Interesting Quote

It is a painful thing to look at your own trouble and know that you yourself and no one else has made it.

~Sophocles, BC 496-406, Greek dramatist

Important Development about US Dollar: Gulf States may stop Using Dollar

The Indepedent (which was subsequently carried by Bloomberg and Others) reported that the Gulf states may stop denominating their oil exports in the US Dollar. Interestingly, one of the unstated reasons for the US invasion of Iraq by George Bush was supposed intention and attempt by Iraq (under Saddam Hussein) to start using the Euro as the denomination for its oil exports. Rest apart, if the development actually does materialise then we may be about to see a paradigm shift which would structurally alter the global economy for the rest of our lives. It could also start the inauguration of the gradual decline of the US dominance in every sphere of our lives. In other words, it could mean the end of the US Empire.

But on a pure contrarain basis, it could also (only in hindsight can we actually be sure) be the medium term bottom. Look at it this way, people are selling USD as if there will be no tomorrow.

And, remember, major turning points occur at such turbulent times. So, we could just be near, at least a short-term bottom simply because I believe that it cannot get worse than this in the immediate future.

More on this later.

Short-Term Caution on Commodities

While we continue to remain bullish about commodities over the long-term, we believe that in the short-term caution may be well advised in the commodity space (as a whole). We continue to hold that while Gold is a good buy on substantial declines, the rest of the space, especially base metals seem ripe for a sharp correction.

Commodities have a tendency to witness very sharp corrections, so dont be unduly worried. If you are the one who incessantly worries about such sharp corrections then the commodity space is best avoided.

The chart below provides a graphic representation of the US Commodity Open Interest (as published by Bloomberg).

(Click on the Image to Enlarge)

While we would like to avoid particular recommendations, we decided that we would like to make an exception

It is imperative to note that at the present juncture, on a purely technical basis, we believe that commodities like copper may witness selling pressure once it falls below US$260. The first sign of trouble will be hinted once it falls below 264 and 262.

In case of short-term gold speculators, it is prudent to note that our post about Gold a couple of weeks back is still valid. In the very short-term, speculative long-positions in gold could be contemplated once it cross 1007 and 1011. On the downside, very short-term speculative short positions could be contemplated once gold falls below US$1000. But, keep in mind that the interesting development that gold is not closing below US$1000. Below 1000 major supports are at 997, 990, 987 and 982.

Please note that our bullish long-term stance in the commodities being in a secular structural bull-market with cyclical bear-market corrections remains intact.

Margin Debt on NYSE in 2008

The following table provides details about Margin Debt on NYSE on a monthly basis in 2008. The Debt is in US$ millions.

Click on the Image to Enlarge

Margin Debt on NYSE in 2007

The following table provides details about Margin debt on NYSE on a monthly basis in 2007. The Debt is in US$ millions.

Click on the Image to Enlarge

Margin Debt on NYSE in 2002

The following table provides us with the overview of margin debt on NYSE in the Year 2002. The Debt is in US$ millions.

Click on the Image to Enlarge

Margin Debt on NYSE in 2001

The following table provides us with the overview of margin debt on NYSE in the Year 2001. The Debt is in US$ millions.

Click on the Image to Enlarge

Margin Debt on NYSE in 2000

The following table provides us with the overview of margin debt on NYSE in the Year 2000. The Debt is in US$ millions.

Click on the Image to Enlarge

Deciphering the Riddle of Liquidity & Rally

Every day we hear that the boom since March 2009 has been driven by 'liquidity'. This shrill has become all the more pervasive with the recent rally in the markets. We keep asking the question what has induced such a strong rally (apart from the usual factors such as government support as well as other technical factors). So I thought the best thing would be to research how far argument is actually backed up by solid statistical evidence. I decided that I would dig out statistics from different sources and try to find out a macro-argument for or against liquidity inducing this rally. I looked into ICI statistics and also the statistics put out by the US Federal Reserve Money Stock Measures (in billions of dollars as on 1 October 2009) and the ECB and tried to analyse (with an open mind) which way the liquidity riddle.

I kept reminding myself that liquidity is a ubiquitous but double edged sword and probably the easiest way to unfathomable market movements. I consider this posting to be part of a longer-term research in progress wherein we would like to track the flow of liquidity into different asset classes and consequently the socio-economic impact of this process.

At the outset, it is pertinent to remember that this rally directly or indirectly has the blessings of the governments the world over for the simple reason that a rally of this magnitude goes a longway in reducing the leverage on the balance sheets as well providing succour through rising assets on the books of the beleagured financial institutions of the developed world. The statistics and charts provided in this post clearly indicate that money supply creation may have slowed (at least in the USA) at best and that itself could be a red flag. Recent reports by Bloomberg claims that the European Central Bank has actually given lesser number of loans than expected.

Another argument that we can put forth is that the rally became possible (apart from the usual conspiracy theories) is not because of liquidity that has been created due to investors becoming risk averse but instead it is largely due to money that originates in the global central bank emergency measures. The results of Goldman Sachs and others clearly indicate that trading has become an important part. So we looked up statistics about margin lending and it gives credence to the view that private pools of capital are warming up to leveraging once again. Margin Debt has been increasing. This is not to claim that they were not interested in borrowing, just that there were no lenders.

It becomes increasingly difficult to argue that the rally in the equity markets worldwide was largely because of growing willingness on the part of various segments to take on more risk, or risk aversion abating. That story may only be partly correct. It becomes increasingly difficult to argue that the rally was driven by money coming out of the US Money Market funds. A small part of it may have come into the markets. The chart below clearly illustrates the fact that money on the sidelines has come down, but it is equally important to note that not all of it would have come into equities.

It has been pointed out that the amount of money shot up in the aftermath of the Lehman Crisis. The chart below show that it increased from about US$3.399 trillion to about US$3.922 trillion. A commonly held view is that a part of that is coming back into the equity markets. The Chart below (from Bloomberg) clearly indicates that even before the crisis began the amount of money in US Money Market Funds in mid 2006 was about US$2.038 trillion and after the problems with Bear Stearns in March 2007 it was about US$2.432 trillion. In early September 2008, just before Lehman collapsed it was US$3.585 trillion. Two days back it was about US$3.425 trillion. This indicates that the jump was approximately about a US$1 trillion after the problems began.

Please Click on image to expand Image

It is important is that we have to note that about US$190 billion moved into commodities, approximately US$220 billion dollars moved into bond funds.

