The Mirage of the Recovery

The last few months have been quite taxing on any rational person, a fact that has been aggravated by naive (or maybe intentional hype) about the so-called recovery in the economy. Any sane person searching for signs of recovery would have very clearly come to the conclusion that the recovery (if at all it existed) was due to the government support and the near disappearance of the capitalist order that was propounded as the panacea just three years ago. 

It is perplexing that all those who at one point of time were strongly against subsidies are now demanding not just subsidies but doles that are many times more than what the government would spend on public health and education. I remember the years immediately after the process of liberalisation started we had industry bodies demanding that subsides to people (poor as well as middle classes) only made them more lazy and that these should be dismantled because free markets are the best way to reduce poverty and create a work ethic that supposedly doesnot exist in India. Two full years into a crisis, nobody talks about dismantling subsidies, instead these bodies are now clamouring more subsidies, albeit to their own members. 

As a student of Social Sciences, I find it absolutely interesting to watch how fickle the markets are. Till about January this year we had everybody (including the 20 something reporters in the press, who would be hard pressed to explain the difference between macro and micro economics to the policy makers who are willfully lying about the state of the economy) claimed that the world has recovered. Even important members of the bond houses were warning about the era of hyper-inflation that was about to be unleashed - I guess their assistants forget to give the charts of M3 and M2. In reality, the recovery turned out to be the case of 'so near yet so far' - as it has happened so often in the past three years. 

 Two charts given below would probably reinforce the need as to why people should be more circumspect about the supposed recovery.

The Chart above shows the Personal incomes in the USA including the government transfers, often used till now to indicate the 'recovery'. Seems good! Good as long as we dont see the chart along with the rise of government debt. 

The chart below shows the state of Personal Incomes in the USA excluding government transfers. 

The chart is one that I guess our learned friends in the media and among the policy makers would like to think that did not exist. Unfortunately, our elected politicians donot have that luxury as they will learn in the next few months and years - if you dont believe me, ask Germany's Chancellor Merkel. She has stopped making public statements after the provincial elections wiped out their alliance due to a 10% vote swing. Rest assured her political career is likely to come to a spectacular end in the probably the next three years.

For long I have been in the deflation camp. I continue to believe, as I did for the past two years, that we are heading into a deflationary (at least over the next two years, if not more). Nor do I believe the hype about China, India and the emerging markets replacing the west as the major consumers in the present context. It will happen, but the argument is probably a few decades early. By the middle of this century, it is likely to happen but we are likely to be too old (and I am sure i will be quite senile to even think about the issue). 

Interestingly, if my argument is about a likely deflationary environment wrong, then I think it will be unique because the very fundamental nature of capitalism as we have known since the end of the Second World War will have changed - forever

Where are we in the Sovereign Debt Issue?

I am sure the predominant question that everybody would like to ask is the title of the post. So I thought it would be a nice time to take stock of the situation (NOTE: take stock is more of a metaphor). As usual i would like to give you some important statistics and ask a few important questions and then would prefer to leave it to the best senses of the read to come up with rational answers. The last part of the post will consist of some important scenarios that investors have to consider in the present economic environment.

Is the Sovereign Debt crisis winding down or at least are we seeing light at the end of the tunnel? One would only wish and hope that we could give straight short postive answers to the question. Unfortunately the only short answer is that we still have a long way to go. The reason for this negative brutally frank answer is clear. Despite all the rhetoric about the Greek package, Greece is only a small fringe player in Europe. That may surprise the passive observers of the economy. But anybody who follows the bond market will understand that the problems for Greece are only partly over and the problems for ther other countries, especially Spain and Italy are just starting.

The bond markets are likely to panic far more than the present (unless we have dramatic action by the world's central banks) in late June and early July because a number of countries have to roll over or repayment of substantial amounts of outstanding debt.

In the next five months the amount of debt that various countries in EU have to roll over varies from about 4% in the case of Ireland to about 9.7% in the case of Italy. EU as a whole needs to rollover or repay about 6.2% of its total outstand public debt.

The following statistics will probably place the issue in a better perspective (the total quantum of debt is given in brackets).

Italy needs to roll over 9.7% of total debt (which stands at US$1.4 trillion)

Portgual needs to roll over 8% of total debt (which stands at US$286 billion)

Spain needs to roll over 4.7% of total debt (which stands at US$1.1 trillion)

Ireland needs to roll over 4% of total debt (which stands at US$867 billion)

Greece needs to roll over about 6.2% of total debt (which stands at US430 billion)

UK needs to roll over about 4.4% of total debt (which stands at more than 848 billion Pounds)

The total outstanding debt is likely to be more than that cited above as most of the statisitcs are for total debt at the end of February-March 2010 while in the case of UK the outstanding debt is as on 18 February 2010.

Therefore the options that the Central bankers, especially ECB, have are rather limited. They (ECB) can either rollover the debt by printing more money and using the procceds to buy bonds or simply allow a default. The second option is inconceivable, especially on such a scale. So they will have to buy bonds and concurrently allow the banks to pledge any collateral, even if it has 100% likelihood of default being pledged with the ECB. Among the other smaller measures that the ECB will invariably take up will include a cut in interest rates (all the way to Zero - and they can still cut 1%: not bad) and providing the banks with unending supply of loans on very easy terms. This money will (after about 6-12 months) come back into the markets. But in the process the ECB would have only postponed the issue by that much time and would help create the mother of all bubble which will probably burst in about 18 months time - IF EU is able to weather the present perfect storm.

There are a number of scenarios that an investor would have to seriously consider. These are enumerated below. Though some of them are unthinkable at the present juncture, the more prudent investors should probably have an open mind about various options.

1. What would be the market reaction if the ECB were to announce Quantitative Easing by buying their own bonds (most of which are anyway near junk)?

2. What would the government do with their largely insolvent banking system? Till date sovereign debt was considered a risk free asset and its holdings went into the calculation of the banks capital adequacy ratio. Imagine if this were to happen in India: most of our public sector including LIC would be insolvent as they hold GSec's.

3. How to deal with the hitherto unthinkable: How would the market react to a collapse in the Euro (as it exists in its present form)?

Probably the Governments will ask their banks (or even better Goldman Sachs) to rig up the markets by buying all the indices and would ask JP Morgan and HSBC to keep selling gold futures so that people dont panic.

Deja Vu all over again.

