Friday, July 31, 2009

Indian IT Exports

About 4 years ago I read a post in rediff about a Mckenzie report that projected India to achieve IT exports of $62 billion by 2008. It sounded phony and I mentioned so at that time in my blog. Today I read this article in TOI stating India achieved $50 billion in IT exports in 2008. Falling short by 20%. I really would like to know how these projections are made. I understand the need to make these projections, so that the CEOs and IT pundits and drop these numbers to project their own interests, but seriously, I do not think there is much thought behind these models.

Tuesday, July 21, 2009

Partial Capital Account Convertability

I've read all but last 30 pages of the Paul Krugman's book. This has been an enlightening book on economics. I refrain from hyperbole because I read so little, its tough to compare with other books.

This has also been a journey of discovery. I have come to appreciate India's stand on partial capital account convertability. Its been demonstrated time and again, how assets bubbles are created through foreign investments and how a country could face financial crisis owing to no fault of theirs but only because of speculators, sentiment and lack of depth of their own financial markets.

I have now started believing that unless a country has enough depth in its own financial markets, it should not let free inflow and outflow of capital. The sheer volume and speed of the flow and cause bubbles or busts (depending on which way the flow goes).

The reason India remained relatively unaffected by Asian crisis, and to some extent US meltdown is because of these curbs, regulations and checks. I now see the wisdom of it. A country needs to manage its transition to prosperity on its own terms. India is doing it, and so is China. Chinese Yuan used to quote @8.25 in early 2005 and around the time I visited Shanghai. Today its quoting @6.8. Its about 16% gain in 4 years. Its gradual, managed and thats how it should be done.

Corollary to Previous Post

US stock mkt has gone up for the last 7 sessions. This is indeed good news for the investors. My view is that this is largely due to increased liquidity. Another proof of increased liquidity is emerging markets. As the financial crisis threatened the US economy, the investors sold their holdings across the world and flocked back to the US. Now that the monetary policy is easing, the money is flowing back to the emerging economies.

In principle, US is a leaky economy, i.e. if there is too much liquidity and PE is high, the money will exit US shores and go to rest of the world in search of better returns. In the 60s,70s and 80s, the world was relatively closed. But with globalization, capital is flowing to developing economies in search of above average returns.

It is my view that US mkt is saturated and therefore there will not be too much upside to stocks in the US. In the coming years, the spending in US will be fueled by growth of investments outside of US. Just like the housing and stock bubbles, US money will now stoke bubbles in emerging economies and fuel internal consumption backed by gains in these economies.

The interest rates in the US will remain depressed for years to come as these investments will bear fruits only some time down the road.

The same happened in Japan in the 90's when interest rates were depressed to 0 and capital was available cheap. The east asian economies swelled due to capital inflows from Japan. Investors could borrow cheap from Japan and then lead at higher rates in countries like Thailand, Korea, Mylasia etc. Only this time the amount of money will be bigger and will create bubbles in developing countries across the world.

The good news is that Indian stock market will receive a lot of money from US investors, at least in the short run.

Friday, July 17, 2009

Anatomy of a Crisis

I'm reading "The Return of Depression Economics" by Paul Krugman. A very enlightening book for a coffee table economist like me. He traverses the history of meltdowns across the world from Latin America to South East Asia. A very interesting journey indeed. This journey triggered a thought in my mind. If its brought out later in the book, I'm not aware. Its not there in the first 100 pages and given my ageing memory I thought it best to write it down before I forget it. So here goes.

Size of Economies
All these crisis economies (Mexico, Argentina, Thailand) etc. are essentially small, unlike US or Japan. The businesses within the country do not have much power to move the indexes too much for their lack of resources. The outside players such as US and Europe pump in money or pull it out as they feel. Though the money they pump in or pull out is small change to these countries, they are substantial sum when compared to size of these economies.

I've read somewhere that speculators add liquidity and depth to the market. In financial markets of these countries when sentiments change, the first world speculators collectively move to one end of the spectrum (buy or sell), lets say 10 funds. Even if there are 100 other operators within the country that wanted to buy at lets say 10% less than current price, they can't buy all the load thats coming their way. This reduces the prices beyond their natural bottom(bottom it would have settled if external and internal operators had about equal buying powers).

The sheer size of their economies makes these countries more susceptible to crisis. That's how I could explain the Contagion effect.

Another point. When these countries face crisis, the currencies get hammered because the pulls out the money. However, when a Crisis hits the biggies, the currencies appreciate. For example, before the 2008 crisis hit US, Rupee was trading at 43 per dollar. The moment Crisis hit us in September, rupee dropped to 50 and beyond, more than 15%. India is not much of an export driven economy compared to lets say South Korea(25% of GDP vs 40% of GDP. They have comparable GDPs). I also checked Australian Dollar vs USD The AUD dropped from 1.2 in Sep-08 to 1.5 Dec-08. Why did this happen?

America and Europe have huge hordes of money. Though most of that money is invested in US and Europe, a significant part is also invested in other parts of the world. So when a credit crisis happened in the US, all this money across the world flooded in to the rescue bolstering liquidity cushioning the fall. Same with Yen. The Japanese had the 12% contraction in GDP (Q4 2008) vs 6% in US. Their currency actually appreciated against the USD (112 in the end of 2007 vs 90 at the end of 2008).

In effect, the anatomy of crisis in Big and Rich countries is a little different. They are better protected against the crisis just because they could call upon investments in other countries to cushion the blow.

Punishment to a small country for their economic sins is far harsher compared to the rich. Didn't I just prove the social aspect of crime and punishment in economic terms. Ha!

Monday, July 13, 2009

Headed for a Jobless Recovery

The size of the Balance Sheets for US banks and companies is shrinking. Companies are fighting to stay profitable in this challenging environment. And they will succeed, I'm sure of that fact. Challenge is how to grow the company. No one is focusing on it and I do not think it would be on their radar for some time. As a result, companies will turn around. Leaner, meaner(literally) and profitable. If the companies fire enough people, shut down enough plants and cut enough costs and yet survive they will eventually be profitable, albeit with a smaller revenue base. However, the people that were spitted out with pink slips will not be assimilated back in the system anytime soon. Net, Net this will be a jobless recovery and it may take a decade or more to reach full employment of 4-5%.