That leads us to the important question: what led to this huge rally? Invariably short-covering played a part. But that is not to be over-emphasised. More important is the money printing as indicated by the US Federal Reserve statistics given in the table below.

We have to assume that a part this money did flow into the various markets as banks are not lending it to consumers (as some of our other posts have shown). A part of the money did go into covering the losses of the banks, while it is likely that a large component is simply being hoarded by the banks due to either uncertainty in the economy or uncertainty over their own capital requirements to cover losses in future.

The rally (in the equity markets) seems to have been fuelled by equity mutul funds putting some of their cash back into the market. The table below (from ICI) shows that the cash position of the US equity funds have largely been reduced thereby creating additional demand.

August 2009	July 2009	August 2008
4%	4.2%	4.5%

The following table provides us with Net New Cash Flow of Money Market Funds (In US$ million)

August 2009	July 2009	YTD 2009	YTD 2008
-53,788	-48,325	-291,1782	339,548

Source: Investment Company Institute

One important source for the equity rally in the US has been the increase in margin debt as shown by the table below. It provides us with the annual average of margin debt for the years preceding 2009, while for the current year monthly statistics have been provided. This indicates that a large part of the rally has been induced by speculators (likely to be hedge funds) borrowing money to buy stocks. Interestingly ICI statistics show that US based equity funds have only seen inflows to the tune of about US$65 billion in 2009. In contrast the Bond funds have seen inflows of nearly US$220 billion, indicating that money moving out of the money market funds is going into bond and commodities and even emerging markets rather than US equities. Emerging market funds have seen inflows only to the tune of about US$9.68 billion on a net basis. Hedge funds on the other hand have seen inflows. Added to that is the leverage that has been built with banks lending only to them and their borrowing on the basis of margin debt. One could also add that in almost all the countries we have seen a large amount of money being pumped into the system, a large part of this invariably has entered the markets (all of them for financial speculation). A number of reports indicate this has largely been the trigger for the rally in countries such as China. The fact that a number of investors (especially mutual funds) putting some part of the cash cannot be overlooked, but should not also be overemphasised.

Year	Average Margin Debt on NYSE
2000	243,448
2001	164,550
2002	141,003
2003	150,190.8
2004	183,287
2005	207,166.7
2006	239,572
2007	331,554.2
2008	285,168
2009 January	177,170
2009 February	173,300
2009 March	182,160
2009 April	184,120
2009 May	189,250
2009 June	188,140
2009 July	199,460
2009 August	206,720

All the above figures in $ Millions
Source: NYSE

The above analysis hopefully provides greater clarity about the the source of the rally. The important question that we need to ask is how long will the liquidity last? The short answer is that is not likely to last long (at least not beyond the next two or three months) unless the US decides that the weakness in the economy needs another round of stimulus of various kinds. That is probably one of the reasons what the commodity market is sniffing.

We would believe that most of the money that would like to enter the equity markets has already entered the equity markets and the role of liquidity is probably being overhyped. There is probably more selling that is likely rather than the other way round. Insiders are selling quite aggressively, while the investment herd seems to be buying.

While our analysis may be full of certain generalisations, we think this could be a good starting point to carry out further research and debate on the issue. Hopefully others will add to the debate.

History of Bubbles: The South Sea Bubble

As a student of history one cannot but marvel about the nature of human mentality and human emotions. Nowhere is this more visible than when it comes to investor behaviour in the financial markets. The history of bubbles goes back hundreds of years (at least). The remarkable similarities of bubbles starts with each generation of people believing that they are living in an era of great technological change that generations before them had never witnessed. These "revolutions" probably first started with the ability of humans to use fire, then the ability to harness the wheel, maps, industrial revolution, the invention of the steam engine, telephone, electricity, railways, (may not be in that order though). In recent years the ostensible reason for elation has been technological change that invariably leaves us spellbound. The list is exhaustive.

These 'revolutions' invariably leave in their legacy of euphoria amongst the investment community and every few years we have a new fad that becomes the rage. There are a number of interesting manifestations of these manias or in investment terminology - bubbles - are the eerie similarity and their amazing simplicity. Often, in retrospect one may be forgiven to wonder how normally rational, intelligent investors could fall for such a simple illogical investment theme.

A common trait of most of the bubbles is the fact that nearly all of them characteristics that are remarkably similar in the way that they have operated through the ages.

I thought there would be no better way than to go back and research about the past bubbles from what contemporary observers (who kept their sanity) had to say. There is no better book to back to than Charles Mackay’s Extraordinary Popular Delusions & the Madness of Crowds, first published in 1841. However, writing about each of the bubbles will be my priority but due to time constraints, I thought it would be best for me to reproduce parts and pieces from different bubbles that he has documented and try to dig up similarities with bubbles that I have been observing since 1993.

Over a period of time, I have found that the best way to observe the formation of bubbles is when people in a different line of activity start taking notice of returns in a particular asset class. We opine that the greater the attention from non-professional investors, the greater the validation that a bubble has started to expand. A classic instance of a bubble was in 2000: It was reported by Marketwatch website (then http://www.cbs.marketwatch.com/ in a story titled “Buffett defends his tech aversion on 29 April 2000) that a ten year California girl demanded an explanation from Warren Buffett (considered to be one of the most successful investors of the present) during their Annual Shareholder meeting as to why he avoids technology sector.

In this post, I will highlight some important quotations about bubbles and Mackay’s observations. The South-Sea Bubble is one such classic bubble.

The South Sea Company was established in the year 1711 by Harley, the Earl of Oxford. The company was formed to restore public credit which had suffered due to the dismissal of the Whig Ministry. A company of merchants decided that they would assume the debt themselves and in return the government agreed to provide them with certain duties in lieu for a certain period of time at an interest rate of six percent per annum. A monopoly of trade was granted by the British Parliament. The amount of debt that this company of unnamed merchants would assume amounted to nearly ten million sterling, a considerable sum in those days. The interest rate was reduced to five percent from six percent in 1717 on the request by the company.

Reports then surfaced that the company was to be granted four ports in South America by Spain so that it could trade in gold, silver and slaves. These rumours held ground despite the Philip V of Spain having no intention to grant free trade concessions to the British. The Company was granted permission to increase its capital. To cut a long story short, during the course of the debate in parliament about extension of benefits to the company, the stock price exploded due to speculation.

