commissioned in 1901.By 1871, about Rs. 18.6 million had been invested in the Assam tea industry. The total investment by 1881 had touched Rs. 63.8 million. And the total investment in the organized economic sectors (tea, railways, coal, petrol and saw mills) from 1881-1901 was about 200 million rupees. It was one of the highest investments in a region in British India.
The transition of the pre-colonial feudal economy to a modern capitalist economy was too fast for the Assamese people to adjust to the new system. Suddenly the Assamese people faced land hungry East Bengali immigrants and tea garden labors from other Indian provinces in huge numbers. Bengali clerks, Marwari traders and Hindi speaking semi skilled labors flocked in the closed Assamese society. The population of Assam increased from an estimated 8 lakhs in 1826 to about 22.2 lakhs in 1901, out of which one third of the population were non indigenous . Modernization of Assam was accompanied with the formation of the Assamese middle class.
The huge British capital invested in Assam did not help in the growth of domestic capital of the Assamese people. The Assamese people remained mainly dependent on agriculture. The increased land revenue rendered the peasants poor and the savings was meagre. The economic situation hardly improved for the people. The tea planters made huge profit because the land tax was very nominal for them and the tea labors were poorly paid. The surplus income of the tea planters was usually remitted back to London or re-invented in the tea, timber, coal or oil industries. The immigrant labors, other professionals and the petty traders from India never invested their savings in Assam. In these ways, most of the income generated in Assam was drained out. The surplus of the foreign investment was never reinvested or diversified in the overall growth of the economy.
After 1901, foreign investments came down and the new investments came from income generated in India. But the land grabbing by the tea planters continued till 1947. The influx of the immigrants, specially from East Bengal began on a larger scale by 1911. The economic transformation of Assam witnessed the demographic shift in a big way encouraged by the colonial masters. After the partition of India in 1947, East Bengal became East Pakistan and then Bangladesh in 1971. The immigration continued unabated. The Indian state did nothing to stop the influx from the foreign country.
Assam’s present economy is simply a continuation of the British colonial economy. The transaction from the feudal economy to the modern capitalist economy without diversification to other traditional sectors hardly benefited Assam’s economy. The resource mobilization of Assam’s national wealth to fulfill the British interest was carried out in the same way under the Indian administration to benefit the Indian economy at the cost of Assam’s interest, which is already a most economically under developed region in the Indian sub-continent. In spite of its precious natural resources such as mineral oil, gas, coal, timber and tea, Assam remained basically an agricultural economy. Assam, which was previously internationally connected under British Raj became land locked in the post colonial period. Indian investment dried up by 1950s and after the Chinese intrusion in 1962 it was completely stopped. The Indian state started using Assam as its hinterland with neo colonial policies.
There was never an attempt to mobilize the natural resources internally for industrialization of the region. The Indian state, even after the liberalization of the Indian economy from mid 1991, never tried to maintain the priority and the trust applied by the British to boost the global investment in Assam. The economic liberalization and the new industrial policy of the Indian Government attracted huge foreign direct investment (FDI). From 1991 to September 2011, about 162.11 billion USD has been invested mainly in the services (financial and non-financial), telecom, IT, roads and highways, housing and real estate, construction and power sectors in the comparatively developed region in India. The under developed eastern region, especially Assam, was left out. The Look East Policy (LEP) was introduced as an extension of the economic liberalization policy of India to forge ties with South East Asia, but it is mainly guided by defense and strategic interests. No foreign country has invested in Assam. Foreign investment in Assam came only as loan through The World Bank (300.6 million USD), Asia Development Bank (420 million USD) and the Japanese Bank for International Co-operation (Rs. 1200 Cr) for development of rural infrastructure, agriculture, roads and highways, administrative and fiscal reforms, urban infrastructure, flood control, power sector, water supply and other urban services. The exploitative and the hegemonistic approach of the Indian state has to be abandoned for a healthy economic growth in Assam.

Wednesday, November 16, 2011

How PIIGS Defaults Could Affect The Markets.

PIIGS is not the most flattering acronym to describe a group of countries, but Portugal, Ireland, Italy, Greece and Spain may have to make due for the time being. The name is thrown around to describe a set of eurozone countries considered to be the most at risk when it comes to sovereign debt and has grown more popular by the frequency at which stories relating to their economic woes appear in the news. Images of rioters in Greece and protesters in the streets of Spain have come to symbolize both the follies of governments and the fear of future austerity.
Three "Little" PIIGS CrisesPortugal, Ireland, Italy, Greece and Spain are in trouble – this is a given – but looking at individual statistics doesn't show how complex the current situation is. There are really several crises occurring in rapid succession: a crisis related to PIIGS banks' exposure to debt, a crisis related to PIIGS government debt and a crisis related to non-PIIGS banks' exposure to PIIGS debt.

The first crisis is related to government debt. Take general government gross debt as a percentage of GDP. We've got some pretty high numbers: 83.9%, 82.3%, 75.5% and 94.3%. Those aren't for the European countries on the brink of collapse; they are for Germany, France, the United Kingdom and the United States, respectively. The figures for Ireland, Italy and Greece are 94.9%, 118.9% and 142.7%, respectively. They are much higher. Government debt levels are expected to increase in the coming years due to deficits, pensions and rising healthcare costs.

