Friday, November 21, 2008

The Bigger fool game

The bigger fool game has come to an end. The party has stopped, but the music has just begun for those who have been caught in this bigger fool game. Brokerage houses, financial engineers and more than anything else the real estate players have all been caught on the wrong foot. They are all loaded with debt on their balance sheets, and with partly paid assets which will fetch 20 paisa to a dollar.

The euphoria of land bank valuations mean, that when the double bubble of stocks and real estate burst all the investors in this sector were left and high and dry. Stocks losing more than 95% from their peaks. The real estate bell weathers Unitech and DLF which painted the growth and development story have been equally badly hit.

Even though it is going to be incredibly painful, we sincerely hope that the real estate players get into a deleveraging mode sooner rather than later. Few players have started making the right noise, with sales of non core assets, raising capital through whatever sources they can, others are still playing the blame game. Interest rates shot up, requesting bail out packages, bank loans and the moon from the government. They are bargaining with the government for sops and cheaper interest rates against dropping real estate prices!! Incredulous, do they really have a choice is what baffles me?

If they don’t sell, they go belly up, banks will put pressures, investors will put pressure, and the sahukaars in real estate lending business will gobble them, if they don’t do that. So for god sake stop calling the bluff, and do what you anyways you need to do. You are not doing the country, FM or anyone favor by reducing prices of property, honestly you guys have no choice and no holding power either. For the first time I see, the otherwise fragmented and dog eat dog industry of real estate bargaining in a joint fashion with the Government. I hope Mr. Chidambaram calls the bluff, tells them, tighter lending norms, pay for your own excesses, and if you don’t wish to cut prices, suit yourself, you are the only ones who will left holding the baby. Make no mistake those who cut prices first will be there standing last. There are no ivory towers, and there is no place to hide.

Housing loan at 7% when Fixed deposit rates are 11%??? Please spare us we can live without another stupid bailout, where tax payers are whipped, financial system put to danger, to support unscrupulous real estate players. I know Mr. Chidambaram is wise enough to know what is going on, but I hope he does not fall to the pressure of elections, showing cheaper homes as a victory of old slogan of roti kapda aur makaan, and gives stupid concessions to these guys.

Another sector where a similar game is being played is the airlines sector, where the monopolistic premium domestic airline Companies have been holding the government to ransom, and getting ATF prices cut by the aviation minister, where surprisingly the retail prices of petrol diesel are left unchanged. Today ATF is cheaper than petrol on per litre basis, so much for a welfare state. The public at large are subsidizing people who fly. It happens only in India. In spite of all this air fares for the premium airlines have only headed north, and not to forget the occupancy south. With an understanding between the two leading private airlines Company on fares, there is very little choice in the premium segment for the corporate flyer, so they were hoping this will boost the traffic. Alas! Old India and smart India comes to the fore, the occupancy heads further south, with even Corporate travelers likes us more than willing and happy to travel through low cost carriers which have been proactive in reducing prices and increasing the occupancy.

If the leading airlines, don’t stop playing this bluff with the government for more sops, excise cuts and holding those things to ransom to reduce prices, and the government calls bluff, the airlines will bleed themselves to death. In India, if you have to survive you have to accept the market realities and reduce fares. Period. No pacts, no understandings will work sir, yes, unless of course our illustrious politicians are willing to bend backwards to accommodate this heresy of airlines. Gentlemen are premium airlines, please keep the fares up, someone is going to get to buy your fleet at close to peanuts.

Its always fun to see the music stop in this bigger fool game. Now we are having another round in all countries, where people are predicting doomsday scenario. As things become cheaper, the risk perception of over-payment instead of becoming lower increases beats me. I know there is a systemic change ahead that we see coming, and even at current levels I will be afraid of investing in US markets, where the pain is going to be huge and to an extent unsustainable.

I will not be surprised if Dow falls another 50-60% from here. (for posterity sake, Dow is at 7500 today, and I am not ruling a possibility of Dow going below 4000). Why I say so? One of the biggest frauds of all time the US Dollar is threatened, the country which was consuming everything produced all over the world and paying off by printing currency, may not be able to do so anymore. We all know what happens when a currency collapse. What happened to Rouble and then to Russia which marked the end of cold war. I think we are back to becoming a multipolar world, where China will become extremely important pole and India will get more important than what it has been. European Union will become important too. Public+private debt to GDP ratio of 350%, rising unemployment, closing manufacturing capacities, textiles, airlines, now automobile, US in for real rough weather. In real terms, honestly I think US economy will make a mockery of these predictions of recession of 1-2%, the degrowth over the next 3-4 years could be as high as 15-20% of the GDP.

The Leadership Challenge

Would like to wish Mr. Obama all the best for what is going to be the most difficult time to be American President since time immemorial, couple that with hostile global climate, dependency on outsiders for oil, limited ability to fund your defence spends, in times of crisis, a crumbling financial institution. Really the only light at the end of the dark long tunnel for US is that of an oncoming train. Leadership will be extremely important in this era for US. We pray that adverse situation does not unleash the hawk in American President and they are patient and virtuous enough to weather the tough times ahead without looking at war as tools to assimilate resources.

The world also needs leadership in addressing environmental issues, and to address the depletion of energy resources and to keep in check the monster of global warming to drown precious land and coastal areas. Clean energy is also need to be tapped and developed for better health, more self dependence and for the sake of our great grand children. Yeah, I am an optimist, they will be born and we will not have a doomsday before that.

The leadership challenge is not only for US, where the challenge is managing its citizens, its hopes, its fears, and to tide through the painful times, by making right sacrifices, and by finding ways to reinvent their positioning for the economy. The challenge for China and also to an extent India is much greater. China, India and European Union need to take the responsibility of world leaders with compassion, objectivity and fairness. They need to be assertive to do away with inefficiencies with consideration that the troubled landing of US economy has a human face to it.

US on the other hand will need to be made more responsible, will have to undertake sacrifices and should be given surplus budget targets for every year, absorbing as much dollars as they can from the world economy while sacrificing its consumption growth. We are in bad times anyways and surely cant afford another bubble in US economy, I am not sure US will be able to afford this one either. The greed of cornering all resources, crude, mines, commodities have beggared them. As they mother earth has enough in it for everyone’s need but not for their greed.

Another challenge for the world leaders will be a spiritual one, where the virtues of goodness, honesty, sacrifice will have to be extolled once again, against the creed of greed. We will need to be compassionate towards the excesses of US too.

We pray that the world gets strong, compassionate and foresighted leaders, who rise above their national interests to embrace the world and become world leaders. Who stand up and say, they care for the starving children in Africa, who bother about the alienation of the Muslim world, who take measures to address the daily loss of flora and fauna, who imbibe and extol virtues of goodness, mutual respect, sanitation, equality and are not overtly swayed by greed, excesses of power and corruption of mind. I pray one day I will be one of them.

This world deserves much better, we deserve much better. Lets take a pledge, when we die we will leave the world better than what it is today.

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