Don't Stop Looking for the Exits

How many times have we heard the Policy makers emphasise that there is no crisis and that they are top of a situation? Their bland speeches, ad nauseam content is actually taking a toll on my health (though not the financial part, because I dont believe them anyway). In late 2007 and early 2008, we were told that the banks were safe and then were told that the bailouts were essential to save the financial system. Any discerning investor should have avoided investing in the financial sector (unless one was a speculator). Everybody loves a rally, especially the financial sector and the policy makers for the simple reason that for one (financial sector) they can profit immensely from the proclivities of investors who think this time is different; while for the other (Policy makers) capital is easy to come by during market rallies. They dont have to do anything. Rising asset prices give a false sense of capital buffer (as they did during 2003-2007 rally).  

This time is different. But, for the wrong reasons.

It is imperative to note that the basis of calculating the price of an asset is at best inaccurate or at its worst speculative. It depends on two parties making a lot of inferences about the future, which is essentially unknown. This could have remained at the realm of abstraction but for the fact that with fiat money and financialisation the financial markets cannot be ignored. In 2008 and 2009, the policy makers transferred private risk from the banks onto themselves by massive bailouts and by assuming more debt by attempting to reinvigorate the global economy. The money would probably have been well spent had they immediately forced the much delayed structural change that was needed. Instead, their thinking was based on only one assumption: hoping that private demand would come back. Unfortunately, that has not and now we are in the throes of yet another crisis: only this time it is much larger than the previous only. The postponement of a surgery only leads to greater problems down the line. 

I am reproducing two important charts. One chart shows that Europe is so interconnected that we have now reached the end of the road because till date various countries were only running a ponzi scheme.  The chart below shows the amount of debt that each country owes the other cannot and no way can they repay such large amounts. Add to this other obligations of the countries including those related to pensions, health, etc and the only way that a country can meet its obligations to all other stake holders is by defaulting on their loans. I believe that it is a matter of time before there is one form or another of debt default (or call it restructuring if you may).

The bond market is not going to like that and it would instead prefer that the governments' cut down on spending, which would hurtle the global economy into a deflationary spiral. But creditors will be big winners in such a scenario. I am quite sure that it is going to be disappointed in the long-term because the polity of west is not like China. Take the case of Greece: It has promised austerity measures that are nearly 13% of its national income spread over the next four years. If the government actually attempts to deliver on its promise then rest assured that the ruling party will not be elected for at least another 20 years. 

A candid confession to this possible outcome created a flutter in UK recently when Mervin King is supposed to have claimed that if the parties deliver on their promised reduction in expenditure then they will not be elected for a generation. 

The Second Chart (above) shows why the problem has just got out of hand. The banks in most of the countries are on the verge of insolvency. Hence the urgent need for the Greek bailout (and many more down the line).It shows that the banks of Europe have exponentially large amounts of money (nearly 150 billion Euros) to Greece and Portugal. Add to that the monies lent to Spain, Italy and UK. Compound that to the lending spree in Eastern Europe, Latin America and USA.

There is another short-term solution to the problem: create an even bigger bubble by pumping in more money. The interesting aspect that has been missed is that the very fundamental nature of Capitalism has changed due to the most recent crisis in the following ways:

1. State Capitalism now rules most parts of the developed world (OECD, India, China, etc)

2. Public Sector is the only game in town

3. The time duration between two recessions have been cut short: in the 1970s the next recession was 10 years, by the 1990s it was 5 years away and now it is probably 18 months to 2 years (or who knows may be even more)

Charts Tell Another Story: The Case of Wheat

The chart of Wheat (given below) is probably one of the more interesting charts. In technical analysis terms, we have what is often referred to as positive divergence or what seems to be an accumulation pattern. The reason why the chart seems so interesting is that the chart seems to indicate accumulation despite the fact that there are a number of news items' that claim that we are heading for a record Wheat crop in USA as well as India. The significance of the chart (US markets Wheat Continuous KBT) increases since it has occurred in the weekly charts, which tend to have a greater bearing on the long-term trend. Add to this the recent reports about the complete crop failure in Niger.

Interestingly, the Base metals complex is exhibiting more signs of distribution (or negative divergence) han accumulation. The significance of this pattern would only be known once there are more details about the actual output of wheat, rather than estimates. The fact that the world food stocks are at their lowest point in three decades may have ominous portends, if these charts turn out to be true.

                                           (Click to Enlarge Chart)

Greek Tragedy:
Beginning of the End or End of the Beginning

A remarkable feature of the financial markets is their recurring problem of selective amnesia. The past decade has seen short-term volatility jump exponentially and reach record levels that were often considered the realm of theoretical possibility. A flabbergasting feature of the markets over the past decade seems to be at odds with the conventional logic that fundamentals always catch up over the long-term. The point is: what is our long-term should perspective and what metrics should we use? This question is not simply a point for academic debate, it is probably the most important riddle that we need to solve in the era of rapid financialisation that is vastly aided by technological changes just at a time when the world is at the cusp of a major structural change. This paper attempts to grapple with changes in the sphere of political economy of global finance

One is forced to wonder whether the structural changes that are taking place in a number of the more advanced economies are being missed by a number of market participants.

A few months ago (in February 2010) a former Chief Economist of IMF (Simon Johnson) described the G-7 economies as ‘fundamentally useless’. We could extend that analogy could probably be extended to describe the emerging markets as ‘technically useless’. We attempt to grapple with the major issues facing some of the economies of the world. This could be a particularly good time to take up such a study as we are bound to witness increased euphoria that the ‘Greek tragedy’ has come to an end and the world economy could roar back into growth – just like old times. I really hope so. But I would probably be a bit more circumspect and would probably keep the age old adage: buy the rumour and sell the fact. It is likely that this time is no different. Nothing has changed structurally over the weekend – not even with the US$61 billion bailout of Greece. At most it is just the end of one chapter. We are bound to witness a short interregnum period (at the most 2-3 months) before another country take the markets take pot shots at the next most vulnerable country. The list is quite exhaustive, to put it mildly.

BIS, one of the most authoritative voice, in global finance has pointed that public sector debt is now expected to exceed 100% of GDP of OECD countries in 2011 – something that has never happened before in peacetime.

Major Structural Issues:
    * The world may be ending the policy that drew largely on Keyanisian policy of  counter cyclical spending by governments because of their public debt has almost in every country reached its sustainable level. Any increased debt is likely to lead to a sharp deterioration of public finances.
    * Concurrently, we have consumers wilting under heavy debt caused by a culture based on debt induced consumption. The process of debt deleveraging has probably just begun – as implied by the demand for loans in different parts of the world.
    * A large number of European countries have no competitive advantage in their economies that will enable them to recover from the blows of the recent credit crunch. In most of the countries the boom was based on spending that accrued in the form of increased revenues originating from over priced assets, especially in the housing sector.
    * With the likely end of government largesse turning into an era of enforced fiscal tightening, would the world economy return to economic boom conditions? The short answer once again is negative because of the simple reason that if the governments were to tighten liquidity then we are likely to witness a deflationary spiral at which point the burden of debt only grows due to the declining incomes. If the governments’ donot withdraw the money that they have pumped into the world economy as stimulus then the best case scenario is likely to be stagflation: none of which are good for the return of a consumption oriented economic boom conditions that two generations have come to rely on for any growth.
    * The era of low long-term interest rates (over the next decade) is likely to have come to an end, implying that everybody from the governments to the consumers will have to pay a lot more for their debt.
    * OECD countries are rapidly ageing and this will open up the Pandora’s Box of problems in their pension systems.

