It's the Economy........ Stu--d - Part 2

It has been a few weeks since I wrote the first part of the above subject. India's had her elections and I have been comprehensively proved wrong on my prediction about the third front and M (not the current PM) playing a key role. I have read somewhere that only sages and fools indulge in prophecies and I know I can lay no claim to sanctity!! :-) Let us come to the subject at hand. Things are starting to look good now with the stock market smartly rallying by as much as 50% over last few weeks and the India's GDP numbers looking respectable at 6.7% for FY09 with positive projections for FY10. Stock markets are also rallying globally from Russia to Brazil. Note that in the same time crude prices have gone up quietly by almost 50% and by lesser extent, a few more commodities and metals. The world's going gaga over the new American president and his first 100 days in office and there is hope that the downturn has bottomed out even if recovery is not yet at hand. Global economy, originally expected to contract, is now expected to grow by 0.5% and bounce to a respectable 3% in 2010 according to the IMF. Herein lies my worry..... and well summed up by the old American saying, "you ain't seen nothin' yet". The damages of the "Richter 9 earthquake" that hit us on 15th Sept'08 in the financial markets is still being assessed by the globe but there is an equally strong "after shock" coming that is not being sensed or predicted. Read on.... We have stimulus packages over stimulus packages being annouced by the Europeans (over 2 trillion $), US of A (over 1 trillion $ so far), Chinese (0.6 trillion $) and even Indian (0.1 trillion $ approx) not to mention several other countries. While most of these are loan guarantees to instill confidence among lenders, much of it is also bail-outs. So there is, in my view, real cash being put into the system unlike previously where it was notional money from valuations. Further, global interest rates are arguably at their lowest levels at any time in history. Let us look at the other side..... globally investments for capacity building has come to a virtual halt. Existing capacities are being rendered unviable as a result of low demand and are being closed to cut costs, esp. manpower costs. Closing plants and cutting jobs seems to be the most sensible thing to do for most companies globally in these troubled times. So we have a phase of overall capacity shrinkage happening across the globe in unprecedented scale this year. Fast forward to 2011...... World emerging out of a growth of 2 or 3% in 2010 means increased demand for goods and services.With a soft interest range regime and aftermath of several stimulus packages, the wwould be flush with money...... real money. The question now is, will there be enough goods and services available to match up these funds, given the large cuts the world has made in capacity creation in the dark days of 2009? As our Eco (the Late Mallayya Sir) would resoundingly state, "inflation is more money chasing less goods......", we could be facing a situation of hyper-inflation in 2011 that would be the "aftershock". And in my view, it would be an unprecedented one as well and could last a long time. Crude could be $200+ a barrel, gold could be well over $2500 per oz. Valuations of companies on the stock market could be "over the top". Am tempted to say, BSE sensex could be at Rs. 35000 levels (Dow Jones $20000+ at the least). What could we do? If you've got cash now and think your job is quite steady for the next few years, then buy up things..... real things that keep their value and appreciate as well - land, house, Gold, blue chip stocks, sunrise stocks, commodity futures and even timeshare holidays!!! (stay out of cars, furnitures, fashion jewellery, customised anything). And don't keep the cash locked up in your locker or in a FD with a bank!!!! Lock up your money today in real assets and you will be glad you did in 2012...... So much for predictions from a guy who just lost money on the last one he made....... so believe in it at your own risk! Caveat emptor or is it caveat lector!!! Sreeram ('80) PS: I can sense many asking "what about India?". This time we may not be as lucky or insulated from this global hyper-inflation even though India's stimuli is in the form of investments in infrastructure and in schemes like JNNURM, NREGS and Skill Upgradation. Interestingly, the 6.7% GDP growth includes over 13% growth in Community and Social services, indicating investments in people. Importantly, investments growing to 35.7% of GDP in FY09 is good news (32% in FY08). Nevertheless, the Great Inflation of 2011 could be a reality in India too!!