Tuesday, April 27, 2010

Crucial Time.

Posted on : Apr, 27 2010

Dear All,

Coming days and weeks are very crucial. Germany has shown hesitance in bailing Greece out. Obviously it is keeping in mind that next candidates like Italy, Spain, Portugal, Ireland who will assume bailout if Greece is bailed out.

Now if Germany says No, I see 2 possibilities here one is IMF may still bail them out resulting is USD firming technically against EURO.

Another possibility is if Greece is allowed to fail. Well, this can again change rules of game. It can create massive short to mid term down tern in global equity markets.

Also in India RBI is speaking speaking and speaking about monitory tightening. If they really do so, time to come in short term will be tough, However if Greece is not bailed out and RBI does tightening it can obviate hyperinflation concerns in long term.

So let’s wait and watch.

P.S. Gold made all time high in EURO today in USD went up to 1170 if Greece fails we may see another All time High level in weeks to come.

Monday, April 26, 2010

Real Estate - Investment or Debt Trap

Recently I came across a very new type of investment” Real Estate Investment” . It works in its unique way. I mean a place where you live is not investment its "Home" and has to be bought. (Although I would prefer rent) However for Investment I found it little funny. Let me explain how.

If you go to buy this “investment” you are told that nothing is remaining and everything is sold. Or you are told you have only 3 options one on 2nd one on 6th and one on 17th Floor. Funny part is same is told for almost a year. (I always wonder for selling 3 flats why such a big sales office is maintained. Anyways.) Then cost grows as floor number grows. Also depending on “pool side” or backside, rate changes. I don’t remember I have seen anyone swimming in open pool in any residential area in India …maybe … with growing economy people will start swimming....

So it’s kind of complex thing. You have to go from one builder to another and see flats. While you are spending time, rates are growing so you are under that pressure as well. I came across one such builder who told me On coming Saturday till 12.00 in midnight if you come price is 2400 Rs / sq ft. But if you come on Sunday it’s 2800 Rs / sq ft. I asked him then why don’t you close sales office till Sunday? from Sunday you will get better rate. He went to council another customer leaving me to watch site alone...

One of my friend passionately told me when he went to builder he told him flat is for 4300000 INR. When I went via “Agent” he got the flat for 41,00000. Though he paid agent 40,000 he saved 1,60,000….

Well by selecting the right flat your investment is not over infact it begins there. Below is real time data collected from one of my friend who got flat for 41 lakhs (This amount is something I can not even think of buying but my friend who bought told me it's common now a days).

Real Estate Investment
Let me explain it a bit If you see the table above, you can make out that the Brokerage for this investment is on little high side i.e. 14.63% and In order to make this investment work, i.e. to rent it, you have to add furniture and some work like kitchen trolley etc… So total overhead now becomes 21.95%, which is almost non-refundable.

So one thing is sure that before starting testing fruits of that investment of 41,00,000, “Sum of 10,00,000 has already gone and there is loan for 40,00,000 resulting EMI of 40,000 per month for Next 20 Years (Assuming Interest rates are same)”.

Now we must understand that if we are considering Real Estate for "Investment", Total of 10,00,000 Spent already + 40,00,000 Loan @ End of 20 Years should be less than Price at which it will be sold after 20 Years. Will it happen or not? Nobody knows at the moment. Though almost everyone believes it will only time can tell us where it goes. 

Because it's an investment he rent it and then getting rent of 25000 Which is 15000 less than his monthly EMI.. He spent 10,00,000 + 40,000 / month and bearing loss of 15000 to allow someone stay in his "Investment" for 25,000. Seems like deal huh .. :) 

Also before closing just update on Indian Inflation. RBI is speaking about hiking CRR once again to control inflation, which is a very good move for a long term. In short term it may mean more EMI for all loan but for economy in general it will be good.

