Monday, October 04, 2010

ET interview with Pranab Mukerjee

Essentially the Finance Minister says that they will not curb FII investment in the near term, RBI will intervene whenever the rupee tries to rise quickly and higher prices are here to stay forever. To quote him "Prices do not go down. In fact they never go down". I foresee the following happening over the period of the next year.

1. Sensex hits an all time high however retail investor participation remains very weak. The common man has not forgotten what has happened in 2008-2009 and is going to stay on sidelines for atleast few more years before his memory begins to fail.
2. RBI raises interest rates as stock markets hit record highs. Interest rates begin to pinch the common man who has taken loans for his own house, education, home improvement, credit cards etc. Buyers keep buying houses in all cities except Mumbai where without 1crore of black money nothing moves
3. Prices of goods keep going up as speculators hoard commodities and producers reduce supply to maximize margins.
4. Companies try to be efficient to keep up with rising costs. Wages remain stagnant. No Pink slips yet.

Net effect

Stagnant wages, Higher loan payments, higher monthly expenses , lower savings, say bye bye to financial independence.

Welcome to the Matrix. If you take the blue pill, you get to see how deep the rabbit hole goes

Here is the finance ministers interview

In an interview with ET Now, Finance Minister Pranab Mukherjee says it’s not a time to put any restriction on the inflow of FII and that the regulators are closely watching the market. Excerpts:

What do you think are the primary reasons for the market rally we are experiencing currently?

Always the fear of having some sort of bubble would remain. I do not think this is a time to put any restriction on the inflow of FII. Certain market sentiments are there. Prospective investors are looking into the market, and naturally, India as an emerging economy, along with China and some other Asian economies, is considered a safe destination for investment. One of this upswing is that robust recovery which was expected in North America and Europe has not yet taken place and the IMF forecast has also been revised. We shall have to watch the situation. We reached more than 20,000 in January 2008. So, the stock market fluctuation always takes place, but we shall have to see that it does not have that adverse impact just like a bubble effect.

Is it safe to presume here that you are in touch with the market regular and keeping a close eye on how the market has really moved today?


samix said...

Essentially the Finance Minister says that they will not curb FII investment in the near term, RBI will intervene whenever the rupee tries to rise quickly

Desi batman:

This is what I was referring to when I said that the common Indian is bogged down by a government that is constantly debasing its currency under the auspices of voodoo Keynesian economics

Anonymous said...

Currency manipulation has become a big time interference from Govt. This is the outcome of Chinese model. Gone are the days of free floating of currency in open market.

Meghana said...

I agree with this post.
My hunch is that everything will be hunky dory, bullish till about 2012-2013, when the bubble/s will begin bursting. Real estate will undergo the most correction, followed by the Stock Markets. The India Story will be strong and growth rates will be impressive. The sycophant party (Congress) will not return in 2014. From 2015, with corrections in fact and fundamentals strong, another bull run may steadily begin.

Meghana said...

The best time to buy/invest in any kind of assets/equity will be 2013-2014.

Anonymous said...

Assuming that planet earth survives the giant meteorite hit in 2012.

DhImAn said...

Why bother with currencies? The world's super rich certainly don't - see this article.

samix said...

Dhiman people will never understand this until it hits them on the face, and hits them very hard.

For Indians/sub-conti's/Middle East this may not be such a rude shock because gold is a part of these cultures, so not many will be badly hurt!

You should just see the expressions and the sly replies that I get when I try to talk people into buying gold for securing their wealth, like I am speaking Bull shit, on the other hand if you speak to the same people about Stock Markets you should just see the respect and the admiration that is bestowed on you....

Anonymous said...

India to outpace China's economy soon: Economist

What a joke!!! Looks like GOI has established a new dept to bribe the foreign media to spread false propaganda. I recently returned from a trip to china and I can confidently say that china is ahead by 100 years in terms of development.

Just look at the pathetic state of our slums in Mumbai. They lack basic amenities like drinking water, toilets and electricity. Todate, 90% of indians are living below poverty levels. Housing has become unaffordable to those who have no access to graft.

GOI is a laughing stock

DhImAn said...

Samix: You should just see the expressions and the sly replies that I get when I try to talk people into buying gold for securing their wealth, like I am speaking Bull shit, on the other hand if you speak to the same people about Stock Markets you should just see the respect and the admiration that is bestowed on you....

Hahaha, yes, I can identify with that.

