Good time to buy stocks???

Ever since the markets fell a few months ago, experts have been advising people that it is a good time to buy stocks with a long term horizon. But should we really buy stocks, and what exactly is ‘long term horizon’?

The current economic downturn is the worst since the great depression. The current market crash has been pretty similar to the ‘Great Crash of 1929’ which led to the great depression. In both the cases stocks fell almost 50% within a very short period of time. A look at the Dow Jones Industrial Average (stock market index for the US) shows a pretty similar pattern in both cases.

July, 1929 - December, 1929



July, 2008 - December, 2008


However, what is not common knowledge is that the ‘Great Crash of 1929’ was just the beginning. The 50% fall is stocks looks like a tiny fall, compared to what happened after that. The markets recovered briefly after the great crash, but thereafter they kept going down for a long time. Eventually, the market lost close to 90% of its value!

July, 1929 - August, 1932

The two major reasons for the fall were the collapse of global trade (due to the Hawley-Smoot Tariff bill) and deflation. While there is a remote possibility of a global trade war happening today, there is a very real danger of deflation. If it happens, the stocks could head lower than the levels we have seen in 2008.

After the great crash of 1929, experts may have told the people - it is a good time to buy stocks with a ‘long term horizon’. However, people who would have taken that advice would have had to wait for a quarter of a century just to break even!!!

July, 1929 - May, 1955

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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can also be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

Buy Indian only???

With the global economic crisis worsening, there have been mails / posts about how Indians can help their country by buying Indian goods. The argument is that if Indians buy only Indian goods and boycott foreign goods and brands, India will be able to save a lot of foreign exchange. But will reducing the consumption of foreign goods actually help India? Let us see what history tells us...

In the 1910s and 1920s, global production capacity was increasing at a phenomenal rate, due to widespread use of mass production and huge efficiency gains brought on by the use of farm tractors in agriculture. The US was fearful that products and foodgrains from other countries will flood the US market and lead to job losses in US industries and farms. With the intention of protecting the US farmers and industries, the US government passed a law called the Smooth-Hawley Tariff Act.

Smooth-Hawley Tariff Act: The Act raised US tariffs on over 20,000 imported goods to record levels. It imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the US, almost quadrupling previous tariff rates. In essence, it made imports of many products into the US uncompetitive.

Global reaction: Following the act, there was a huge global outrage, and countries all over the world took steps to counter this. Canada preemptively imposed new tariffs on 16 products that altogether accounted for around 30% of U.S. exports to Canada. Other countries in Europe and elsewhere also raised tariffs or banned US goods altogether.

Result: U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by around 66% between 1929 and 1934. Unemployment which was at 7.8% in 1930, jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933.

Although the act was passed after the stock-market crash of 1929, some economic historians consider the political discussion leading up to the passing of the act a factor in causing the crash, the recession that began in late 1929, and its eventual passage a factor in deepening the Great Depression.

As can be seen, banning imports or raising tariffs can cause similar reactions from other countries, leading to a reduction in overall trade. In such a case everyone is worse off. Hence banning foreign products and using only Indian products may not be such a good idea.




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

India’s 7% growth rate?

Even though the International Monetary Fund (IMF) is predicting a global recession in 2009, India’s growth rate is expected to be at 7% . In a world where most economies will shrink or grow marginally, 7% is a stunning growth rate. However, is this a realistic prediction? There are a host of factors that could derail India’s growth in 2009.

Consumers: The biggest risk to India’s growth comes from the consumers! The Indian consumers, till a couple of decades back, primarily believed in saving money and living within their means. But as the Indian economy opened up, the Indian consumer started spending more. Consequently the economy benefited. Credit card off-take increased, malls and multiplexes came up everywhere, and spending began in right earnest. Just when it seemed like this would never end, the global economic crisis began. This has led to a fear of job losses and uncertainly, leading to a fall in consumer demand.

