Wednesday, May 21, 2008

Fundamentals likely to get worse before they get better.

The economic situation in US is likely to get a whole lot worse before recovery begins. Retail housing prices expected to fall further in 20% range. Commercial real estate following on same lines. Consumer demand to be low. Recession to get worse.

Global economies expected to slow down by varying degrees.

Give the lag timing of 6 months with US, for India the worst quarters likely to be the last two quarters of fiscal 2009.

We are sitting on more than one time bombs as explained in my previous posts – Oil price rise , coal price rise, food price rise and the overall slowdown in growth due to cascading impact of global slowdown.

Are we sitting on a time bomb: The unseen chaos in Indian Economy
Recovery a Fantasy

Here's how the world is faring – a roundup of news, views and excerpts from across the globe


Prices cross the $ 132 mark. Speculation theory gaining ground. One of the Senate committee's in US investigating role of speculators. Michael Masters , a hedge fund manager 'spilling the beans'. Check my detailed post on this.

Oil : Speculative bubble theory gains ground


Excerpts collated from some of the world's leading business and economic publications :-

  • IMF Managing Director Dominique Strauss-Kahn warned that tight global credit conditions may go one even though there are "good reasons to believe the worst news (is) behind us." The changes in consumer behavior triggered by a meltdown in financial markets that began in the U.S. will continue to ripple through economies worldwide, he said, meaning there will be no broad recovery before the end of this year, and possible not until mid-2009. Speaking to a European Parliament committee, Strauss-Kahn said that the U.S. economy would only pick up once the housing market is stabilized.
  • The world economy is "teetering on the brink" of a severe downturn and is expected to grow only 1.8% in 2008, the United Nations said in its mid-year economic projections Thursday. That's down from a global growth rate of 3.8% in 2007, and the downturn is expected to continue with only a slightly higher growth of 2.1% in 2009, the U.N. report said. The U.N. economists said the deepening credit crisis in major market economies triggered by the U.S.-led slump in housing prices, the declining value of the U.S. dollar, persistent global imbalances and soaring oil and commodity prices pose considerable risks to economic growth in both developed and developing countries.

  • Foreclosures - filings climbed 65 percent and bank seizures more than doubled in April from a year earlier
  • Industrial production - large drop in April, equivalent to the one following Hurricane Katrina.
  • Jobless claims - applications rose for the fourth straight month in April
  • Index of leading economic indicators – rise in April for a second month. In line with a uptick expected due to tax claims.
  • Nonresidential projects – and construction markets believed to be slowing down
  • The US economy is in “uncharted waters,” says Federal Reserve vice-chairman Don Kohn , warning that both financial and economic recovery was likely to be slow
  • Fannie Mae's CEO says that the housing market is "about halfway through" its crisis and home prices could fall as much as 25% before the worst is over.
  • Credit card charge off- rose to 6.05% from 4.64% a year ago, the highest in last couple of years.
  • Retail demand – slowing down. As per some top US retailers, weak economy and poor housing scenario were discouraging consumers from making anything more than basic purchases. Consumers operating as if they are already in a recession

Other major economies

  • UK – shows a rise in unemployed claim. Seems to be following US footsteps.
  • Japan - economy grew by a surprising 3.3 percent last quarter, faster than last quarter. Seems more of an aberration in absence of any other mitigating factor.
  • Europe (excerpt) - Jean-Claude Trichet, the head of the European Central Bank, has indicated that the worst of the credit crisis may not be behind us. Mr Trichet said that we were seeing "an ongoing, very significant market correction." He compared the recent hikes in energy and food prices to the oil crisis of the 1970s, when higher wages undermined Europe's ability to compete, resulting in widespread unemployment.

Oil : Speculative bubble theory gains ground

Oil prices rose to above $132 a barrel today.

I maintain my position that the prices are being driven more by speculative interests than by actual demand and supply reasons. Key drivers of such interest being institutional money , falling dollar and a weakening global economy.And this thought seems to be gaining ground.

A US Senate committee is hearing testimony of experts on how speculation by institutional investors might be driving commodity prices including oil and food grains.

Michael Masters, a hedge fund manager has disclosed exactly how speculators are the key reason for high commodity price including oil. As per Michael Masters “ What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.”

