Continued Rise of Evils identified as Culprits of the 2008 Crash

1. In 2008, in the wake of the financial crisis, assets under management in so-called "retail alternative funds" in the US [a.k.a. alternative investments, and defined to include absolute return, commodities, currency trading, dedicated short bias, equity energy, leveraged strategies (both long and inverse), managed futures, market neutral, multi-strategy alternatives, natural resources, options arbitrage, precious metals, real estate and volatility strategies; but to exclude distressed debt] crashed in the US from $368Bn to $275Bn. However, as a percentage of "all long term retail fund AUM" [defined to include mutual funds, closed-end funds, ETFs and UCITs (Undertakings for Collective Investments in Securities) structures, and excludes limited partnerships and separately managed accounts], it never fell - indeed, the figure of $275Bn in 2008 was 5% of LT Retail Fund AUM in 2008 whereas the bigger figure of $368Bn was 4% of the same figure in 2007. 
2. From 2009, the share of alternative investments as a percentage of the all long term retail fund AUM started rising once again, boht, in the US, and globally excluding the USand they have been growing @21% CAGR in absolute terms in the US, and at 11% globally excluding the US;  till 2011.
3. At the same time, several other disturbing parameters have been heading in the "wrong" direction. See the table below, which shows these statistics as they stood  at three different times I have tracked them in my blog. 
4. Reading this table closely shows that the average American is on the right path (reduced personal debt per citizen; higher GDP per citizen) but the US Government has continued its profligacy with a vengeance (rise in National Debt as % of GDP; Total Debt per Citizen; and US Debt held by Foreign Countries). Just look at the US Total Liabilities and US Interest Burden per citizen from April, 2010 to September, 2011 to see what havoc the US fiscal and monetary policies are wreaking.   
5. What is worse, the investment bankers are back with a vengeance: as paras 1. and 2. above indicate, and as the figure of Currency and Credit Derivatives in the Table below confirm, what Warren Buffett famously termed as Weapons of Financial Mass Destruction are growing in value at an uncomfortable pace.  Derivative exposures have risen by as much as $91 Trillion (or 6.37 times the US GDP in just 30 months), when they should have been falling! 
6. It is time that the US Investment bankers are stopped from selling "innovative" risk-masking derivative products - for the sake of the financial health of the entire world.

Table 1

Parameter	8 Apr 10	26 Jul 11	11 Sep 12
US National Debt as % of US GDP	89%	98%	104%
US National Debt per citizen ($):	41,381	46,619	50,959
US GDP per citizen ($):	46,381	47,488	48,805
US Total Debt per citizen ($):	1,80,484	1,76,113	1,81,307
US Personal Debt per citizen ($):	53,787	51,441	50,132
US Interest Burden per citizen ($):	1,493	11,664	12,343
US Total Assets per citizen ($):	2,34,181	2,43,086	2,96,124
US Total Liabilities per citizen ($):	3,50,054	10,26,974	10,54,522
US Gross Domestic Product ($):	14.333 Tr	14.809 Tr	15.342 Tr
US Debt held by Foreign Countries ($):	3.875 Tr	4.584 Tr	5.376 Tr
Currency and Credit Derivatives ($):	648.975 Tr	611.499 Tr	740.277 Tr

Sources of data: 

Para 1 and 2 above: from "The Mainstreaming of Alternative Investments - Fueling the Next Wave of Growth in Asset Management", a Report by the Financial Services Practice of McKinsey & Co, Sep 2012.

Para 3 : extracted on 11 Sep, 2012 from www.usdebtclock.org,

Table 1 above: extracted on dates mentioned in cols 2-4 of table 1 from www.usdebtclock.org,  

Global Power Shift

This is just a series of observations that support my idea that we are living in what, in a few decades, will be seen as tumultous times.

Recently, there was a news item that stated that by 2020, China will become a larger economy than the US; and by 2050, India will top even China, leaving the US a distant third. This is not someone's wishful thinking, but just the magic of compounding – of economic growth, rather than of your money in a bank.