Housing: A house is the single biggest purchase for most middle class Indians. Housing also drives a host of other industries and products like, paints, consumer durables, furniture, etc. Also, when the house price goes up, people ‘feel’ rich and end up spending more. With many houses bought in 2007 and 2008 now quoting below their purchase price, consumers in India are learning the hard way that property prices can actually go down!

The key reason why India was supposed to do well, despite the global gloom, was that the Indian economy is driven by internal consumption. But the biggest risk now is that the Indian consumer, who had just started to spend, may cut back on spending and start to save more. If this continues for a long period of time, it could potentially lead to deflation .

Businesses: Many Indian businesses have also been guilty of borrowing heavily when the times were good, and are clearly under-prepared for this downturn.

Government: The government has been slow to react to the global financial crisis. Till some time back the government was still fighting inflation, by keeping interest rates high, when there was a clear case to reduce rates to boost growth. The two stimulus packages were too little too late to help the economy in any meaningful way.

Elections and Monsoon: The two jokers in the pack are elections and monsoon. A government with Left’s support or an inadequate monsoon could be the last thing the Indian economy needs in 2009.

Given all these factors, it will be very difficult for India to maintain a 7% growth rate in 2009. The growth rate could actually go down to as low as 4%-5% over the next few quarters. Lets hope the Indian consumer keeps spending...




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

Low oil price bad for the economy?

For all of us who fill in our vehicles at the petrol pumps, the recent drop in oil prices is a welcome relief. However, looking at the macro picture, the recent drop in global oil prices (from the highs of around $150 per barrel last year to the current price of $40) may turn out to be a bad thing. Lets see how...

The soaring price of oil in the initial part of 2008, had lead to a spike in the cost of petrol, diesel, etc. It also led to an increase in the cost of virtually everything (all goods have to be transported, and an increase in oil price increases this cost). This obviously hurts the consumers, and since consumers are also voters, governments all over the world started thinking about tackling the oil crisis.

The focus was largely on two things:
Alternatives : Governments seriously started thinking about ways to reduce dependence on oil. This led to an increase in investment into alternatives like wind energy, solar energy, etc. The cost of alternatives was historically higher than oil, however with oil hitting $150, the alternatives suddenly started looking cheap!
New oil exploration : There are huge unexplored oil reserves in non-traditional places like the oil sands of Canada , oil shale in Western US , and deep water oil . At $150 a barrel, companies started exploring these options, as the price of oil was more than the cost of production from these non-traditional places.

Now at $40 a barrel, experts believe that oil has gone below the marginal cost of production! Governments and companies have suddenly shifted their focus away from alternatives and new oil exploration. On an average the marginal cost of production is around $65. It simply doesn’t make sense to invest millions of dollars at drilling new wells when oil futures are selling for $40 or $50. French oil company Total’s CEO recently warned that at $60 oil, a lot of new projects would be delayed.

China currently uses 8 million barrels of oil per day, as against 3.5 million in 1997. China consumes 2 barrels per person, versus 24 barrels per person in the US. The US has 220 million cars for 305 million people, versus 32 million cars for 1.3 billion people in China. There are a host of other countries where the standard of living is rising. Thus; demand for oil will continue to grow in the future.

Adding new oil supply can take decades due to the nature of oil exploration and extraction business. By taking the focus away from alternatives and new oil exploration governments and companies are taking a decidedly short term view. Once the global economy gets on track and the pent-up demand catches up, people will suddenly realize that there is limited supply. This will lead to an oil-shock that will make $150 seem like a bargain! Till then, lets all hope, governments and companies continue to invest and explore more alternatives.




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

Is the US government really doing the right thing?

The US government has been praised for the way it has reacted to the current financial crisis. The US government has acted quickly on both monetary (reducing interest rates) and fiscal (providing stimulus packages and tax rebates) fronts. However the basic question remains, is the US government really doing the right thing?