Now-a-days, in person I simply act like a currency and derivatives trader whenever some jerk is talking nonsense in the name of economics. The looks of awe I get are hilarious. And I purposely throw in a lot of rubbish in there, but nobody ever catches on.

Try it someday. Just yak some BS about derivatives, currencies, spread, algorithms, yak yak yak, get rich, yak yak yak. It doesn't even have to make sense.

I guarantee that you'll have people asking you to invest their money for them.

Desi Batman said...

Read these RTI stories. Most are related to land / RE, police, politicians. Be prepared to be on run or be dead for those who plan to improve or change current system.

Dead Right

What was that rant again - Hindustan is improving?

Desi Batman said...

Samix / DhImAn:

Why was gold not on upward trend when economics across globe were booming? Why now and why so fast?

Investors want their money to be parked somewhere safer, whenever there is bust at one place, there will be boom on another. Gold in itself is simply metal nothing great about it. It is just a mindset that it holds a value.

I would invest in gold for hedging against inflation or currency devaluation. Other than that what does gold hold value?
Same with RE, people are pouring savings and whole earnings in RE because they feel that is safer bet for now instead keeping cash.
RE atleast will provide shelter for one and his family.

Rich (read investors) are putting money into gold thinking it is safer bet for now. Once economics start recovering do you really think same rich guys would keep their investments in gold?

Better start looking what benefits you - Gold, Silver, RE, Cash, Currencies, Stock, etc.. money has taken several forms and value will be passing through these units as and when people's mentality changes. Money is made knowing where the next bubble lies and ride the uptrend in bubble.

Desi Batman said...

@ Vik
ET interview with Pranab Mukerjee

Since when did we Indians starting taking these crappy politicians by their words.

Mind you, these politicians are rulers and not governers. (read Gandhi family)

DhImAn said...

Read these RTI stories. Most are related to land / RE, police, politicians. Be prepared to be on run or be dead for those who plan to improve or change current system.

Batman, this will never change by RTI or activism. It is quite the same in the US, or UK or anywhere else in the world. The rich and powerful will do everything to keep their riches and power.

But change will come - as a catastrophic failure of the system. I don't know when - a catastrophic failure is hard to predict (an earthquake is an example of a catastrophic failure, or an overloaded bridge is).

But failure of the system must come - that is the nature of the universe.

In my estimation, the failure will be triggered or catalyzed by global, systemic monetary failure.

Perhaps I should say it thus: Events that will change the nature of the game will be triggered by global, systemic and monetary failure.

When this will happen nobody can predict, but that it will happen is certain.

Meanwhile, activists will continue to die.

DhImAn said...

Gold in itself is simply metal nothing great about it. It is just a mindset that it holds a value.

Fair questions deserve fair answers.

So here goes.

Anything has value only because people value it; i.e., value is a state of mind, that is absolutely correct.

Living things assign high value to those material (and even non-material) things that help them survive better and for longer.

Based on this simple premise - food has value - without it we would die. Water has value, clothes have value, shelter has value, medicines have value. Doctors have value. Music has value, as does sleep. And so on.

Living creatures also want to transmit value through time; thus ants store up food, squirrels store away acorns and so on.

As humans, we search for things that transmit value through time with the greatest efficiency and least likelihood of loss in value.

For instance, you could convert all your things of value today to wheat. You would then have to store the wheat, and would need to build a granary. This would reduce your holdings by some amount, making the efficiency less than 1.

Further, the wheat would rot in a few months or so, leaving your "value" at zero.

Thus, something that transmits value over time must have certain properties.

1. It must be efficient to hold it, so it must be dense - physically dense that is, i.e., it must have high weight or high value per unit volume.

2. It should not be something perishable either.

Now lets consider some more factors.

3. It should be easily recognizable - i.e., when the time comes to convert (this medium of transmission of value through time) to something else you need, such as food, people should recognize it easily and trade you for it.

4. It should be difficult to counterfeit - for obvious reasons.

5. Its quality should be uniform and easy to determine. For instance, there are hundreds of different varieties of wheat - the quality varies greatly and is hard go determine except by specialists. A corollary of this is that the set of people who determine its value should be as large as possible, so that local goons, laws and politicians can't alter its value to suit their purposes.

6. It should be easily divisible - so that you can convert it to things of varying values.

7. It should be fungible - that means that when you divide it into say a hundred parts, each part has one hundredth the value of the original.