Today, we are all living at the crossroads of history. A subtle power shift, significantly visible in time frames of decades, but barely perceptible at the time frame level of a day or a week, is happening all the time. Witness the following:

• The Arab Spring happened over a period of months and still seems dramatic. I doubt if the spring has completely spent itself. It is not yet all cool in Syria and Egypt, and it may yet erupt again in some other nation(s).
• Technology laughs at national and geographic borders. Accountability and clean governance pressures were earlier driven within each nation's power centres, laterally. However, now there are vertical pressures that cross national borders earily – thanks to telecom, internet, satellite broadcasting and global moneychangers (both, traders and speculators).
• Unregulated or unpoliced space soon becomes populated with groups that thrive on chaos and absence of regulation. Witness Somalia, Sudan, South Sudan, etc. to see the truth of this.
• Unregulated pockets in otherwise regulated economies also give birth to chaos. While this is not to be taken as an approval of the concept of a police state, it is sobering to hear Paddy Ashdown cite a fact that 60% of the $4M that funded the 9/11 bombings passed through the WTC itself!
• Now, the enemy is within each country. Thus, for properly defending a country, the defence ministry may need to speak to the Health ministry (to protect against pandemics); Ministry of Commerce and Industry (the hi-tech infrastructure of the country is sensitive and vulnerable to attack), Home Affairs (to track infiltrators), and Transportation (Air/ ship/ road security). Defending our borders is just not enough.
• The maximum vulnerability is at all “interconnection points” (airports, docks, bus and train terminals). So defending at such points necessarily means overlap in responsibilities and powers. Hence, working with others efficiently is a capability all need to develop.
• Defence co-operation is not enough. Nations and people living in them need to realize that war is an immensely expensive zero-sum game that can go on infintely to their collective detriment. Only then can long-festering disputes cool down sufficiently to permit normal life.
• In 1945, when WW-II ended, there were about 100 countries. Today, there are nearly 200. We are adding almost 1.5 new  countries a year on an average over the last 67 years.  At the same, time, we have witnessed European countries lowering the borders and becoming a single currency area (that initiative is arguably in the endgame stage already).
• Siberia has such inclement weather that in the Far East province of Russia (area double of India) less than 60 Lakh people live. Greater Mumbai has double that population! However, it is a source of power for Russia – most of its natural gas and oil is sourced from this vast area. Surprisingly, this is a source of power for China too! Global warming has given rise to vast wheat fields in Siberia – but there is no one in Russia to feed. Russia's population is shrinking. But we see that some 600,000 Chinese migrate to Siberia, cultivate wheat during the summer on vast leased farm tracts, and come back home every year. This wheat feeds a good proportion of the Chinese population.
• China is controlling a larger and larger part of the world – without firing a shot. They are, quite literally, either buying them up, or colonizing through sheer numbers of immigrants. They are “partnering for prosperity” with several poorer countries, notably in Africa. Thereby, it is creating a China-centric circle of influence that rivals that of the US already. China has trade relationships with Korea, Japan and other countries in the neighborhood, and lower tariffs for poorer countries. In Singapore, Vietnam and Malaysia, the ethnic Chinese population is a significant, loosely united power bloc. In BRICS and in the Asian Free Trade Zone, China is assuming an increasingly dominant role. For example, on Iran, both China and Russia have vetoed UN Resolutions sponsored by the US for increased sanctions. China is still the largest customer of Iranian oil, with India being second.
• Chinese yuan is threatens to emerge as an alternative reserve currency in addition to the dollar and euro, which (when, not if, China can get away with it) will deflate the US balloon much faster than one can imagine. When that happens, the US will be awash (not overnight, but over a finite period of, say, 3 years) with inflation of  the trillion dollars of bonds that China won't need. Thus, the US seems poised to deteriorate as a global power. Inflation robs from the poor, and shifts even more economic power to the rich, so it will exacerbate social tensions in the US, as the feeling is already rife that the US bends backwards to accommodate the rich, at the cost of the poor. The recent BRICS meet discussed this concept, but shied away from pushing immediately for it. If, and when, yuan gets adopted as an alternative reserve currency, the power shift will accelerate.

I intend to develop this line of thinking further in coming days and weeks. I welcome inputs in the form of comments from anyone who has more to contribute to this line of thinking.