A speaker (Walpole, the only one who spoke against the company) had the prescience to warn in parliament that, ‘the dangerous practice of stockjobbing would divert the genius of the nation from trade and industry. It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for the prospect of imaginary wealth….’

The parliamentary debate over the bill took two months and in the meantime the stock was the magnet of speculation. The stock rose from about 100 to about 400 and then settled near 330 by the time the bill was passed by the House of Commons. At its height the stock reached a high of 890. A large part of the speculation was driven by rumours that claimed that the company would grow exponentially. Among others, an interesting rumour was that the Earl had received overtures in France from the Spanish government that they exchange the company Gibraltar and another port for some places on the coast of Peru.

On April 12, five days after the bill was passed the company decided to issue fresh shares to the public. The bids received were nearly two million more than the existing capital. Even the Prince of Wales decided to invest about 40,000 of his own money. This boom led to more companies being formed to trade.

Mackay points out that there were nearly a hundred different projects were formed. This is eerily similar to our present day bubbles. Hundreds of companies decide to raise capital from the public: all to monetise the prevailing investment fad. During that era, it was estimated that nearly three hundred million sterling was raised from the public for dubious ventures (p.68). Among the ventures for which money was raised included:
Establishment of a company to make deal board out of saw-dust
Establishment of a company for encouraging the breed horses in England, and improving glebe and church lands, and repairing and rebuilding parsonage and vicarage houses.
A company for carrying on and undertaking of great advantage, but nobody knows what it is.

Once the bubble burst, the following is the list of some of the companies that were declared to be illegal. Mackay lists nearly 85 different companies that were declared illegal and abolished. Amongst them the interesting ventures were:

1. For the importation of Swedish Iron

2. For supplying London with Sea-coal

3. For building and rebuilding houses throughout all England

4. For effectually settling the island of Blanco and Sal Tartagus.

5. For improvement of lands in Great Britain

6. For Purchasing lands to build on.

7. For Trading in Hair
8. For erecting salt works in Holy Island
9. For carrying on an undertaking of great advantage; but nobody knows what it is.
10. For paving the streets of London
11. For furnishing funerals at any part of Great Britain
12. For insuring of horses
13. For a grand dispensary
14. For improving the art of making soup
15. For a settlement on the island of Santa Cruz
16. For improving of Gardens
17. For drying malt by hot air

Once the stock collapsed, it was pointed out that the wealthy of yesterday became the beggars of today.

Source: Charles Mackay (1841), Extraordinary Popular Delusions & the Madness of Crowds, Three Rivers Press, New York, Reprint 1980.

News Headlines from the Great Depression

1929-1932 Headlines

September 1929“There is no cause to worry. The high tide of prosperity will continue.”- Andrew W. Mellon, Secretary of the Treasury.

October 14, 1929“Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board.”– New York Times

October 29 1929
Stock market crash

December 5, 1929“The Government’s business is in sound condition.”– Andrew W. Mellon, Secretary of the Treasury

December 28, 1929“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.”– Associated Press dispatch.

January 13, 1930“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.”– News item.

January 21, 1930“Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction.”– News dispatch from Washington.

January 24, 1930“Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast.”– New York Herald Tribune.

March 8, 1930“President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.”– Washington dispatch.

May 1, 1930“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.”– President Hoover

June 29, 1930“The worst is over without a doubt.”– James J. Davis, Secretary of Labor.

August 29, 1930“American labor may now look to the future with confidence.”– James J. Davis, Secretary of Labor.

September 12, 1930“We have hit bottom and are on the upswing.”– James J. Davis, Secretary of Labor.

October 16, 1930“Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment.”– Charles M. Schwab.

October 20, 1930“President Hoover today designated Robert W. Lamont, Secretary of Commerce, as chairman of the President’s special committee on unemployment.”– Washington dispatch.

October 21, 1930“President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter.”– Washington dispatch.

November 1930“I see no reason why 1931 should not be an extremely good year.”– Alfred P. Sloan, Jr., General Motors Co.

January 20, 1931“The country is not in good condition.”– Calvin Coolidge.
June 9, 1931“The depression has ended.”– Dr. Julius Klein, Assistant Secretary of Commerce.
August 12, 1931“Henry Ford has shut down his Detroit automobile factories almost completely. At least 75,000 men have been thrown out of work.”– The Nation.

July 21, 1932“I believe July 8, 1932 was the end of the great bear market.”– Dow Theorist, Robert Rhea.

More Links for Great Depression Era Headlines

http://www.jolietpubliclibrary.org/Digitization%20Projects/The%201930s/Depression.htm

We Never Learn from History - Interesting Quotes

A friend suggested that some interesting quotes should be put on the site. Most of these quotes are those that I have come across or those that friends have sent me. Wherever possible I will acknowledge them

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one - Charles Mackay

Insanity consists of doing the same thing over and over again and expecting the same results

Discovery consists of seeing what everybody has seen and thinking what nobody has thought”
. . . Albert von Nagyrapolt, The Science Speculates

“The main purpose of the stock market is to make fools of as many men as possible.” – Bernard Baruch


Interesting Headlines from the Past:

August 28, 1930:
There’s a large amount of money on the sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly entrenched.” Economists point out that banks and insurance companies “never before had so much money lying idle.”

September 3, 1930:
Market has now reached resistance level where it ran out of steam on July 18 (240.57) and July 28 (240.81). Breaking through this level would be considered a highly bullish signal. General confidence that this will happen based on recent market action; many leading stocks have already surpassed July highs. Further positive technicals seen in recent volume pattern (higher on rallies and lower on pullbacks), and in continued large short interest.

Some wariness based on recent good rally recovering all of drought-related break; some observers advise taking profits on at least part of long positions, to be in position to rebuy on good pullbacks.

Most economists agree business upturn is close; peak in business was reached July 1929, so depression has lasted about 14 months. “Those who have faith and confidence in the country and its ability to come back will profit by their foresight. This has also been the case over the past half century.”

Harvard Economic Society points to steady rise in bond prices as favorable for stocks. Says there is “every prospect that the [business] recovery … will not long be delayed,” although fall period may not be strong as expected. Notes worldwide decline in business, but 1922 recovery demonstrates U.S. due to “great size, natural advantages, and diversity of conditions … can lift itself out of depression without the stimulus of improved foreign demand.” “We only know now with perfect hindsight what these pundits did not know back then - that there was another 80% of downside left in the bear market.”

