Following is an extract from an overall opinion I gave on Greece (on 7 February 2010), and a section of this has been quoted in the Macquarie's Equity Research - Guanxi dated 11 February 2010:
Greece is what Dubai was in Nov/Dec 2009. The difference is that Abu Dhabi did come to support Dubai, but who is coming to help out Greece? I have a negative outlook on Greece and think it will trigger an anti EU domino effect. My hypothesis is based on my understanding that strong countries of EU (primarily Germany and probably France) are more interested in Eastern Europe, primarily due to growth opportunities.
The question is: Why should EU or Germany or France lend to Greece to repay debt to IMF, WB or other lenders? When it can fund Eastern Europe, and create market for its exports.
The consequences of default for German banks and others who have lent to Greece can be damaging. However, that is only accounting and stock market loss. For the government, the main issue is job creation and keeping the transaction cycle running. I think any country or government that is looking at profitability as the KPI will surely end up facing election carnage. They need to focus on people issues, jobs, SMEs, innovation, R&D. From German perspectives, all these are not served by bailout of Greece.
The next question becomes: If Greece goes, then what happens to Euro? I am not too positive about Euro also. I am not an expert, but Euro faces significant issues. How can a currency be fixed for distinct economies? Some in shambles, and some in growth. Some having inflation, and some probably in deflation? Some even having religious issues. May be, in my lifetime, I will see the end of Euro in its current form.
Where did it start? Well, I really don’t know. But I can see that easy and cheap credit did play its part.
Wednesday, February 24, 2010
Thursday, January 14, 2010
Bankers and taxes
I came across an article on Bloomberg titled: Bankers ‘Let Down’ as Tax Makes London Most Expensive (Update1)
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUqrw1WTZtNk
While in Dubai, we are thinking in terms of being the financial center of the future, the present comparison by Bloomberg does not even feature the city.
An interesting tax comparison for a person earning $1 million from Bloomberg is copied here:
In my opinion, they should all move to Dubai ... no tax and rents are really down. Lifestyle is quite good also.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUqrw1WTZtNk
While in Dubai, we are thinking in terms of being the financial center of the future, the present comparison by Bloomberg does not even feature the city.
An interesting tax comparison for a person earning $1 million from Bloomberg is copied here:
As of April 1, 2010 City Income Tax Social Security Total London 477,519 13,759 491,278 Frankfurt 476,469 10,339 486,808 Paris 350,786 110,342 461,128 Mumbai 338,050 120,000 458,050 New York 414,250 18,520 432,770 Zurich 363,694 54,492 418,186 Tokyo 349,655 12,260 361,915 Singapore 190,366 1,180 191,546 Hong Kong 149,859 940 150,799
In my opinion, they should all move to Dubai ... no tax and rents are really down. Lifestyle is quite good also.
Saturday, January 9, 2010
When US sneezes
A friend of mine forwarded me a very interesting article by Bob Herbert in The New York Times, titled "An Uneasy Feeling". I think everyone should read it:
http://www.nytimes.com/2010/01/05/opinion/05herbert.html
The article highlights not a few, but a lot of issues with the economy. It comes in a time when Warren Buffett's Berkshire Hathaway buys Northern Santa Fe Corp for USD 26 billion and WB is quoted as saying "It's an all-in wager on the economic future of the United States".
WB may have placed his bet. However, for the rest of the world, the realities are not conducive for a wager as yet, not on USA and not on any other country either.
The emerging markets phenomenon is currently shining like pyrotechnics. Stock markets have given gains in excess of 50% and we are hoping that they will pull the world out of the financial crisis. The statement may be true, but the world must not forget that it is important to have recovery in the USA also, and this recovery needs to be for the middle class, and not merely for WB and the likes.
At present, USA is still approx. 20% (USD 14 trillion) of world’s economy (USD 70 trillion, Gross domestic product based on purchasing-power-parity, as per IMF http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx ). China comes closest with 12% (USD 8.7 trillion). Other key emerging countries are: India 5% (USD 4.5 trillion), Russia 3% (USD 2 trillion) and Brazil 2.8% (USD 2 trillion). In speedometer terms, apart from China, and probably India, at global level, growth in rest of the emerging markets hardly move the needle of economic growth. (For reference purposes, UK is 3% - USD 2 trillion).
In case of China, GDP growth is mostly export let, and significant amount of its exports are to the USA. Most of its surplus ends up being invested into US treasury bonds i.e. it lends heavily to the US government. The US government channels this money back into the US economy (and various wars across the globe). As the US economy produces very less of its needs, it ends up importing from China again, plus it also ends up paying interest on bonds. Apparently, this is a cycle that runs in perpetuity:
- Americans not only end up buying Chinese goods, but also pay interest to China through their tax payments.