Is the West afraid of democracy?

In recent times, governments in both, the US and Europe have shown that this could indeed be true!

We now look at a few examples in recent years, of the West running scared of true democracy.

• Hamas was democratically elected as the governing party in a free and fair election which the US itself had approved of holding. Since that victory, neither Israel nor the US have recognized the Hamas government as a legitimately elected government in Gaza and the West Bank. All its talk of exporting democracy to justify ousting despots has been shown to be hollow and self-serving.
• The US also took an inordinately long time before ditching its long-time ally Hosni Mubarak, and throwing their lot with a spontaneous non-violent democratic uprising in Egypt.
• The current move to scuttle Palestine's application to be recognized as a country and admitted to full membership of the UN via a US veto in the Security Council is another example of the US running scared of democracy in action. The vote in UNESCO, where the US has no veto, shows what would happen if true democracy were allowed to prevail. 107 countries voted for admitting Palestine as a member of UNESCO while 14 countries (basically the US, Israel and like-minded countries) voted against.
• Poland, Czechoslovakia, among several countries, wanted a referendum (the most democratic method, where every citizen can participate in the decision) to decide on the Lisbon Treaty (proposing constitutional change in the EU). However, they were all prevailed upon to not hold the referendum; instead, elected representatives alone ratified it.
• Ireland, however, held a referendum and the proposal to join the EU was defeated. A year later, another referendum was forced to be held in Ireland on the same question when enough votes swung in favour of the Lisbon Treaty. That decision was hailed as a resounding endorsement of the Lisbon Treaty. This is a new kind of democracy where you repeatedly ask the same question, till you get the answer you want.
• The most recent case is when the Greek PM, George Papandreou proposed that the rescue package cobbled together by Germany and a few other EU countries be voted on by the people of Greece (referendum). It had the effect of a hungry cat among a flock of alarmed pigeons. Why should the prospects of a Greek referendum trouble the richer countries?
• Because Greece as a country is any way in a soup, whether they agree to the rescue package, or don't. It is has a choice of entering 8-ft deep water, or 25-ft deep water. The real rescue package is not for Greece, but for the banks in the developed countries that are holding Greek government bonds that have fallen steeply in value. For them, it s the difference between accessing EU's rescue funds to rescue them from the fallout of poor investment decisions and not getting that access, and bearing the entire loss themselves. With the backdrop of Occupy Wall Street campaign, and the widespread anger against bankers, a referendum would almost certainly return a resounding “NO” to the EU package.
• So it is not a surprise that Papandreou was prevailed upon to abandon his idea of a referendum. It continues the long saga of the democracies fearing democracy.

The Gold Standard: In Memoriam

On August 15, 1971, 40 years and 3 days ago, President Nixon, remembered today for another of his “achievements” - the Watergate scandal, announced that the United States will go off the gold standard. Till then, the gold standard meant that the money supply in any country would be limited to a specified proportion of the gold reserves owned by the Government. The gold standard was abandoned when the consumption-hungry Americans found the fiscal discipline it imposed on all Governments too inconvenient, and substituted it with a promise of the United States Government, then the most powerful and richest country on Earth.

After this epochal action, demand for Gold fell worldwide. To such an extent that India (its citizens, not the Government) was the only net importing country in the world, importing what the rest of the world exported, for well over two decades. Till India reached its economic nadir in 1991, when the Government was forced to sell or pledge tonnes of gold to save the country from financial bankruptcy. After that, India has slowly picked up its gold buying again, and Indians are still the world's leading buyers of gold. The RBI has bought back all the gold it pledged, and more. I am also sure that the RBI has recently bought more gold – it announces the value of its foreign currency reserves in US Dollars, but the actual composition is India's best-kept secret. I suspect that the RBI has fallen back on the age-old wisdom of buying gold when all currencies' future looks uncertain.

For aeons, gold has been considered in India as a refuge against uncertainty, as well as a status symbol – something no family would sell unless they were in dire straits, and then too, with the internal understanding that they would buy it back at the earliest. So while India's Government is the 10^th richest in terms of gold holdings officially declared, Indian citizens' private hoard of gold, if added to the RBI's holding, would probably make India the richest nation with the most liquid reserves in the whole world.

