Cricket let you dance; so with Financial Markets!

Generally I refrain from writing on issues not related to finance, but cricket is no longer unlinked to financial world. The industry bets high amount of money in ethical and unethical manners which helps both ways. After making a historic win over Men in Green, Men in Blue finally conquered the excitement and gifted a beautiful gift to all Indians who stood still on Mar 30, 2011 from their regular work. One Billion plus prayers worked for us. Now the focus shifts to India vs Sri Lanka. The online domains are already filled with slogans favoring India like Ram Sena on its way to conquer Ravan Sena, Lanka. Both the teams are at their best; India has to work on its negatives. It is just few hours away from 1983 historic day, after which we could not witness.

Out of these hopes, the question arises – are there any relationships between cricket and financial world? What are the best chances that India would win? Exactly 28 years back i.e. in 1983, all the days and dates match with those of 2011. So, we have a strong chance we would repeat the history. Also, in 1983, the current finance minister Shri Pranab Mukherjee was the then finance minister under then Prime Minister Indira Gandhi. Though there does not emerge any correlations on these happenings, superstitions and astrological theories have always surrounded the game of cricket. Also, the current networking age or the age of Twitters, Facebook or Orkut, the positive correlations emerge like a rising sun in the east.

Cricket is considered as a religion in Indian sub-continent which boasts of world’s major population. Luckily, the ICC World Cup 2011 would have remained in this continent even if we had lost the match against Pakistan. Examining the relationships between Cricket and Stock Market, the events suggest that large sporting events do affect the sentiments of viewers which ultimately become investors. Depending upon their mood swings, stock prices move through crests and troughs.  Mishra and Smith (2010) have already shown that there is an asymmetric relationship between the performance of the Indian Cricket team and stock returns on the Indian Stock Market. While a win by the Indian cricket team has no statistically significant upward impact on stock market returns, a loss generates a significant downward movement in the stock market. When Sachin Tendulker, India's most popular cricketer plays, the size of the downward movement in returns is larger. However, in last few trading days, when the cricket fever is on, markets have moved upwards. Though there are reasons, the continuous wins support the correlations. This time, it has worked positively.

Even Aiyar and Ramcharan (2010) suggest that it is lucky for international cricketers to play their debut Test (international) match at home.

A good start may have a persistent, positive impact in other fields, too. Nonetheless, selection committees appear to systematically penalize both bowlers and batsmen for the misfortune of debuting abroad—and systematically penalize bowlers more than batsmen. It would therefore seem likely that similar biases are widespread among employers of all kinds, for whom performance metrics are more ambiguous, differences in initial conditions harder to judge, and the decision itself unlikely to be second-guessed by millions of opinionated fans around the globe.

Whatever the reasons be, Indians hype the situation beyond the limits and looks into all permutations and combinations. Why? The betting is on, boss! A large part of Indian financial market is conceptually linked to bettors. Let India play its natural game! Let them give 100% to win 110 crores hearts. Also, we stand united.

Enjoy the game!

Let the Cricket win! Let India win!

Probably by this time, Indians must have reworked their schedules for the deadliest fight between India and Pakistan; mind it – it is not a battle ground war but the craziness has gone beyond it, the craziness for Cricket. Welcome to the Semi-Final Cricket match of ICC world Cup 2011 between India and Pakistan. Until now, fans across the countries have started exchanging verbal feuds especially women of both countries. And everyone knows – when women fight, they forget the conclusions. All the social-networking sites have been fired with online campaigns in favor of India. Probably everyone is eyeing this world cup as the last world cup for cricket’s own god Sachin R. Tendulkar.

But are we just concerned to win this semi-final? Is lifting the World Cup not equally important? And the craziness has gone beyond limits; truly said India sleeps Cricket, speaks Cricket, drink Cricket et al.

Shaila Baghail, a cricket enthusiast rather an India enthusiast, an ex-navy officer, an entrepreneur and my Aerobics trainer walked down from Navy Nagar to Siddhivinayak Temple, covering a crazy distance of 19 km in scorching heat of Mumbai to offer prayers at the temple for India’s win in this crucial hotheaded fight. Should we call her a crazy fan or did she pour her blessings and mind to India wholeheartedly? The media reports that crazy fans have been lining through the days and night in Mohali outside the stadium to get tickets despite the officials claiming that they have been sold out. People luckier to get few tickets have been black-marketing after adding a single zero or double zeroes on the actual price of ticket. So, a ticket worth Rs. 5,000 has been selling at Rs. 50,000, even costlier than Olympics. India Inc. has gone beyond their rule books; while many companies have relaxed their employees to leave early in 2^nd half, some have arranged big-screen in their auditoriums. 

