India Inc. is Poised to Fall
The Sensex is poised to drop by another 15 % to 13500 in the next 45-50 days and will bounce back by mid-October. This is because of the following multiple events:
1. The nation-wide anti-corruption movement led by Anna Hazare has put the Government of India in a very cautious mode. Too many scandals for GOI to deal with. No major decisions will be taken till the politicians sort out their problems.
This has a direct impact on the energy, infrastructure and real estate sectors - all typical growth sectors.
2. The global slowdown is already affecting the software, BPO and IT industry.
On account of 1 & 2 above, the Foreign Financial Institutions (FIIs) who dominate the Indian stock market are exiting from India at a record pace.
This down will last till the last week mid October and the markets will bounce back by then (around Diwali which is a major festival in India). In short, the next 3-6 months will be a rocky ride for investors in India. The longer term story on India (3-5 years) is still intact and investors who invest for longer periods should expect returns of at least 18 % per annum.
Silicon Valley - Bouncing Back
No doubt about it - Silicon Valley is bouncing back. The creative energy is fostering a new wave of start-ups focused in areas such as cloud computing, clean energy and biotech. Restaurants are crowded, and most importantly people are spending again. This is the first wave of a resurgence and will herald in a new generation of entrepreneurs. American ingenuity and resilience coupled with hard work is going to show tremendous results over the next four years.
Where is the Money?
I guess if you are like me you are tired of seeing these financial advisors deal out advice on money saving, investing etc. because none, I repeat, none of it is realistic. Have you ever seen any advisor tell you that include a job loss in your plan, include years of no paychecks etc. No - they simply start with a base income and tell you how much you need to save per year to get to your $ 1 M. No realities, like quitting a job to take care of the family, etc. etc.
Outlined below is a scenario which captures one scenario. Depending on the response to my blog I shall add some more. The idea is to let people know that it is not their fault that they are behind in the race, it is just that the race itself is difficult and needs a lot of focus for anyone to come ahead and for success, luck is a critical ingredient.
Tom graduates with a Bachelor’s in Business and starts working at the age of 22 for a starting annual salary of $ 38000. He has a student loan of $ 22000 to pay off. He is practical and drives an old car (that runs well) that he bought in his final year of college. He saves a total of $ 18000 after three years, and has brought down his loan amount to $ 18000. His salary has increased after three years to $ 44000 per year. His car has given up and he buys a decent used car for $ 6000. That leaves him with a saving of $ 12000 at the age of 25. By the time he is 30 he is married, has a wife (Julia) and a child and has a savings of $ 15000 and a credit card debt of $ 3000. His wife also works for three of these five years before deciding to take a break and be with the child, Her average income in these five years is $ 28000 and she has a saving of $ 8000 with no separate credit card debt.
This means that at the age of 30, Tom and Julia have a total savings of $ 23000 and a credit card debt of $ 3000. They start saving for a home – the plan is to own a home by the time Tom becomes 35. Tom has switched jobs etc. and by the time he is 35 he draws an annual salary of $ 50000. Julia is also working and again has worked for three of the five years drawing an average compensation of $ 35000. Their savings have grown from $ 23000 to $ 58000 (including 401(1) k, investment returns etc.) and his student loan is down to $ 3000 by the time Tom is 35. They buy a $ 300000 home with a 10% down and take a PMI. By the time Tom is 36 his family savings are more like $ 25000 (of which $ 20000 is in their 401(k)s).
This is when crisis hits. Tom is laid off – the market collapses, his house price has fallen below $ 250000 – their combined 401(k) is reduced to $ 7000, their credit card debt has gone to $ 5000, the student loan is $ 2500 and they have to survive on Tom’s unemployment check and Julia’s income. A year goes by and Tom has not found an opening. He has enrolled in courses to look into other areas. He is also considering business. At 37, he is at a cross-road in life.
Tell me folks, where is the money? And what on earth could Tom and Julia have done differently?
NASSCOM CHAIRMAN IS WRONG
The recent news about US President Obama saying that the loopholes in the prevailing tax laws will be plugged, has sparked attention in the Indian press – of particular interest, was his saying that it was imperative to create jobs in the US (for eg. in Buffalo, New York) as opposed to Bangalore, India. The response by the NASSCOM Chairman, Mr. Pramod Bhasin, is perplexing and in my personal opinion, totally flawed and wrong. He says that Indian companies will not be severely impacted by the President Obama plan.
To begin with, this is a very quick off- the- cuff response by the NASSCOM Chairman to an announcement by the US President. As a US citizen and having been the co-founder of two Silicon Valley companies, I do understand the industry from a US perspective. Mr. Bhasin’s pointing out that this will affect US companies is absolutely right – nobody questions that – that is very clear from President Obama’s message.
What is not clear is how once can conclusively say that there will not be any impact of this on Indian companies – the real answer is ‘Nobody Knows’ and any other answer offered by the NASSCOM Chairman is ‘wrong’ in my book. It is clear though that if this becomes law, there could possibly be huge layoffs among the CISCOs, Microsoft, IBM, Oracle and Intel employees based in India. That could boomerang and possibly affect the other Indian IT companies – for Mr. Bhasin to say that none of that will happen is definitely premature and hasty.