8. It should be useless or nearly useless for most purposes. This is not self evident, so let me explain. If you want to keep something as a medium of transmission of value, it had better not be something that has other uses, else you will use it up.

For instance, you could keep medicines as things that would transmit value through time. But those medicines have other uses, so they would get used up, serving their primary need.

9. Given that value is relative, and is inversely related to scarcity, it should be relatively scarce, but not so scarce that it can't be widely known, recognized and used.

10. It should have a high and stable stocks to flows ratio. This means that new flow, or new production should be a small fraction of existing stocks, this prevents the medium from losing value by large factors in short periods of time, i.e., keeps the value stable on the human time scale.

To be continued...

DhImAn said...

Now if you search your own knowledge and experience to find which material thing has all these properties, you'll find that gold stands as the only one that meets all requirements.

Quickly lets study each of real estate, diamonds, silver, platinum and fiat currencies.

1. Real Estate: Not dense or efficient. Value is not universal or uniform, and is subject to local laws, political conditions etc. Not divisible or fungible. Stocks to flows ratio can vary wildly since it is created by humans.

2. Diamonds: Not fungible. Break a diamond and sum of value of the pieces is much less than the whole, bigger diamond. Non-uniform value, too many variations in quality, requires expert valuations to estimate quality and value.

3. Silver: Good properties, except has plenty of industrial uses, and oxidizes/corrodes. Also, since many metals are white, not too difficult to counterfeit.

4. Platinum: White metal not too difficult to counterfeit, has many industrial uses, much scarcer than gold, not widely known or recognized.

5. Fiat currencies: Flows are wildly variable, making stocks to flows ratio, and thus value, wildly variable. At the mercy of politicians and governments. History only shows debasement; never stability or appreciation.

So what remains?

Only gold. For tens of thousands of years, people have tried to find alternatives to gold - but without success.

Gold is dense, and is universally recognized because it is unique in color and is one of the densest substances on the planet. It is a soft metal, making it easily divisible; it is fungible and easily reconstituted. Its value is determined by worldwide markets, not subject to local manipulations, it is a noble metal that does not corrode or rot. It doesn't have significant uses in the industry save a little in the electronics industry and some in dentistry. Its stocks to flow ratio is 50 years or more. You cannot counterfeit gold, and very simple tests exist to determine purity. In short, gold is the only physical thing that meets all criteria.

Thus, gold, even today, stands as the only proven way to transmit value through time, i.e., the medium for saving par excellence.

One may invest in enterprises, speculate in bubbles, trade in derivatives - or whatever - but when it comes to saving, one should only save in gold.

This is my humble opinion. Actually scratch that - giants before me have all said this, for hundreds of centuries - I merely echo their thoughts.

Anonymous said...

They say that the meteorite that is going to hit the earth in 2012 has a lot of gold in it. I think after all humanity is wiped out by the impact, the remaining inhabitants of the planet (mainly cockroaches) are going to be very rich.

Laaloo Prasad yadav said...

Anon above,

what do u think about your chances of survival and enjoying vast amounts of gold..?/

Itna betaab mat ho.. tera bhi din aayega....

samix said...

Batman, I could not have said it better than Dhiman, just to add to what he said...

Ponder over this

"today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds its worth, as in the exchange rate for another currency? "

This is a quote from a person who used to call himself 'Another'

Desi Batman said...

Samix, correcto. That's what I was saying in my earlier posts - print money - circulate as black money in market - have growth!

Can anyone give one reason why black money cannot be tracked and accounted? I feel lots of currency money is printed as counterfeit or real money but unaccounted from mint and circulated in market. Yeaa! we now have tons of money! we are super power!

Q: If India finds 1000 tons of gold mines within it's boundary. Does it signify Indians are wealthy? If so what happens to productivity? What happens to earnings by hard work and labor if one can have wealth by simply finding something by doing nothing? Therefore people living in non-Indian countries become less wealthy?

samix said...

Batman, if we find find that amount of gold, then I am sure the politicians and their touts would make sure that we don't get an ounce of it, so nothing will change for the common Indian!

Anyways jokes(reality?) apart, Just look at what happened to the Middle East after they discovered tonnes of oil under their feet. They became filthy rich, but it has also brought in a lot of social problems for them with respect to productivity and other such fronts, so that can never be over-ruled.

But from a pure economics sans philosophy point of view, yes we will be rich, though 1000 tonnes is really not that much of gold from a sovereign's point of view.

DhImAn said...