In the meanwhile, the freedom from the peg to gold allowed the United States to spend like there was no tomorrow. Whenever it looked like tomorrow would dawn, the United States would instigate a competitive devaluation game among other countries, which enhanced the external value of the dollar, which ensured that tomorrow was deferred yet again. Dollar prices of gold went up briefly following the 1974 oil price shock; and then again after the 1979 oil shock. Then, it continually fell till 2001. So, if one compared gold prices against inflation or any other currency value, gold always suffered, till end of 2001 when it was $272.22 in the NY market. After 9/11, some Middle Eastern countries and their residents, sharing the Eastern love for gold with India, began hoarding up on gold. So dollar prices of gold started looking up. But then, in 2007-8, tomorrow arrived.

By 2009, gold had crossed the hitherto unthinkable barrier of $1,000 an ounce. To put this in context, in August, 1971, when the gold exchange window closed, the price of gold per ounce (1 troy ounce=about 31.1 grams) was $37.60 (according to Niall Ferguson in his excellent book, The Ascent of Money). Going to $1,000 in 38 years means a CAGR of around 9% per annum. A handsome rate, but absolutely mind-boggling, if one allows for the fact that for almost 32 of these 38 years, gold prices hardly rose at a CAGR of 3% in dollar terms, when it rose at all. Do you know what the price of gold now is? It is $1,794 an ounce as I write this, in August 2011. Which means a growth of 79% over the 2000 value of gold.

Let us look at this from another perspective. If an American had turned in $1,000 before the US went off the gold standard, he would have got almost 26.6 ounces of gold. The same quantity of gold today would be worth $47,720. This is an index of how much the value of the dollar has slipped and that of gold has gone up. This means that gold worth $1,000 is now worth almost 48 times as much in 40 years – a CAGR of about 10.1%. Not bad, for something considered as a bad investment by the whole world, for almost 30 years! When the world realizes that gold has proved to be a safer haven than any other currency, there could be a renewed weakening in the belief in the US Dollar as a store of value and as a reserve currency.

Way back in June, 2008 I had written that it was time to buy Gold.  Elsewhere, I have written that gold prices could touch $4,000 an ounce in 3-5 years. At the rate the price of gold has been shooting up in the last few months, this price point should be reached much sooner than 3 years, if only because of the expected continuing weakness of the dollar. So will we see a return to the Gold Standard, or some variant of that? That has to be counted as a distinct possibility after the S&P downgrade of the AAA+ rating of the US.

Till that happens, we Indians should thank our womenfolk for consistently ignoring advice that investing in Gold was a poor bet. Thanks to that, India is possibly the most liquid and financially secure economy in the world today. What's more, it is a hidden strength - it is the reason why Indian families will survive in a world without Medicare/ MedicAid/ Social Security.

(Historical gold dollar price data sourced from www.measuringworth.com and current price from http://goldprice.org)

 

BofA: The vultures are gathering ...

Barely 3 days after I blogged on the death spiral Bank of America seems to be sliding into, the signs of death throes have become clearer. Already, its share price represents only 32% of its book value, showing that the market agrees with my assessment that its assets are massively overstated. I had pointed out only one asset, Goodwill, that called for significant impairment.  
Wall Street Journal now reports that Bank of America has entered into deals to sell the following:

• its Canadian Credit Card portfolio to TD Bank
• its Spanish Credit Card unit 
• its small-business cards in the UK to Barclays

WSJ also reports that BofA intends to sell other card units in Europe. It further speculates that BofA may also sell its stake in China Construction Bank Corp. Another report states that Bank of America has also sold off portions of its credit card business within the United States to Sovereign Bank and to Regions Financial Corporation. In April this year, BofA sold its stake in Black Rock Inc.. 
All these sales are obviously intended to shrink its way into a viable situation by raising money without a share issue, and also thus raising "tangible net worth per share" of Bank of America.
If you think BofA was the only bank in trouble, look at this list of 64 FDIC-insured banks that have failed and closed down in the first 7 months of 2011. This is in addition to 157 banks that failed in 2010, and 138 in 2009. It is obvious that things aren't getting better. But that they have company is cold comfort for BofA, around whom vultures are gathering. 