Questioning the Unknown:
    * An interesting question that investors would need to grapple with is: why is gold rising, especially if what was supposed to be a Greek tragedy has come to a happy ending? A lazy answer would be that the US Dollar is falling after the announcement of the bailout package. But gold rose from about 1044 in February 2010 and is now near the technically critical resistance of 1170.
    * Bond markets seem to thinking that they will not be asked to forego their principle. This seems to quite an oxymoron. Never in the history of capitalism have lenders been not forced to take a haircut (especially large ones) when sovereigns or countries default.
    * The countries in trouble profess extreme confidence that they will be willing to reduce their deficit from levels that exceed 11-15% to about 3% (as required by EU) in 2-3 years.

The Never ending Greek Tragedy:
Unfortunately, the ‘Greek Tragedy’ is not about to end so easily, at least not because of the package that the EU has announced. Interestingly, they have not announced as to who will pay the US$61 billion. It has been estimated that the financing requirements of Greece over the next three years is about US$150 billion. The EU has committed to less than half the Greek requirement. Invariably we can be sure that the issue will come back to the centrestage, sooner rather than later. The next time it comes back to the centre stage we may rest assured that it will be accompanied by similar predicaments for other countries. Unless the problem is solved permanently (through drastic structural change) we are bound to witness the game of who is next? The list is quite large and in each country the political instability (or perceptions about such instability) are enough to send ‘hot money’ rushing for the exit. Thailand is the latest example. Geo-political tensions in the middle east could provide another source of problem. More troubling such stop gap bailouts will only provide an opportunity for speculators. The next issue that Greece and its banks have to face is how to overcome the flight of capital, which is already growing at an alarming pace. It has been estimated that nearly 4.5 percent of the GDP has already been transferred out of the Greek banks. Unlike some of the emerging markets, Greece is helpless against such capital flight.

The first important question that any person willing to go beyond the financial media headlines would like to ask is how is Greece going to move from at least 4% GDP primary budget deficit to a 9% GDP Primary surplus – needing a total of 13% GDP further fiscal adjustment. Not an easy task, especially in countries that have been so used to a welfare state model. By the end of 2011 Greece’s debt will be 150% of the GDP (as per IMF estimate) with nearly 80 percent of the debt being owned by foreigners. Therefore even if Greece were to withdraw from the Euro and devalue its currency, the huge increase in the nominal value of the debt is quite high for consumers and government. It has been pointed out that every 1 percentage point rise in interest rates means that Greece needs spend an additional 1.2 percent of its GDP to it bond holders.

The only viable solution for Greece: Default on its debt and write down the principle by about 60-65% and that would bring down the debt to about 50-60% of its debt. Unfortunately, the bond market is not discounting such a big haircut but unfortunately that is the write down that Argentina offered after its default in 2001. Interestingly, there are a number of similarities between Argentina and Greece, if anything Argentina seemed better (at least on paper). In 2001, Argentina’s public debt was 62% of GDP, while in the case of Greece it is 114%. Argentina’s fiscal deficit was 6.4% of GDP in 2001, while in the case of Greece it is 12.7% of GDP in 2009. The current account deficit of Greece is about 11.2% of GDP, while in the case of Argentina it was 1.7% of GDP (in 2002).

Grappling with the unknown:
The BIS has pointed out that there will be substantial pressure on the balance sheets of various OECD countries in 2010-2011 (See Chart Below). This would need deep fiscal tightening in order to reduce their debt from current levels, but their debt would remain far above the levels that existed before the start of the crisis. We could therefore extrapolate that the next few years will lead to less government spending and with it a collapse in domestic demand in most of the various OECD countries. Unfortunately, the Purchasing power of the populace of the emerging markets is far below that of the OECD and therefore they are unlikely to replace the lost demand. Importantly most of the governments’ in the emerging markets too have increased since the beginning of the crisis, thereby capping the upside growth potential for the world economy.

Can Governments’ Cut Debt so quickly:
The Quick answer is theoretically plausible, but practically speaking probability of a democratic government cutting debt so quickly successfully will probably be less than 10 percent. Take the case of Greece. Simon Johnson the former Chief Economist of IMF, has pointed out the country which had a deficit of about 12.7 percent of GDP in 2009 will have to cut it down to 3 percent by 2012 (two years from now). He estimates that every One Euro cut in government spending (or fiscal tightening) will lead to a decline of about 1.5-2 Euro in lost domestic demand. Greece is not like China, where the rulers need not face a direct election. The government will have to face an election, though not in the near future. The only way Greece can meet that target will be if their policy makers decide to risk political oblivion. Let us accept it: that is unfair or more like asking for too much from a party that has just been elected, after 8 years out of power. Unfortunately, Greece has no industry that can lead to its revival. Their important foreign exchange earner is tourism and that is stuck in the quick sand as Greece has no currency of its own which it can simply devalue to the extent of say 35-50 percent so that their goods become competitive in the global market place. They are stuck with the Euro. Therefore over the next year or two it will become increasingly clear that the only way Greece can come of out of this quagmire is to either to default or exit the Euro.

Ultimately, every $1 of fiscal tightening may generate $1.50-2.00 in lost domestic demand.  Fiscal tightening only works if the new unemployment leads to wages and prices falling, so making a nation more competitive.

Counter Point:
There is always a contrarian opinion to any view. It may be pointed out that most of the bull markets will probably start this manner. That may be true to a certain extent but there are two important differences, this time. Unlike in the past (the post World War II era) we have never had so many countries (especially the richer countries) facing such crisis. In most of the cases, they are staring at solvency issues and not liquidity issues. More importantly, unlike the last time this time the policy makers have run out of ammunition thereby limiting their ability to continuously indulge in trillion dollar bail out.

How much is a Trillion Dollars

Came across this interesting piece:

Picture a stack of $100 bills. It might surprise you to know that it only takes a stack four inches high to be worth $100,000. So $1,000,000 would be a stack of $100 bills 40 inches tall. How about a Billion? Well, you would have to stack $100 bills up to the top of the Empire State Building...twice...in order to reach a Billion. So to picture $1.25 Trillion represented by a stack of $100 bills - that stack would be 850 miles high. If you could turn that stack on its side and were able to drive alongside it, it would take you longer than 14 hours to reach the end. If you laid those $100 bills down side by side, they would travel around the world 50 times.