Mirage of Recovery

The US Federal Reserve released statistics about the US personal savings rate (and disposable personal incomes) that clearly point to a problem that is far from being solved. The chart below illustrates the magnitude of the collapse in incomes. While there is a recovery from the recent lows, it is amply clear that the incomes are far from what would be healthy for a sustainable recovery. The importance of the fall should be seen in the context that the personal consumption now accounts for nearly 70 percent of the GDP, while manufacturing consists of probably the remainder. It would be erronous to see the present economy with that of the previous times as during the 1980s and 1990s consumption accounted for less than 50 percent.

Click on the Image to enlarge it

A large part of the jump could be due to the jump in incomes of that could be short-term including tax cuts/refunds, rise in minimum wages and also income that accrues to the well to do due to rising asset prices (if it is actually working), which are unlikely to be sustained.

The chart below (in billions of US Dollars) clearly illustrates that the problem there seems to be no rise in personal incomes on a long-term basis. Recovery in incomes seem to far from certain as the US economy is still losing jobs (job losses in September were more than most of the forecasts). Recent reports claim that a large proprtion of people with income of about US$100,000 per annum have little savings. Nearly 70 percent of the households are living on pay-cheque to pay-cheque. More worringly, about 35% of the households that make US$100,000 are living on pay-cheque to pay-cheque. So about half of the US population can go bankrupt if they dont have income for one month.

Click on the image to enlarge it

The charts are as on 1st October 2009.

Crude Oil Fibonnaci Retracement Levels

In the commodity stable, Crude oil charts seem especially interesting. So we thought we would simply leave the chart of crude oil and the Fibonnaci chart in its raw form and let our views take the call.

The following are the Long term Fibonnaci Retracment levels on the Weekly charts

Please note that the levels are rounded off to the nearest higher number

1984- 2009 (Sept 15)
Low: 9.74 (April 1986)
High: 147.27

61.8% Level	50% Level	38.2% Level	23.6% Level
76.20	90.07	103.22	120

As on 22 September 2009
Source: CFTC

SILVER	All Open interest	Long Positions	Short Positions
Producer	171,065	8823	72596
Managed Money	171,065	45427	1109
Swap Dealers	171,065	15077	21480

GOLD	All Open interest	Long Positions	Short Positions
Producer	628,409	52,699	246,474
Managed Money	628,409	215,058	825
Swap Dealers	628,409	29,950	144,117

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	117,689	3,851	41,492
Managed Money	117,689	19,009	18984
Swap Dealers	117,689	57,188	18,187

Watch out: Bubbledom Elite are changing their views

A very interesting change seems to be taking place. Over the past few days, important segments who we believe are the elite of the bubbledom have slowly embarked on their journey to hedge their reputations. We could speculate on the reasons.

One, apparently is that they have immensely profited from the 6 month rally, they must have sold all their stocks that they were stuck with or they had averaged at the low. Then there is another factor. End of the year is traditionally a time for bonuses. So they better cash out quickly or they will not get real cash. This real cash is better than securities, which are even more worthless than US Dollars. At least the US dollars can be quickly sold or converted to cash. Imagine somebody paying you with structured products which cannot be sold. I know the problem as I have some such securities (though they are equities). Another reason for this change of heart could be that they are simply trying to hedge their reputations and positioning themselves for a "I told you so" period sometime in the future.

Coming back to the point, over the last two days we have seen Greenspan claiming that the US economy's growth will weaken in 2010 on Bloomberg (See the Video) and then Goldman has started to hedge their views. It has started with easiest indicator to track - US Employment.

It now says that its estimate about US losing 200,000 jobs in September is worng and instead the US Economy may have lost 250,000 in September (Bloomberg). I am quite sure this is the start of their slow shift into a bearish stance. It could also be a prelude for smart money to postion themselves for a large fall (this large fall may not be a few days affair it could be a gradual slide down over a period of time as investors/people become increasingly skeptical about the mythical green shoots. We may have to reserve our judgement about the intentions of those behind green shoots logic out of academic etiquette.

Let us simply turn our back on the debate on whether there are green shoots (at least on our blog) . Suffice to say that it is likely to say that there will be no meaningful recovery (if at all we can call it a recovery in the first place) till at least till the end of 2010. It is likely to go beyond that. As for reaching the output of the peak era, I would think it could be beyond 2012. We have the finance chiefs of EU saying that they are unlikely to remove the stimulus measures till 2011. What more evidence do we need?

What should we do? We believe that it would be best to buy insurance. The fact that October has traditionally been one of the most volatile months is a sufficient reason to buy this insurance.
See the chart of VXX and VIX below. Technically both of them are screaming text book buy cases (Disclosure: I have been telling my friends, and some of them have bought VXX).

CLICK ON THE CHARTS TO ENCLARGE THE IMAGE FOR A BETTER VIEW




The Chart of VXX is especially interesting as it has seen a steady increase in volumes as the Dow peaked near 9500 over the past two weeks.



Readers need not get too disappointed. All these actually means that our view that commodities will be the business to be in is being validated with each passing day. So prepare yourselves for the coming winter (need not necessarily be a storm), the aftermath and the sunshine. Only that we should all be cautious. Rest assured, we will always be there to give you our objective views since we are traders.

US Single Family Home Prices

The Following chart (by Chart of the Day) illustrates the sharp fall in the value of homes. Considering the fact that various other studies point the impact of wealth effect point to a correlation of 3-5% on the lower side, and a correlation of about 25% on the higher side, invariably all home owners (even those who bought their homes in the 1990s) will be feeling the impact of the falling home prices. Even if they do not feel poorer, they definitely will not feel richer.

Those excited by the positive wealth effect due to the rally, should keep in that the present rally has invariably has mostly benefitted only those in index funds, while those who own single family homes have not had a large rally that could lift their willingness to resume consumption. At best, the prices have not fallen any further, but that is hardly a reason to celebrate.

Probably the song line, "we have been down for so long, that it feels like it is up" has never been more valid than today.

Weekly Investors Survey
Dogs of the Dow

Values in brackets {} are from 4 weeks ago.