Read Master's presentation here

The chairman of a Senate oversight committee had said yesterday that they are considering a legislation limiting large institutional investors in commodities markets.

Masters explains in his detailed presentation how $250Bn of speculative money has poured into the commodities markets since 2003, driving the average cost of commodities indexes up 183% without significant increase in demand.

OPEC has already reduced its global demand forecast for 2008, reinforcing the group's belief that factors beyond supply and demand are driving oil prices.

I am coming across more and more such reports and analysis where the views of market experts seems to be turning more and more towards the speculation theory.

What else justifies oil prices rising from $ 100 to $ 132 in a period of few months..?

Also Read:
Dens of Gambling - Oil and food bubble about to burst ?
Are we sitting on a time bomb: The unseen chaos in Indian Economy
Which way would the bubbles burst?
Bubbles waiting to burst

Tuesday, May 13, 2008

Deterioration starting to pick speed

- CEO of JP Morgan, Jamie Dimon made a statement yesterday , that while the current credit market crunch may soon be over, the U.S. economy could still face a deep and extended recession.

- The median home prices in U.S dropped some 7.7% in first quarter, the largest in 29 years. Its expected to decline over the next two years before starting the climb back up in 2010. Home price decline will have a severe cascading impact across US financial sector.

- Total sales at U.S. retailers weakened slightly in April

- Price of oil near $126 a barrel in volatile trading with a high of $127, on Iranian supply cut fears

- As per Moody's, Asian economies likely to be significantly impacted in second / third quarter of this year.

Thursday, May 8, 2008

Are we sitting on a time bomb: The unseen chaos in Indian Economy

End of last year the focus was whether US was slowing down or not. Beginning of this year the focus was India's IIP numbers. All eyes are now on inflation numbers.

All these are important factors, but are me missing out some likely threats, far bigger in magnitude. Here're the likely top four:-

  • The world's largest economies (US, China, UK and Japan) are going into varying degrees of slowdown at the same time. Are we missing out on the impact this might have (direct and cascading ) on Corporate India?
  • Oil has gone from just $ 50 around Feb '07 to around $120 now. Fuel subsidies likely to result in under-recoveries to the tune of Rs 1,80, 000 Crore for 2008-09. Will the cost not flow down to Indian consumer, one way or the other, now or later. And what happens if oil goes up to $ 200 as predicted by Goldman Sachs.?
  • International coal prices have also more than doubled over the past one year ( and for some varieties, tripled). Coal is a key input for industries like Power, steel and cement and we are not self sufficient in coal. Can inflation really come down significantly in this scenario, and if so, at whose cost.?
  • Around one third of India's power stations are reported to have coal stocks at 'critical' levels I.e less than 7 days worth, instead of the usual stocks of around 21 days. What will happen if price of power starts going up the food / oil way.?

I am not even talking about worrying trends in food, real estate, gold and Indian financial sector. And the fact that we are going into elections at a time like this.

Are we sitting on a time bomb?

Wednesday, May 7, 2008

Recovery a Fantasy

Any thoughts about an economic recovery (US as well as India ) is unfounded , in spite of some positive numbers in US economy and price control measures by Indian Government.

US is reporting slightly positive numbers for wage productivity and there are comments from quarters like the Treasury Seceratery , Merril Lynch that the worst is over..

However folks like Morgan Stanley and Prof. Nouriel Roubini strongly believe that the worst is yet to come. I second that opinion And here's the reason why :-

-Oil at $ 120 (and rising) and rising coal prices will put a dampener on growth across the globe.

-Rising food prices will continue to impact consumption demand across the globe.

-In the US, housing prices still have a 'bubble' element remaining. Unless that corrects, recovery will not begin.
-That housing price correction will severely impact the financial sector in forthcoming quarter.

-In US, consumer debts (credit card, card, student loans) have risen far above expectation this month. Indicative of the squeeze on the general population. Auto loan sector too has a bubble similar to housing, that needs to unwind

-US store sales results today evening are likely to be not as bad as projected, but that would have been driven by huge discounts , impacting the net profits of retailers.

-Other major economies of the world i.e. UK , China and Japan in varying degrees of slowdown.

-In India, the oil price losses being absorbed by oil marketing companies is a time bomb waiting to burst.

