US Trade deficit

It took only one month for record trade-deficit of the month of September to be overtaken by another record trade deficit in October. US trade deficit jumps 4.4% in one month to end at a record high of $68.89 Billion for the month of October. More about this here.

Investment Boom in India

This week has been very good for Indian economy. Close on the heels of Microsoft announcing $1.7 Billion dollars investment in the country, Intel has announced a $1 Billion plan in India expanding their operations siginifcantly. Cisco has also announced $1 billion investment in India. It is not the tech sector only which has seen unveiling of such grand plans. India's booming stock market has given risen to multi billion dollar opportunities for global investment banks. DSP Merril Lynch has announced significant investments and other top-tier investment banks are also close to announcing their plans. It is a boom time for Indian , if only there is some investment in manufacturing sector as well then this year would be a watershed year for indian economy.

Year of the Dollar

America's current account deficit hit a record $66.10 billion for the month of September, a record which is sure to be broken in coming months. America, world's largest and strongest economy is also one of the world's most heavily indebted one! If it were any other country IMF would surely have gone to town for a bailout mission. Economic convention may suggest given such high deficits US dollar should weaken, a convention even Warren Buffet believes enough to have a large bet on dollar's decline. However, this being america, home of capitalism conventional wisdom does not apply, not yet atleast! The greenback is up 13% this year against Euro and Yen. The much talked about chinese yuan revaluation has resulted in a gigantic appreciation of yuan ... by 1%. So, what is going on with the US economy? Today's WSJ has this to say-

The Dollar remains attractive to investors for a few reasons, starting with interest rates. The federal reserve has raised the price of credit for 12 consecutive meetings, cranking up short rates to 4%. Meanwhile, the Eurpoean Central Bank, supplying euros to a sluggish Continent, is only now thinking of budging from its historic low of 2%, set in June 2003. If the dollar yields twice as much as the Euro, thats an easy suitor to pick from the crowd.

Similar things are going on Japan, where interest rates are at "extremely low levels" to keep fueling the recent growth momentum.

The Journal further states-

The relative economic health of nations of course also influences currency demand. The US economy has continued to power along while most of Asia is gradually slowing and Europe bumps along. Most economists expect America to expand at around 3.5% rate in the fourth quarter and into next year-nothing to sniff at. Employment is rising. So far consumer spending remains strong, despite the slow down in housing. This isn't a picture of a country in distress.

I guess it is safe to assume that Warren Buffet is not a happy man these days.

Smart Economist

Came across this really interesting assertion

Q : Why would a smart economist believe in God?

A: Even though existence of God is highly unlikely, there is still a small probability that a God exists. Disbelief in God contains a risk (even though a small one) of spending your after-life in hell for eternity. Since, there is nothing to lose in this life by believing in God, the risk of spending all your after-life in hell can be considerably reduced if one simply decides to believe in God. Thus, a smart person should certainly believe in God.

Whither GM?

World's biggest automaker , General Motors, seems to have hit bad time, big time. Close on the heels of its mounting struggles to remain profitable come the accounting problems which has sent its stock-price plunging even further. In a major restructuring move today, CEO Rick Wagonor, has announced that GM will cut 30,000 jobs over next three years , 9% of its total global workforce. GM's list of problems is long. A bloated workforce, huge retirement and pension costs, decline of its profit-making SUV unit because of rising fuel prices, intense competition from Japanese auto makers particularly Toyota, bankruptcy of its spin-off Delphi and most recently its accounting woes. No wonder GM's credit is in the junkyard and markets are rife with speculations of GM filing for bankruptcy in a year or two. If that happens that will be a huge blow to this once icon of american capitalism. In fairness though, all is not completely lost, GM's insurance arm GMAC is still one of the most profitable companies around and GM's cash hoard ($ 19 Billion) is more than its market-cap ($13 billion). GM can still bounce back because of its solid financials and if the management shows some foresight.