Today, the match got politically involved too after the Pakistan PM accepted Indian counterpart invitation to watch this fierce fighting live at Mohali, very near to Lahore, once a part of India pre-1947.

Let the craziness remain! All Indians would owe to their team if India manages to win. But the question arises – are we close to ICC World Cup 2011, a feat unachieved since 1983. Let the spirit of game prevail!

Innovation reaches to Indian Investors – Try MOSt Shares NASDAQ-100 ETF

Imagine some of the most innovative companies on the globe; probably you would name Google, Apple, Ebay, Amazon or others etc. They have presence almost all over the globe. Now, if you want to buy these companies, you need to find an Indian broker who offers the facility to buy foreign shares. Probably there are very few brokers in India who offer to buy foreign shares; and that too comes at high cost ranging 1 - 4 per cent. Moreover, your investment will fall under the foreign investment limit of        $ 2,00,000. So, as an individual, you can’t invest more than US $ 2,00,000.

Here come your solutions – Invest in MOSt Shares NASDAQ-100 ETF

Motilal Oswal Mutual Fund, after trying the domestic innovations in the form of M50 (a large cap oriented fund) and M100 (a mid cap oriented fund) – these funds got wide acceptance from investors – launched MOSt Shares NASDAQ-100 ETF, India’s first US Equity ETF providing exposure to US and International firms on NASDAQ Index.

Why MOSt Shares N100?

·         The fund provides unique access to World’s most innovative firms; all non-financials including some market leaders like Google, Apple, Cisco, Baidu and many more.

·         It is Rupee dominated investment and does not fall under the foreign investment cap of US $ 200,000.

·         It is a passive investing with no discretion to Fund Manager; that too comes at a lower cost (relatively at 1 per cent).

·         Very low-correlation of NASDAQ-100 with India’s major indices – around 0.29 with Sensex and Nifty – thus, providing the ideal diversification option for domestic investors.

·         The NASDAQ-100 has a healthy mix of all sectors – Technology, Consumer Services, Health Care, Industrials, Telecommunications, Consumer Goods, Oil & Gas and Basic Materials – with around 60 per cent of holdings falling under Technology.

·         The NFO being treated as Other than Equity Product (since the investment is made outside India) will offer Double Indexation Benefit as the AMC claims that the allotment would happen before March 31, 2011.

Why NASDAQ-100 Index?

·         No doubt NASDAQ-100 Index® (NDX) is one of the widely watched indices in the world. It includes 100 of the largest domestic and international non-financial securities listed on The NASDAQ Stock Market based on market capitalization.

·         NASDAQ-100 comprises the A (Apple) to Y (Yahoo) of innovation. Comparatively, the index has sound fundamentals, low valuation, low correlation with Indian markets and global spread of innovation.

Performance Analysis (NASDAQ-100 vs Nifty)

One can suspect why an investor needs to diversify beyond India if he is getting better returns in India only. It is imperative to state that the decoupling story no longer holds true in India vis-à-vis to developed economies. However, the low correlation of NASDAQ-100 against major Indian indices makes a strong case on the performance of NASDAQ-100. The long term growth story of NASDAQ-100 is still intact as relevant from the historical performance of NASDAQ-100 vs Nifty.

While in 1-year and 3-years category, NASDQ-100 has beaten Nifty by good margin, in other categories, it lagged Nifty. However, in 15-years category, (In India, hardly any investor keeps his money locked for 15 years), the NASDAQ-100 has bitten Nifty by almost 300bps.

Why MOSt Shares N100 at this juncture?

Most emerging markets have dramatically come out of the global financial crisis since the fall of Lehman Brothers at faster pace in comparison to its developed counterparts; however, the inflationary pressure kept on building too, thanks to hike in commodities’ prices around the globe, supply-side issues including demand related factors. Also, there had been geo-political tensions arising from Tunisia spreading to Egypt, then Libya and now Bahrain. The natural catastrophe in Japan colliding with the man-made catastrophe (Nuclear Plants blast and leakage) has further worsened the situation. The global crude prices have gone beyond US $ 111 per barrel and it is estimated if the similar trends continue, it can touch US $ 200 per barrel.