PIIGS in line to collapse

Posted on : Feb, 20, 2010
Dear All,

This has been a week with events. G out of PIIGS cried this week. The term PIIGS stands for European Nations with Debt Crisis (Portugal, Ireland, Italy, Greece, Spain). So far it's easy for us to read the stories of this and even their Nationals are ok as there are Big Countries that can Bail out. Just Imagine who will be there to bail out if Big Nations go in debt crisis, which as we know is inevitable. Of course root causes are our false assumptions about Economy like.

1) More GDP better Growth.
2) More consumer confidence more Growth.

Anyways I will explain national Debt issue due to "Rolling up Debt" and more on terms above in coming updates as have really less bandwidth this week. However for those who can spend some time the Video below is really interesting one.


Some Real Good Videos.

Posted on Feb, 08, 2010

Hi All,

Due to time constraint this and next I won't be able to write much. However let me share few videos of the legendary Economists who are predicting economic future of world that is uncomfortable. See the videos below carefully.

Jim Rogers

Marc Faber

Story of Samadhan vs Modern

Posted on Feb, 01, 2010

Dear All,

Let’s start this week with a story:
There was one small village with small economy. There were 2 hotels in village. One was owned by conservative owner and was named “Samadhan Lodge”. While other was owned by more aggressive owner named as “Modern Lodge”. All of a sudden a circus came in a village. Village’s economy started to grow. People from surrounding villages started coming to this village for circus. Suddenly demand for rooms in hotel started rising. Obviously there was competition in both hotels and both hotels started earning much more than they used to.

Samadhan Lodge took benefit of added income and made his Lodge more clean and improved on service. While aggressive Modern Lodge owner went for expansion plan and took loan that was to be repaid in 5 Years. He built a new building in record 6 months time and provided equally good facilities to customers. Modern Lodge threw a huge party while inaugurating his new facility. He got compliments from villagers as aggressive, growth oriented or even as visionary.

After a quarter from inauguration Modern hotel booked huge profits and shared his success story to villagers. Villagers complimented him as real visionary and exemplary entrepreneur. While they openly criticized the Samadhan lodge as old fashioned, sluggish, orthodox minded.

Modern Lodge’s owner started to think more aggressive. There was one more piece of land next his 2 buildings he made that as target and ambitiously planned to go for 3rd building. This time he had to pay more as the land owner knew that Modern Lodge is going to make big profits out of it. But Modern Lodge was super aggressive. He took some personal loans and Another Loan that was to be repaid in 10 years.

In the next quarter Modern Lodge’s picture was looking fantastic. He was now owner of 2 Lodges that were running soaring his profits and one more lodge under construction. People started giving him compliments as great visionary “Right decision in right time”. Also people started criticizing Samadhan Lodge as stupid, foolish, orthodox. Another 2 months went. In all this time Samadhan Lodge was doing well in terms of revenue however he was not ready to expand.

Meanwhile, circus that had came to village decided to move out to another district as they always do. Now the demand that was created by circus reduced dramatically. This sent shock waves to Modern Lodge while Samadhan Lodge was ok as nothing had changed for him. Modern Lodge faced challenge to repay loan EMIs and hence he was left with no option but to increase rates to cover up his EMI. This step further fuelled problems for him as customer preferred same service for lower price in Samadhan Lodge.

Things started changing rapidly Modern Lodge’s owner started getting in pressure and he called few of his friends for advice. They advised him to sell off 2nd and 3rd building. However Modern Lodge made it a prestige issue and continued it with some price cuts. As few more months went Modern Lodge’s problems started going worse. He started defaulting on Loan EMIs and this even ruined his personal life. People started criticizing him greedy, bad timer, while they started to praise Samadhan Lodge as stable one with feet on ground.
Finally after few more months Modern Lodge had to foreclose the loan and surrender both ready buildings and 3rd building that was under construction to bank. Bank obviously started public auction for the buildings and sold them at very low rate. One of the buyers among those was Modern Lodge but again he just bought only 1 Building, as traditionally there were only 2 Buildings Hotels in village.

Conclusion : The story above does not mean that business should not expand but it says that expansion should not be based on misleading signals.