Batman: Q: If India finds 1000 tons of gold mines within it's boundary. Does it signify Indians are wealthy?

Another fair question.

Value is inversely proportional to available supply. If gold were as abundant as sand on the beach, its value would be that of sand on the beach, i.e., near worthless.

In nature, gold is rare. This is because it is a heavy atom, and it it is theorized that whatever exists was created in supernovae.

This puts the likelihood of suddenly discovering a huge stash of gold somewhere on the planet at a low number. But I suppose it is still possible.

All the gold that exists amounts to about 4 billion ounces, which is about 124,400 tons. If someone suddenly found 1000 tons, that is a change in global supply of 0.8%. This will reduce the value of gold by 0.8% for everyone, no doubt.

In truth, annual gold production is at 2500 tons.

However, population growth is at roughly 2% or so, which means that demand increases at about the same rate as supply, keeping the value of gold nearly constant.

This is what is meant by a stable stocks to flows ratio.

Nothing in this world has constant, or forever appreciating value. Gold is one of the things whose rate of change of value is smallest.

Sometimes gold becomes less valuable because of new discoveries or production, sometimes it becomes more valuable because hoards are lost like when ships carrying gold sink to the bottom of the ocean or when there is population growth.

So there isn't a guarantee that gold will always and forever be the most valuable thing to use for savings.

It is merely the thing with the highest probability of being so, when compared with other things, whose probabilities are significantly lower.

Anonymous said...

Some Giants from the field of finance on Gold -

Gold is the ultimate bubble - Soros

It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
– Warren Buffett

DhImAn said...

Popping the Soros Gold Bubble

DhImAn said...

Warren Buffett on gold, and a response

Anonymous said...

A nice debate on gold but then how exactly do you value it? Is it cheap at current price or expensive? That is why I find it difficult to buy gold.
With stocks or property, one at least has some metrics associated with it to get some idea if it is cheap or expensive. Is there a way to value gold?

DhImAn said...


Gold occurs at about 1ppm in the earth's crust, or one part per million. Thus, you have to dig up one metric ton of earth, sift through it, get the ore, refine it and so on, only to get one gram of gold.

There are 4 billion ounces in existence, and 6 billion people. That means each person's lifetime share is only about 2/3rds of a troy ounce, or about 20 grams.

World GNP is about $44 Trillion. If we arbitrarily assume just a tenth of this wants to buy gold without affecting price, then 4 billion ounces would cost 4 trillion USD, giving a figure of roughly $1000 per ounce.

Of course, 4 billion ounces is not an annual sum, so if we take the annual production of gold, which is about 80 million ounces, and we assume 10% of world GNP bids for those 80 Moz, then we arrive at a figure of $50,000 per ounce.

If we assume only 1% of GNP bids for the 80 Moz produced annually, we get about $5,000 per ounce. This means that 99% of people think gold is crap and won't buy it, and only 1% will. That is quite conservative, if you ask me.

And finally consider the futility of measuring anything in a system of changing units. When gold's price fluctuates, how do you know it is because of supply and demand of the metal, or because of strengthening or weakening currency? Thus, the price in a floating currency is entirely meaningless.

So who knows what a "correct" price in fiat is, but I can say this: currently gold is trading at an affordable price. If 20g is your lifetime share, and you decide to say get just 200g, i.e., the lifetime share of 10 people, it will just cost you Rs 4 lakhs, which is peanuts in today's world.

And yet it provides a good measure of insulation against currency shock.

You don't even have to buy coins or anything. Just get your wife or girlfriend some bangles, earrings and a necklace or two, and you'll already be at 200g.

You'll build tremendous value in hard metal, and your significant other will love you for it.

What better win-win could there be?

Anonymous said...


This is the doomsday guy back again. In 2012, after armageddon, the undead will rise from their graves. Assuming that 10% of them were buried with their jewelary, the worldwide gold prices will fall by 10% due to increased supply. This assumes that the undead will sell in the open market, because they all might just sell to count Dracula.

2012 doomsday guy

samix said...

samix awards dhiman a doctorate in gold!

shailesh said...

TOKYO/WASHINGTON, Oct 7 (Reuters) - Emerging economies should consider steps to contain fund flows that could cause currency rallies and asset bubbles, the World Bank chief was quoted as saying, but the International Monetary Fund called such actions "undesirable."

The contrasting views over capital controls come amid rising tension between emerging and developed economies over exchange rates, which is expected to be a hot topic at Group of Seven and International Monetary Fund meeting starting on Friday.