• In early 2011, it settled charges of mortgage-backed securities fraud charges with BlackRock, PIMCO, Freddie Mac, Fannie Mae, insurer Assured Guaranty and a few others, agreeing to pay $8.5 Bn. These settlements have run into some trouble, and are now facing opposition.
• Already, AIG has claimed $10 Bn damages for securities fraud in sale of mortgage-backed securities by BofA, Merrill and Countrywide. 
• In addition, over 90 similar suits have been filed demanding damages of $197Bn, says the above article, quoting LawyerLinks, a legal consulting firm.
• Now, it  is being reported that the National Credit Union Administration has declared that it is suing several banks for damages of up to $50Bn for misrepresenting safety of securities it sold to several credit unions that collapsed as a result of the investments. Among those likely to be sued is Merrill, now part of BofA. 
• Credit Default Swaps on BofA have risen to their highest level since May 2009, showing nervousness of investors.
• BofA has begun writing down principal on Californian "underwater" home loan mortgages of troubled borrowers. BofA is reported to be seeking immunity from prosecution in return for paying fines and writing down principal outstandings of underwater mortgages.
• Elsewhere, BofA is facing energetic protests from locals fed up of the number of foreclosed properties that are ill-maintained, sending property values in entire localities tumbling. 
• The richest Hedge Fund Manager in the world according to Forbes' 2011 List of Billionaires, John Paulson, and who is known for sticking to his bets for longer than most fund managers, has sold half his stake in BofA and Citigroup.

There is speculation that it could spin off Merrill Lynch Wealth Management and Investment Banking operations. There is also some speculation that BofA could put Countrywide, acquisition of which is by consensus considered as a big corporate blunder, into bankruptcy. However, moves taken to consolidate Countrywide and BofA have clouded BofA's ability to ringfence Countrywide-related liabilities. 
Watch this space! 

The Death Spiral beckons ...

Bloomberg reported that as of August 10, 2011, 186 US-based financial services companies traded for less than 60 percent of their book value, or common shareholder equity, including Bank of America, Citigroup Inc., Morgan Stanley, AIG and SunTrust Banks Inc. Together, they had a market capitalization of $300.5 billion, compared with $686.4 billion of book value. This means that a fall in their share prices to this extent (40%) is well nigh inevitable. 

How likely? These banks are very, very vulnerable. For example, earlier this week, AIG filed a suit accusing Bank of America of securities fraud; demanding damages of $10Bn. This sent the BofA stock down 20%, in addition to the bloodbath that the Dow Jones has experienced in the week after August 2, and the S&P downgrade. Its market cap stood reduced to $68.6Bn. Compare this with just one year-end intangible item on its 2010 Balance Sheet: Goodwill is shown at $73.8Bn (see p.130, Table XIII. See also Footnote 1 below)  – forget the rest of its balance sheet, BofA would have the world believe that this intangible item alone, built up from excess over book value paid for its past acquisitions, is worth more than the entire BofA is worth on Wall Street. How many will believe this, and for how long? There will always be the small boy who shouts, “The Emperor is not wearing any clothes!”. After reading Page 114-115 of its 2010 Annual Report, any accountant will understand that BofA will have to write down goodwill significantly (it wrote down $12.4Bn in 2010) - and to keep the shareholders' equity intact after this write-down, it would need to raise more equity. The dilution this would almost certainly drag the share price lower. Which will require them to raise more equity at even lower prices ... leading to a death spiral.

What about the demand for financial sector shares? All but non-existent. Retail interest was never very visible in the US in equities; now it has disappeared. Institutional investors are worried about what write-down of such intangibles would do to the Balance Sheet – and will stay away from any further issues in sufficient number as to make a public issue a very big gamble that could very easily fail. So the only solution – a government bailout wherein the financial institutions that still bear the TBTF tag (Too Big To Fail) are partly nationalized. Expect this to happen in the not too distant future, when the pressure of reporting numbers that have no relation to stock market prices forces them to look for ways of raising their net worth to blunt the edge of the writedowns that are inevitable already. 
What if the US Government finds it politically unpalatable or impossible to rescue these firms with a QE3? Refer to the title of this post! 




