Friday, 13 July, 2012

Financial Predictions

Financial Predictions

It has become fashionable to make all kinds of predictions about:

  • The Euro Mess
  • US Recovery
  • Chinese Hard Landing
  • Indian GDP Growth rate for the next decade
  • When the Nifty & Sensex will cross their earlier "ALL-TIME" Highs

Different experts come up with different answers.

My take: Take all of that with a Dead Sea of salt.

I ought to thank for referring me to this Motley Fool article:

Basically, you'll perhaps be better off if you treat the predictions of business news channels and business newspapers the same way you'll treat the "Next Week for you" column on astrology in your weekend newspapers & nes magazines.

Remember Mark Twain's immortal words: "Prediction is difficult, especially about the future"



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Tuesday, 10 July, 2012

First in Denmark, Now Negative Yields in France & Germany

First in Denmark, Now Negative Yields in France & Germany

A couple of days back, in one of my posts, I'd written about how Denmark is offering negative yields (ie., they are charging you a bit of money for the perceived assurance of keeping it safely with them!).

Apparently, the Euro-mess is such a big mess that other countries perceived to be "safe" are also following suit. Take a look:



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Saturday, 7 July, 2012

No "Automatic" safety against Inflation - You need to create it!

No "Automatic" safety against Inflation - You need to create it!

Many of us in India (especially those above 50, who had perhaps started earning in the late 70's or early 80's) tend to feel confident about investing in bank and corporate deposits (as against equity shares or equity mutual funds). And think that they can protect themselves (by and large) against inflation.

But is all that equally valid for the next generation?


Especially wrong for those who are in their 20's & 30's today. Chances are bright that India will become part of the "developed" economies in the next 10-15 years. And when that happens, the pace of growth will taper off to levels presently prevailing in Europe / US. And that will be accompanied by low - very low interest rates.

By the time YOU (the guy/gal who is presently just about finishing your formal education or starting out on your career) reach your middle age, say by the year 2025, watch out for the big monster of inflation:

And if you thought that depositors will continue to get some returns on their deposits, look at Denmark today:

The "official" inflation may continue to remain low. However, commodity inflation is set to grow with increasing prosperity and Service costs are also set to grow due to scarcity of skillsets - After all, if you as a software engineer or a lawyer or a doctor wish to earn ever increasing incomes, so will other service providers! This will imply an ever-increasing cost of living even to maintain your standard of living. And, you're likely to aspire to continuously improve your standard of living!

You'll continue to want to change your mobiles every 6-12 months, your car every 3-5 years, your washing machines, TV sets, etc. every 5 years, etc.

And, thanks to your increasing health-consciousness, you're likely to live for at least a decade more than those belonging to your parents generation.

How are you going to protect yourselves against inflation?

You can't expect simple bank deposits or government securities to provide you that protection.

You need to endeavour to create that protection.

The onus is on you.

You have to wake up, and wake up now.

Watch this space for tools and techniques.

Hopefully, I'll have the time, inclination and ideas to post appropriate info for your consumption!



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Wednesday, 4 July, 2012

LIBOR Fixing - Mother of All Scams

LIBOR Fixing - Mother of All Scams

Many of you must have heard about Barclays Bank being in the soup on getting caught with their pants down in the act of supposedly "fixing" LIBOR rates (London Inter-Bank Offer Rate) over the past several years. Their big bosses have obviously resigned. And there is a lot of "mud-throwing" going on all around.

However, a few points are worth noting:

  • Barclays Bank, irrespective of how large it is / was, couldn't have done it alone. It has already tried to pass some of the buck / muck to Bank of England (Take a look at: Barclays Bank blames Paul Tucker of Bank of England for LIBOR Mess)
  • If Barclays was doing it, obviously it must have been benefitting in a HUGE manner both at the level of the bank and at the level of the individual top management members. Believe me, the figures will make our 2G Scam accused Raja look like a minor pick-pocket in comparison - you'll come to agree when you look at the volumes involved (which I'll be giving a clue about at the end of this post)
  • If Barclays was doing it, chances are bright that at least half-a-dozen other equally large banks must have been doing the same.
  • As a corollary, it must have been an industry-wide mess.
  • Equally obviously, the auditors, the regulators, the government authorities, etc. must have definitely been fully aware of and perhaps even participating in this fraud. The fraud is way too huge to have been brushed under the carpet without involving a multitude of individuals across multiple organisations.
  • In a nutshell, the whole thing stinks - It appears to be a systematic fraud intended to loot a whole range of corporates, countries, including developing countries such as India to the tune of millions of dollars every year.

To get an idea of the volumes involved, look at just the notional value of Interest Rate Swap figures of LCH Clearnet, the global leader in interest rate swaps - Source: LCH Clearnet Website:

  • Daily Volumes for July 3, 2012 - $ 1,986,805,421,914
  • Outstanding Volumes as on July 3, 2012 - $ 306,817,351,398,322

When just a single player (even if the player is the # 1 in the industry), you can imagine the size of the industry.

Even if we assume that 1% of the total volumes involved are adversely impacted due to the fudging of LIBOR rates by people like Barclays, you can imagine the implications of the litigation that would naturally follow.

Now, I can safely repeat, the figures do make our 2G Scam accused Raja look like a minor pick-pocket in comparison!

What does all this mean for India and for Indian corporates?

Simple - There is going to be a lot of turmoil in the months and quarters ahead (as though we've not had enough of that in the past 3-5 years).

Likely to impact all corporates (and the state and central governments) who have borrowed (or lent) any kind of money on the basis of "LIBOR Plus" interest rates, which virutally is the norm for all kinds of overseas borrowings.

Likely to impact all corporates and governments around the world who have borrowed/lent any kind of money on the basis of "LIBOR Plus" interest rates.

Likely to cause huge volatility in both debt markets and equity markets around the world.

Likely to cause completely unexpected and perhaps even unintended consequences in terms of direction and level of capital flows, cost of borrowing, foreign currency exchange rates, etc.

Be ready for a rocky ride!



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