PIIGS banks' exposure to their own sovereign debt is troubling. Of the $763 billion in sovereign debt held by 90 European banks, 59% of it was held by banks in the country that issued it in the first place. Spanish banks hold 78% of their country's sovereign debt. As the risk of holding that debt increases, these domestic banks will find it increasingly difficult to get funding from other financial institutions. This is especially concerning because these banks rely heavily on wholesale sources of funding, and these sources will become more expensive as countries lose their creditworthiness. Suddenly you have sovereign risk becoming general bank risk.

The third crisis relates to non-PIIGS financial institutions exposure to PIIGS sovereign debt. Spreads on sovereign debt bonds over German bunds grew wider as investors' faith in PIIGS government wavered, and were hit especially hard by a Greek debt downgrade in April 2010. Yields on two-year Greek debt jumped from below 10% in October 2010 to above 76% in October 2011 and 10-year debt rose from 5% to 24%. European governments have certainly taken note of this, since they know that in order to preserve the euro they will have to prop up PIIGS governments or allow them to go through default in a semi-orderly manner. (For more insight to the correlation of risk and governments, read The Government And Risk: A Love-Hate Relationship.)

PIIGS and The BanksThen there are European banks. The European Banking Authority (EBA) conducted a stress test on 90 different European banks, including an examination of their exposure to government debt. When banks were not "allowed" to raise capital, their average Capital Tier 1 (CT1) ratio fell from 8.9% to 7.7%. If banks were required to raise capital, eight would have CT1 rates below the 5% threshold set forth in test, and a further 16 would be perilously close to falling behind. Without capital raising, 20 banks would fall below 5%, which is a frightening statistic because banks may very well lose access to capital if governments start to default. The EBA found that 42% of bank funding came from wholesale and interbank sources, rather than less risky consumer deposits. If markets freeze up, banks won't have access to capital. (To learn more about how the Tier 1 Capital Ratio measure a bank's health, check out Is Your Bank On Its Way Down?)

Sovereign Debt
This brings us to bank exposure to sovereign debt. The 90 banks reviewed by the EBA had gross exposure to PIIGS debt of $763 billion, with 80% coming from Italy and Spain. Fourteen of the 90 banks had more than $30 billion in individual exposure, including BNP Paribas (France), Intesa (Italy), Unicredit (Italy) and Banco Santander (Spain). If the EBA requires banks to shore up their Tier 1 capital, these banks could find themselves well short of the requirements. As the value of sovereign debt bonds declines, the balance sheets of these banks look worse and worse.

The more out of control this amalgamation of financial terror becomes, the worse off European businesses will be. This is especially true considering how some of the more healthy European economies wind up sending a lot of exports to PIIGS countries. In 2010, Germany exported $1,300 billion worth of goods, with Italy ($75.6 billion), Spain ($36.9 billion), Portugal ($10.10 billion), Greece ($6.1 billion) and Ireland ($4.65 billion) representing roughly 10% of all exports. Because this is a cascading problem, once exports start to fall so too will unemployment rise, tax receipts dwindle, unrest build and bank runs pop up. In short, it's a mess.

The Bottom LineThere is no easy solution to this crisis, but one thing that everyone can agree on is that no one wants disorderly government defaults. Banks will have to be recapitalized, just as they were in the United States in 2008. The composition of debt held by banks will need to become more diversified, since it was the reliance on "safe" sovereign debt that put them in the precarious position that they are in today. Banks will have to show their hand in terms of their debt composition, which will make investors more confident in the health of each bank. Government regulations will have to ensure that sovereign risk is kept separate from bank risk, which will require an end to implicit government guarantees of support for banks in times of trouble.


Thursday, November 10, 2011

Generating Green Energy from Coal Mines.

The principle is simple. When a large amount of wind and solar energy is available, it is used to pump water out of the mine tunnels into an artificial lake on the former mine grounds. When there is an electricity shortfall or if the energy supply begins to fluctuate, the floodgates are opened and the water drops through the giant pipes to drive the turbines 1,000 meters below the surface. The entire output becomes available to the grid within a very short amount of time.