Sovereign Debt: A Snapshot

Country	Debt as % of GDP 2007	Debt as % of GDP 2009	Debt as % of GDP 2010 (Projected)
Japan	167.1	189.3	197.2
Iceland	53.6	117.6	142.5
Italy	112.5	123.6	127.0
Greece	103.9	114.9	123.3
Belgium	88.1	101.2	105.2
France	69.9	84.5	92.5
USA	61.8	83.9	92.4
Portugal	71.1	83.8	90.9
Hungary	72.2	85.2	89.9
UK	46.9	71	83.1
Germany	65.3	77.4	82.0
Canada	64.2	77.7	82.0
Ireland	28.3	65.8	81.3
Brazil	57.4	66.9	69.6
Spain	42.1	59.3	67.5
India	42.3	45.0	45.7
South Korea	25.7	33.2	36.8
Australia	15.3	15.9	20.3
China	21.9	20.0	20.0
Russia	6.8	7.2	7.4

Source: OCED, JP.Morgan

Europe is Looking  a lot like Japan

• Most of the European countries need 8 to 9 per cent of GDP-worth of permanent fiscal tightening which would lead to a huge deflationary spiral if carried out. But unfortunately the governments would have to take up this belt tightening if that were to happen.
•  All the governments in the G-20 will have to start cutting their fiscal deficit, which means that they will have to grapple with the prospect of a deflationary spiral as it will leave little room for further stimulus measures over the next three years. Europe will contract this year due to the greater emphasis on reducing fiscal deficit: Greece’s GDP has already contracted by 3.0% YoY, as of Q4, and is expected to contract 1.1% in 2010 and 0.3% in 2011 as a 13% deficit-to-GDP ratio is sliced from 13% to 3% (assuming this fiscal goal can be achieved politically). Portugal has a 9.2% deficit-to-GDP ratio that is in need of repair and Spain has a deficit ratio that is even worse, at 11.4% of GDP.
• Now governments are being forced to cut their spending, which will inevitably lead to great suffering a large scale rise in the already high unemployment. It is worth noting that about 25% of the Spanish youth are unemployed. At some point (though may not be immediately) we are bound to see a rise in social tensions across Europe).
• Greece has offered to cut between Euro 8 billion to 10 billion in budget. However, EU is demanding that they increase these cuts by a further 2-4 billion Euros. It has been pointed out that this year Greece will have to shrink its budget by upto 20% of its GDP – a disastrous recipe for accelerating pressure of deflation.
• Greece needs to raise about Euro 54 billion this year and has so far raised only about Euro 13 billion.
• More importantly international banks are still not safe. EU (as with most of the governments in different parts of the world) forced their banks to buy sovereign debt. Now that has become a problem issue. It is pertinent to note that about nearly 95% of the Greek debt issued by the government is owned by European banks. Apart from this U.K. banks have $193 billion of exposure to Ireland. German banks have the same amount of exposure and an additional $240 billion to Spain. Many international bond mutual funds also have sizeable exposure to sovereign debt of Portugal, Ireland, Greece and Spain as well. US banks have about US$190 billion exposure to the countries that are in trouble. So any problem of perception (need not be actual default) will lead to exactly the same type of consequences as those in the aftermath of the bankruptcy of Lehman Brothers in September 2008 – only this time it will be many times more severe because now various countries will be impacted. In the past two years various banks were buying the debt of the countries thinking that they are safe, if a country sinks then invariably the banking system of that country will also collapse.
• There is a very important structural problem for the troubled countries of Europe. Most of them have no product that they can sell and earn money in order to enable them to recover from their problems. Spain’s economic growth was because of Housing, where a nation of about 45 million was building more houses than the combined number of houses being built in Germany, France and Italy at that point of time(which had a combined population of 200 million). 
• Globalisation over the past few years has systematically deindustrialised countries such as Greece, Spain, Italy, Portugal as well as others who had a lower wages. Industrial production has now shifted to different countries of the emerging markets, especially China.
• Add to this the problem of the Aging Europe and we have a recipe for a disaster in the making. The only difference is that unlike Japan, EU is not one entity that can print money. EU doesnot have the reserves like Japan. 

So the only solution to the mess that Europe finds itself may be to go back to the state of individual nation states so that they can simply print money as they like and tax people as they like (and of course, if necessary run deficits as they like). EU better come up with a solution quickly as if the greater the delay, the greater the problem.

There seems to be only one certainity in this age of uncertainity: The people of those countries better prepare for greater suffereing, higher taxes and less government spending. After all this is not a new age as it was claimed, just a return to a forgotten chapter of our history.

A Greek Tragedy & Other Interesting Statistics

I complied some of these statistics from different sources on the Internet

• Fiscal Deficit of Greece: 12.7% of GDP 
• Workers in Greece have the second highest level of actual hours worked.  
• Greece needs to refinance about Euro 64 billion worth of debt - most of it before April. By end of January they raise about Euro 8 billion. 
• EU wants Greece to cuts it budget by 8.7 percent this year and down to three percent within three years.  
• The total debt of Greece is Euro 254 billion other estimates place the debt at Euro 300 billion.  
• Nearly 30 percent of Greece's economy is underground and hence beyond the scope of taxes. 
• If Greece swallows bitter pill and makes the budget cuts, that means that nominal GDP will decline by (at least) 4-5% over the next 3 years. Since tax revenues will also decline, even with tax increases, it means that the country will have to make even further cuts, over and above the ones contemplated to get to that magic 3% fiscal deficit to GDP - a great recipe for an economic depression. 
• Add into the equation that borrowing another €100 billion (at a minimum) over the next few years, while in the midst of that recession, will only add to the already huge debt and interest costs. 
• Unfortunately for Greece it cannot take the easiest way out by devaluing its currency or printing more in order to take up 'quantitative easing' like UK, USA or Japan, because it does not have a national currency. (A great reason why the Euro could fail). 
• Bank of International Settlements (the central bankers' central bank) says that the largest holders of Greek debt are the French, Swiss and Germans. In June 2009 it was France €86 billion, Switzerland €60bn, and Germany €44 billion. Other estimates place this at of France €73b, Switzerland €59b, and Germany €39b. In terms of GDP, for Germany it is minimal - just over 1%. Of more concern, for France it is nearly 3%, and for Belgium 2.5%.

