Global Financial Crisis and India

What actually happened

In simple terms global financial crisis, was a man-made bubble which burst, like all bubbles. Isn’t it a known fact from physics (Not sure whether it's physics or chemistry) that all bubbles burst at some point or the other? In the USA, where all the trouble began, government backed banks started lending loans to people at very low interest rates, to buy houses and riding on this wave, house prices began soaring up. 

Even people with lower income were given loans as the banks were given an assurance by the US federal government that their returns are safe. This assurance made banks greedy and more and more banks began giving out loans. There may be politically driven vote bank motive behind this move as the fed government wanted people to realize their “AMERICAN DREAM” of owning a house in Mainland America.

If I remember quite well, every private bank in India repeatedly calls people (I don t know where they get our numbers from) asking to take loans and in contrast nationalized banks hardly think of loans as their mainstream business, they are bothered only about big fat deposits coming into their banks. This may be a good reason why our public banking system has withered the storm, but what about development? Our nationalized banks have a thousand rules to pass a loan, even for a BICYCLE.

Anyway, back to USA, these mortgages were bundled into securities by the banks and sold to China, Ireland, Germany and many other countries. So far so good. But gradually interest rates were increased by the federal bank in 2006; people could not pay back their loans as the rates were high. An obvious effect of all these was house rates going falling steeply which in turn led to foreign investors thinking twice before buying such mortgages, and financial institutions such as Lehmann Bros and AIG who had heavily invested in these crazy home loan securities were bankrupt as there were no buyers. Panic drove through all sectors and the whole system tumbled down like a pack of cards. If one thinks that the worst is over, we are wrong.

What is happening

Governments pumped money into the system which ran to the tunes of trillion dollars. Stimulus packages were given to every bank, every automaker to keep them afloat and yet executive bonuses were pretty hefty. If we look closely at the stimulus packages money, it is the taxpayer’s money which is going down the drain. People are encouraged to take another loan to repay their older loan, people are encouraged to spend money which is not theirs, which they should realize is not affordable. 

To nullify the mortgage based bubble, the government has blown another bigger bubble. Every country is doing the same. Even I had thought that spending money now would be the best solution, but it seems to be a mid term solution, the final outcome is going to be a disaster. Political motives and corruption are also not helping to channelize the money to the right sectors. Countries have to go bankrupt in near future due to excessive debts; Experts have named the countries which are going to be bankrupt as PIGS (Portugal, Ireland ,Greece and Spain) just as Goldman Sachs had named emerging economies as BRIC (Brazil, Russia, India and China)

Where does India stand amongst all this trouble?

Well quite frankly, we are doing great compared to other countries. As our economy is mainly domestically driven rather than export driven like Chinese economy, we are better insulated to the storm. The Indian mentality of saving rather than investing has also come in handy. It s like we have had a precautionary shot to overcome this meltdown.

In the early 1990’s when our economy was freed and was made attractive to foreign investment, care was taken to make it moderately export driven by leaving enough space for domestic markets and domestic players.

Agriculture and small scale industries are India’s main breadwinner for a rural family, and IT for an urban family. Around 65% of Indian population depends on agriculture for a living and its accounts for 22% of GDP, and Indian IT and BPO exports constitute 6 % of GDP. There are several other exports like fish, fish oil, ayurvedic medicines and many other secondary materials out of agriculture which drive our export market. Reports say that within the next 5 years India is going to take over from China as the manufacturing hub of the world. Nevertheless, we are hit by the global phenomenon and have to take measures to withstand it.

What should we do?

As responsible citizens of a huge democracy, first thing we can do is to pay taxes and not deprive of the government of their income. This is the right time to drive in some major rural development schemes and fill up the void inside. Distribution of wealth in India is very uneven and the rich are getting richer and the poor more poor (I mean the tax paid is not going in right directions for development work, half the money ends in our corrupt leader’s pockets).

The government has to bring out strict measures to oversee the implementation of some good schemes such as National Minimum Wages and the Rozgar Yojana. Helping farmers spend and cultivate more would be a solution, but again the extent of inflating the bubble has to be checked by the banks before lending out money to farmers. Agriculture sector can create a lot of jobs in India and the only thing which is hindering us is the lack of dignity in making agriculture a career. No father wants his son to be a farmer and vice versa and I do not know why this culture has dawned upon Indians off late.

The world is going to soon see one more financial crisis, as most of the trend analysts predict. We can withstand or even avoid it, if we act upon it soon. We as citizens of the world have to make our contribution by becoming aware of complex investments, government programmes, political situation and its effect on the economy. Even saving electricity and water might help in a small way. Now that we know there is going to be a downturn, it is up to us and the governments of the world to get some measures in place and sail us through the rough times smoothly.

Why I Give: Warren Buffett

In 2006, I made a commitment to gradually give all of my Berkshire Hathaway stock to philanthropic foundations. I couldn't be happier with that decision.

Now, Bill and Melinda Gates and I are asking hundreds of rich Americans to pledge at least 50% of their wealth to charity. So I think it is fitting that I reiterate my intentions and explain the thinking that lies behind them.

First, my pledge: More than 99% of my wealth will go to philanthropy during my lifetime or at death. Measured by dollars, this commitment is large. In a comparative sense, though, many individuals give more to others every day.

