Inflation ! a contributor to boom and bust cycles.

• Inflation !
  Inflation in India at 11% is at 13 year high. But this is normal with crude prices at $135 / barrel. And the global economy having had very excellent 4 years of growth from 2003 to 2007. But now the party seems to be coming to an end. ( read my earlier blog- Cinderella story!). As all previous bubbles in history, there is fundamental genuine demand to increase demand first and consequently lead to increase in prices – unprecedented boom in China , India & other emerging economies in this case leading to exponential increase in crude prices. The huge application potential of information technology leading to I.T. bubble of 2000. But then the upward movement seems to become an act of faith & is expected to go on forever. This is makes people greedy- someone somewhere has made huge money out of this boom and now everybody wants to do so. A crowd is built up, all willing to invest in the ever rising asset at overvalued prices, leading to irrational (very high) prices. But as has been rightly said if something can not go on forever then it won’t. What goes up must come down. All this huge global growth has been possible because of the low interest regime in all global economies till a few months back. Vice versa of this too has to apply. That is what is causing the present slowdown in global economy- the global increase in interest rates. A chain is as strong as its weakest link. And in business the weakest link is debt. And it is this weakest link that is breaking. And this is leading to the collapse of real estate market in U.S.A. & consequent collapse of financial sector. And now crude oil is definitely in bubble territory. People investing in crude oil futures in particular and commodities in particular better be wary.
  
  Emotions in human nature in general & equity markets in particular.
  Emotions 23 times stronger than logic.
  
  EMOTIONS-Fear, greed, hope, despair.
  
  Fear 3 times stronger than greed. That is why in equity markets, we see bigger down swings than up swings. In recent past Indian stock indices have stopped trading because of having hit a lower circuit filter. But this has not so far happened on the upmove of the indices.

Joke of the day: what makes a man think of candlelight dinner. A power

failure.

How to convert 25 paisa into Rs 23 crores!

The Growth Of Profits & Its Rate Of Growth Is The Key To Make Profits By Investing . This is the magic used by all great investors from Wareen Buffet- world's richest person, Peter Lynch, Philip Fischer. You too can do so. How? Please read on.....
In A Growing Business Compounding Comes In. Compounding Is Just Like Magic. Its Magic Is That 25 Paisa Compounded At 100% P.A . over Thirty Years Becomes ( Take A Guess)- A Whopping Rs 23 Crores! But In Real World 100% Compounding Is Not Possible..
l But The Moot Point Is That In Equity, The Investor Has The Growth Of The Business On His Side To Ensure That Even A 10-15% Compounded Profit Growth Of His Business Would Increase The Share Price Of His Company Which In Turn Would Give Him A Decent Return Over A Period Of Time Above 5 Years. See Data Below To Understand The Profound Impact Of Compounding

COMPOUNDING AND ITS VARIATION WITH RATE OF INTEREST AND TIME PERIOD INVOLVED : ( COMPOUNDING P.A.)
RS 1 LAKH @5.5% AFTER 5YEARS=RS1.3LAKH AND AFTER 10YEARS=RS1.71LAKH
RS 1 LAKH@10 % AFTER 5 YEARS =RS 1.61 LAKH AND AFTER 10YEARS=RS 2.59 LAKH

RS 1 LAKH @15%AFTER5 RS2.01LAKH AND AFTER 10 YEARS =RS4.05 LAKH

AMT AT END OF 5 YRS@15 % COMPOUNDING =1.53 AMOUNT AT END OF 5 YRS@5.5 % COMPOUNDING

AMT AT END OF 10 YRS@15 % COMPOUNDING = 2.37AMOUNT AT END OF 10 YRS@5.5 % COMPONDG

THIS ILLUSTRATES THE MAGIC OF COMPONDG. AT HIGHER RATES FOR LONGER PERIOD .

IS THERE ANY DATA TO INDICATE THAT IT PAYS TO INVEST IN EQUITIES ?

SENSEX IN 1979= 118 ( WOULD YOU BELEIVE THIS FIGURE!)

SENSEX IN 1999=5005, COMPOUNDED R.O.R.=20.6%

SENSEX IN 2007 =21000,COMPOUNDED R.O.R=28 %

Crude prices at record highs!