Moreover, the developed countries followed the Tortoise race in ‘Hare and Tortoise’ race and have started recovering from the financial crisis recently. They have been showing signs of increased employment, higher productivity and increasing economic growth. So, in a nutshell, the United States is expected to re-emerge as an engine driving global growth.

Words of Caution

Diversification is the key to investors’ portfolio to minimize the losses and the N100 fits in due to low correlations with Indian indices. However, any uneven and significant movement of rupee-dollar exchange rate against can have a bearing on returns. Also, in the long run, Indian equities may outperform US equities as the strong domestic consumption story still remains intact.

Happy Investing!

Inflows to Equity continued; total inflows upped by Rs. 25,757 cr

The growth saga in Equity continues with a net inflow in Equity categories – Equity, ELSS and Balanced. The Equity category saw a net inflow of Rs. 2,495 crore, the highest inflow since July 2009. This positive figure is also for the third time in a row month-wise. However, the net assets of Equity dwindled due to fall in broader markets and outflows of foreign ‘hot moneys’. While the FIIs were the net sellers to the tune of Rs. 4,584 crore in Equity, Mutual Funds were the net investors to the tune of Rs. 1,477 crore. In totality, the Equity AUM nosedived to Rs. 1.59 lakh crore in Feb 2011 from Rs. 1.65 lakh crore in Jan 2011.

Total AUM also upped

The total industry AUM also rose to Rs. 7,07,412 crore in Feb 2011 from Rs. 6,91,080 crore in Jan 2011, a gain of 2.36 per cent. Also the total inflows were Rs. 25,757 crore in Feb 2011. The industry witnessed a strong inflow in Income Funds specially closed ended FMPs which saw 65 NFOs collecting a total sum of Rs. 17,232 crore in Feb 2011. The banks also upped its investment in Mutual Fund instruments predominantly in Income Funds and Liquid/Money Market Funds which saw inflows of Rs. 13,708 crore and Rs. 8,770 crore during the month. As on Feb 11, 2011, the banks’ combined investment reached to Rs. 95,018 crore compared to Rs. 13,483 crore in Dec 31, 2010.

New FMPs continued pouring in

The high interest rate scenario and tight liquidity in the financial system prompted Mutual Fund houses to launch FMPs which have become investors’ favorites. The tight liquidity has sent the CD/CP rates haywire crossing 10 per cent. Moreover, banks have also been building its balance sheets through subscription in Certificate of Deposits (CDs) as the financial year closes in. During the month, a total of 65 FMPs and Hybrids Funds were launched.

Other categories too saw inflows

The other equity categories such as ELSS, Balanced Funds and Other ETFs saw inflows to the tune of Rs. Rs. 348 crore, Rs. 216 crore and Rs. 480 crore respectively. The Gold ETF category also witnessed its successive positive inflows to the tune of Rs. 25 crore; lower than the last month figure of Rs. 125 crore. However, the gilt fund category and FOF investing overseas saw outflows to the tune of Rs. 271 crore and Rs. 14 crore respectively.

New Funds enter into industry

A total of 5 funds came into existence in open end category with 3 funds in Income category and 2 funds in Equity category. In close-ended category, 65 funds were launched in Feb 2011 which mostly consisted of FMPs and Hybrid Funds.

- Happy Investing!

Open letter to Shri O P Bhatt, Chairman, State Bank of India

Dear Mr. O P Bhatt, Chairman, SBI

I admire you as the great democratic runner of India’s oldest banking group, the State Bank of India which takes pride in serving its citizens during many disasters, wars and good times too for long 200 years. The bank has positioned itself as the real bank of India reaching to every nook and corner of India, shown by its massive network of more than 14,000 branches.

Your bank always have the first mover advantage and it also takes pride in being adjudged largest/biggest/longest/worthiest for common people like us. Even today, the common people reliability lies on you and your services which benefit us in building assets including easing our lives in financial complications.