At a big picture level, GM's problems are an indicative of troubles big companies face when they grow just too big and are not nimble enough to respond to changing market forces. GM's and infact American auto industry's problems are reminiscent of Steel industry's woes and more recently the airline companies . The story is familiar, GM has been unable to compete in a globalized world where it has faced intense competition from smaller but much more efficient and innovative foreign companies. Its base has eroded siginificantly even on its home-turf in the US where Toyota has gained significant market share at the cost of GM and Ford. GM completely lost out in the passenger car-market and is far away from responding to Toyota's hybrid challenge. GM's flagship unit SUV has fallen on hard times as rising fuel prices have slowed the sales of gas-guzzling behemoths. In today's globalized world, big companies have found to their dismay that they are unable to compete in terms of price with smaller companies and now are even falling behind in quality. In an intensive competitive globalized world, bigger is not better, infact it may be worse.

Google a $400 Gorilla!

Google has crossed another milestone, its share price is now past the magic (not to mention stratospheric) barrier of $400. Today's Wall Street Journal has this to say-

" Type in the world Mania in Google's search engine and you should see a link to Google Inc somewhere"

Google's stock price just knows no bounds. A year ago it debuted with a price tag of $85 and has jumped more than 4-folds miniting millionaires and billionaires along the way. With the crossing of $400 price tag, Google is one of the biggest companies on earth with a market cap a staggering $112 Billion for this internet upstart, more than Coca-Cola, Cisco and Time-Warner . Its P/E ratio of 89(!!!) makes it one of the most expensive companies to buy. Compare that with Yahoo's P/E of 38 and Microsoft's 23. Inspite of all this, there is no dearth of analysts who consider Google a buy even at this outer space price. Wonder what will happen if Google misses earning expectations of next quarter by a whisker or better still does not top earning expectations as much as expected or if Microsoft and Yahoo start making a dent in its core search business, the stock may come tumbling down a couple of hundred bucks.

Good going for US corporate bonds

Today's Wall Street Journal has this interesting news item. As Federal Reserve is tightening the monetary policy ,thus increasing the interest rates on treasury securities, the foreign investors are shunning US treasuries and embracing US corporate bonds. The buying of US corporate bonds by foreign investors is at record level this year. US corporations are enjoying the benefits as such enthusiasm of foreigners is keeping their borrowing costs low , increasing their profitability. It is particularly surprising that Japan has purchased a lot of those corporate bonds when there is no dearth of opportunities in Japan's booming market. Is this another evidence of the theory that it is a global savings glut which has created huge US current account deficit not the profligacy of US government?

The New Fed

I know this post is a little stale as Ben Barnanke has been chosen to succeed Alan Greenspan as Fed chariman for quite some time now. However, since it is only today that I have started this blog and the appointment of Gentle Ben is the most significant economic news of last one month, hence I would still like to comment on it . Ben Bernanke is widely considered to be one of the finest monetary economist of his generation. His appointment was widely expected and it is no secret that he was Wall Street's favourite to succeed the old oracle. The Dow index greeted his appointment with a 170 point salute. Bernanke has wide respect and renown in the academic circles for his intellect & erudition, however his skills in the real world of policy making are relatively untested. It was only in 2002 that he was appointed in the Federal Reserve as one of the board members. He must have done really well to earn the trust of Bush and Greenspan, who had little hesitation on appointing him the "second most powerful man" in the world. Still 3 years is very little experience for such a high profile and responsible job and his early days on the job will be watched with great interest. Even before the official taking over as the chairman Bernanke's backing of inflation-targeting, an idea which requires Federal Reserve to publicly state the inflation they would want to see in the economy, has raged debate in the economic circles. Greenspan is well known to be against this idea as according to him it reduces Fed's flexibility in responding to a crisis or unforeseen situation. Given that Greenspan's Fed has managed the economy so well in past 18 years, any departure from his legacy is sure to invite widespread criticism, after-all why fix something which ain't broke. The only problem with this argument is that almost all of Greenspan's legacy is not inheritable. Greenspan is famous for responding to situations from a gut-level or intuition or divine intervention, whatever one may call it, which can leave other staff members perplexed. According to reports, many times he does not follow the plain economic data , but interprets the data in his own unique way and more often than not comes up with the right response. The most famous example of this approach was when Greenspan refused to raise rates in 1996-97 when Information Technology was driving an unprecendented productivity boom in the world economy creating an economic boom of 1996-1999. Bernanke has sought to remove this reliance on one man's unique talents in something as important as economic policy making and bring more systematic approach to this imporant job. It will be very interesting to see how far Bernanke succeeds in his plans.