Crude prices at record highs!
What a difference a couple of years can make. In ‘Rip Wan Winkle’, the change that occurred in decades takes now just a few years. It is hard to believe that crude oil was selling at $10/ barrel in 2000- just 8 years back. The same is now $132 / barrel and rising fast( And to add salt to injury, the slowing global economies have to remember that the cost of production of one barrel of crude oil in Arab countries is $1 ). It seems like Armageddon. But this has happened before also. In the previous big oil shock of 1970’s after the Arab – Israel conflict, the Arab countries turned the crude oil tap off, angry as the they where over the role of western countries and US in particular for their support to Israel (Could history be repeating itself- first time as tragedy and second time as farce- and the Arab countries have again turned off the crude oil tap , angry as they must be over the on going war in Iraq & Afganistan ?). The previous high of crude oil was $ 33/ barrel in 1990’s. Then it fell to a low of $10/ barrel in 2000. A fall of more than 70% from its peak!
Where every body is talking of crude oil at $200/ barrel in a few months, I am willing to stick my neck out and predict that in about a few months to a year, crude should be around $40-$50/barrel.
Why? Firstly, the world economy is already slowing, with the world’s biggest economy
( it might not remain so for long in future & eventually has to be over taken by China )- USA is on verge of recession. Secondly, the central banks of some of the growth engines of global economy China & India are raising their bank rates thus slowing the economic growth & dampening crude oil demand. Thirdly, the record high prices are bound to bring massive additional supply to market. And the commodities prices seem to be in a bubble stage. Fourthly, high prices are bound to reduce consumer consumption and give a boost to alternative technologies to oil guzzling automobiles like hybrid cars are already a commercial reality. Last but not the least, policy makers all around the globe are in a panic, & when they start to panic markets stop to panic. Hmmm, let us see what happens. As someone rightly said, may you live in interesting times. And we certainly are doing so.

The importance of Grisham’s law- BAD MONEY PUSHES OUT GOOD MONEY!

The importance of Grisham’s law

Grisham’s law states that bad money pushes out good money. What in hell does this mean? In a bull market, greed is all prevalent & logic, common sense and rationality are hard to find. People are buying what is worth Rs 10 for Rs 20 thinking that there will come a bigger fool who will buy these already overvalued assets for even higher price. For some time, this does happen as the asset prices reach bubble level ( US & other global mkt. housing market’s phenomenal rise ). People who make their investment decision based on what an asset is worth find that the prices have risen to an irrational level. Hence they sell out. This is the good money ( why good money? because these investors will again invest when the bubble bursts, ASSETT PRICES FALL TO REALISTIC / UNDER VALUE LEVELS) and hence help stabilize the fall in asset prices). And hence the bad money ( why bad money? Because they further take the asset prices to even higher irrational levels and any small investor who now buys, loses his shirt when the asset prices collapse on bursting of bubble- I.T collapse in 2000) of irrational investors drives out the good money.

Impact of interest rates on assett prices

Macro economic factors affecting equity / other asset prices


Interest rates- are the most important Macro economic factor affecting asset prices. Even a one basis point change in interest rates affects equity prices. An increase in interest rates causes a decrease in asset prices and a decrease in interest has an opposite effect. This can be understood by the ongoing sub prime crisis in U.S.. The decreasing interest rates in U.S. in the Greenspan years from 2000 to 2003 ( for which now he is drawing a lot of flak ) when Fed interest hit a low of 1% fuelled an unsustainable boom in housing market in U.S. & housing & other asset classes globally. Then as the economy in U.S. as well the global economy came out of the slump caused by the dot com bubble burst of 2000 from 2003 onwards, Fed interest rates were increased to a high of 5.25% in 2007. This delt a death blow to the housing bubble in U.S., U.K. & other developed countries. A similar impact was on equities as well, especially the emerging market among them the so called BRIC countries. Suppose the interest rate is 5 % & a co. X has a share price of Rs 100 & an EPS of Rs. 5. then an owner of this share is getting a 5% return, the same as the debt investor- as just like water, returns tend to keep level . Suppose now the interest rates double ( in our case in the U.S. economy they increased over 5 times as stated above). Now since a debt investor is getting a 10% return, the equity investor return should match over time. This can happen in two ways- first, the share prices falls by 50% to Rs 50 or the EPS doubles to Rs 10. The first scenario is what happens in case of most cos. as it is very difficult to increase earnings in an increasing interest rate scenario. Hence the sub prime crisis & falling equity prices.

Q.E.D.
Pl. refer to earlier blog Cinderalla story.
To be continued.