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How To Counter Inflation

This document discusses strategies for countering inflation. It summarizes the views of several experts: Marc Faber advises buying gold to protect from inflation, as the Federal Reserve will not be able to control it due to high government debt. A Moody's whistleblower alleges that the credit ratings agency fudged ratings to generate more revenue. The document also discusses India's high fiscal deficit and low primary education rates compared to other countries.

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559 views

How To Counter Inflation

This document discusses strategies for countering inflation. It summarizes the views of several experts: Marc Faber advises buying gold to protect from inflation, as the Federal Reserve will not be able to control it due to high government debt. A Moody's whistleblower alleges that the credit ratings agency fudged ratings to generate more revenue. The document also discusses India's high fiscal deficit and low primary education rates compared to other countries.

Uploaded by

Jogender
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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What's your strategy to counter inflation?

In this issue:

» Buy gold to protect yourself from inflation, says Marc Faber

» Deficit figures concern Pranab Mukherjee

» Credit ratings are fudged, says Moody's whistleblower

» Mutual fund intermediaries beware

» ...and more!

The US Federal Reserve has said that although economic activity is picking
up, it plans to keep interest rates close to zero for an extended time. This
is after US interest rates have fallen steadily from a high of 5.25% since
September 2007. Central banks around the world have resorted to a soft
interest rate regime to jump start their economies that went into a shock
from the global financial meltdown.

We wonder if the prolonged availability of easy money will extract a really


steep price from us in the days to come. The longer such easy money is
available, the greater are the chances that it will find its way into several
asset classes and create bubbles there. It is most likely to also cause
runaway inflation i.e. devalue the purchasing power of currency. In fact,
Warren Buffett has recently sounded a warning that the US risks
becoming a banana republic if the monetary medicine is administered for
a prolonged period.
In fact, commodity guru Marc Faber advises investors not to be fooled by
the Fed's assurances that it will keep inflation in check. It simply cannot,
given the pressure to print money due to hue huge debt sitting on its
books. Further, Mr. Faber has added that it is very important for
everyone to own some gold because the US government will make the
dollar useless. Although commodities in general do well in times of
runaway inflation, Gold is traditionally the most favoured anti-inflation
play. In our opinion, businesses with strong franchises will also be able to
counter inflation. Those rare businesses that have the ability to raise
prices without losing volumes.

01:07 Chart of the day

If one were to analyse the fundamentals of a country, one of the key


areas would have to be the level and quality of education that its citizens
receive. While India boasts of some great institutions of higher learning,
its primary education leaves a lot to be desired. We are not even talking
about the quality of the primary education, which is another topic. The
reach of primary education in India remains poor. Today's chart
shows the nations with most number of children who
should be attending school, but are not. India has the dubious
distinction of securing the second spot in the list. And it is not merely
because India is a populous country. After all, the one country with a
greater population than ours and also rapidly marching out of its
'emerging market' status – China – is conspicuous by its absence.
Interestingly, the most affluent country in the world, the US, also has a
tough time putting all its children in school. In our opinion, this is one
area that needs urgent attention, if India has to fulfill its dream
of becoming an
economic superpower.

Note: Latest data as of 2006. Ethiopia and US as of 2007

Source: UNESCO institute of statistics, August 2009.

02:06

Although the hopes of India clocking a better GDP growth rate (6%) in
FY10 as compared to earlier projections gather momentum, burgeoning
fiscal deficit remains the bone of contention. India's Finance Minister Mr.
Pranab Mukherjee has recently cited his concerns with regard to
controlling the deficit figures. According to him, the drought condition
coupled with the financial crisis has only added pressure on the
government budget. The government has stepped up its development
outlay to the extent of 39% this year primarily financed through
borrowed resources. Of this, Rs 2.8 bn was given out through stimulus
packages. If the Centre's tax collections are not adequate to fill in the gap,
the year's fiscal deficit may even cross 11% of GDP. It may be noted that
the government has set a target of bringing the fiscal deficit down to 5%
of the GDP by 2011 and 4% of the GDP by 2012. We believe that these
are very ambitious targets in the current scenario.
02:48

With SEBI planning to bring in transparency in the way mutual funds


operate, investors can breathe a sigh of relief. As reported in a leading
business daily, the SEBI has issued a code of conduct for intermediaries,
including distributors of mutual funds. According to it, asset management
companies (AMCs) have been told not to deal with non-compliant
intermediaries and should report such cases to the Association of Mutual
Funds in India (AMFI) and SEBI. This follows on the heels of the directive
in June this year which called for transparency in payment of commission
and the load structure and thereby mandating distributors to disclose all
commissions. Amongst other things the code proposes to check
malpractices and ask the distributors not to assure returns to clients. We
believe that given how certain transactions in the mutual fund industry
had become murky, it had become necessary to impose regulations so
that investors' interests were protected. While it was high time that the
SEBI stepped in to rally around investors, we believe the key is how the
code is implemented.

03:23

Recently, in a study of the compensation received by the CEOs of the


world's largest banks in 2008, it was found that out of the 5 highest
figures, 4 were from the US. One might think that it is not possible to
recruit CEOs without hefty compensations. Not quite. The CEO of world
largest bank, Industrial and Commercial Bank of China, received US$ 0.2
m in 2008. The CEOs of Commonwealth Bank of Australia and HSBC, UK
received US$ 8 m and US$ 3 m respectively. A far cry from US$ 20 m
package at JP Morgan Chase and US$ 14 m at Wells Fargo!

04:00

At times, it takes a whistle blower to speak the truth! A recently


suspended managing director of credit rating major Moody's, Eric
Kolchinsky, has alleged that the company has been fudging credit ratings
in order to generate more revenues. He says Moody's methodologies of
rating complex securities were inadequate in realistically reporting the
underlying risk and that the analysts were bullied to award ratings in
favor of revenues. This revelation comes at a time when US regulators are
mulling over regulating credit rating agencies, which played a part in
causing the global meltdown by conferring investment grade rating to
junk securities. In our opinion, it is only fair that rating agencies took a
thorough look at the conflict of interest in the credit ratings business.

04:29

Meanwhile, after yesterday's nosedive, the BSE-Sensex opened on a


negative note today. Despite attempts to recoup the losses during the
day, the index remained in the red. At the time of writing the BSE-Sensex
was trading 103 points below the dotted line. However, the BSE Small-cap
index was trading marginally in the positive. As for global markets, Asia
ended the day on a mixed note, while the European markets are currently
trading in the red.

04:48 Today's investing mantra


"Warren (Buffett) and I have skills that could easily be taught to other
people… But Warren and I are better at tuning out the standard
stupidities. We've left a lot of more talented and diligent people in the
dust, just by working hard at eliminating standard error." - Charles
Munger

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