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Debt Economics

June 12, 2008


Some time back, Wall Street Journal reported that there was a staggering 82% wealth growth since 1992 to 2000 and around 39% [close to half of that rise] from 2000 to 2008. In the post Color of Money , I talked how money or wealth as such is a marker of productivity [A side note: Hence if you really want to make a beggar rich, dont give him alms, teach him a skill] .
So extending the common logic, did the rise in unprecedented technology improve our productivity?
To a certain extent yes. As much as the improvement of blogging it and talking about it NOW rather than sending this article to a morning newspaper editorial and wait for it to come the next morning.

But 82%?
No nothing close to that! But the staggering growth is not only due to technology or improved productivity, but the easy availability of sliced and diced credit. Credit free flowing and easily accessible that, it beefed up the individual portfolios by as much as 82%!

Credit has an amazing power of being a morphine to a prizefighter. It injects some much needed enthusiasm and vigor in the system, but mind you a prizefighter cant actually afford to think Morphine is its friend!
This freely available credit, has actually lifted and pulled the entire US consumer spending by so much, that seemingly the entire global economy has been lifted!. Only this that, we did the mistake of taking it for granted.

What started by late ’93 and continued till ’99, was the tech bubble. When the tech bubble emerged, FED took the surprising action of actually cutting back the Fed rates, and injecting credit [/morphine] in the system. Pushing up the liquidity, pushing up the real inflation and pushing up the spending power of people.
Wrong maths!All it did was give birth to another bubble. The great realty bubble!
All the cutting and slicing of the Fed rate, kept your cousins hooked to their iPODs, Playstations, Wiis and Diet Cokes! [ A slight digress: Perhaps Steve Jobs’ iPod had not been that hit if not for Greenspan, just a thought though!]
And of course, their parents served themselves generous amount of that credit by cashing on the realty bubble. Effectively they booked several times the normal leverage bank provides for an ordinary residential home and converted their home into a virtual ATM!
Spend… consume.. spend.. consume!
This spending was so high, that the entire global economy started looking up. Sub- Saharan desert registered a growth of 12%. Ajerbaijan grew by 31% in 2006! [read Swaminomics, End of 9% growth]

Indian government finally and formally announced a 8.6% growth. And its resolution in keeping it high. I trust their intentions. I trust them [I have no other option], but its just a wonder that given the history, it will be a Herculean Challenge,this year.

Stock Markets is actually a lead indicator of a nation’s GDP. So if we assume that Jan’s fall is factored in this years GDP, still then, May’s fall will affect this upcoming years national economic results.

This latest fall in the stock markets, seems to have chased away quite a lot of weak institutional hands from India.
Interesting!
And I welcome it, even if stock markets take a bit of beating. Why? For we really do not need, speculators, we want investors. And I bet, the investors are still there and betting on the long term India story.
Some people on Seeking Alpha asked me, define: long. And some people even accused me of going back on my words.
First let us keep the fundamentals right and answer them.

1. Indian economy in long term looks good. Define Long
Long as in 2-3 years hence, has high potentials of returning your investment with a yield of 100-150%. And it is going to compound with an increasing time frame. India needs infrastructure, lots of it. Technology, plenty of it, power, a lot and finally increasingly self-sufficient life. Invest in sectors involved in it, you will reap profits.
Sectors to watch out: Infrastructure, Power, High-Tech,Retail

2. You were talking in a bearish tone here, yet you were bullish some time back. Dont go back on your views

I am not really going back on my views! If FIIs think China is a spent force, then its a pity! If they think India cant overcome this blip on the radar, mighty sad. Long term fundamentals are in place and this fall and long protracted bleeding is actually, in line with expectations. Come to think of it, Chinese Markets were scaling PEs of 50 before this fall. Do you expect, it to go on like this? Indian markets were hovering at levels of 30s ,the costliest two in the Asian ones. They are today the markets which corrected the most. In fact, I would have been concerned if it would not have corrected.That would mean just the beginning of the end. Indian markets have just registered a 30% fall. Hopefully till August, we may see the rest 8.2% fall of the fundamental Fibonacci level happen. After which we should hopefully see some positive movement. So what does it make me? Short on Long term Indian economy? Heck ! no… Long extremely long for Indian economy. Only short for the immediate short term, 1-2 months is lesser time frame than a short time investment… 🙂

Now coming back to the story, how will India move ahead, if at all it registers some good movement post 38.2% levels, now that FIIs are themselves running short of money. For one, speculators will seek safer havens with rising oil , like Russian and Brazil and try to ignore India. But on the other hand, real investors who foresee that Oil itself has transformed into a huge soaring bubble will stay invested in this story. I often keep repeating, China may have some real firepower under its wheels, but it lacks real entrepreneurial cum business backed investment environment. India on the other hand is marred and dogged by the poor infrastucture which actually is a catalyst to a proper business nation. So going forward, both of these markets have their own quirks and whims. But what is for sure is that, no more will be fundamentals and technicals will taken for a free ride by the fanatics of liquid and free credit backed investment.
Debt is bad, mistaking it for wealth is a sin.

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