Western leaders are worried efforts by emerging economies to weaken their currencies could derail the fragile economic recovery. Officials from developing markets say ultra-low interest rates in rich countries are fuelling massive fund flows into their markets, pushing up their currencies and inflating prices of stocks, property and other assets.

World Bank, IMF at odds over hot money flows

shailesh said...

40 pc dip in flat sales seen in big cities in first half of FY' 11, says Assocham

"According to property dealers of seven metro cities (Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad and Pune), the sale of flats has gone down in the first half of 2010- 11 by over 40 per cent as compared to the last year," the survey says.

And the reason cited for such sluggish sales is the escalated rates of housing units.

According to the report, developers increased the prices of their existing projects and the rates of newly launched projects are significantly higher than the previous ones.

The survey says, two- bedroom, hall and kitchen (two BHK) apartments costing Rs 30 lakh is now selling for Rs 45 lakh, which is beyond the reach of the middle class.

Another reason for the steep rise in price is the speculative bubble in the real estate sector, which kicked off as prices started escalating.

"Speculators start buying properties and start selling them at higher prices within months to make a quick profit. The demand for property increases due to this reason. This causes prices to rise to stratospheric levels," the survey says.

The continuation of the teaser home loan rates is likely to act as a positive in reviving demand in the real estate sector. And though the festival season is round the corner, banks have no plans to raise home loan rates, at least in the next few months.

DhImAn said...

Samix: Thank you, but I hardly deserve a Ph.D., even a not-real one, for parroting what so many others have already said.

However, here is a true Ph.D. in Economics, who has written "Why Gold?" which is an excellent read.

As a rather stunning co-incidence for me it was published tonight, Oct 7, 2010 at 9PM Pacific time. Just when the ridicule a la vampires had started, here is someone with plenty of credibility saying exactly the same things.

Anonymous said...

To DhiMan,
Although I agree with all the people who say that Gold is real money and I have started accumulating it (for the last 3 years now), I recently cam across a Gold Bear's sales pitch, which is at the link below. I have not subscribed to the newsletter that he is hawking, but his analysis seems logical. However I am not sure that his figures are truthful. Can you check it out and give your opinion on it? Thank You Note: I am not an affiliate or something, nor do I endorse what he has to say, but it does seem logical.Also I am not sure that his analysis is applicable to India, since inflation in India is sky high as compared to USA and Europe.

DhImAn said...

I don't know what the USD:gold ratio will be. The USD is controlled by people who can change its relative scarcity on a whim, thereby creating massive fluctuations in price. He could be right that the ratio of USD to gold could fall to 200 USD/oz.

In my opinion, his analysis is flawed, (though his figures seem sound) and I'll list my reasons below, but I want to point out that gold has been a thing of value for all of human history. Empires and their fiat currencies have come and gone, yet gold has retained its status as a thing of value.

It does make a good money, but don't worry about that. It is a thing that has value, much like diamonds - so holding a little of it isn't going to ruin you financially.

Now, if you think T-Bills are a better investment, go right ahead and do what this Nick guy says.

About Nick's logic: his is the classic approach of salesmen who want to mislead you. Feed you a whole bunch of truthful numbers and statistics, and then draw the entirely wrong conclusion. Or draw the conclusion he wants to put forward.

He's quite right about derivatives, M3, depression and all that. And then he derives the conclusion that we should believe in the government because believing in Wall Street is bad.

Why not go a step further and simply don't believe in any financial or monetary product that humans create? Why treat one group of people as crooks and not another? They're all crooks, if you ask me.

If Wall Street derivatives are a synthetic product with no intrinsic value, so is the USD. Some will tell you that so is gold.

Sure, but gold isn't made by man and has a stable stocks to flows ratio, keeping its relative scarcity or availability at more or less constant, whereas the creators of the USD can create an infinite supply of USD or reduce its supply to near zero in short order.

The choice comes down to what you'd rather trust - lying governments, lying brokers and their synthetic financial products or something not in human control.

Nick says that you could become rich when gold goes down in price. I agree. You could buy a whole lot more at a lower dollar price point.

Cool Head said...

Thank You for your astute analysis.
I had asked you the question as Anon@07:43.
As of now gold seems to a better bet than the dollar.Lets see how it goes. AS of now the technicals show a straight upward trend.

rajni sharma said...
This comment has been removed by the author.