- China reinvests its export earnings into US government securities.
The same story is repeated in the petroleum cycle and probably the IT cycle (Refer http://www.treas.gov/tic/mfh.txt for listing of holders of US treasury securities).
THE BUBBLE
The cycle is creating a bubble and is working like a ponzi scheme and the risk is that if and when US will sneeze, the repercussion will not merely be the world catching common cold. The second risk that that the world will not reach the point of catching a cold (or in other words, the point of bursting of the bubble), as the US government will keep us all busy with wars and propaganda while media will keep us distracted with non issues like the Tiger Woods case or renaming of Burj Dubai as Burj Khalifa.
From my perspective, I truly hope that we see a revival in the true economy of USA.
http://www.nytimes.com/2010/01/05/opinion/05herbert.html
The article highlights not a few, but a lot of issues with the economy. It comes in a time when Warren Buffett's Berkshire Hathaway buys Northern Santa Fe Corp for USD 26 billion and WB is quoted as saying "It's an all-in wager on the economic future of the United States".
WB may have placed his bet. However, for the rest of the world, the realities are not conducive for a wager as yet, not on USA and not on any other country either.
The emerging markets phenomenon is currently shining like pyrotechnics. Stock markets have given gains in excess of 50% and we are hoping that they will pull the world out of the financial crisis. The statement may be true, but the world must not forget that it is important to have recovery in the USA also, and this recovery needs to be for the middle class, and not merely for WB and the likes.
At present, USA is still approx. 20% (USD 14 trillion) of world’s economy (USD 70 trillion, Gross domestic product based on purchasing-power-parity, as per IMF http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx ). China comes closest with 12% (USD 8.7 trillion). Other key emerging countries are: India 5% (USD 4.5 trillion), Russia 3% (USD 2 trillion) and Brazil 2.8% (USD 2 trillion). In speedometer terms, apart from China, and probably India, at global level, growth in rest of the emerging markets hardly move the needle of economic growth. (For reference purposes, UK is 3% - USD 2 trillion).
In case of China, GDP growth is mostly export let, and significant amount of its exports are to the USA. Most of its surplus ends up being invested into US treasury bonds i.e. it lends heavily to the US government. The US government channels this money back into the US economy (and various wars across the globe). As the US economy produces very less of its needs, it ends up importing from China again, plus it also ends up paying interest on bonds. Apparently, this is a cycle that runs in perpetuity:
- Americans not only end up buying Chinese goods, but also pay interest to China through their tax payments.
- China reinvests its export earnings into US government securities.
The same story is repeated in the petroleum cycle and probably the IT cycle (Refer http://www.treas.gov/tic/mfh.txt for listing of holders of US treasury securities).
THE BUBBLE
The cycle is creating a bubble and is working like a ponzi scheme and the risk is that if and when US will sneeze, the repercussion will not merely be the world catching common cold. The second risk that that the world will not reach the point of catching a cold (or in other words, the point of bursting of the bubble), as the US government will keep us all busy with wars and propaganda while media will keep us distracted with non issues like the Tiger Woods case or renaming of Burj Dubai as Burj Khalifa.
From my perspective, I truly hope that we see a revival in the true economy of USA.
Saturday, December 19, 2009
Five Blind Men (media, rating agencies, banks, contractors and analysts)
The first one said that elephant is like a big wall (because he had only felt the big belly of the elephant). The second said that it is like a tree (interestingly, he had only felt the giant leg of the animal). The third person’s observation was that it is like a stick (referring to the tail), fourth said it was a wide sheet (assuming ‘an ear’ was all that the animal was) and the fifth said it was like a big pipe (due to the trunk). Individually, or collectively, they did not get the full picture, and the outcome of their own understanding was not proper either.
Lets apply the story to the current situation. The elephant is Dubai (and its colossal projects), and the five blind men are the media, rating agencies, banks, contractors and analysts. Issues of the elephant are littering the press all around. I am covering the blind men.
1. Media was enchanted by Dubai, and kept on projecting its amazement of Burj Dubai, the Palm, etc. Though they are now highlighting issues with the Dubai dream, yet they fail to accept and acknowledge their own failure to identify them upfront. I do not want to name them, but there were multiple projects that were destined for disaster from day one. The media hype was so great, that President Bush visited Dubai (when probably, he never visits multiple cities in one country) and one must not forget Gordon Browns visit to Dubai, to seek contributions for his idea of an expanded International Monetary Fund (IMF) as a bailout package in the global financial crisis (how ill informed was the prime minister of UK).