Consider the analogy of a person who falls ill. The doctor can give the patient a medicine which takes a week to take effect and will cure the person completely. Thus the patient will slowly get better in a week. Alternatively, the doctor can give the patient steroids, which will make him feel better within a day, however it will only suppress the disease. The person, in this case, feels better in a day, goes to work the next day and is generally happy. Till after a couple of months - the disease comes back with renewed force...

Let us look back at what happened in the US in 2000-2001. Events like the dot com burst and 9/11 raised the possibility of a US economic recession. The response of the US Federal Reserve (or the Fed) was to reduced interest rates drastically (from 6.5% to 1%), in its bid to spur the economy. This acted like a steroid and sure enough the economy picked up.

However, the question remained – did the Fed cut interest rates too low? Should it have let the economy go through a slow recovery rather than try to artificially stimulate it? To deal with the dot com bubble, had the Fed sown seeds for a bigger mortgage bubble?

As with the patient example, the economy has now tanked even more badly after 5 years. In order to prevent a minor downturn then, the Fed has inadvertently led the country to a major downturn.

An economic downturn is not necessarily bad. It is one half of the overall economic cycle of boom and burst. A downturn in the US would lead to the demise of old, uncompetitive companies so that new, competitive companies can take hold. By bailing out these companies (for example the big 3 in automobiles) the US government is trying to keep alive uncompetitive, value destroying companies. A downturn also leads to stability in prices and acts as a balance for the inflation during a boom period. The current downturn is actually helping genuine buyers find homes, after the steep correction in house prices. A downturn also leads to a drop in currency which should help boosts exports and correct the balance of trade crisis – which the US so desperately needs. However if a downturn is not allowed to run its course, it can have nasty consequences.

The Fed response to the current downturn has been the same as 2002 – if anything, much swifter. It has rapidly reduced interest rated from 5.25% to almost zero. It has also used big fiscal measures like the income tax rebate program and stimulus package. Again the Fed is using the equivalent of steroids – lots of it. In doing so, it is doing exactly what it did last time – only on a much larger scale. The result may be the same. In order to prevent a huge crisis today, the Fed is sowing seeds of a catastrophic crisis in 2015...




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

Great Indian Businesses?

A lot has been said and written about the Indian businesses - how they were growing at a scorching pace, how they were making global acquisitions, etc. However, for all the hype surrounding the Indian businesses, the fact still remains that they had a plethora of factors going for them until some time ago:
- Huge liquidity in the global financial system
- Increasing Foreign Direct Investment (FDI) in India
- Booming economy
- Prevalence of the decoupling theory

Now with most of these factors gone or reversed, the Indian businesses leaders and their business models are being severely tested:
Tata Motors: The acquisition of a luxury brand like Jaguar while the global economy was facing a threat of recession was a questionable move. On top of that, the acquisition was done by borrowing a lot of money. The stock-holders of Tata Motors have paid a heavy price for that mistake. There are talks Jaguar and Land Rower now being bailed out by the UK government.
DLF: That the DLF stock tanked was not a surprise. However, the move on part of DLF to buy back shares definitely was. The company was losing cash on its core operations. The company was sustaining its operations though IPO money raised a year ago, fresh borrowing, and raising capital by selling equity in various special purpose vehicles. This made a strong case for cash conservation. However, the DLF management it seems was more interested in making sure that their share price remained high – and was not too worried that their operations were in a bad shape. The buy-back done with the sole intention to raise the share price was an ill timed and unwise move.
Reliance Power: The Reliance Power IPO marked the zenith of business optimism and absurd valuations. No surprise that with the economy going downhill, the stock went substantially below its IPO price.
Satyam: As if the failed Maytas acquisition was not bad enough, the financial fraud by Raju has now severely exposed the vulnerability of Indian businesses in this downturn!

To be fair, over the last two decades India has produced some very good businesses, a case in point being Bharti (Airtel) which has been a very innovative business generating tremendous value for its shareholders. However the sad fact remains that like the Indian stock market, the Indian businesses also benefited a lot by the tremendous liquidity of the past few years. The great investor Warren Buffet once stated, "Only when the tide goes out do you discover whose been swimming naked". Now that conditions have become much more challenging globally, we will find out which Indian businesses have good sustainable business models.