-Real estate in India still expected to correct (overall basis) by another 20-30%

-The worst impact on India likely to during the last 2 quarters of this year.

Monday, May 5, 2008

Global Slowdown Continues

Slowdown continues across the globe.Q2 likely to be much worse. Layoffs are on the rise. Auto sector likely to go the housing way. US Govt's stimulus package not expected to have much impact. The 0.6% GDP growth and some other positive upticks hide the underlying weaknesses which are likely to unwind in coming quarters.

Food price on the rise primarily on supply side concerns and Oil prices moving like a pendulum on speculative positions

Japan slowing down due to export dependency on US. In Europe, UK and Germany going the US way. China growth already expected to be lower.

India still following US with a 6 month lag thought the impact might not be as severe. Dependency on exports to US, Europe and China will take a toll. Matters will get worse since India is dependent on import of food, oil and coal. The revised GDP numbers at 7% to 8% levels (down from 8 to 9% levels) seem optimistic. Food prices hurting common man. Fuel price bubble will burst anytime taking a severe toll of the economy.

Here are some key news excerpts capturing the latest developments to the global economy along with my comments


  • As per Prof Roubini, “ The headline +0.6% hides a fall in real final sales of domestic product as a build-up of inventories of unsold homes added 0.8% to GDP; the payback will come in Q2 as unsold inventories are unwound. In Q4 GDP growth was also 0.6% but final sales growth was a strong 2.4% and a run down of inventory of 1.8% subtracted that much to GDP. So with final sales growth slowing from +2.4% or a -0.2% the collapse in final demand in Q1 is extremely sharp. We were already in a recession in Q1 that will get much worse in Q2.”
  • Warren Buffet says “ We're in a recession,. But this is an awfully pale recession at the moment. The declines in employment have not been as big as you'd expect to see.'' ``Until there are stabilized prices of homes, and I think they have a good way to go down, you still have prospective losses'' for financial companies and investors. ``It's too soon to tell'' if the worst of the credit crunch is over”.
  • Home prices drop by 12.7% in the 12 months ending February. Foreclosures up by 112% in the first quarter.
  • Auto sector bubble : Auto sales are showing a sharp fall and auto loan delinquency have hit a 17-year high in the fourth quarter of 2007. Auto sector too is showing 'negative equity' as in housing sector.
  • Employers cut 20,000 jobs from their payrolls in April, surprising economists who were expecting a bigger deficit of 75,000. Employers cut 81,000 jobs the previous month. The unemployment rate, generated by a separate survey, fell to 5% from 5.1% in the previous month. Economists thought it would rise to 5.2%, on average. This is however a false lull and driven by large jump, by 306,000, in the number of people who were working part-time who wanted full-time positions
  • Stimulus package unlikely to be effective in boosting up spending. Two reasons :- people more likely to pay up expensive debts, and secondly in any case the amounts are not sufficient to provide any significant boost.
  • As per Institute for Supply Management, its non-manufacturing index was 52.0 in April versus 49.6 in March. This was the biggest improvement in seven months. However this is more a short term cycle playing out and the trend likely to reverse soon.
  • Federal prosecutors in New York have formed a task force together with other government agencies to examine the collapse of the market for risky home loans. Expect more skeletons tumbling out of the closet.
  • Layoffs continue in financial sector. Morgan Stanley is planning to layoff another 1500 employees.


Japan's factory production fell at the fastest pace in at least five years in March. The U.S. slowdown is beginning to take a toll on Japan's exports, one of the main drivers of growth in the world's second-largest economy.


  • Current inflation is due to supply-side not demand-side factors. Monetary/fiscal measures may have limited/lagged impact. Fiscal/trade deficit likely to increase significantly.
  • Earnings and profits of tech companies hit on U.S. Slowdown. Going forward effect likely to be mixed. New deals / clients might not come about, however existing clients likely to outsource more in second half of 2008.


Oil futures have have now crossed $120 a barrel on news of supply threats and dollar weakening. Seems to be driven more by speculation.


As per a McKinsey study, more than 10m Germans could fall into poverty by 2020 because of insufficient economic growth.

Food Inflation

Oman is to buy 200,000 tons of rice, enough to build a two-year stockpile, as it seeks to ease the inflationary burden on its population. If more countries start stockpiling food stuff, the impact on food inflation would be severe.