Wednesday, November 9, 2011

10 Golden Rules that can make you an Millionaire.

In my experience, lack of financial literacy has been the main reason why people have not made the best use of their money. Their potential to become millionaires has, therefore, unfortunately remained unrealised. Worse, they have repeatedly fallen prey to fraudulent schemes. If you want financial success, this has to change. You have to become more vigilant about your financial matters.
For your convenience I have listed below 10 Golden Money Rules that are the catalyst to your millionaire-aspirations.
1. Invest in financial lessons before investing in financial assets
You don't drive without learning driving and getting a license. Do you? Similarly, you need to first learn how to acquire good assets and manage them appropriately. Educate yourself. Books, internet, seminars . . . you have so many avenues to choose from. After all it is your hard-earned money. So please do take good care of it.
2. Have a detailed Financial Roadmap
Without one you could easily get lost in the financial maze and may not reach your goals. Get yourself a financial GPS.
3. You are unique. Hence, do what suits you
Blindly copying others is not a good idea. Your assets, liabilities, needs, desires, time-frame, risk-appetite are different from your friends, neighbours, colleagues, relatives. So naturally, your investment pattern too has to be different from them.
4. Keep things simple
A simple term plan, a simple mutual fund, a simple medical insurance plan, etc. will work well in most cases. Don’t be under the false impression that complicated products give better returns.
5. Start early, invest regularly and stay invested
Time makes money. Even Einstein was impressed by the power of compounding. Assets are merely the tools, which Time employs to make money for you.
6. Always pay your credit card bills before the due date
This will not only save you lots of avoidable interest charges, but also prevent splurging. It will ensure that you buy only what you really need.
7. Avoid Leveraging
A millionaire with debt is a fake millionaire. I am sure you wouldn't want to be one. All Debt is not bad. Understand good Debt and Bad Debt. Keep a check on your Debt to Networth Ratio. Also monitor the effect of the new loan on your monthly Cash Flow.
8. Avoid exotic products and derivatives
They have been rightly termed as Weapons of Mass Financial Destruction. Look what happened even to the mighty USA. 
9. Seek guidance from professional financial advisors
Right directions will save you a lot in terms of time, efforts and money.
10. Beware of scams and scheming agents
If anything sounds too good to be true, it usually isn't true. Don't trust anyone. Triple-check every deal offered to you. Internet is a great tool to get right information.
This list should, however, be your starting point, not end-point. Educate yourself. Books, internet, seminars . . . you have so many avenues to choose from. After all it is your hard-earned money. So please do take good care of it.
In fact, I would go to the extent of saying that if you just follow one rule - KEEP THINGS SIMPLE - you will not go wrong with your financial decisions. (The financial lessons will be easy, the roadmap would be simple, you will not need any experts, you will avoid scams and exotic products, you will keep away from debt, you will not have any problems in paying your bills on time, etc.).

Wednesday, November 2, 2011

Papandreou's Master Plan.

Germany and France seemed genuinely shocked by Papandreou's decision to call for a referendum. This morning, officials from both countries telegraphed that there would be no alterations made to the plan and that Greece was going to have to accept it in its entirety or lose the billions of euros in aid it needs to keep paying its bills.
So who holds the advantage here? If Greece goes ahead with the referendum, its citizenry would most probably reject the plan, creating a wave of instability in the region. In response, the EU would probably cut its lifeline to Greece, forcing the nation to default on its debt. That would cause all of the major Greek banks to collapse, as they are the largest holders of Greek debt. But at the same time, it would cause several European banks to take billions of euros in write downs, as they too hold significant amounts of Greek debt.
Snowball effect
It doesn't end there. Since the Greeks were forced into default, credit default swap contracts on Greek debt would be triggered. That means the banks and hedge funds that were short Greek debt would now be owed billions of euros in insurance payments by those that were long Greek debt. It is widely believed that the large banks, which issue and sometime hold on to all those CDS contracts, have not set aside enough capital to payout claims. This could lead to an AIG-style meltdown of many financial institutions. That explains why bank stocks around the globe fell hard yesterday, especially those that play big in the CDS market like Bank of America (BAC) and JP Morgan Chase (JPM) in the U.S., which were both down around 6%, as well as those in Europe like Societe Generale, which was down over 16%.
This CDS chain reaction is one of the major reasons why the Europeans have kept Greece on life support for so long. The total collapse of the Greek economy would be a sad event, but a confidence crisis in the word banking system, three years after the fall of Lehman Brothers, would be a catastrophe. One of the major planks of the latest fix-it plan was to get the banks and other major holders of Greek debt to agree to take a 50% haircut on their bonds. Since such a cut would be voluntary "soft default," it would not trigger the CDS contracts, therefore limiting the fallout to those banks that physically held Greek debt.
A hard default would probably see all that Greek debt go to zero. While that would wipe the slate clean for the country, it would be a pyrrhic victory as its economy would be decimated. Papandreou is fully aware of this fact, as are members of Greece's main opposition party in parliament, which has blasted the prime minister for being reckless. If Papandreou survives a vote of no confidence Friday, the stage will be set for months of further market instability. The referendum would take place probably at the end of December or beginning of January.
To avoid all of this, the French and the Germans may need to swallow their pride and work out a better deal for the Greeks with the banks. Under the current plan, Greece's debt-to-GDP ratio is projected to be around 120% by 2020. While that is an improvement from the projected 190% ratio projected by 2013, it's still very high. The plan assumes further cuts in Greek government spending and a positive economic growth rate. Those assumptions are generous, since the cuts in spending, coupled with a strong euro, would probably lead to much slower economic growth. To dig itself out of this hole, Greece needs to cut its debt by more than 50%. The banks have balked at taking a larger haircut, but the threat of a hard default may scare them into accepting a greater loss.
Warren Buffett once called derivatives financial instruments of mass destruction. The CDS contracts attached to Greek debt are proving to be quite a destructive force indeed. Papandreou is now threatening to push the button. To avoid a nasty surprise, the Europeans will probably need to yield to Greece's demands.