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

Is Deflation a possibility in India?

Indian people are all too familiar with rising prices. Over the past few years, inflation had been steadily climbing upwards making almost everything expensive. It’s a relief to see inflation begin to cool off recently. But that raises a question - is deflation a possibility for India?

Deflation is the opposite of inflation. During inflation prices go up. During deflation prices come down. Things start becoming cheaper! Now this may sound very good, but economists try to avoid deflation like plague. There are very good reasons too. Consider a classic deflation scenario, in which prices are coming down:
Customers postpone purchase: Customers tend to postpone further purchases - especially big ticket purchases, apart from basic necessities (a good example of this is the real estate sector in India - most customers are waiting for prices to fall further).
Aggregate demand falls: As more and more customers postpone purchases, the aggregate demand goes down. When this happens, two things happen simultaneously: Price cuts and Production cuts.
Prices cuts: Some producers reduce prices to spur demand. As producers reduce prices, it reinforces the customer mentality that prices will go down further. Thus they postpone purchase further!
Production cuts: Some producers start cutting down on production. As producers cut down production, it results in layoffs or pay cuts. Both scenarios lead to a fall in aggregate demand.
Cycle repeats: As aggregate demand falls further, producers again respond in the two ways above... and thus a vicious cycle starts.

As expected, the fallout of deflation is that economic activity slows down, unemployment increases, and stock markets languish. History has shown that once deflation has set in, it is very difficult to reverse . A classic example is Japan , whose economy has been severely hit by deflation in the recent past.

So, is deflation a threat to the Indian economy? The Indian economy is already seeing deflationary pressures in some sectors (like real estate and to an extent automobile). A full-fledged economic deflation, though, is a remote possibility. However, if the global financial crisis drags on for another six months, then the Indian economy will face a very real threat of deflation. Let us hope things don’t come to that!




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

Is Capitalism really to be blamed for the Subprime Crisis?

Not a day passes by when we do not read or hear about the failures of capitalism in the US and how it led to the subprime crisis (which in turn went on to become a global financial crisis). But is capitalism really to be blamed? Or was it poor political intervention that led to all this? Lets see:

Historically it was observed in the US that low-income people and minorities were not granted sufficient home loans (mortgages) due to their poor ability to repay those loans. However repeated policy interventions over the years have altered this, leading to dangerous consequences.

Intervention # 1: The government decided to enact the Community Reinvestment Act (CRA) in 1977, which basically forced the banks and other regulated mortgage lenders to lend more to the low income and minority mortgage applicants. As it did not make a lot of economic sense lending to the poor, banks complied reluctantly to avoid regulatory scrutiny. Hence mortgages to the poor (subprime mortgages) remained a small portion of the overall mortgage market and did not pose a systemic risk.

Intervention # 2: To counter this, in 1992, the Department of Housing and Urban Development set targets for Fannie Mae and Freddie Mac to purchase low-income loans for sale into the secondary market. With Government Sponsored Enterprises (GSE) like Fannie and Freddie ready to buy up their subprime loans, banks started lending out enthusiastically.

Intervention # 3: As if this was not enough, an amendment to the CRA was passed in 1995 - permitting securitization of these loans. This changed everything. Securitization basically meant that these subprime loans could be bundled together with virtually anything and sold off to other investors. From the late 1990s into 2005, the subprime share of mortgage lending exploded from about 5-6% to over 20%.

This was all good till home prices were going up and interest rates were low. But once both these things reversed in 2007, people started defaulting on subprime mortgages and with subprime mortgages now being a big part of the overall mortgage market, this posed a systemic risk to the whole economy.

In a capitalist system it is difficult to see how mortgages would be given to people who cannot afford them. However, combine capitalism with political intervention and you have the perfect ingredients for a crisis. As the famous economist Milton Friedman said - just about every economic and social ill that confronts the US could be traced to misguided federal policies and their unintended consequences.