But my thinking stops at one point and forces me to think whether your bank is really interested in helping common man, especially living in rural areas and want to build financial assets. You have come up with a public issue of Lower Tier II Bonds to garner Rs. 1,000 crore along with a green-shoe option of Rs. 1,000 crore, totaling Rs. 2,000 crore which you intend to deploy the issue proceeds to augment your capital base in line with your future growth story. The returns offered are good, in fact so good that it may provide trading opportunities on listing. The reservation for retail applicants is no doubt very good i.e. 50% of total issue. Bravo!

However, I fail to understand why you have limited the number of application collection branches to meager 126 out of 14,000 SBI branches. Very judiciously, you have covered 24 states and 80 cities and you have also given greater jurisdiction in major commercial centers. Just to add, you have given One branch each in Patna and Guwahati to cover the population of 8.3 crore and 4.8 crore respectively (as per Census 2001, India) covering 8 states. Even in Siliguri allocated branch, there have been incidences of not accepting the forms without their home branch cheque. It is very heartening to know that Indian banks have become so proficient that 2 branches can handle 13.1 crore residents as per your predictions. But did you figure out what the common people lost out of it?

By doing this, you have thwarted the majority class of retail investors who wanted to invest in these bonds. They are the genuine investors who wanted to take a pie of the high interest rates offered (still they don’t understand how to link it with the current macroeconomic scenario in the country). Thanks to your “First Come, First Serve” policy, the responses have been substantial. However, the bond issue has given trading opportunities which have increased the grey market actions. Brokers have been dolling out as high as Rs. 15,000 on each retail application. My grandfather including all senior citizens is also not happy with you as they could not avail the issue because of non-availability of collection centres in their cities. Also they won’t get these rates on other investment products for 10-15 years. I don’t know whether we should rejoice or groan over your step behavior towards India’s common residents. I believe the bank has forgotten its tag of “The Banker to Every Indian”.

Sincerely Yours,

An unbanked Proud Indian

From financial crisis to financial reforms? Implementation of the Dodd-Frank Act

From financial crisis to financial reforms? Perhaps the Federal Reserve of United States completed its cycle with the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

Chairman Ben S. Bernanke released its testimony on the Implementation of the Dodd-Frank Act.

The Bernank’s testimony says that

One of the Federal Reserve's most important Dodd-Frank implementation projects is to develop more-stringent prudential standards for all large banking organizations and nonbank firms designated by the council. Besides capital, liquidity, and resolution plans, these standards will include Federal Reserve- and firm-conducted stress tests, new counterparty credit limits, and risk-management requirements. We are working to produce a well-integrated set of rules that will significantly strengthen the prudential framework for large, complex financial firms and the financial system.

Good! This will put checks on their market participants’ risk taking measures and lending practices.

The testimony also says that

Complementing these efforts under Dodd-Frank, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally active banking firms. These efforts resulted in the adoption in the summer of 2009 of more-stringent regulatory capital standards for trading activities and securitization exposures. And, of course, it also includes the agreements reached in the past couple of months on the major elements of the new Basel III prudential framework for globally active banks. Basel III should make the financial system more stable and reduce the likelihood of future financial crises by requiring these banks to hold more and better-quality capital and more-robust liquidity buffers. We are committed to adopting the Basel III framework in a timely manner.

It is good to know that the Federal Reserve has been serious in implementing Basel III framework for their banks. The good quality assets and high liquidity buffers by these banks will help in preventing the financial crisis further.

What the act says?

The nice brief summary of the Dodd-Frank Act compiled by United States Senate Committee on Banking, Housing and Urban Affairs is mentioned here. It aims to create a sound economic foundation to grow jobs, protect consumers, rein in wall street and big bonuses, end bailouts and too big to fail and most important, prevent another Financial Crisis.

In testimony words,

The act also requires supervisors to take a macro-prudential approach; that is, the Federal Reserve and other financial regulatory agencies are expected to supervise financial institutions and critical infrastructures with an eye toward not only the safety and soundness of each individual firm, but also taking into account risks to overall financial stability.

To conclude, the Dodd-Frank Act is a major step forward for financial regulation in the United States which may provide a starting step for others to follow.

Happy Reading!

-       Amar Ranu

Has Interest Rate peaked out?