Short Term (3 month) Sentiment
Bulls = 52.9% {65.8%}
Bears = 20.6% {21.1%}
Neutral = 26.5% {13.2%}
Average Prediction = 2.8% {2.7%}

Long Term (12 month) Sentiment
Bulls = 76.5% {71.1%}
Bears = 11.8% {18.4%}
Neutral = 11.8% {10.5%}
Average Prediction = 11.4% {8.4%}

Interesting Quote

J.P.Morgan once declared:

"I never buy at lows, I never sell at the highs, I play the middle 60 per cent"

US Interest Rates: Past & Present

The following chart illustrates the US Federal Funds rates since 1950s. The interest rates are close to their level in the 1950's and far above where they were in the recent years. One question that we could ponder is: Is the USA headed the Japan way, where zero interest rates have been the norm for the past few years. Even if the US was not to stagnate like Japan for a decade, if the economy remains tepid for a prolonged period of time (say more than 2 years) then it could unleash its own set of problems.

If the economy continues to remain tepid (even by the most optimistic estimate) what it would be like if the US Fed were to start raising interest rates? The simple (and probably most generalised) would be that it would relapse into another downturn. We would believe that the US Fed would have great difficulty in raising rates till at least about October 2009 (if they can actually do it by then). Anyway, the US Fed Rate futures indicate that the interest rates will remain unchanged till March 2010. The question is if the US Central Bank can increase the rates after that.

US Railroad Traffic

The Latest US railroad freight traffic (as on 12 September 2009) statistics have been released by the Association of American Railraods. The chart below provides an overivew. The statistics indicate that the freight handled was down 19.8 percent compared to an year earlier. All 19 carload freight commdity groups were donw from last year. Interestingly, the lowest declines were in farm products, excluding grain (1.5%) and the highest in metallic ores (52.3%). The "Cash-for-clunkers" programme was responsible for a big jump in the auto freight movement, which in turn positively impacted the overall statistics.

Are we out of the Woods - Part I

Recent times have witnessed great euphoria that we are at the end of what has been called the 'Great Recession' after a period of 20 years of 'Great Moderation'. Apparently with so may prefix's 'Great' we thought it may be a good idea to provide graphical illustration of how the present 'recovery' compares with that of the past recoveries. By recovery, we mean that we comparing periods when the economy (in this case the US Economy) compares when coming out of past recessions.

This is meant to be a series that will provide some graphical evidence about the nature of the present recovery. We belive that if there is any recovery it will be more statisticial than anything else and that in turn would have been enabled by the governmental efforts rather than private business investments.

The chart below provides a representation of the Michigan consumer sentiment since 1975 to July 2009. Note the points where the sentiment was in the shaded areas (which are the periods of recession). It is only then that we tend to get a greater idea about how it actually is in historical perspective going back decades.

Compare the sentiment at the end of the recession of 2001-2. A glance at the index at the end of the recession in 1990, when it was close to about 90 gives an indication of why the 'green shoots' may actually become brown dust.

Dollar Carry Trade

What Happens if Dollar Becomes the Vehicle of Carry Trade

The global economy has over the past two years has had to navigate a number of risks associated with the bursting of the housing bubble. Unprecedented governmental and regulatory action has averted what seemed a certain financial meltdown in the not too distant past (15 September 2009, to be precise). While those risks have been barely surmounted a new albeit more ominous risk seems to be emerging in the global economy. This risk, if it is confirmed, is that of the US Dollar becoming the new preferred currency for carry trades.

However, it is prudent to note that this is not yet confirmed simply because it is so difficult to confirm its existence till it is in an advanced stage. What has however, given credence to these reported views is that it is increasingly clear that a structural shift may be taking place in the world with greater cynicism setting in about the fiscal health of the US economy and by corollary its currency, the US Dollar. We believe that this event (US Dollar becoming the preferred currency for carry trades) would unleash volatility on an unprecedented scale that would be detrimental to the health of the world economy considering the fact the US Dollar is the de facto Reserve Currency of the world.

The negative sentiment of the US Dollar can be gauged by the recent reported statement of David Bloom, the Chief of Currency, HSBC. He thinks that the USD seems a lot like the Sterling after the First World War and more like the currencies of the emerging markets. He further adds that the risk-reward for emerging market currencies has changed, not because their economies have had an increase in their standards but because of the decline of the western currencies and their economies.


What is carry trade and should we be so worried about what it could do to the world economy? The Short answer to the second part of the question is: Yes. Currency carry trade is essentially a trading strategy used by currency speculators to increase their returns. Utilising this trading strategy, investors borrow in a currency in countries that have low interest rates, sell that currency and use the funds to purchase higher yielding assets (or currencies) that provide either higher interest rates or simply higher returns. To illustrate this with an example, speculators would borrow money in the USA, since it has interest rates that are nearly zero. Sell the US dollars and use the proceeds to purchase other currencies, debt instruments, commodities, equities or any other assets. The premise of the strategy is that the returns from the assets thus purchased will exceed the interest rate paid and also any possible currency fluctuations. This seems to be amazingly simple and seems filled with obvious sound business logic.

The consequences of this are more complex than the seemingly simple trade. Traders will not risk borrowing in a currency in large amounts unless they are confident that the interest rates are low, and that would mean that they expect the interest rates to be low because an economy is mired in difficulties of a magnitude and complexity that the central bank will not be able to raise rates in the medium term. In the past, we had speculators borrowing in Yen once there was sufficient clarity that the Japanese economy would be mired in a deflationary spiral. They Yen became the preferred currency for carry trade for nearly 3 years: 2004-07. In the present instance, it is widely rumoured that the speculators are selling US Dollars and buying the Australian and Canadian Dollar. It is likely that a proportion of this money is also flowing into commodities and other Asian asset classes.

Now if the US Dollar is becoming the vehicle for carry trade, it would probably mean that the speculators do not expect the US Federal Reserve to interest rates till at least the end of 2010. The Fed Futures indicate near zero probability of a interest rate hike till at least March 2010. If the Fed is unlikely to raise rates before the end of 2010 (as per the calculation of the speculators) then it is highly likely that we will not even a semblance of a meaningful recovery till 2011.

If the underlying economy is weak then is likely that the US dollar is likely to remain weak, at least till then. Unfortunately, for the global economy world trade is mostly denominated in US Dollars since it is the World’s reserve currency. That would mean that the next few years (at least as long as the US Dollar weakens) would be followed by a rise in prices of nearly all dollar denominated assets, especially commodities. There will invariably be two sides to this coin. The falling dollar may be good for the USA where its exports become cheaper but it will be a disaster for most of the other economies, especially those in Asia which survive on exports. The list of countries that will be adversely affected is headed by China, little wonder that the Chinese are showing great keenness in entering into Yuan denominated currency swaps and Yuan denominated trade with different countries of the world.