Footnote 1 referred to above: 
Table XIII on p.130, and Table XII and Table XIV before and after it, were the result of BofA's attempt to dress up their Income Statement and Balance Sheet, and the justifications for using these were on page 40. If they had followed GAAP alone, the Tables and the explanation on p.40 would be unnecessary. They used "non-GAAP measures" - euphemism for accounting legerdemain to make accounts smell sweeter, euphemism for which is "additional clarity". The footnote to Table XIII reads: Presents reconciliations of non-GAAP measures to GAAP financial measures. We believe the use of these non-GAAP measures provides additional clarity in assessing the results of the Corporation. Other companies may define or calculate non-GAAP measures differently.

What goes around, comes around ....

The US, IMF, and the World Bank have lectured India on the need for fiscal discipline, how to allow market forces full rein, and allow businesses and companies to close down rather than support them in difficult times, which is what the Government was wont to do. The US have not taken their own advice, on the specious plea of "Too Big to Fail", and bailed out top investment banks, commercial banks and insurance companies.  The IMF and the World Bank conveniently forgot to lecture the US for the same folly - of letting deficits go haywire.
What goes around, comes around ....
The UK Press had a great time, roundly criticising the organising gaffes of the Organising Committee for the Commonwealth Games. They preened over the fact that with one year to go, their preparations for the Olympics were ahead of schedule. In less than a week after this, the London riots have exposed the seamier side of the recession-hit economy - about how thin the veneer of civilisation is, even in what is considered one of the more civilised countries in the world. All it requires is a little financial discomfort in enough people to spark riots, arson and looting. And now, there are worries about how secure London really is, with a few sports ties being called off due to the riots. Who knows if the 3rd test between India and England will happen now? If you think such rioting is uncommon, see this from November 2010 and this protest in March 2011 pushing for greater profligacy from a Government that already has racked up a cumulative deficit of 4 times the country's GDP. 

What goes around, comes around ....
The BBC calls the London arsonists and looters as "protesters" - a cute euphemism - but coyly refrain from saying what they are protesting against. A far cry from what they call helpless victims in unmanned drone attacks and in cross-fire between the "Coalition" forces seen as interlopers and those protesting their continued meddling in Iraq and Afghanistan  - "insurgents". See synonyms of insurgents here and judge for yourself how many of these terms apply to those perpetrating violence in London more accurately than "protesters".  And then Google this phrase: "Insurgents Iraq Afghanistan BBC". Orwell's 1984 is well and truly upon us. Long live Doublespeak!

Some scary statistics about the US - revisited

In April, 2010, I had blogged about some scary statistics about the US economy. I revisited these statistics, and here are the results. While everyone is absorbed about whether the Republicans will agree to increase the US debt ceiling, let us revisit some statistics that looked scary to me in April, 2010. Let us see what has happened since then.

• US National Debt has gone up from 89% of US GDP to 98% of GDP.
• Total US Public Debt stands at $14.293 Trillion; by August, it will touch $14.3 Trillion, which is the current ceiling.
• US GDP per citizen has actually gone up by a little over $1,100, in spite of increasing unemployment numbers.
• However, US National Debt per citizen has gone up by $5,200 in the same period.
• US Debt held by foreign countries has gone up from $3.875 Trillion to $4.584 Trillion.
• US external debt to GDP ratio has crossed 100%. The equivalent figure currently for India is 21%. For the UK and France, this ratio is at a staggering 388% and 208% respectively.
• Assets per citizen has gone up by $8,900 while Liabilities per citizen has gone up by a staggering $674,000. Similarly, Interest burden per citizen is up from $1,493 to $11,664.
• There has been winding down of about 5% of currency and credit derivative exposures, but a much longer road remains to be traversed.
• All-in-all, a dismal report card. For a Nobel Peace Prize-winning President who has got the US involved in a third senseless aggression in Libya, and so far failed to unwind its involvement in two other messy wars it has been engaged in for more than a decade. 