That is not all. Others are not far behind:

• By the way, the politically right word to refer to the troubled countries of Portugal, Spain, Ireland, Italy and Greece (which were also refereed to as PIIGS) is now Club O'Med. 
• Barclays Capital says the net external liabilities of Greece are 87pc of GDP, or €208bn (£182bn). Spain is worse at 91pc (€950bn), and Portugal worse yet at 108pc (€177bn); Ireland is 68pc (€123bn), Italy is 23pc, (€347bn). Add East Europe's bubble and foreign debts top €2 trillion. 
• It has been pointed out that the total exposure of various countries to Club O'Med is $853bn for France (30pc of its GDP), and $707bn for Germany (19pc of GDP).

Hold your breath! the UK takes the cake: It has been pointed out that UK banks have a 250 billion pounds exposure to the Club O'Med countries.

See the following table

 

COMMODITY CORNER
Long/Short Position of Traders
As on 26th January 2009
Source:  CFTC
Net Change over previous reporting period (19th January 2010) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	153,070(-10,538)	9,085(-244)	69,086(-1,860)
Managed Money	153,070(-10,538)	26,889-10,629)	1,768(+1,331)
Swap Dealers	153,070(-10,538)	18,662(+1,480)	15,008(-4,147)

GOLD	All Open interest	Long Positions	Short Positions
Producer	651,455 (-70,630)	57,233(-3,164)	233,770(-24,772)
Managed Money	651,455 (-70,630)	184,073(-20,047)	7,917(-96)
Swap Dealers	651,455 (-70,630)	43,862(+2,833)	129,080(-9,666)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	141,166(-2,276)	5,719(+409)	70,903(-2,712)
Managed Money	141,166(-2,276)	43,187(-1,822)	13,356(-3,311)
Swap Dealers	141,166(-2,276)	44,874(-1,471)	8,847 (+42)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	23,354(+92)	766(+96)	14,066(-595)
Managed Money	23,354(+92)	12,129(+267)	1,478(+249)
Swap Dealers	23,354(+92)	3,081(-108)	4,121(+85)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	34,697(+345)	616(+50)	16,382(-799)
Managed Money	34,697(+345)	18,964(-83)	1,092(+182)
Swap Dealers	34,697(+345)	5,057(+92)	11,843(-94)

The Advantage of Selective Amnesia or The Sign of the Times we live in:

Today (Sunday, 24 January 2010) headlines in some newspapers prominently displayed the smashing performance of Maruti Suzuki, the largest car company in India. The papers in their enthusiasm declared that Maruti's Q3 net profits had doubled, while its sales were up 62.5 percent.  That sounded to me like the overnight sprouting of the equivalent of the Amazon forest in the Sahara region. So like our name suggests we took a slightly Different View and decided to peek into history of the company (after slogging digging out various things from the net we found that we took the round route to a relatively easy task. Maruti actually makes it easy for history guys by placing their quarterly results on their website).

The reason why we believe that the story deserves a blog spot is that Maruti is a good barometer of the India consumption story. We took up a very simply task that was more based on one simple question: What was the actual sequential quarterly growth of the company? Forget what our media says. We believe that is important that we keep an eye on that perspective because it provides more clues about the nature of this recovery and where we are heading?

A word about the company's sales growth:  The third quarter is generally speaking the best time for the company with festival sales. I dug out some of these details and it clearly shows psychologically how good it is to experience selective amnesia (as our media and investors would love to). Minus the festival sales & exports Maruti is likely to have either had tepid sales (at best) or even a loss at worst. Considering the fact that the commodity costs are likely to move up in Q4, the results at the end of March should show us that the emperor actually has no clothes. But what does it matter, anyway by March we are likely to have an outlier event in the form of a 'black swan' in the form of either Greece or Spain or innumerable countries, apart from the usual deeply troubled Uncle Sam (who is increasingly looking like a Great Gandpa). Then all our analysts and policy makers would be back to claiming that they cannot help being off the track on their forecasts simply because of the fact that this is 'once in a hundred year event'. That is the advantage of selective amnesia. We are not facing 'once in a generation crisis' but have had these crisis with amazing frequency: 1997 (South East Asia Crisis), 1998 (LTCM collapse), 2000 (tech bubble), Argentina default, 2006 crash in Emerging markets, and the freshly minted, recent financial crisis.

Maruti Announced headlines (as in the papers) - All figures Over the corresponding previous year

Q3: Net profits Doubles
Net sales Up 62.5%
Operating Margin:16.33 vs 10.26 in the corresponding previous year.
Gross sales 804.645 cr
Total income from operations:750.285 (after excluding excise, etc)
Total Expenditure: 657.172 crores
Sales of Domestic Vehicles: 218,910
Exports 39,116
Total vehicles sold: 258,026

My peek into history (considering the fact that i am a history guy):

Q2 - September Quarter: Sales:720.261 crores
Total income (including other income: 731.262
Total Expenditure: 628.647
Total Domestic sales: 209,083
Exports of cars: 37,105
Total cars sold: 246,188

Wow Great Results: Sequential Quarter on Quarter basis: number of extra cars sold: 11,838 cars (Minus the 2000 cars, which was largely due the government subsidy for fuel efficient cars, which has since ended)

What an age we live in? An era when 9827 more car sales is considered great news that deserves bold headlines.

I leave the conclusion about the nature of economic recovery and its shape ('V', 'U' or 'L') to the better judgement of readers.

COMMODITY CORNER
Long/Short Position of Traders

As on 19th January 2009
Source:  CFTC

Net Change over previous reporting period (12th January 2010) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	163,608(+3,740)	9,329(-171)	70,947(-164)
Managed Money	163,608(+3,740)	37,518(+1,119)	438(-264)
Swap Dealers	163,608(+3,740)	17,182(+601)	19,155(+560)

GOLD	All Open interest	Long Positions	Short Positions
Producer	722,085 (+12,993)	60,397(+2,929)	258,542(-2,347)
Managed Money	722,085 (+12,993)	204,120(-1,191)	8,013(-2,953)
Swap Dealers	722,085 (+12,993)	41,029(+3,058)	138,746(+247)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	143,442(-8,307)	5,310(+841)	73,614(-2,141)
Managed Money	143,442(-8,307)	45,009(-1,281)	16,667(-6,763)
Swap Dealers	143,442(-8,307)	46,345(-7,018)	8,805 (+20)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	23,262(-175)	670(-65)	14,661(-924)
Managed Money	23,262(-175)	11,862(-4)	1,229(+181)
Swap Dealers	23,262(-175)	3,189(-152)	4,036(+98)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	34,352(-150)	566(-66)	17,181(-348)
Managed Money	34,352(-150)	19,047(+451)	910(+373)
Swap Dealers	34,352(-150)	4,965(-56)	11,937(-785)

COMMODITY CORNER
LME Base Metal Inventory Position

As on 22 January 2010

Commodity	Opening Stock	Closing Stocks	Net Change	Warrants	Cancelled Warrants
Aluminium	4,640,750	4,635,075	-5,675	4,397,850	237,225
Copper	534,650	534,200	-450	522,125	12,075
Lead	153,175	153,475	+300	152,900	575
Nickel	161,706	162,270	+564	160,662	1,608
Tin	27,325	27,375	+50	26,150	865
Zinc	490,100	491,200	+1100	487,725	3,475

Is the World Economy heading for a sustainable recovery?