2. The rating agencies did what they do best: rate without knowing/understanding the reality of enterprises (everyone knows of the ratings fiasco that led to the credit crunch and the world wide financial crisis). If anyone reads their reports on Dubai, more than half of what they say are based on assumptions, speculations, possibilities and the data they present on debt is only what is available in public domain and hence, their analysis and conclusions are no better than those of the blind men.
3. Banks continued lending as if there was no tomorrow, i.e. lend short term for projects that were clearly long term. To top their incompetence, they lend for projects that did not make sense. E.g. how on earth did their credit committees accept that almost 4.5 million people will live in the Waterfront area when the current population of UAE as a whole is not more than 5 million? What was their expectation from Dubai regarding business opportunities and job creation? Anyways, this is a long debate. By the way, one must not forget that many of these banks had already demonstrated their weak investment policies and pathetic credit risk management elsewhere around the world (some took TARP funding, some got nationalized and so on) and are a burden on tax payers of their respective countries. After busting all corporate governance matters in their own entities, after cheating and deceiving their own shareholders and their nations, and after being responsible for the financial crisis, many of these banks are giving lectures on transparency and communication. What a shame.
4. Contractors just followed the Nike philosophy i.e. “Just Do It”. There is no detail available in public domain about them, so I cannot comment as such. However, if I was a contractor, I would be highly critical of doing any logic defying project on credit, unless the basis of my decision making is gambling rather than rationale.
5. Analysts lured investors, but mostly speculators. In hindsight, one can see that most of the economic outlook reports, capital markets related equity reports and comments on tv etc. were incorrect. Many of the analysts/economists were as clueless as the blind men I mentioned above. To a large extent, their analysis and reporting led to speculative buying of stocks and property. In fact, the same analysts continue to produce reports. But this time, all is negative. The way I see it, it was not until the system derailed, that they reported negatively. In Hollywood terms, Terminator 1 and Terminator 2 were both played by Arnold Schwarzenegger, but once a bad guy and once a good guy. In terms of analysts, they played the good guys in part 1, only to follow up with a bad guy role in part 2.
I will write again. May be, with exclusive blogs on the each of the 5 blind men.
Tuesday, December 15, 2009
USD vs Euro
We observed a USD free fall for a considerable period of time and we are all observing the consequences. The rise in crude oil prices, capital exodus through investments in gold and precious metals. We have observed various countries shifting foreign exchange reserves to sovereign wealth funds (e.g. Saudi Arabia, China …). We have also observed alternate currencies like Euro appreciate in value and various businesses demanding payments in alternate currencies.
Are the days of glory over for USD and is it giving way to the Euro? Most of the pundits / economists / analysts etc. try to seek the answers by forecasting the future. Yet, in my opinion, history tells a story that may be likely or unlikely to repeat itself.
It was the British pound that led the first era of globalization in the 19th century. The GBP was the legal tender across the British Empire. It served as the unit for measurement, medium of exchange and a store of value that allowed trade and commerce across the colonies.
The first and the second world wars changed the playing field. Britain had to incur large debts to the United States and GBP lost significant value and in 1940, the pound was pegged to the USD, effectively signaling its end as the world’s reserve currency. Many other countries followed up in 1945, after the Bretton Woods System established an obligation for each country to adopt a monetary policy that required the exchange rate of its currency within a fixed value in terms of gold i.e. pegged system (in principal as the "reserve currency" was USD, this meant that other countries would peg their currencies to the USD). The system collapsed in 1971, following the United States' suspension of convertibility from dollars to gold. From this point onwards USD continues to be a currency backed by “faith”. The world continues to keep faith in USD as the "trade and reserve currency" as it believes in the continued pre-eminence of the US in the political, military and economic spheres resulting in the continued leading role for the USD.
The basic idea of bringing history into perspective is that GBP enjoyed, and the USD enjoys unparallel dominance. The shift from GBP to USD had not been liner. Major international events took place, like collapse of empires, world wars, independence of new nations, new financial systems and new trade and monetary disciplines. In the current state of affairs, the most notable events comprise the fall of the Soviet block, progress of the emerging markets, the formation of the Eurozone and the financial crisis of 2008. These events can probably tilt the balance of power in favour of Euro. This is a conclusion that we hear on tv, we read in news papers and we discuss in tons and tons of meetings. However, in my opinion, the Euro is still years away to give competition to the USD.
My opinion is based on the following facts relating to USD and USA:
1. USA is still 1/5th of world economy (GDP based on PPP is c.$14bn of the worlds c.$70bn)
2. The American citizens are still the biggest consumers
3. USA still leads the world in innovation and formation of new business ventures (ipod, iphone, google, and just about anything that resulted in major consumption and wealth creation)
4. USA consumes almost 12% of oil production of the world. This makes the oil producers not only sell oil in USD terms, but also maintain their currencies pegged to USD.
