Downgrade the Downgrader

What does Indian Economy, Rcom, JSW Steel and our beloved Prime Minister Dr.Manmohan Singh have in common? In the last twenty five days each of them has come under severe criticism. Each criticized for different reasons and by different agencies. However there is something that is common that runs across all these independent events.

In the first instance, it was S&P that threatened India that it would downgrade the investment grade rating it had given us citing policy paralysis and political road blocks to economic policy. Barely days later Veritas cut Rcom's target price to Rs. 15 a share when it was trading at Rs. 63 questioning Rcom's accounting policy and the very high leverage. After a few days hiatus Credit Suisse did not want to feel left behind and came out with a steep target price cut for JSW Steel after accusing the company  to have understated debt and also pointing to the firm's unhedged foreign currency exposure. Finally this time it is TIME magazine which has branded the Indian PM an under achiever. As expected all of these have been condemned very strongly by the people concerned. 

If viewed independently all of these are isolated incidents and it is a normal day in the life of a brokerage firm or a rating agency  to analyse  major companies and countries, and so is in the life of a magazine to report on various leaders and their performance. But when viewed in unison what has so drastically changed in the past Twenty five days that all swords are out on the Indian economy and its chief driver and its stocks.

There is no great evidence either to conclude that these incidents have occurred out of some common animosity. One of them is S&P the big daddy of global risk rating and analysis, one a famed research firm from Swiss while the other a canadian brokerage house. Finally TIME a world renowned news weekly. However there is a common thread that runs across all these - The Great Indian Growth Story.

The Reason
The global economy today is shakier than ever. Euro region is slowing down and not throwing any major investment opportunity. US markets as usual do not give superlative returns. China is having its own trouble in terms of equity returns with its markets languishing in a very narrow range for what now seems to be an eternity. Japan is going through its own phase of structural bear market and this has been the case for close to two decades now.

Now we are left with only BRIS (as C in BRICS already discussed). Brazil is reeling under a sever drought, the biggest it has faced in the past five decades. So RIS is the only major opportunity available apart from few sporadic opportunities here and there. So the global analyst and investment community does not want to let go of this opportunity and they want to do it before its too late.

The global central bank community as a whole has been living in a perpetual state of denial. The EURO crisis has shown how a group of eminent economists who are stalwarts at an individual level can be not so eminent when they come together. Any disease should only be cured and not suppressed. On the contrary it is only being suppressed by an enormous amount of notional money and being cured. However this can not go on for ever. When the drug loses its ability to fight, the disease would recur and would recur with much greater force than ever before and which is what is playing out in the EURO zone today. SO when the relapse is going to hit the global economy is anybody's guess.


On the other hand US is an even bigger threat to the global economy. It was US that set the precedence of this entire act of suppression and they have proved to be masters at that. QE*(Sorry lost count of the number) has pushed US's Deficit to GDP ratio to 30% and Debt to GDP ratio to beyond 500%. It is a ticking time bomb and timer is moments away from explosion. With elections slated we can be rest assured that the ticker on the bomb is well timed to explode post the election. 


That leaves us with some food for thought. Before any of these catastrophe hits the global financial markets  these brokerage houses want to make the most of it. Cheap money will be available over the next few months as all the major central banks across the world throw in few trillion dollars by way of QEs and LTROs and Operation Twists and any other fancy nomenclature they would come up with. I really wish the ideas were a fraction as creative as their names to cheap money. Brokerages do not want to let go of the opportunity to eek out a sizeable returns from the rally fueled by this easy money.


By instigating our Govt and our corporations they are eagerly expecting some positive reaction from our end. I am not getting into the multi billion dollar question - Is governance in India doing the right thing by doing what they are currently doing. But having said which, I am skeptical as to why these world class brokerage  and credit rating agencies are so desperate  in getting us to act. I am still of the opinion that there is vested interest behind the veiled threats and direct allegations they have been throwing at us. After all the downgrades and allegations of misrepresentation will Veritas not participate in the FLag Telecom IPO (a subsidary of Rcom), or will they not pour money into our markets even after complaining about our under achievement, I am sure they will. 


Conclusion
So is Rcom right with its financial accounting or is JSW really understating its debt, well the jury is still out on it. But the way these leading brokerage houses and analysts have criticized our economy, our leaders and our stocks  makes me very skeptic about their hidden interests and I would take any of their advisory with truck loads of salt.


Regards
SVJ


Disclaimer: The views expressed were purely my personal understanding and interpretation. These views were not made to demean any particular nation or any specific community or any single entity or any individual.  Readers will do best to ignore all this as trash and choose to ignore any viewpoint they wish to disagree. 