We are in a very peculiar situation; equity market is down but gold prices are picking up. Inflation has not been budging down; the liquidity deficit along with the RBI’s ‘calibrated’ turned ‘aggressive’ monetary policies has been driving short term rates. While the Industrial production as measured by IIP nosedived drastically to 1.6 per cent for Dec 2010 from 18 per cent in Dec 2009 mainly due of high base effect and slowdown in industrial activity, the headline inflation cooled marginally to 8.23 per cent, higher than the street expectation of 8.1 per cent. This extreme slowdown in industrial growth may not prevent the central bank RBI to hike the policy rates for another time as the inflation remains stubbornly high.

What other indicators say?

·         10-year G-Sec Bond movement

The G-Sec 10-year yield, an indicator of long-term interest rate scenario in India has been trading below its July 2008 peak when the world markets had been reeling under the immense economic upheavals.  In July 2008, the yield on 10-year note went as high as 9.4 per cent. Due to various accommodative measures announced by RBI, the 10-year note touched to its low of 5.2-5.3 per cent. However, with improved market scenario and increased government borrowing which led to wide gap in fiscal deficit, the bond yield inched upwards to the level 8.23 per cent, but still below the July 2008 level.

·         Short Term rates at its 26-month peak

The interest rates on 3 Months and 12 Months Certificate of Deposits (CDs) – these are short term deposits raised by banks from fellow participants; unlike normal term deposits, these are traded in secondary market – have reached to its 26-month peak on tight liquidity in the system. The liquidity deficit since 3G and WIMAX auctions which led to outflows of over Rs. 1 lakh crore coupled with the government’s high cash balances with RBI and sluggish deposit-credit ratio have led banks tap this market. Short-term rates have continued their upward movement after the RBI started hiking policy rates. The 3M and 12M CD rates have crossed 10 per cent albeit below the level of 2008 economic crisis as given in the graph.

Which is bigger risk for India – Interest rate or inflation?

Many think-tanks say that inflation is a bigger risk in India because the economy becomes haywire because of it. However, this can be dealt with tighter monetary policies albeit in India, the structural and frictional issues are dominant factors in building up the inflation. To a large extent, the RBI has taken protective measures but few more hikes are imminent. The global commodity prices have also been roaring for which the US’s QE II should be blamed. This has affected the local domestic prices too to a large extent.

Moreover, the high fiscal deficit has been worsening. Though in the current financial year, the government has been successful in narrowing down the deficit, thanks to one-time big inflows from spectrum auctions. They might not be successful in future too.

What is expected in future?

The market participants expect massive government borrowing in the next fiscal year to be announced in the upcoming budget in last Feb to meet the increased expenditures which will lead to more bond supply. This will put upward pressure on yields. Also the liquidity deficit which will worsen further on account of advance tax outflows in the current quarter will take the short term rates high further. Moreover, banks have been issuing CDs aggressively to build their large balance sheet size, another reason to boost up the interest rates. Hence, an expected gradual rise in interest rates, given sticky inflation would add to hardening of bond yields.

- Happy Investing!

- Amar Ranu

RBI 3rd Quarter Monetary Policy Review 2010-11 – Containing inflation to remain predominant objective

The RBI monetary policy soap opera verdict is out. The mixed global recoveries rather still subdued and the inflationary pressures in emerging market economies (EMEs) including India has been on the top of the radar of RBI in its Third Quarter Monetary Policy Review 2010-11. From the earlier stance of growth-inflation dynamics, the RBI moved to anchor the inflationary expectations likely due to sharp increase in the prices of primary food articles and the recent spurt in global oil prices.

Key Policy Measures:

•  Repo rate, the rate at which banks borrow from RBI, up by 25 bps at 6.5 per cent
•  Reverse repo rate, the rate at which the RBI lends to banks, up by 25 bps at 5.5 per cent
•  Cash Reserve Ratio (CRR), the portion of deposit that banks keep with the central bank retained at 6.0 per cent
• The inflation target revised upwards to 7 per cent from 5.5 per cent for march-end 2011
• The baseline projection of real GDP growth retained at 8.5 per cent with an upward bias.

Domestic Outlook

The domestic economy is on strong trajectory path as revealed by the 8.9 per cent GDP growth in the first half of 2010-11 powered mainly by domestic factors including strong consumption. The strong agricultural output on satisfactory kharif production and higher rabi sowing will contribute significantly to overall GDP growth in 2010-11. The industrial output also showed buoyant figures; however, the significant volatility adds uncertainty to the outlook.

