Indy Telecom & Industrial Media

A bunch of people have sent me this, and it’s definitely worth reading – Jeremy Grantham talks about the state of the world (and American) economy in the 4th GMO quarterly of 2008.

Reading it brought to mind some points that I have been thinking about for a while now – and this is as good a place as any to talk about them.

One of the interesting things that is mentioned is the four ways in which the economy could turn out – a few big write downs until our debt is back to something reasonable, wait for the passage of time to wear down debt levels, or inflate our way through this debt. Of course, he also talks about the fourth option (which I would call a Greenspan-ian one) where we just move from one asset-class driven inflation to another (tech bubble to real estate – we all know how well that worked out).

Traditionally, the US has always inflated its way through all debt. Unfortunately, right now we are in an economically deflationary period. However, our government seems to think that writing down our debts is somehow wrong, and that we need to print more money to get through our current predicament. This does not make sense in the slightest because this is the very definition of a bubble — overinflated asset valuations, and a correction when the bubble bursts.

Of course, it does not help that everyone keeps calling it a credit crunch. Was there a period when there was a lack of credit liquidity in the market? Of course. But is it really a credit crunch? No, a more realistic take would be a debt overload (or, in Lana’s words, a big cluster fuck).

Therefore, printing additional currency is more likely to make things worse because printing more money is a short term patch that will worsen things in the long run.  Soon, we’ll reach a period of excessive liquidity, which will end up driving inflation through the roof within the next five years, if not sooner.

Another thing that I really enjoyed is when Grantham mentions Taleb’s Black Swan. Many people (and I’m guilty of this on occasion, as well) have misused Taleb’s Black Swan as a definition for high sigma events. Yes, Black Swans do occur in nature and yes, they serve as a fantastic example to all of us on the impact of the improbables and the unthinkables.

However, the current economic crisis is by no definition a Black Swan. We all knew it was coming all along, and we fed it along. Every American consumer consuming in excess of what’s needed, buying McMansions, big cars, and being knee deep in debt. And every one with half a brain cell predicting the bubble for what it was.

If anything, this is as white as it gets and we were just too blinded by our greed to see it. If you did not see this coming, you were a fool.

I also liked his take on Obama’s cabinet, and how he had a chance to bring in some real change, but instead chose yes-men and spineless folks who I’m afraid won’t stand to do the right thing.

That said, here are a few predictions from my end –

• Our economy has not bottomed out. There will be more write downs, and this is not going to be over any time soon.
• We will definitely go through a period of some rather unhealthy inflation that is likely to wreak even more havoc into American families already strapped for cash.
•  There is another asset class whose bubble hasn’t really quite burst yet — retail consumer economy. Sure, we are going through a rather conservative spending phase. But in my mind, that’s a bubble that may have fizzled out a little, but is far from bursting. And that is another rather scary thought.
• We really haven’t seen the full implications of this world wide. We’ve not even truly begun seeing the effects of this in the middle east (think Dubai), China (who knows what the real economic situation there is – outside of what the government tells us), India or South America.
• One word -Buffet.  Could he be wrong? As an investor in Berkshire Hathaway and an ardent devotee of the Oracle of Omaha, I’d like to think not. But there is always this tingling doubt at the back of my mind.

That’s my take. Arguably, it is a bit cynical, but I’d like to believe that it is a bit more realistic than what the media would have you believe.

The New York Times has an excellent article on the state of the current US economy.

One of the key points that they bring up is that traditionally, boom and bust cycles result in higher purchasing power and better lifestyle to the people during the boom cycles. Unfortunately, this is not necessarily the case in the US.

For instance, at the end of the 2000 economic expansion, the median American family’s income was $61,000. In 2007, it was $60,500. If anything, the American middle class is not just stagnating — it is recessing, made worse by inflation and high gas prices.

Contrast this between the real median family income that quite literally doubled from the 1940s through the late 1970s. In the three decades since, it has barely risen by 25%.