If this process (of a dollar decline) is a long-drawn out process then over the long-term we may actually see a number of Trans-national corporations that invested in various emerging markets to exploit the low wages, may actually migrate back to the USA.

A more immediate problem will be that the export oriented sectors will be decimated in most of the countries. Large amounts of short-selling of the world’s reserve would lead to an exponential increase in the volatility of the currencies world wide. A larger than expected fluctuation of the dollar will lead to either a sharp rise or fall in the asset markets that would have attracted inflows due to their fortitude of being on the other side of the correlation or pairing matrix. Unlike the equity markets, the impact of currency volatility would be detrimental to the economy as a whole. Except the speculators (who are on the right side of the trade) very few would actually benefit. This would be because a large number of industries (and other users) tend to buy their requirements over a period of time. Very few of them actually have the resources plan and hedge their use, especially of commodities and currencies.

Extreme volatility (which will be an invariable bye-product of the carry trade speculation) mean businesses and consumers will not be able to gain any clarity on the nature of the cost of either their business (at best) or losses due to the price fluctuations of commodities, assets as well nearly all other goods and services. Unlike financial speculators, businesses will not be able to raise their prices (or reduce their prices) at the drop of a hat. Any government intervention in the currency markets tends to increase rather than decrease this volatility. A rise or decline in currency could lead to a cascading effect on not only the speculators but also those who borrow in foreign currency, importers as well exporters. This becomes all the more important as the last decade has seen integration of the financial markets and increased flow of capital to different geographies. Extreme volatility will not only increase the cost of capital, not many would want to take a long-term perspective until they gain greater clarity. Therefore, if this situation continues for longer than say 6-8 months, an already speculative financial system will resemble a casino where three months is the new long-term horizon. Commodity speculation, as well as speculative trading in other assets would be one of the major beneficiaries. Various social scientists over the years have clearly pointed out that when capital cannot be profitably invested in a business, it would find its way into speculation. History attests this wisdom. This may already be happening. The increased monetary stimulus instead of finding its way into the real economy may actually find its way into the speculative circulation space.

On a day to day basis, we could be headed for an era of asset inflation (or even bubbles), high prices, low growth and high unemployment. All the right ingredients for a period of possible stagflation, if not anything else.

What can governments do?
• Unfortunately for the governments there could be very few options. Either they could ban carry trade (an impossible task given the complexity of the financial markets);
• They could simply relax all the rules so that industries, business or consumers need not disclose their losses. This could include accounting changes that would enable a longer period to carry on their losses.
• Increase interest rates. This would be difficult as the economies would continue to remain weak and there would be tepid growth (if at all there is growth). Raising interest rates would be counter-productive.
• The best solution may just be to make speculation expensive. There could be a global tax on speculative transactions, which would be vigorously opposed by the financial industry. This opposition is bound to have a sympathetic audience among the US policy makers for the simple reason that the inter-linkages between industry and policy makers are far more complex in USA than in other parts of the world. But that is likely to be the only deterrent for speculators. It would be better if the policy makers this time err on the side of caution and the impose a tax that is on the higher side.

US Commercial Banks: Loans & Leases

The Chart provides an overivew of the US Commercial Banks total loans and leases as on 21 September 2009. Surely, inflation sees to be too far in the horizon to actually worry about it.

Bank Credit In USA

The US Federal Reserve starts its meeting today. There is a lot of talk about the US Fed giving indications about their withdrawing of monetary stimulus that they had pumped in so far. How far would they indicate that through actions, rather than statements? Plausible. But, personally we do not believe that strenuous effort is actually necessary.

We provide two charts below to validate our views. They show clearly that despite the money being pumped in by the US Federal Reserve, not much is actually reaching the real economy. As we have pointed out in a previous post, it has led to asset inflation in the financial markets, not inflation in the actual goods and services in the real economy. The sharpness of the contraction of credit is indicative of the problems that the US economy continues to face. The contraction in credit probably means that the Fed will probably do nothing to rock the boat. More so, because there is probably nobody better than Ben Bernanke to understand what happened in the Great Depression.

The charts show bank credit in the USA from 1973 to 9th September 2009 (the latest statistics released by the Fed).

This chart provides a broad overview:


The Chart below show the contraction of credit in the past one year.

Bear Markets Durations

This interesting analysis (in the chart below - Click on the image for greater clarity) of the recent bear markets was undertaken by Morgan Stanley. I would probably believe that only the 1930s case would be suitable for the present context for the simple reason that most of the other recessions never had to face the risks or even questions about the counter-party risks. This bear market is more about solvency problems rather than liquidity.

What is interesting about the post 2007 world is that probably never before have we had so many people being divided into two diametrically opposite camps - Inflation or Deflation. The Golden Mean seems to be almost non-existent.

Problems in the US Housing Market till 2011

The following chart provides probably one of the best overview of the intensity of the problem in the US Housing Market. Desipte all the official claims about the 'Green Shoots' it is clear that the major problems for the US Housing Market lay ahead. This is only being belatedly realised.

It has recently been pointed out that a large part of the recent demand for housing is due to a US government tax benefit to the tune of nearly US$8000 for first time home buyers. This unfortunately runs out by end November. But we can rest assured that the US government is likely to extend this. Extending this sort of small benefits are politically more feasible than the big time US$500 billion bailouts.

Assets in US Money Market Mutual Funds

The Investment Company Institute of USA released its statistics about the funds in various US money market mutual funds on 17 September 2009.

Warning Signs about Commodities

The recent run up in commodity prices seems to an anomaly (or are they harbinger of more dangerous times). The reaction of the governments' to the financial crisis have been to inject unprecedented monetary stimulus (about US$12.8 trillion by official count) as well as various other unorthodox measures. This invariably led to an immediate complete meltdown. While some may claim that it would lead to inflation down the road, the immediate consequence has been asset inflation. Stocks and commodities have shot up. Copper for instance has more than doubled since its March 2009 low. Lead recently hit a 16 year high. The list goes on...

This post will essentially try to grapple with the Question: Are Commodities in a Bubble? The short-answer is "may be" (which is akin to saying the glass is half-full). There are some traders who believe that they are in middle of their multi year upward super cycle. If that is true then we should be relived that, at least they are not in a bubble. Even if they were in a bubble, the rising prices may have a long way to go over a period of time.