Inflationary Concerns

The headline inflation as measured by WPI remained uncomfortably high since Jan 2010. Although it moderated between Aug and Nov 2010, it reversed in Dec 2010 mainly due to sharp increase in prices of vegetables specially onion, tomatoes, garlic etc and petrol prices. The current inflation level is also contributed by structural demand-supply mismatches in other cereal items. Considering all the scenarios, the baseline projection of WPI inflation for March 2011 has been revised upwards to 7 per cent from 5.5 per cent earlier. The sources of price pressure – fuel and non-fuel commodity prices and some food items could be non-responsive to RBI monetary policy actions. Going forward, the price level will depend how the global and domestic prices evolve.

Liquidity – still in deficit mode

Since the outflows caused due to 3G and WIMAX payments, the liquidity remained in deficit mode in the financial system. Also, the sluggish deposit growth, far below the RBI projection along with the non-food credit growth of 24.4 per cent worsened the liquidity in the system. Meanwhile, the RBI also intervened by cutting SLR by 1 per cent and initiated OMO transactions worth Rs. 67,000 crore. The additional liquidity support to banks up to 1 per cent of NDTL has been extended up to April 08, 2011. Under this, the bank may seek waiver of penal interest purely as an ad hoc measure. The 2^nd LAF will be conducted on a daily basis up to April 08, 2011.

Burgeoning CAD (Current Account Deficits)

The current CAD expected to be around 3.5 per cent of GDP is not sustainable as feared by RBI. CAD, an outcome of net exports and imports may get worsened further if the global recovery improves. Till now, the capital flows, which so far have been broadly sufficient to finance CAD may get adversely affected as the global recovery can trigger the flight to safety.

Global Scenario

There has been a significant improvement in global growth prospects in recent weeks; however, the recoveries are still fragile with uneven scenarios in Euro region and Japan. The deflation fears looming largely on advanced economies got some reprieve with early signs of inflation. The real GDP growth in the US improved to 2.6 per cent in Q3 2010-11 after witnessing a muted growth in 1.7 per cent. The retail sales and corporate capital spending has improved. Unlike in advanced economies, Emerging Market Economies (EME) has been affected by burgeoning inflation trends due to spurt in global food prices including a spurt in crude oil. 

With better signs of sustainable recoveries, the global growth in 2010-11 is anticipated to be less frictional and will show firm signs of sustainable recoveries. With rising prices on increased demand, inflation would be a global concern in 2011.

Why the rate hikes?

The market had been anticipating a tougher stand from RBI as the inflationary issues failed to settle down. While the market had mixed anticipations – 25bps vs 50bps hike, the RBI followed a calibrated approach – hiking the policy rates by 25 bps only – after taking a “comma” stand for few weeks in its policy rate hikes. The current policy rate is still below the pre-crisis level. Since March 2010, it has increased rates by six times. Also, keeping the LAF corridor at 1 per cent, the RBI intended to bring down the volatility in overnight rates within the corridor.

Happy Reading!

-          Amar Ranu

A new ranking for Universities in Economics

Economics lovers!

A new ranking is in place for the best department of Economics in globe; it is based on online voting. Alas! It does not include any Indian university; however, it includes an Asian University i.e. National University of Singapore. Massachusetts Institute of Technology (MIT) tops the chart followed by Harvard University and University of Chicago. For more, click here.

So, Economics lovers! Go and grab your choice university; of course, the admission comes with their tough admission patterns. :)

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How the ranking has been done?

- A total of 58,013 votes are taken which includes almost all major locations of the globe. The maximum numbers of voters are from North America followed by Europe. The rest are from South Africa, Australia, New Zealand and Asian Countries too.  Out of the blue it includes New Delhi too.

- Overall total number of submitted ideas = 183

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Disclaimer: This project, All Our Ideas is financed by grants from Google and CITP at Princeton
University. It is a research project to develop a new form of social data collection that combines the best features of quantitative and qualitative methods. 

Happy Reading!

-         Amar Ranu

How many zeroes can you think of – Try Zimbabwe Bank notes and play in Billions or Trillions

Imagine a situation – a $ 5 could buy you enough bread in India while in Zimbabwe, back in 2008, 700 million Zimbabwe dollars bought a loaf of bread. Playing in Billions/Trillions had been a fun in Zimbabwe until the government abandoned its currency in early 2009 and decided to revalue its currency, removing 12 zeroes. Now, 1 trillion in Zimbabwe dollars is equivalent of one Zimbabwean dollar. Under the new valuation, the largest note is a 500-dollar Zimbabwean dollar. Earlier, the largest Zimbabwean bank note was for 100 trillion dollar (wow...hope India would become a $ 100 trillion dollars soon) and one U.S. dollar was worth more than 300 million Zimbabwean dollars. 