In a nutshell, the above question seems to be uppermost in the minds of everybody  and that  question is asked all the time. As always six economists will produce seven different theories, we think it would be good to ask some questions that may help in answering the above question.

At the outset, it is imperative that we underscore the fact that we do not claim to know the answer, though we continue to be extremely skeptical of the present recovery.  We have consistently held that the present economic momentum will taper off. The consequences will be disastrous if the government decides to step back. Now, World Bank (which is always late to the party) has said the same thing. therefore it may be important to look at the sum of different pieces that comprise the whole and then ask pertinent questions.

We have decided to pose two questions that we think are important at the present juncture. 

Question 1:

We all know that a sustainable economic recovery will mean a rise in the demand for the metals and as a natural corollary, the prices at a later date. The question that we need to ask is that should the rising metal prices be construed as rising demand?

Those who would look at the above question should keep in mind that a recent article offered the following  intersting statistics:

• Global Auto production accounts for about 25% of the aluminum usage, 25% of Zinc usage, 15% of Steel usage, and about 8-10% of copper usage.
• Auto Catalysts accounts for vehicles accounts for 40-50% of the Platinum and Palladium demand.
• Interestingly Global auto output is expected to rise by about 20% or about 71 million cars in 2010, more than 2008 production and only about 3% below the peak level of production seen in 2007 - the peak year of the bubble era. 

Considering the above, as well as the fact that the process of debt deleveraging is just starting (as is clear from the recent US credit growth statistics), collapse in capital spending all over USA, Europe and especially Japan, we should ask ourselves: are we going to see a sustained demand for Automobiles?

A more pertinent problem is in the form of inventory of all the base metals, which has reached the highest point since 2004 (in some cases since 2000). 

Question 2: 

Can China lead the world out of the morass that we find ourselves in after the recent economic meltdown?

The short answer is possible, but be weary of a straight forward answer. There are many more issues. The Chinese economy has been on a roll (or more like roller coaster to be less economic with the truth). China's economic recovery is built more on quicksand than solid healthy economic foundations. In short, it based on a few important factors: (a) Government spending, (b) Loan growth, and (c) asset market rise.

All three are (to say the least) aspects of the recovery that dont lend much confidence. Of the above three factors, the only factor that has a semblance of possible continuity for the time being is government spending. But how long? Nobody knows. If the tepid economic conditions were to continue, then it is likely that in the next year or China is likely to run into a capital account deficit and then their mercantalist policies are likely to reach a dead end.

The loan growth cannot continue as it has already reached dangerous proportions. Loan disbursements last year are at clearly unsustainable levels. A decline in new loans will invariablely mean that that the asset markets will collapse if there is no new money entering them. A long-time China observer recently pointed out that to maintain economic growth of 8% this year, banks in China will have to increase lending that is equivalent of 30% of its GDP (to place this in perspective: the current lending is about 25% of GDP). Is that possible? It is theoretically, but practically it will not just release the 'animal spirits' of the speculators, instead it will release large 'red' dragons all over that country.

The only way China can (in the long-term, not in the short-term) help the world considering all the present imbalances in the world economy is by increasing internal consumption. But, that is easier said than done. The first impediment to that is that wages are too low. China cannot increase them as that would destory the present economic model that enabled it to become the 'workshop of the world' (or is it sweat shop of the world?). Second impediment: China's current domestic consumption is about 37% (while in the case of USA it is about 71% and in the case of India it is about 65%). Ironically, domestic consumption in China has declined from nearly 50% to the present 37% in the past 25 years (when the reforms there started).

So, if a reader is convinced that they have a satisfactory answer to the above two questions, then we believe that they have deciphered the riddle to our two questions.

COMMODITY CORNER
Long/Short Position of Traders

As on 12th January 2009
Source:  CFTC

Net Change over previous reporting period (5th January 2010) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	159,868(+5,367)	9,500 (+959)	71,111(+3,642)
Managed Money	159,868(+5,367)	36,399(+6,152)	701(-1,858)
Swap Dealers	159,868(+5,367)	16,581 (-452)	18,595(+1,056)

GOLD	All Open interest	Long Positions	Short Positions
Producer	709,092 (+17,536)	57,469(-102)	260,889(+9,729)
Managed Money	709,092 (+17,536)	205,311(+4,024)	10,966(+4,270)
Swap Dealers	709,092 (+17,536)	37,971(-1,338)	138,499(-3,301)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	151,749(-7,230)	4,469(+149)	75,756(-3,366)
Managed Money	151,749(-7,230)	46,290(+587)	23,431(-5,474)
Swap Dealers	151,749(-7,230)	53,363(-10,989)	8,875 (+1,056)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	23,437(+58)	735(+74)	15,585(-759)
Managed Money	23,437(+58)	11,866(-535)	1,048(+204)
Swap Dealers	23,437(+58)	3,341(-61)	3,938(-188)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	34,502(+920)	632(-141)	17,529(-756)
Managed Money	34,502(+920)	18,596(+411)	537(+212)
Swap Dealers	34,502(+920)	5,021(-316)	12,722(+304)

The Lessons that Investors ought to learn, but never learn

There are a number of lessons that investors (or any observer of the financial markets) need to learn but rarely do. Instead we always make the same mistake(s) with a monotony that would normally shock any rational person. I came across the following pieces of advice at the end of a roller coaster year for the economy and the market. 2010 promises to be an even bigger one (both ways, but we think it will most probably surprise everybody to the downside).
The best 'lessons' are brilliantly noted in William Eng's book: Stock Market Trading Rules: 50 Golden Trading Strategies, which is a must read for all those interested in investor psychology.

The following lessons were compiled by Jeffery Saut in a recent report

Richard Bernstein’s Lessons

1. Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.

2. Most stock market indicators have never actually been tested. Most don’t work.

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than are income or cash flow statements.

7. Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financialstatements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

David Rosenberg’s Lessons

1. In order for an economic forecast to be relevant, it must be combined with a market call.

2. Never be a slave to the data – they are no substitutes for astute observation of the big picture.

3. The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.

4. Fall in love with your partner, not your forecast.

5. No two cycles are ever the same.

6. Never hide behind your model.

7. Always seek out corroborating evidence.

8. Have respect for what the markets are telling you.

Bob Farrell's Lessons:

1. Markets tend to return to the mean over time.

2. Excesses in one direction will lead to an opposite excess in the other direction.

3. There are no new eras – excesses are never permanent.

4. Exponential rising and falling markets usually go further than you think.

5. The public buys the most at the top and the least at the bottom.

6. Fear and greed are stronger than long-term resolve.

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chips.

8. Bear markets have three stages.

9. When all the experts and forecasts agree – something else is going to happen.

10. Bull markets are more fun than bear markets.

COMMODITY CORNER
Long/Short Position of Traders

As on 5th January 2009
Source: CFTC

Net Change over previous reporting period (29 December 2009) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	154,501(+2,854)	8,540 (-257)	67,469(-1,579)
Managed Money	154,501(+2,854)	30,247(+2,237)	2,559(+1,181)
Swap Dealers	154,501(+2,854	17,033 (-1,445)	17,539(+71)

GOLD	All Open interest	Long Positions	Short Positions
Producer	691,557 (+21,610)	57,571(-279)	251,160(+2,029)
Managed Money	691,557 (+21,610)	201,286(-2,298)	6,696 (+672)
Swap Dealers	691,557 (+21,610)	39,309(+625)	141,799(+944)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	158,978(+4,013)	4,320(-863)	79,122(+306))
Managed Money	158,978(+4,013)	45,703(+856)	28,904(-191)
Swap Dealers	158,978(+4,013)	64,352(-185)	7729 (+673)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	23,379(+977)	661(+116)	16,344(+102)
Managed Money	23,379(+977)	12,401(-13)	844(+56)
Swap Dealers	23,379(+977)	3,402 (+423)	4,126(+716)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	33,582(+1,109)	773(+268)	18,285(+703)
Managed Money	33,582(+1,109)	18,185(+787)	325(-291)
Swap Dealers	33,582(+1,109)	5,337(+342)	12,418(+1,065)

Charts That Tell Us a Different Story

The endeavour of our blog is to provide an alternative view as the title suggests. To meet this goal we have been scouring the Internet for statistics that will enable us to meet our goal of trying to understand and explain the formation of bubbles that are forming in different asset classes. Optimism now pervades through the financial markets even the more rational among the policy makers leave alone the investing crowd (which is usually wrong) about the sustainability of this recovery and the impending return to a boom (if not immediately over the next two years).

Certain interesting statistics need to be cited so that it will enable our readers to place the present rise in the financial markets in the proper perspective.

* In April 2008, the US Budget Deficit was 1.6% of GDP. It is now closer to 9.9 percent. So after spending nearly 8.3% of GDP, the US has been able to eke out a growth in GDP of 2.2% or thereabouts.

* The US Federal Reserve's balance sheet has expanded from US$858 billion at the start of 2007 to the present more than US$2.24 trillion dollars (at the end of 2009)

* Globally, governments have pumped in nearly US$12.8 trillion (or probably more) as different forms of stimulus measures.

These must have been the 'positive surprise' for the markets and hence the rise by nearly 60% or more in most of the asset classes (i.e. from its March 2009 low).

Another predominant wisdom that we hear regularly has been that economies witness faster economic recoveries coming out of a recession. This is one of the reasons why the markets are discounting a 30% rise in earnings. Unfortunately it is only a matter time that this myth is deflated. The chart attached with this post provides the behaviour of economies coming out of recessions. It is clear that historically economies witness weak recoveries (if you can call it that) coming out of a financial collapse. Considering universally acknowledged fact that this is the worst financial meltdown since the Great Depression, the global economic recovery should be considered if it can grow at 2 percent over the next few years. However, one can never underestimate the power of financial speculation that has now become rampant due to all the money pumped in the economies by the governments. Moreover, one never knows when the next stimulus package will be announced, it could be just round the corner.

COMMODITY CORNER
Long/Short Position of Traders

As on 29nd December 2009
Source: CFTC

Net Change over previous reporting period (22 December 2009) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	151,647(-305)	8,797 (-184)	69,048(+752)
Managed Money	151,647(-305))	28,009(-355)	1378(+745)
Swap Dealers	151,647(-305)	18478 (+512)	17,467(-38)

GOLD	All Open interest	Long Positions	Short Positions
Producer	669,947 (-18,265)	57,850(+935)	255,533(-2,499)
Managed Money	669,947 (-18,265)	249,131(-6,402)	6,024 (+644)
Swap Dealers	669,947 (-18,265)	38,684(-671)	140,586(1,212)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	154,962(+9,003)	5,183(+907)	78,816(+6,086))
Managed Money	154,962(+9,003)	44,847(+7,582)	29,095(-475)
Swap Dealers	154,962(+9,003)	64,537(-183)	7056 (+860)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	22,402(+51)	545(+56)	16,242(-50)
Managed Money	22,402(+51)	12,414(-339)	788(+62)
Swap Dealers	22,402(+51)	2,979 (+57)	3,410(-74)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	32,473(-5)	505(124)	17,582(+170)
Managed Money	32,473(-5)	17,398(-73)	616(-77)
Swap Dealers	32,473(-5)	4,995(-10)	11,353(+97)

Agricultural Commodities Traders' Positions
Source:CFTC

Commodity	Sugar 11 (ICE)	Wheat (CBOT)	Rice (CBOT)
Date	29 December 2009	29 December 2009	29 December 2009
Open Interest	1,269,415 (-1,262)	437,771 (-2,251)	16,821 (-490)
Producer Long	307,347 (+4,211)	38,088 (-4,484)	3,347 (-31)
Producer Short	527,279 (-3,127)	151,548 (+363)	13,791 (735)
Managed Money Long	174,643 (-4,448)	57,904 (+1,439)	3748 (-7)
Managed Money Short	7,286 (+3,428	66,587 (+1,031)	117 (-6)
Swap Dealers Long	156,663 (+1,467)	168,901(+2,552)	2381 (+26)
Swap Dealers Short	164,304 (+332)	22,982 (-871)	0
Others: Long	24,759 (-14)	14,996 (-336)	2,213 (-50)
Others: Short	13,200 (+539)	20,103 (+1,351)	730 (+546)

Change over previous week in brackets

India Statistics
Factories Registered in India (State-wise), 2005-06
Capital in Rupees Lakhs

