Really don’t want to sound a financial commentator but though would take the liberty of sharing a couple of thoughts on the occurrences in the financial markets and its potential ramifications!
The dream run that gold has been having the last 12 months as a “safe haven” investment has suddenly run into rough terrain and has lost over 7% in the last one month and nearly 13% from its peak a couple of months back.
Couple of aspects have to be considered in the context. In an uncanny coincidence in terms of timing, George Soros, the famous hedge fund manager, had made an observation of the gold being the ultimate bubble. George Soros is the person who, in 1992, is credited to have “broken the back” of the Bank of England and the British Pound. It is no wonder that market took him a little too seriously and gold started dropping steeply even within a couple of days of his statement.
The other aspect is the prospect of the significant unwinding of the “Carry Trade” based on US Dollar. Soros was stated to have said - “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.” The strengthening of the US Dollar or more appropriately the weakening of the Euro has also contributed to the significant drop in gold prices.
The drop in gold prices of the magnitude last week, i.e. US $ 60 an ounce has to be viewed with caution. The last time drop of this magnitude happened was in July / August 2008 and we immediately saw the unfolding of the financial crisis across the world with the start of the bankruptcy of Lehman Brothers and AIG! The continuous drop in the stock market should also be a cause for concern.
The next couple of weeks is going to be a cause for concern in the international markets. The recovery of 2009 may again be tested again. There are already talks of the “w” shaped recovery! That would mean we could see a drop before a complete recovery. Euro is going to be tested quite a bit. The problems in Greece, Spain and Italy is not going to help Euro either. The strengthening of the dollar is not going to help the economy either.
Gold would possibly see some more corrections but would have to go up considering the increasing uncertainties. Short term it would be possible to see some pull back before the Chinese New Year as that period would see increased level of retail buying in the Chinese markets
Sunday, February 7, 2010
Sunday, January 10, 2010
Promote Efficiency
In a relatively capital constrained country like India, it is imperative that all efforts are made to promote efficiency that encourages optimisation of resources and maximisation of the same. Innovation is the key. We need to think out of the box and ensure efficiency is encouraged with due consideration being given for adequate risk management.
To begin with, banks and financials institutions should encourage existing units that proven ability to get better bang for the buck. This should not be restricted to just the MSME's but to all units. Use of traditional evaluation methods like the debt equity ratio or the current ratio needs to be reviewed with more appropriate ones like capital employed turnover ratio or human productivity ratio. I am sure that we could find quite a few and give them weights to arrive at a composite index!
On the fiscal side too we need to encourage units with higher productivity and efficiencies with a lower tax rate! While we encourage new units with tax covers and incentives, we don't seem to recognise ones who drive greater profitability in existing ones.
Archaic labour laws that stipulate minimum wages appear to penalise employers as it does extract any commitment from the employees to ensure greater productivity. The employer is penalised with increasing inflation indexed dearness allowance. The employer has no control over policies or the lack of it, which drive inflation. Competition and customers are consistently driving prices lower. Considering that over 60% of the country's GDP is derived from the service sector, even assuming that 50% of the cost is represented by salaries, a 10% increase would imply that margins are down close to 14%! So here we are perpetually running to stand were we are by constantly increasing capacities.
All pointers therefore indicate that we need radically different thoughts to encourage efficiency!
To begin with, banks and financials institutions should encourage existing units that proven ability to get better bang for the buck. This should not be restricted to just the MSME's but to all units. Use of traditional evaluation methods like the debt equity ratio or the current ratio needs to be reviewed with more appropriate ones like capital employed turnover ratio or human productivity ratio. I am sure that we could find quite a few and give them weights to arrive at a composite index!
On the fiscal side too we need to encourage units with higher productivity and efficiencies with a lower tax rate! While we encourage new units with tax covers and incentives, we don't seem to recognise ones who drive greater profitability in existing ones.
Archaic labour laws that stipulate minimum wages appear to penalise employers as it does extract any commitment from the employees to ensure greater productivity. The employer is penalised with increasing inflation indexed dearness allowance. The employer has no control over policies or the lack of it, which drive inflation. Competition and customers are consistently driving prices lower. Considering that over 60% of the country's GDP is derived from the service sector, even assuming that 50% of the cost is represented by salaries, a 10% increase would imply that margins are down close to 14%! So here we are perpetually running to stand were we are by constantly increasing capacities.
All pointers therefore indicate that we need radically different thoughts to encourage efficiency!
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