Thanks have a great week and good time ahead..

Inflation - top concern for tomorrow.

Posted on 23 Jan 2010

Welcome to our hub where we all share and learn the things. I have been getting quite encouraging response from many readers.

Well we spoke about hyperinflation last week and as if it's co-incidence we got this news from India this week.


This is still not hyperinflation. This is just hi-Inflation. Hyper inflation is still down the line unless central banks raise rate of interest considerably.

Let's try to understand how inflation comes and how it works.

There are 2 definitions of inflation. One is “Increase in money supply” which we will discuss in very detail later. More commonly used definition today is “% increase in consumer prices”.
In other words if Rice is 100 Rs a Kilo today @Inflation of 13 % it will become

113.00 Year 1
127.69 Year 2
144.28 Year 3
163.04 Year 4
184.24 Year 5
208.19 Year 6

This I believe is known to most of us. There are different parameters that we consider under inflation in different countries e.g. in India WPI (Wholesale Price Index) is measured. WPI Inflation is divided into three broad categories i.e. Primary Articles (Food), Fuel Products and Manufacturing Items. In US CPI (Core Inflation is Tracked). It does not include food and energy. On the top of it if car becomes costly say by 10% and is made safe by 10%, impact on CPI is null.
Anyway we calculate, I am completely convinced that inflation is a matter of worry no matter how we calculate it.

So real question is where it comes from. Of course it mainly comes from "expansion in money supply". And money supply comes from central banks e.g. Fed in US, RBI in India and so on.

This is little complex to understand. One of the most common reason for Increase in Money supply is due to Policy of making interest rates artificially lower then “Actual Inflation”. We will discuss it later in very details. Other reasons are. a) Many times they are forced to do it due to political pressure to run government programs that cost more then tax revenue. b) Also sometimes they do so to solve next immediate problem like credit crunch of 2008-09, collapsing banks, to bail out companies etc.... On the top of this, there are governments that have money and governments do not have.

See at above URL carefully. this is the current account balance. While governments who have the positive current account balance can take a call if they want to waive of loans or want to save banks / companies, Governments with negative current account balance just can’t do it.

So what they do is to increase money supply (Print Money) and that is exactly what leads to inflation in fact that’s the real definition of inflation.

Why to Learn Economics

Amaresh Ashok Gangal 
Posted on : Jan 17 2010

Perfect economic system is a system where common man need not learn economics unless he has keen interest in it. He should be able to learn anything of his interest, work for a field he like, innovate, maintain his hobbies and fulfill his family and social responsibilities. However we just can’t compare today’s economic system with word “perfect”.

We will explain the reason why we believe so. Though we broadly believe that we are in recovery phase, we should be deeply concerned about next economic crisis. Of course that does not mean we should stop working now and worry about it, but in fact it mean we should work even hard and invest wisely for next economic crisis.

Reason for worrying for next economic crisis is very important. We anticipate next crisis as “currency crisis led hyperinflation” or “high inflation” followed by “Interest rate shock” We don’t know what will happen exactly but either of these is absolutely inevitable. I.e. we will end up in hyperinflation and currency reforms across the world or we will end up in very painful time where most of the “Zombie” businesses will be allowed to fail.

Either of these situations will not be good for common man. Though later i.e. “High Interest rate” will restore economy in long term, it will be very painful for few years. Timeline wise I believe if we go for Scenario 1 i.e. hyperinflation we can experience very high stock market returns i.e. Dow may run as high as 40000 – 50000 Range (but grocery expenditure will also be 3-5 times) by year 2015-16 and then collapse dramatically or if we settle for Scenario 2, which may happen anytime depending upon call from the central banks and governments we will have situation where asset prices “Real estate” in context of common man will be ¼th of the prices they were bought and Mortgage will be twice than what it is today.

Of course there is possibility of double dip recession in which case both of these scenarios will be postponed to some later date with even bigger numbers. However we believe that understanding the system will help us plan for upcoming decade better and can even give us opportunity to profit from same.