One of the most critical problems facing our country today is education. The US is lagging far behind compared to the rest of the world, and despite faulty programs like “No Child Left Behind” has one of the lowest graduation rates among developed countries.. Another one is public infrastructure — a lot of money that’s currently spent is on useless pet projects, while the larger infrastructure needs aren’t being met. And of course, there is the issue of health care and the fact that a significant portion of Americans cannot afford to take care of themselves.

Finally, there is the age old issue of tax cuts which are supposedly favorable to the higher-income bracket groups versus the lower-income bracket groups (this is the one point that I disagree on).

But either way, it is a good point, and a very insightful one in a very sad way.

Here are a few assorted interesting links from the past month; ideally, I’d have liked to blog about a few (if not all) of them, but there’s only so much you can do in a week.

• Derivatives: The stupidity of the Indian media on derivatives (Rediff)
• Pop goes the economy: The correlation between economic performance and champagne purchases (The Economist blog)
• Information overload: Why we’re powerless to resist grazing on endless web data (WSJ)
• Old-School Economics: Why the recession was bound to happen anyway (NYT)

With a sluggish economy, it was only a matter of time before stores adopted the any-which-way-they-can to make money attitude.

The NYT has a post on how a lot of the megastores are willing to negotiate with the customer on what the prices may be.  This includes such big names as Best Buy, Home Depot and Circuit City. Here’s an excerpt:

“We want to work with the customer, and if that happens to mean negotiating a price, then we’re willing to look at that,” said Kathryn Gallagher, a spokeswoman for Home Depot.

…

“The recession is helping to push these seedlings to the surface,” she added. “It’s a real turnabout on the part of the buyer and the seller.”

Wow. Un-freakin’-believable.

Here are some interesting links that I’ve been meaning to post for a while –

• Old-School Economics: An interesting article on the NYT on the current recession stagflation.
• Anti-bubble: What’s up with all these attempts to coin weird sounding terms, anyway?
• It’s not over until the fat lady sings.

Jim Rogers, who worked with George Soros to build the multi-billion dollar Quantum Fund, feels that the US is “undoubtedly” in a state of recession. Not that I necessarily disagree with him; but I just feel that the market may need to make as much as a 10% correction before it can think of going back to being in the green. That could take as little as six months, given that there have been a lot of write-downs by financial institutions — or as long as a year or more.

Of course, that’s assuming that the shrub in power does not do something ridiculously stupid (you know, like attacking Iran) or some such crazy thing. In which case, we all can go back to living in caves etc.

And to top it off, Rodrigo Rato, the IMF chief, has warned that the dollar may suffer “abrupt failure”. And of course, other countries are taking steps to temper their local currencies from appreciating too much against the dollar, mostly because some of them are worried about a repeat of the late 1980s. This includes Asian countries (especially India and China) and of course some European countries which are wary of the sharp rise of the Euro against the US Dollar.

The US Treasury secretary had these pearls of wisdom to offer us –

US Treasury Secretary Henry Paulson, addressing the plenary session of the 185-nation twin financial institutions, also sounded a note of caution.

“We need to continue to be vigilant, because all of our capital markets are not yet functioning normally,” Paulson said.

“Not yet functioning normally” — when financial institutions are announcing losses in multi-billions and profits fall over 90%, not normally is as good a phrase as any, I suppose.

For the first time since 2003, the Federal Reserve lowered its interest rate from 5.25% to 4.75%. Most people expected a cut of maybe 0.25%, but a cut of 0.5% was significantly higher and perhaps underscores the serious concerns about the economy.

While this may not directly affect consumers, this will have an impact on the prime lending rates of most financial institutions in the country. And interestingly enough, the stock market seems to have soared with the news with significant gains.

So, is this merely going to postpone the inevitable or will the extra financial liquidity be used “wisely”?

Personally, I think that this could be a boon for FIIs to invest in other more stable markets (e.g. Asia). This would not necessarily peg the investors to a market that might go into recession in the near future.

Either way, it would be interesting to see how the market reacts to this in the long term.