Hyperinflation or Deflation?

Currently, the world is divided into groups – with one set of countries majorly developed states flirting with the deflation and another set of countries majorly developing states like China, India etc battling to control burgeoning inflation. India has a serious concern on inflation due to structural issues on which the central bank has raised it many times. Recently, the RBI governor D Subbarao commented – “When I meet other central bank governors, they tell me `why don't you give us a bit of your inflation. That's how desperately they want some inflation and how desperate we are to control inflation”.

The hyperinflation has its own history.  Prof. Steve H. Hanke, Professor of The Johns Hopkins University and Senior Fellow of The Cato Institute has calculated the highest monthly inflation data as given below:

So, it is not only Zimbabwe but other countries like Hungary and Germany have also faced the hyper inflation in the past. Still, Hungary holds the record with the highest monthly inflation rate in the past. 

Now soiled Zimbabwean Dollars find new takers..

Western visitors to Zimbabwe are looking for zeros. They are toying with the soiled Zimbabwe bank notes, not in circulation now, most notably the one hundred trillion Zimbabwe dollar bill as an economic souvenir. The report says

The one hundred trillion Zimbabwe dollar bill, which at 100 followed by 12 zeros is the highest denomination, now sells for $5, depending on its condition. That bill and others -- among them millions, billions and trillions, were abandoned nearly two years ago, when the American dollar became legal tender in the hopes of killing off the record inflation that caused all those zeros.

"I had to have one," said Janice Waas on a visit to the northwestern resort town of Victoria Falls. "The numbers are mind bending." She got her so-called "Zimdollar" in pristine condition, from a street vendor who usually sells African carvings.

Call it the passion or curiosity; everyone now wants to get a pie of it. No wonder inflation – be it hyperinflation or deflation is a weapon of mass devastation. Hope in India, someone must be listening!

Happy Reading!

- Amar Ranu

Cash Strapped or Cash Hoardings – Look at these numbers

The world might be running high of rising asset prices and abundant liquidity which have heightened the inflation across the world. Last day, the republic of China raised its bank reserve requirements by 50 bps, the sixth time in less than a year and 4^th time in last 2 months in order to tame the inflation. Liquidity in the financial system has been another issue around the globe after the financial crisis. However, it eased after the developed countries announced a series of quantitative measures to ease the situation with US coming out with TARP, QE-I and now QE-II.  Sovereign crisis fear the European region which has questioned the existence of a unified region.

Amidst all these developments, many financially sound companies or marginally affected due to globe hoarded the money awaiting the new ideas for which they hoarded the cash in large quantum. The VRS Research team at Standard & Poor with the help of Capital IQ data examined the top 50 publicly traded companies globally, excluding financials, ranked by their latest reported quarter’s total cash and short-term investment holdings. The sum total for these companies’ cash balances is approximately US $ 1.08 trillion, almost near to cash holding for the entire S&P 500 Index.

We found 17 U.S.-based companies among the top 50 global corporate cash holders--which means that among specific nations, two-thirds of the top 50 global cash holding companies are headquartered outside of the U.S. From the perspective of dollar amounts, the 17 U.S companies account for $458.2 billion, or about 42%, of the top 50's global cash holdings. Meanwhile, the cumulative cash holdings of the 13 companies located in Asia and Australia, among the 50 below, amount to more than $270.1 billion, or about 25% of the group's total. In Europe, we find 17 companies among the top 50 global cash holders with aggregate cash holding total of $287.7 billion, or about 27% of cash balances among the global top 50.

With the abundance of capital abroad, there is a likelihood possibility that the firms may go for increased cross-border mergers and acquisitions as well as for strong earnings growth outside the U.S. After 2008 crisis, this domain has almost died given the tight liquidity scenario in their home country and globally. However, currently, the list could serve as a starting resource for ideas on who may be buying, where deals could occur, and possibly where profits may emerge.

Happy Investing! Happy Reading!

-        -   Amar Ranu

(Permission sought from S&P to post their articles on this blog)

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