State	No.of Factories	Fixed Capital	Productive Capital	Invested Capital
Andhra Pradesh	15,790	3,932,393	4,467,175	5,985,776
Assam	1,864	752,035	1,019,700	1,090,976
Bihar	1,669	292,352	433,893	529,740
Chattisgarh	1,478	1,579,146	1,849,578	2,067,035
Goa	543	392,137	603,444	615,388
Gujarat	14,055	11,953,996	14,780,192	16,397,187
Haryana	4,304	1,852,399	2,578,357	2,987,200
Himachal Pradesh	808	829,821	1,126,125	1084540
Jammu & Kashmir	519	116,996	212,175	192,497
Jharkhand	1,590	1,879,988	2,108,906	2,482,824
Karnataka	7,835	4,368,896	5,510,289	6,200,736
Kerala	5,643	769,483	1,193,223	1,465,135
Madhya Pradesh	2,951	1,900,597	2,392,917	2,976,885
Maharashtra	18,711	10,197,038	13,149,267	15,770,422
Manipur	59	847	1,442	1,364
Meghalaya	66	32,133	58,783	42,444
Nagaland	109	2,898	5,944	7,314
Orissa	1,862	2,361,133	2,600,657	2,867,646
Punjab	8,332	1,392,579	2,292,719	2,373,166
Rajasthan	6,005	1,624,464	2,368,104	2,390,995
Tamil Nadu	21,265	6,034,229	7,732,863	9,376,713
Tripura	307	12,186	23,269	27,793
Uttarpradesh	15,790	3,932,393	4,467,175	5,985,776
Uttarakhand	900	419,984	683,832	728706
West Bengal	6,077	2,650,026	3,514,048	4,002,439
Union Territories	6,915	1,583,186	3,278,141	2,851,709
All India	140,160	60,694,028	79,140,288	90,157,861

Source: Annual Survey Of Industries, Govt of India, 2005-06

India Consumer Durable Ownership Levels

Number of Households owning consumer durable goods per '000 households in the country.

Type of Durables	2001-02	2009-10
Scooters	78.62	86.28
Motorcycles	70.78	282.62
Cars	30.03	91.38
All TVs	453.07	634.73
Refrigerators	134.03	224.88
Washing Machines	72.04	153.98
Airconditioners	10.47	24.1
Other White Goods	247.09	451.73
All fansSeptember	804.71	1446.18
Transistors	516.79	648.65

Source: NCAER, The Great Indian Market

Advantage of a Short-Memory: Case of 2009 Car Sales in India

A cursory glance at some of the Newspapers in India would make any objective observer of the Indian economy marvel at the growth rates that it seems to be achieving over the past couple of months. Little wonder that we have the middle classes being overawed by the 'India story' and even the normally skeptical members of the middle classes frown on the naysayers, who may question the resilience of the Indian economy -especially its supposed recover from the global meltdown.

Evidence of this resilience trickles in every other day, the most important being the rise in the stock market indices.  The latest evidence of India's recovery  to high growth tragectory being the exceptionally large jump in car sales. Such statistical 'evidence' has led to a remarkable complacency in large sections, the last time such complacency was witnessed in India was during January-February 2008 (and we know the results of that).

We decided to look at the car sales statistics from a different part of the room  that is slightly different from the viewing angle of the government and the media. We believe that  spending in the economy is dynamic and month-on-month statistics are more important that a year-on-year comparison. Only then will, we believe get a more wholesome picture.One only needs to look at the statistics released by the Society of Indian Automobile Manufactures (SIAM) on its website to be misled into the soundness of the continuous growth of the Indian Auto Industry. This not to deny that the year-on-year comparisions are not required. On the contrary, we believe that a year-on-year comparision while important (especially for long-term trends), tells us only a part of the story. So we compiled the statistics on a month-on-month basis. A cursory glance at the statistics would make even the novice investor cautious and would probably leave them with more questions about why analysts are being economic with the truth.

A note about the car sales is in order, if we were not to draw the same criticism about being economic with the truth. There are some months that are normally considered lean months for sales. Two such months are March (when banks are more reluctant to give loans due to year end considerations) and December because the end of year and onset of new year will reduce the re-sale value due to year-end considerations. The festival months (September-October) normally see higher than normal sales as these months are the preferred (auspicious) months for the more religious buyers.

Month	2009 Car sales	2008 Car Sales
January	110,212	113,894
February	115,386	94,757
March	128,074	114,145
April	102,899	98,752
May	113,490	110,745
June	107,531	99,741
July	115,067	87,901
August	120,699	96,082
September	129,683	107,517
October	168,043	126,276
November	133,687	83,121
December	119,930	80,402

The above statistics clearly indicate that while the sales are better than the previous year (when there was a near economic paralysis with the banks refusing to lend) the sales are not as good as we are being told. This is because of two reasons. The discounts have increased substantially this year and more importantly, interest rates are at historically low levels. If we were to exclude the festival month of October, then the sales should (at least privately) be making the policy makers sleepless nights. This is probably the reason why the Finance Minister has been categorically stating that it is too early to withdraw the stimulus.

INDIA STATISTICS - Funds Raised in India

Funds Raised in Rs '000 Crores

YEAR	IPO & FPO	Overseas	QIP
2000	3.00	4.3
2001	0.30	22.3
2002	2.00	1.0
2003	2.20	2.9
2004	30.52	22.4
2005	22.80	35.9
2006	24.70	57.3	4.0
2007	45.10	97.8	23.4
2008	16.90	4.6	3.6
2009	16.00	36.4	38.1

Source: Prime Database Quoted in Business Standard, 1st January 2010, p.8.

COMMODITY CORNER
Long/Short Position of Traders

As on 22nd December 2009
Source: CFTC

Net Change over previous reporting period (15 December 2009) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	151,952(-231)	8,981 (-708)	68,295(-1,166)
Managed Money	151,952(-231)	28,364( -602)	633(-821)
Swap Dealers	151,952(-231)	17,966 (-51)	17,506(-339)

GOLD	All Open interest	Long Positions	Short Positions
Producer	688,212(-3,908)	56,915(+1,455)	255,533(-2,499)
Managed Money	688,212(-3,908)	207,168(-8,036)	5,380(+1,489)
Swap Dealers	688,212(-3,908)	39,355(+5,528)	142,068(-7,664)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	145,962(-2,077)	4,277(+121)	72,730(-1,196)
Managed Money	145,962(-2,077)	37,265 (-2,730)	29,571(-18)
Swap Dealers	145,962(-2,077)	64,720 (+252)	6,196 (-312)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	22,351(-29)	489(-59)	16,292(137)
Managed Money	22,351(-29)	12,753(+227)	726(-143)
Swap Dealers	22,351(-29)	2,922 (-63)	3,484(-81)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	32,478(-431)	381(39)	17,412(-567)
Managed Money	32,478(-431)	17,471(-824)	693 (-26)
Swap Dealers	32,478(-431)	5,005(-101)	11,256(-317)