The following factors should be kept in mind.

• A reason for the rally is that there is invariably more amount of money flowing into commodity funds. Till date about US$200 billion dollars have flown into commodity funds against US$160 billion during the first half of the year. The funds are expected to attract another US$20 billion in funds. More importantly, the impact of these funds at sharply lower values (than last year first half, when they were at their peak) would be much. In other words, a fund could buy more quantum of commodity in the first of this year than they could last year.
• The growing financialisation as can be seen from the debate about the role of the US Natural Gas Fund (an exchange traded fund under the symbol UNG) about it cornering about 20% of the natural gas futures market only indicates the importance of financialisation (and expansion) of trading.
• Fears of inflation and decline in value of fiat money may be driving investors to commodities.
• Commodities as an asset class may be under-owned and investors are now diversifying.

Despite the above important factors, it is important to keep some important contrarian signs which may or may not be indicating a commodity bubble but at they do indicate that it is the time for caution.

• Technically most of the the commodity charts (especially metals) are showing what are called Negative divergences, which normally harbinger sharp falls. How sharp? Nobody knows.
• More problematically, the inventories of all the commodities are rising (as per LME data)
• Bullish analysts who have been bidding up copper prices claim that since the 'economic recovery' the total inventories are sufficient for only about 4 months of production. If that were the case, then why are the mines not investing and producing more. They should normally be increasing production if the economy really were so good. I have taken copper because it has widespread applications.
• Worryingly, Pig farmers and other speculators in China may have amassed nearly 50,000 metric tonnes of copper (according to London based Sucden and reported by Bloomberg) which is about half of the total inventory tallied in the Shanghai Futures Exchange.
• Often a contrarian signal is one that comes when we open the daily newspapers (non financial ones). There is an increased coverage of the new high's that gold is hitting.
• The managed money long positions on the US Futures exchange were exponentially high. (See a previous post about Long/Short statistics)
• Baltic Dry Index does not reflect the optimism of the prices of commodities. It indicates indecision at best and stagnation in the demand for commodities at worst.
• According to the IEA, more than 60 million barrels of fuel is stored on tankers offshore.
• It has been reported that oil producing nations are producing about 600,000 barrels more than we need on a daily basis.

Conclusion of all that: Be cautious. There could be wild swings.

Gold:Speculating on Speculators' Speculation

This post is essentially for Gold Speculators and is based on an analysis based on Technical Analysis. So this post is by nature quite speculative in nature.

Short term gold seems to be at its most critical turning point. The chart below provides the Hourly chart of Gold since the 8th of September. The area in the circle indicates the move bold but the interesting thing is the area within the circle. At a broader level there is a diamond formation that is shaping up. If the price of gold were to decline below 1004 it is likley to lead to a sharp short-term sell off that could take it to about 985 level. However if the prices were to rally beyond 1019 it is likely that gold is not only like to touch a new all time high over the very short-term, but would also rally sharply over the medium to long-term.
An expanding triangle has been forming since 16th in the hourly charts. These triangles are generally considered to be dangerous as they tend to dissipate the strength of the underlying security.




Hence it is prudent for investors to be cautious while speculating in Gold. Maybe it is the time for a violent move either way.

Statistics about US Consumption & Investment

The following statistics have been complied from US Federal Reserve Flow of Funds Statistical Release (17 September 2009)

The statistics are provided in order to provide an overview of the bubble era (from 2004 to end of 2nd Quarter, 2009)

(The following are in US$ billions)

Item 2004 2005 2006 2007 2008 2009 (Q2end)
Personal Consum 8285.1 8819 9322.7 9826.4 10009.8 9996.6
Fixed investments 1903.6 2122.3 2267.2 2170.8 2066.6 1558.6
Residential Invest 680.6 774.9 761.9 629 477.2 346.2
Household Sector 594.4 681.9 670.1 541.9 401.1 289
Net Private Savings 679.2 619.1 666.5 495 619.7 913.6
Net Govt Savings -387.8 -257.1 -152.7 -214.8 -724.8 -1305.8

Status of US Household Wealth

The US Federal Reserve released its Flow of Funds release for the second quarter of 2009, which provides a fascinating insight that should normally debunk the theory of "green shoots". However, the recent events since March 2009 in the financial markets have brought about a paradigm shift in irrationally of the ever exhuberant Wall Street, whose new centrality is the concept of "Less bad news is good news". Moreover,c onsidering the fact that rationality is alien to the irrational markets, we just have take cognisance of the problem and keep reminding ourselves that deflation is still a likely possibility, if the world economy doesnot recover quickly.

The following points have been gleaned from the most recent release (on 17 September 2009):

-- Household debt contracted at an annual rate of 1.75 percent in the second quarter, the fourth consecutive quarter of contraction.

-- home mortgage debt decreased at an annual rate of 1.5 percent, while consumer credit decreased at an annual rate of 6.5 percent.

-- Household net worth—the difference between the value of assets and liabilities—was an estimated $53.1 trillion at the end of the second quarter of 2009, $2.0 trillion dollars more than in the preceding quarter

Disappearing Money Supply in USA

Two interesting factors seem to have largely gone either unnoticed or have been given low priority. One, credit has been declining at a rate of nearly 1% a month in the USA, the largest consuming nation, and Two, the M2 supply as show in the Graph below is indicative of disappearing money. That unfortunately is not a good sign. The last time that credit declined at such a rate was during the Great Depression. It is pertinent to note that the during April 2009, the M2 Money Stock (M2MS) has actually declined from US$8376.4 billion to US$ 8327.3 Billion in July to US$8294.2 billion in August 2009.

While a few months are not indicative of a major in policy, if it does continue for a longer period of time, then the US economy (and with it the global economy) could face a greater prolonged downturn. The chart below provides a better perspective of the gradual decline in money supply (with the chief culprit being the banks, which are refusing to lend).

If the banks continue to withdraw from the lending, then no amount of stimulus would be available for businesses (especially small and medium enterprises, which account for more than half of the employment in USA) and instead it would be used by the larger funds to simply speculate in the financial markets.

This would invariably exacerbate further, the pressure on the US consumers who seem to have
only begun their long overdue but painful readjustment from the excesses of the recent bubble. The chart below of US Household liabilities shows the liabilities are still at historically high and unstainable levels considering the destruction of household wealth.