This is a baby step in the US plan for re-emergence and it will be poetic justice of sorts if the IT Czars of India (Nandan, Premji and Co.) come up with a plan to help put America back on its feet. A model could be developed (and this is what NASSCOM as an industry body should look into) wherein a certain percentage of all positions are guaranteed to US citizens based in the United States. The India-based BPO and IT companies should unleash a BUILD AMERICA plan that targets all the University towns in the United States and assures jobs to the money-starved students – for instance, a university town like Arcata, California might have at least 300-500 students who could staff the BPO offices and then, if the company decides to expand to India creating another 3000-odd jobs in India nobody will begrudge them – because there is a win-win element in the model.
I am confident that the larger IT companies are much more sanguine about this than the NASSCOM Chairman and are probably working furiously at developing win-win models for the future. It is the smaller IT companies that could become vulnerable and it is for them that NASSCOM should investigate options, rather than brushing away the issue.
In my mind, this is a clarion call to Indian IT companies – the party is over – it is time that they also participate in rebuilding the United States from a US perspective by adopting a more pragmatic approach that will ensure long term sustainability for all stakeholders.
Fed For Thought!
This week’s contrarian article (on 10/4/2005) by Bill Fleckenstein posted on http://moneycentral.msn.com titled ‘Greenspan: The worst Fed chief ever’ brought to mind the recent book brought out by the economic sage from Dallas Dr. Ravi Batra (http://www.ravibatra.com/). His book titled ‘ Greenspan’s Fraud’ deals in great detail on the same subject i.e. the mistakes made by Alan Greenspan. Both of these address the problems brought about by actions of the Fed. Likewise. I am sure that there are many others who could defend the actions of the Fed in an equally effective way. What I would like to see, however, is a list of 5-10 things the Fed can do to turn things around – this, to me, is the best approach and I urge all readers to ask all their favourite money analysts and, talk show hosts (such as Bob Brinker on Moneytalk etc.) for their laundry list of action items for the Fed. These if compiled and published online would be useful for the FED and give them added perspectives. Meanwhile, if some such resource has already been compiled I would appreciate your directing me to the same.
Corporate Responsibility in China – Is there such a thing!
Talking of coincidences – just on the day my last blog (on Can China Survive? Or will China Fail?) was posted, it turns out that the Washington Post had an article titled ‘Obeying Orders’ a piece that condemned Yahoo! for the help provided to the Chinese government on the journalist story – it appears as though Reporters Without Borders was among the first who cracked the story on the Yahoo! episode – for the unaware, the Chinese government approached Yahoo! in China and asked for information on a Chinese journalist who had sent out an e-mail to a website about the attempt made by the Chinese government to manipulate the media – Yahoo! gave in to the government request for the details on the journalist who was subsequently arrested. The Washington Post has condemned the Yahoo action, this has been followed by Tina Rosenberg of the New York Times writing in the International Herald Tribune and some neat articles in the San Francisco Chronicle on this and related subjects.
Ms. Rosenberg captures the situation very succinctly when she says and I quote ‘But let's not pretend that foreign investment will make China a democracy. That argument was born out of self-interest. Because China is too lucrative a market to resist, Western businessmen have ended up endorsing the party line through their silence - or worse. They are not molding China; China is molding them’.
The situation with respect to freedom of speech gets further amplified when you read that usage of the Chinese version of Skype is blocked in China – all this and some more articles on Chinese censorship are detailed at http://rconversation.blogs.com/rconversation/.
Which leads me to believe that Corporate Responsibility as we know it is non-existent in China – think about it, folks – investing in China could end up becoming a one-way street and sooner or later a No Entry sign would be placed preventing western 'encroachment'. The Washington Post article of September 18 says and I quote ‘if, in fact, American companies are helping China become more authoritarian, more hostile and more of an obstacle to U.S. goals of democracy promotion around the world -- then it is time to rethink the rules under which they operate’.
Opinions, thoughts, ideas on this and other blogs at this site are most welcome – all prospective bloggers are encouraged to blog on – you will quite often find ads at the bottom of this blogsite that tell you how to get into blogging – remember, if I can, U can!
Goodday!
Can China Survive? Or will China Fail?
This seems to be completely at odds with the ‘real’ world as we see it – articles all over are beating the Chinese (and to a lesser extent the Indian) bandwagon – urging investors from Silicon Valley, New York, London and elsewhere to buy into China. Is this reminiscent of the days when the Soviet Union and the United States were considered to be on a par wrt arms supremacy? And what happened – the Soviet Union as we knew it collapsed in 1991 just a few years after the fall of the Berlin wall. Points to ponder, folks! Can China Survive or will China Fail?
While I am no specialist in international collapses, I would say that there was an exposure to free market systems that preceded both these collapses – I see the same situation in China today – the native Chinese have tasted ‘capitalism’ – and with Hong Kong in their portfolio, the stresses and strains are bound to grow - I believe in the span of a decade they will want a full course ‘meal’ – and ‘democracy’ could very well become the ‘mantra of tomorrow’ in China - the important thing is not whether China as we know it today survives or not – but how will the United States deal with such a crisis – the triggering event could be bank failures and the real estate meltdown in China (akin to what happened in Japan in the not-so-distant past) – we have to remember that when 1 billion people begin to taste something, something has to give. The talented folks at the Economist, Wall Street, and the Fed should plan for such an event because one never knows – meanwhile, for the common investor I suggest that when investing in China, proceed with caution - as they say - 'history repeats itself' - a dose of world history re-visited might save some hard-earned dollars – Goodday!