	8 Apr, 2010	26 Jul, 2011
US National Debt to GDP (%):	89.12	98.18
US National Debt per citizen ($):	41381	46619
US GDP per citizen ($):	46381	47488
US Total Debt per citizen ($):	180484	176113
US Personal Debt per citizen ($):	53787	51441
US Interest Burden per citizen ($):	1493	11664
US Total Assets per citizen ($):	234181	243086
US Total Liabilities per citizen ($):	350054	1026974
US Gross Domestic Product ($):	14.333 Trillion	14.809 Trillion
US Debt held by Foreign Countries ($):	3.875 Trillion	4.584 Trillion
US Government Bailout ($):	6.387 Trillion
Currency and Credit Derivatives ($):	648.975 Trillion	611.499 Trillion

• One point about India: Gold is a bulwark against uncertainty. Indian Government's holding of gold currently is higher than all countries save 9; if the private hoard of gold in Indian families is taken into account, India's gold holdings would be at least twice that of any other country on Earth. Gold prices are at their record high of $1,600 and John Paulson (the hedge fund manager who made a killing in 2008 by betting that the sub-prime crisis would result in CDO/CMO defaults) says it will touch $4,000 an ounce in the next 3-5 years.

US Consumer Debt : Income 50 cents, expenditure 65 cents

-
Since June 2008, the US household debt mountain has shown the seventh consecutive quarterly drop. This should be heartening. However it is not so for two reasons:

1.  The figure is down by a minuscule US$0.37 trillion, out of the US$ 13.9 trillion -- just 2.66% deleveraging in nearly two years. Not fast enough, when you consider that the bigger figure represents 131% of personal disposable incomes. Aamdani atthanni, kharcha 65 paise (Hindi proverb that translates into the second part of the headline of this blog entry) is the condition of the entire US population!
2. Most of this reduction has been achieved by banks writing off mortgage and credit card defaults. If one adds back to the debt figure the amount of write-offs, the bad news is that US household debt has actually gone up slightly, by only US$ 186 Billion! No sign of de-leveraging. The spendthrift habits of two generations are obviously refusing to die away.

 In the meanwhile, Government (Federal) debt has swollen from US$$5.16 trillion to US$ 8.16 trillion. So now, the Government has joined the excessive leveraging game. Not good either, for anyone. A healthy US economy is good for all, but today the US economy's condition is pink -- the pink of high fever, not the pink of good health.
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Not a good time for any stock market

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Airline and automobile industry have always been GDP multipliers. That is because of the huge direct and indirect employment they generate, both upstream (component and ancillaries manufacture, assembly, services) and downstream (sales, service/ maintenance, spares, travel and tourism) besides the airline manufacturers and operators themselves. When any of these industries get hit, the economy gets multiple hits.

Of the two, the airline industry is more vulnerable to random hits, because of the global nature of their operations. Not only are they buffeted by almost every risk there is, including terrorism, hijacking, fuel price and availability risk, currency fluctuation/market volatility risks, political and taxation-related risks, etc., but they are also vulnerable to Mother Nature – sudden “clear air turbulence”, volcanic ash, storms, lightning and bird strikes, storms, besides risks arising out of mechanical, electrical, hydraulic and electronic failures, Air Traffic Controllers' errors, pilot error, irate governments who impound planes to score political points, militant cabin crew and pilot unions, irate customers demanding refunds and free accommodation, careless loaders, .... the list is endless. There is no other industry I can think of, that has such a profusion of risks to contend with every single day. Of course, the insurance industry is a close second.

The automobile industry is already doing very badly in all countries save China and India, thanks to the 2008-9 meltdown and recession, and these two markets are becoming hyper-competitive, thinning the margins and making the business environment even more difficult for all players.

When both these industries are doing badly, it is well nigh impossible for any economy to grow, especially in developed countries where markets are already very developed, saturated and competitive. Add to this fiscal profligacy of successive governments and you have a great recipe for financial disaster. This is what Europe and the Euro area is facing today.