Gold Holdings of Major Countries

The table below provides the details of Gold holdings of the major countries at the end of June 2009.

USA	8133.5
Germany	3412.6
IMF	3217.3
Italy	2415.8
France	2450.7
SPDR Gold Fund (ETF)	1102
China	1054
Switzerland	1040
Japan	765.2
Netherlands	612.5
Russia	536.9
ECB	501.4
Taiwan	423.6
Portugal	382.5
India	357.7

Source: World Gold Council

Correlation of Commodity Futures with Other Assets

Correlation of Commodity Futures returns with stocks, bonds and inflation

(Overlapping data of returns from 1959-2004)

Period	Stocks	Bonds	Inflation
Monthly	0.05	-0.14	0.01
Quarterly	-0.06	-0.27	0.14
1 Year	-0.10	-0.30	0.29
5 Year	-0.42	-0.25	0.45

Peek Into History: India Budget, 1949-50

The Budget Speech of the Finance Minister in 1949-50 provides fascinating insights.

The major issues that the country had to grapple with include the problem of refugee resettlement, cyclone as well as famine in parts of Gujarat, Rajasthan and Saurashtra, apart from the usual challenges arising from the complexity of integration, etc.

The country imported about 2.8 million tonnes of food grains at a cost of Rs.130 crores, more than estimated. The country produced 29.73 million tonnes of Coal and 854,000 tonnes of Steel.

The Revenue Receipts of the country was Rs.338.22 crores, while the Total Expenditure was Rs.339.87 an increase of Rs.82.49 crores over the previous Budget estimate. Among the major items of expenditure Defence accounted for Rs.157.37 cores while Civil expenditure accounted for Rs.165.16 crores. The expenditure on refugee related activities amounted to Rs.52.82 crores.

The Government set aside a princely sum of Rs.6.98 crores to meet the expenditure towards the establishment of The Shipping Corporation of India.

The major sources of Revenue were Central Excise: Rs.107.25 crores, Income Tax: Rs.155 crores, Posts & Telegraphs Rs.30.26 crores (after expenditure of Rs.28.63 crores, there was a surplus of Rs.1.68 crores.

The Balance of Payments Position was critical and the government deficit of US$45 million in the six months from April-September 1948.

The exchange rate between the Great British Pound to the US Dollar was in the ratio of 1:4.

US Investor Sentiment

Interesting survey results that were give out by a site www.dogsofthedow.com

Note - For comparison, values in brackets {} are from 4 weeks ago.

Short Term (3 month) Sentiment
Bulls = 48.5% {58.6%}
Bears = 30.3% {24.1%}
Neutral = 21.2% {17.2%}
Average Prediction = 1.1% {1.9%}

Long Term (12 month) Sentiment
Bulls = 64.5% {55.6%}
Bears = 22.6% {33.3%}
Neutral = 12.9% {11.1%}
Average Prediction = 4.3% {0.4%}

Long/Short Positions of Traders in USA

Data from CFTC

Gold:(contract of 100 Troy Ounces)
Sept.15, 2009
Total Open Interest 622,094
Producer Long Positions 51,596
Producer Short Positions 248,426
Managed Money Long Positions 214,661
Managed Money Short Positions 821

Silver (Contract 5000 Troy Ounces
Sept 15, 2009
Total Open Interest 164,397
Producer Long Positions 8,344
Producer Short Positions 69,468
Managed Money Long Positions 44,533
Managed Money Short Positions 1,042

Future of Global Finance: The Lesson From Japan

A study of history may throw some light on the possible future for the finance world.

I would believe that the next three years (at least) would be like those in the rounded off areas as in the case of the Nikkei chart provided herein.
The chart of the benchmark Nikkei Index in Japan since 1982-to the present (September 2009) witnessed major rallies (four rallies) of more than 50 percent but two decades later it is more than 70 percent lower. If we were to add the rally since 2003-2007 (the global bubble era), it would make it five.



Lesson from Japan: the era of financial speculation is gathering momentum and the centre-stage will be taken over by the financial speculators, especially those in commodity speculation. Two factors are aiding this era of financial speculation: (a) the loss of confidence in fiat currency, and (b) era of low interest rates due to the aftermath of the bursting of the biggest bubble in the history of human race.

Will History repeat itself: The Case of 1929 Crash

Dow Collapsed about 48 percent in 1929, then there was a huge market rally, when it climbed 48 percent. Interestingly, the Dow had declined by a more resonable 17.3 percent for the year 1929. Apparently, people thought (as do now) that the bear market was over and the good times (or the roaring twenties) were back. In 1930, Dow fell by 33.5% and another 52.7% in 1931. The depression signed off with yet another 23.1% decline in 1932 - a decline of 89% from its all time peak in 1929.

Peak Value of Dow in 1929:381.17 Points (3rd September 1929)
From its decade low it had gained 491.51%.
Low Value of Dow in 1932: 41

India 1947 and Now

In 1947 India had a population of nearly 300 million. The currency in circulation had risen from Rs.172 crores in 1939 to over Rs.1200 crores in 1945 (to place things in perspective by end of July the money in circulation was about Rs.40 lakh crores).

In the first budget after Independence, the government of India budgeted for a revenue of Rs.171.5 crores and a revenue expenditure of Rs.197.39 crores. The net deficit on revenue account was Rs.26.24 crores.

By the way, Customs receipts were estimated at Rs.50.5 crores, while income tax was expected to yield Rs.66 crores.

Of the budgeted expenditure of Rs.197.39 crores, Rs.92.74 crores was for Defence services

The public debt of India at the start of 1947 was Rs.2531 crores of which unproductive debt was Rs.864 crores

From April to Septembe 1947, India imported 10.62 tons of foodgrains costing Rs.42 crores.

India was expected to produce nearly 800,000 tonnes of Steel in that financial year.

A good starting point would be consider the various aspects of India’s growth (as well as costs) from a budget that had an expenditure of less than Rs.200 crores to the most recent one that had an expenditure of Rs.10 lakh crores.

By the way USA was no different:
In 1909, the US federal government had an annual budget of $US 0.8 Billion. With this it governed a population of just over 90 million people. The cost of government was about $9 per capita.

In 2009, the US federal government has an annual budget of $US 3,550 Billion. With this it governs a population of just over 300 million people. That’s a cost of about $11,675 per capita.

Is the US 1200 times better off?

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