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

Exemplary regulation in India!

Talk of regulation in India, and people generally think of red-tape and outdated rules. However, in recent times there has been an instance of exemplary regulation in India that should serve as a good example for the other countries of the world to emulate.

The regulator for the Indian banking system is the Reserve Bank of India ( RBI ). Dr. Y. V. Reddy was the governor of RBI from 2003 to 2008. Regulators can detect the building up of bubbles in the economy and make sure they are dealt with early on. Or they can provide support to the economy once the bubble has burst. Most regulators globally have been very good with the second aspect. However, in India’s case the regulator correctly detected a build up of the housing bubble and took corrective action, thus making sure the second stage wasn’t necessary.

By 2006-07 the Indian housing market (like the Indian stock market) was going through the roof. Dr. Reddy and the RBI detected the housing bubble early on and used a slew of policy measures to control it:
Banned the use of bank loans for the purchase of raw land: Land prices were going through the roof and if prices collapsed, banks would then end up with huge non performing assets. Hence RBI stopped banks from making these loans.
Increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of reserve capital: Banks were made to put aside extra capital for every loan made. Anticipating a liquidity crisis, the RBI was mandating banks to plan for it ahead of time.
Severely limited securitization: Banks in India were not allowed to simply bundle up their home loans and sell them off to a third party. Thus, banks ended up holding onto the loans they made to customers. Banks, in this case, had a high incentive to make sure the loans were repaid. Hence the lending standards were not relaxed to absurd levels and also the down-payment requirements were conservative.
Pushed interest rates up: Last but not the least, the RBI pushed key interest rates up early on to prick the housing bubble before it could get out of control.

The housing market did crash in 2008; however, thanks to the early actions of the banking regulator, the Indian banks did not have to write down huge amounts of money. Neither did any Indian bank fail, or require the kind of emergency injections of capital that Western banks have needed. What a huge difference good regulation can make!




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.

Advantage US?

There is a lot of talk about how the US economy is in a bad shape. Many big corporations have been bailed out by the government or have got government funding. The US investment banking business has been badly hit and now the big-3 carmakers are facing the heat. The economy is in a recession and unemployment is rising. The trade deficit is ballooning. Some people are even predicting the end of US economic dominance.

However, given all the bad news, there is one fact that is firmly favoring the US – the US dollar.

The global financial crisis has caused a massive liquidity crunch (shortage of money) and there is a real threat of deflation (deflation is the opposite of inflation – i.e. prices going down, although this may sound good; deflation is in reality very bad). The way to address both these issues is to pump liquidity in the economy, or in other words to print and distribute more money. Ben Bernake, the Federal Reserve Chairman is nicknamed ‘Helicopter Ben’ because he had once said that the way to deal with deflation would be to simply print money and drop it from a helicopter.

Normally when a country increases money supply, the value of the country’s currency goes down. If any other country printed money at the rate at which US is doing, other countries will sell the currency in haste. This will lead to a dramatic fall in the country’s currency and effectively ruin its economy.

So how will the US be able to print more money and get away with it? The dollar happens to be the global reserve currency. At the end of 2007, more than 60% of the identified official foreign exchange reserves in the world were held in US dollars. China has it $2 Trillion of foreign exchange reserves and any significant drop in dollar will lead to a huge erosion of wealth for China. Similarly for Japan’s $1 trillion reserves and India’s $250 million. Oil is traded primarily in dollars, and a fall is dollars, will effectively lead to skyrocketing of oil prices and another oil-shock like 1973.

Thus the entire world has a vested interest in making sure that the dollar does not lose value. Hence even though the US keeps printing dollars, the value of the dollar does not go down.

All this is not to say that US can go on printing money forever. Eventually, there could be an alternate global currency that could replace the dollar - maybe the Euro or the Yen. How soon that happens is anyone's guess. But till then US will be the only country in the world that will not have to worry about printing more money to deal with the financial crisis.




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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can also be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.