With growth rates of all these economies being in the low single digits where positive, and negative in most places, it does not take much to knock an economy, and by extension, due to globalization, an entire region, off-balance. The recent volcanic ash episodes have paralyzed much of Europe, especially the UK for upto a week. Given that a week is almost 2% of a year, loss of such a level of business more than once in a year is a luxury that any European country can ill-afford. We are already into the second bout of airport and airspace closures, and Katla, the bigger next-door volcano, has yet to erupt! Add to it the cost and turmoil of elections (in the UK), fiscal profligacy (Greece, Spain and Portugal) and strikes and unrest (Greece) and it would be a very credulous person who would bet on the European economy growing over the next two years.

Because of the very interconnected nature of markets, it takes seconds, not years, for any contagion, whether of optimism or pessimism, to travel across the globe. So brace yourself for stock market failures. This contagion will definitely travel to India, for no mistake of it own, except Indian markets' connectedness with world markets and contagiousness of investor sentiment. 

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Some Scary Statistics: Comparison with india

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This has reference to my post yesterday. One reader commented that it would be educative to know comparative statistics of India and the United States to make out the difference. I thought that was a fair request. Hence, I did some quick research from the CIA Factbook and got quite a few comparisons between India and the US. The results are given below. Note especially the Foreign Exchange and Gold Reserves position and the Gini Index that shows income inequality to be more pronounced in the US than in India. Moreover, in India, there is no statistic equivalent to the mountain of $649 Trillion of currency derivatives exposure in the US, because such derivatives are not allowed in India. This is the reason India got off lightly in the credit meltdown, and the US is still struggling to cope with the impact of unwinding of this mountain of exposure.

Parameter	USA	India
GDP per capita (PPP) (2009 est)	$46,400	$3,100
GDP Real Growth Rate (2009 est)	-2.40%	6.50%
Unemployment Rate (2009 est)	9.40%	10.70%
External Debt (US – 30 Jun 2009; India – 31 Dec 2009 est)	$13.45 Trillion	$223.9 Billion
Public Debt as % of GDP (US: Mar 2010@; India: 2009 est)	89.10%	59.60%
Distribution of Family Income (Gini Index: 0=no inequality; lower = less unequal) (US – 2007; India – 2004)	45.0	36.4
Stock of Money (M1) (US: Dec 2008; India: Dec 2009)	$1,436 Billion	$279 Billion
Stock of Quasi-Money (M2) (US: Dec 2008; India: Dec 2009)	$10,990 Billion	$853 Billion
Stock of Domestic Credit  (US: Dec 2008; India: Dec 2009)	$15,060 Billion	$1,000 Billion
Reserves of Foreign Exchange and Gold # (India - 31 Oct 2009: India’s World Rank: 4th behind China, Russia and Taiwan)	-$3,588 Billion	$287.5 Billion

# Calculated from www.usdebtclock.org as sum of US External Debt and US Gold Reserves. 
@ Taken from www.usdebtclock.org   
All other data taken from the CIA Factbook.
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Some Scary Financial Statistics about the US

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Some scary statistics about the US Government’s financial condition:

US National Debt to GDP (%):                       89.12

US National Debt per citizen ($):                  41,381

US GDP per citizen ($):                               46,381

US Total Debt per citizen ($):                      180,484

US Personal Debt per citizen ($):                 53,787

US Interest Burden per citizen ($):               $1,493

US Total Assets per citizen ($):                    234,181

US Total Liabilities per citizen ($):               350,054

US Personal Savings per citizen ($):             1,558

US Median Income per family ($):                62,013

US Gross Domestic Product ($):                    14.333 Trillion

Currency in circulation within the US ($):      1.993 Trillion

US Debt held by Foreign Countries ($):         3.875 Trillion

US Government Bailout ($):                         6.387 Trillion

Currency and Credit Derivatives ($):       648.975 Trillion

When Lana Turner, famous filmstar of yesteryear was asked her age, she had diplomatically replied:

I really don’t know, because it keeps changing from second to second.

All these figures similarly keep changing from millisecond to millisecond. I had extracted these figures between 6:45 pm and 7 pm today, Indian Standard time, from here. Check out for yourself what these figures are at this very moment. 

Now, think like a banker would: If the US Government was a loan applicant, how much of additional loan would would you trust the man to service? 

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