Millions of people who regularly contribute to churches, schools, and other organisations thereby relinquish the use of funds that would otherwise benefit their own families. The dollars these people drop into a collection plate or give to United Way mean forgone movies, dinners out, or other personal pleasures. In contrast, my family and I will give up nothing we need or want by fulfilling this 99% pledge.

Moreover, this pledge does not leave me contributing the most precious asset, which is time. Many people, including — I’m proud to say — my three children, give extensively of their own time and talents to help others. Gifts of this kind often prove far more valuable than money. A struggling child, befriended and nurtured by a caring mentor, receives a gift whose value far exceeds what can be bestowed by a check. My sister, Doris, extends significant person-to-person help daily. I've done little of this.

What I can do, however, is to take a pile of Berkshire Hathaway stock certificates — “claim checks” that when converted to cash can command far-ranging resources — and commit them to benefit others who, through the luck of the draw, have received the short straws in life... At the latest, the proceeds from all of my Berkshire shares will be expended for philanthropic purposes by 10 years after my estate is settled. Nothing will go to endowments; I want the money spent on current needs.

My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the US were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.)...

The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs. My pledge starts us down that course.

Should you bet on the yellow metal?

The year 2010 was quite an eventful year. Uncertainty in global economic scenario continued. We witnessed financial crisis in European countries like Greece, Portugal, Ireland and Spain. We also witnessed further quantitative easing by Major developed economies which kept interest lower. It was perfect setting for Gold price to do well and it did well. In India Gold has given return of over 19 per cent since 1st January till date while Nifty Index gave 15 per cent return for the similar period. 

A conventional approach to decide whether to have gold in portfolio or not in 2011 would be to ask the question, “Will gold continue to climb next year and outperform equities in 2011?” Quest for the answer often results in confusion as one comes across conflicting views. The truth is the answer is difficult. No one knows with certainty as the gold price in 2011 will depend on future events which are very difficult to predict. 

So what shall one do in 2011? The answer is one must have some exposure (10 per cent – 30 per cent) in Gold not only in 2011 but also in 2012,13,14 and so on. Why?, because gold enhances portfolio performance. It either generates higher return for the same risk or reduce risk for expectation of same return. Let us understand how this happens. 

The Gold price tends to move many times in different direction than Indian Equity or say Nifty Index. One of the reason why it happens is because Gold and Nifty prices depend on totally different factors. Nifty index depends on factors like performance of Indian Economy, Net FII inflow, domestic money supply etc. while the gold price depends on global factors like global interest rates, quantitve easing or debasement of global currency, demand and supply of Gold etc. When there is global economic crisis the gold price strengthens and equity prices weaken. This unique characteristic of Gold is equally important for the investors. It is also called co relation. Lower the co relation of two assets, more diversification benefits the portfolio gets. The graph shown here will explain the point. 

As we can see from the graph that often Gold prices and Nifty prices went in different directions even though ultimately both have given positive returns in the end. 

The blue line in the middle is value of portfolio which has invested roughly 40 per cent in Gold and 60 per cent in Nifty. One can see that the portfolio value line is smoother than both the assets. Smoother the line lesser is the volatility or lesser is the risk. The graph clearly shows that how in 2010 adding Gold to the portfolio has lowered the overall risk for the investors.

Also 2011 will not be majorly different. As explained earlier since the driver of gold prices remain different than drivers of Nifty index, Gold is likely to behave differently than (will continue to remain uncorrelated with) Nifty. And due to this investors will gain immense diversification benefit by having gold in the portfolio or reduce risk without sacrificing the returns. 

Investment in Gold can be done very conveniently through Gold Exchange Traded Funds (ETFs). Gold ETFs are backed fully by physical gold. The Physical Gold is kept in vaults of custodians who are regulated by SEBI and RBI. The units of Gold ETFs trade on stock exchanges like any other shares and it can be held in demat account. Typically one unit represents around one gram. Gold ETFs introduced in India Since March 2007, have witnessed rapid growth since then. Gold ETFs are set to grow further as more and more investors discover benefits of investing in them.

Gartner raises global 2011 IT spending forecast

Research firm Gartner said global spending on technology is likely to rise 5.1 percent in 2011, higher than its previous estimate, as the dollar's recent weakness helped spending in 2010 top its forecast.

It now expects total global IT spending to touch $3.6 trillion this year, up from its earlier forecast for a 3.5 percent rise. For 2010, IT spending rose 5.4 percent to $3.4 trillion, up from Gartner's estimate of 3.2 percent.

"Aided by favourable U.S. dollar exchange rates, global IT spending growth is expected to exceed 5 percent in 2010, but a similar level of growth in 2011 -- while forecast -- is far from certain, given continued macroeconomic uncertainty," Richard Gordon, research vice president at Gartner, said in a note.

While the global economic situation is improving, the recovery is slow and hampered by a sluggish growth outlook in the key economies of the United States and western Europe, he said.

Also, there were growing concerns about the ability of key emerging economies to sustain relatively high growth rates, he added.

Spending on telecom equipment is set to rise the fastest at 9.1 percent in 2011 to $465.4 billion, with telecom services spending seen rising 3.4 percent to $1.65 trillion, Garter said.

The research firm forecast a 4.6 percent rise in IT services spending to $817.9 billion.

The computing hardware segment, where spending is forecast to grow 7.5 percent to $391.3 billion, is likely to face challenges in growth of personal computers due to a possible weak economic growth through the first half of 2011, Gartner added.