5. USA influences world politics more significantly than any other country.
(I will keep on adding to the above list)
The Eurozone is a bunch of countries with decreasing population, decreasing consumption, almost no innovation, decreasing production of goods and services, collapsing economies (Greece, Spain and others), social unrest (like in France), corruption at state level in various countries and migration. The Union or its central bank never take a leadership position in any matter and are not proactive in any world level issue. Other than Germany, none of the countries in EU produces anything that the world really needs (probably France can say that their fashion products, perfumes and military supplies are essential and Nokia produces mobiles). [I will update my thoughts on Europe later].
Conclusion
The increase in debt of USA will surely lead to fall in value of the USD, but by no means does it mean that Euro will automatically rise. Euro will surely have movements against the USD, primarily due to speculators, traders, bankers and market makers etc. who manipulate markets for their own benefits. However, due to structural issues in EU, I do not foresee Euro rising in status as a reserve currency or a medium of exchange.
If an alternate currency was going to evolve, then it would most likely be the Chinese Renminbi (RMB), but this is a discussion for a later stage.
Are the days of glory over for USD and is it giving way to the Euro? Most of the pundits / economists / analysts etc. try to seek the answers by forecasting the future. Yet, in my opinion, history tells a story that may be likely or unlikely to repeat itself.
It was the British pound that led the first era of globalization in the 19th century. The GBP was the legal tender across the British Empire. It served as the unit for measurement, medium of exchange and a store of value that allowed trade and commerce across the colonies.
The first and the second world wars changed the playing field. Britain had to incur large debts to the United States and GBP lost significant value and in 1940, the pound was pegged to the USD, effectively signaling its end as the world’s reserve currency. Many other countries followed up in 1945, after the Bretton Woods System established an obligation for each country to adopt a monetary policy that required the exchange rate of its currency within a fixed value in terms of gold i.e. pegged system (in principal as the "reserve currency" was USD, this meant that other countries would peg their currencies to the USD). The system collapsed in 1971, following the United States' suspension of convertibility from dollars to gold. From this point onwards USD continues to be a currency backed by “faith”. The world continues to keep faith in USD as the "trade and reserve currency" as it believes in the continued pre-eminence of the US in the political, military and economic spheres resulting in the continued leading role for the USD.
The basic idea of bringing history into perspective is that GBP enjoyed, and the USD enjoys unparallel dominance. The shift from GBP to USD had not been liner. Major international events took place, like collapse of empires, world wars, independence of new nations, new financial systems and new trade and monetary disciplines. In the current state of affairs, the most notable events comprise the fall of the Soviet block, progress of the emerging markets, the formation of the Eurozone and the financial crisis of 2008. These events can probably tilt the balance of power in favour of Euro. This is a conclusion that we hear on tv, we read in news papers and we discuss in tons and tons of meetings. However, in my opinion, the Euro is still years away to give competition to the USD.
My opinion is based on the following facts relating to USD and USA:
1. USA is still 1/5th of world economy (GDP based on PPP is c.$14bn of the worlds c.$70bn)
2. The American citizens are still the biggest consumers
3. USA still leads the world in innovation and formation of new business ventures (ipod, iphone, google, and just about anything that resulted in major consumption and wealth creation)
4. USA consumes almost 12% of oil production of the world. This makes the oil producers not only sell oil in USD terms, but also maintain their currencies pegged to USD.
5. USA influences world politics more significantly than any other country.
(I will keep on adding to the above list)
The Eurozone is a bunch of countries with decreasing population, decreasing consumption, almost no innovation, decreasing production of goods and services, collapsing economies (Greece, Spain and others), social unrest (like in France), corruption at state level in various countries and migration. The Union or its central bank never take a leadership position in any matter and are not proactive in any world level issue. Other than Germany, none of the countries in EU produces anything that the world really needs (probably France can say that their fashion products, perfumes and military supplies are essential and Nokia produces mobiles). [I will update my thoughts on Europe later].
Conclusion
The increase in debt of USA will surely lead to fall in value of the USD, but by no means does it mean that Euro will automatically rise. Euro will surely have movements against the USD, primarily due to speculators, traders, bankers and market makers etc. who manipulate markets for their own benefits. However, due to structural issues in EU, I do not foresee Euro rising in status as a reserve currency or a medium of exchange.
If an alternate currency was going to evolve, then it would most likely be the Chinese Renminbi (RMB), but this is a discussion for a later stage.
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