My Understanding - The EURO Crisis

The quarterfinal match between Germany and Greece was more than just a game. There was an invisible undercurrent of rivalry and it had got nothing to do with rivalry on the field but all of that was off it. Greece wanted to win and show Germany how hurt they are feeling inside on the measures proposed  by later on the  way the former has to be governed. Just as in economics, even on the field it was Germany which was dictating the terms. Though Germany had the last laugh at Arena Gdansk, it will be a while before we know if Germany is indeed laughing at its plight on the Euro crisis.  Greeks feels that Germans are the root cause of all their woes and the Germans feels they are being penalized for something they are not responsible for.    

Greek Elections, a keenly watched event by the entire world, an insignificant event under normal circumstances had attained a globe stopping event status. This was not about who was getting elected to govern the picturesque country but it was about what fallout it would have on the entire global economy. It was an event that could decide if Euro would break within the next few days and weeks or is it buying some more time for itself. 

Euro is an idea who's time has already passed. It was to be a viable alternative to the green back but the way it was run right from the day of its inception was all but right. The Euro was run more for a political clout than economic. Germany, one of the most prominent members of currency wanted to exhibit supremacy over the entire region. A goal it was well on course to achieve suddenly got stunted because of the fiscal imprudence of the region's smaller members. The very goal it set out with, has now suddenly become an albatross around its neck. Germany is now being forced to pay for all the economic mismanagement displayed by its smaller peers. It has now come to such a point where Germany can't let the Euro fail and at the same time saving the Euro is costing it dearly.


To understand what actually led to all this mess we have to go  a little back in time to early 2000s. When the Euro came into force the smaller nations like Ireland and Greece had access to cheap loans which they were not used to. This was primarily because Euro was much stronger than their local currencies. The irony is we do not understand the value of anything in life that comes easy or cheap. Which is exactly why these nations started borrowing left right and center and were splurging on non priority expenses and extending freebies to their citizens.


Ideally the debt should have been utilized to set up the infrastructure and increase capacities. This would have led to higher exports and more income and in the long run would have benefited the nation and in turn the region. In reality the debt they picked up fueled false demand. Added to it the speculative trading by banks and financial institutions caused an asset price bubble. Once the bubble got pricked the nations that were servicing huge debts saw the debt to GDP ratios bloat leading to huge fiscal deficits and newer loans to repay earlier ones. When the debt burden rose beyond their means these nations started defaulting. The banks that lent to these nations started to run into losses and a chain reaction had started.


Germany on the other hand had always been an export oriented economy and was not directly benefiting  from the migration, as German Mark had always been stronger andso was its access to cheaper loans. However one willful error Germany committed was that it turned a blind eye towards all the fiscal imprudence displayed in the region. TO explain it in more simpler terms, for instance in a family one member is very prudent with the way money is spent and if rest of the members splurge the overall family budget takes a hit. This is exactly what happened with the Euro region.


So, what would have made the Euro work. When different economies embrace one single currency it call for strict fiscal discipline by all its members, periodic review and stiff penalties for non adherence. The problem with the Euro was not lack of guidelines but was the lack of commitment towards them. When the weaker nations flouted the guidelines stronger nations chose to just chide them and not impose stiff penalties. By the time the region woke up to the crisis the damage  has already been done. What Germany is doing now was ought to be done at least a  decade ago. This explains why the Greeks and the Germans feel what they feel today.


I am not singling out Germany and Greece as the only pair of nation that had exhibited this behavior. When I was watching the football match I could sense the invisible rivalry between these two countries. In fact this hypothesis is true in any pair of a strong and a weak Euro nation. The irony is a strong Euro nation is now non existent.


It is now left to be seen how much time has the Euro bought for itself, if at all it has bought any


Regards
SVJ


Disclaimer: The views expressed were purely my personal understanding and interpretation. These views were not made to demean any particular nation or any specific community or any single entity or any individual.  Readers will do best to ignore all this as trash and choose to ignore any viewpoint they wish to disagree. 

Money Money!!!

There is a huge information overload about money on the internet and what would this blog dish out new about this necessary evil that propels this world. Well, the answer is - Nothing very radically different.  This blog is about unraveling various facets of money. I will try to map various incidents that take place across the globe politically and economically and connect it to the effects it will have on your finances.

This blog will feature articles about politics of money from across the globe and of course India, about financial market behavior, movements and expectations and also about the various anomalies that are  prevalent in the global financial markets. These are my impressions and interpretations about the complex commodity - MONEY!!!

I assure you this is going to be just a pedestrian effort considering this is my first such attempt. But in a few months from now, I am sure that I will be able to present it with much more clarity of thought and that I will be able to evoke thought provoking questions in the readers' minds.

I will look forward to your feedback good or bad to help me develop the quality of my overall delivery.

Regards

SVJ.