Business Daily from THE HINDU group of publications
Saturday, Aug 12, 2006
Industry & Economy - Economy
Columns - E-Dimension
The `Darwinian element' in supply-demand matters
Nobody complains these days about tighter security regimens. Perhaps, a sign of learning to live despite threats, which were once shrugged off as scares.
Worryingly, it is not only planes and terminals that are vulnerable. "The global economy is under threat," write Jim Mellon and Al Chalabi in Wake Up! from Capstone (www.wiley.com). "The outlook for the world economy is uncertain at best and dire at worst. In the period 2005-2015, the chances of a positive outcome for economic growth in the rich part of the world are low."
Though India is not yet in `the rich part', the grim forecast can make us anxious. And since the book is about surviving and prospering `in the coming economic turmoil', it is worth exploring why the authors see a bleak future. "Figures indicating economic recovery since 2003 in the US and elsewhere are the direct result of aggressive monetary stimulation." The injection of liquidity is merely a short-term palliative care, or `the equivalent of giving a credit junkie one last and potentially fatal fix', write Mellon and Chalabi.
One of the many reasons for global tensions is the mismatch between the rich and the poor, both among nations and within each country. For instance, the US has five per cent of the world's population but 27 per cent of its wealth. "In the US, the wealthiest one per cent of the population controls an incredible 33 per cent of the total national wealth, while the bottom 80 per cent control a mere 17 per cent." The top one per cent of US stockowners hold about half of all stocks by value, even as 35 million Americans, constituting about 12 per cent of the country's population, live below the poverty line.
"The world's rich nations, encompassing 20 per cent of the global population, account for 86 per cent of private consumption; the poorest 20 per cent account for just over one per cent." As a result, the consumption and pollution potential over the lifetime of each new child in the industrialised world is equal to that of 30 to 50 children born in the developing world.
Isn't India successful? No, our stories of triumph, especially in IT, are `an exaggerated view of the reality' say the authors. "While Bangalore may be adorned by the gleaming buildings of its technical success, much of India is still the muddy, chaotic and poor place that it has always been. Many, many more Bangalores are needed and they are unlikely to be forthcoming anytime soon."
Another mismatch is between demand and supply. We have global excess capacity because of `rapid economic expansion across the world in the 1990s.' The authors are of the view that manufacturers, particularly in Asia, `have built too many factories and have over-invested in them,' in the expectation of high levels of economic growth. According to OECD data, real GDP growth fell from an annual rate of 4.9 per cent during the Golden Economic Age of 1950-73, to three per cent for 1973-1998, and has continued to decline subsequently."
The authors see `Darwinian element' in supply-demand matters. "Large firms that are committed to their industry sector effectively have little choice but to continue to invest and compete in order to survive, even if the sector is mature or in decline." In airlines, for instance. Major players continue to invest, "even though rational economics show that the whole industry to be a value-destroying one." A more serious threat, isn't this, compared to what we had started off with?
Macro-wave rubber meets the stock market road
Take a break for coffee, to thumb through Peter Navarro's book, If It's Raining in Brazil, Buy Starbucks, from Tata McGraw-Hill (www.tatamcgrawhill.com). Its theme is that macro-economic waves, blowing thousands of miles apart, can move the stock markets in `systemic and predictable ways.'
In short, if you want to think big, see big. Go for the `macro-wave perspective' to identify the sectors to invest in or to stay away from; for, it is `a powerful trading compass.' Navarro explains to readers how macro-wave logic draws upon `well-established relationships between key macroeconomic variables such as inflation, unemployment, and interest rates.'
He lays down `eight principles of macro-wave investing.' Speculate but never gamble, reads one principle. The difference between the two is winning consistently versus inevitably losing. "The speculator only takes a risk when the odds are in his favour." Another principle advises one to minimise and diversify market, sector and company risk. `Ride the train in the direction it is going,' and go flat `when the markets are trading sideways', counsels Navarro. And, lastly, `don't play checkers in a chess world.' Means? "View the market as a giant chessboard and look as many moves ahead and across as many sectors as possible." Identify `the many spill over effects of a macro-economic event' and act quickly on the information.
Bull and bear phases
Part 3 of the book is `where the macro-wave rubber meets the stock market road.' It has a chapter titled `Stocks to pedal during the business cycle' speaking of `the progression of sector rotations.' In the early bull phase, for example, transportation is the suggested favourite. Technology comes next in the early to middle bull phase. Next is `middle to late bull' when capital goods should see you through, says Navarro. In the `late bull' phase, switch to `basic industries and materials,' and stick to `energy' in the `late bull to market top' phase.
While `early bear' has beverages, food, cosmetics, healthcare, pharmaceuticals and tobacco as the best category sectors, the subsequent phase favours the rotation to utilities such as electricity, gas and wire telecommunications. Finally, in the `late bear' phase, Navarro's choice of sectors to rotate to includes auto, banking, home finance, housing, real estate and retailing that is `financials and consumer cyclicals'.
To those who are clueless about the title of the book, Navarro provides an excerpt from a Los Angeles Times report: "Brazilian growers, who typically supply one-third of the world's coffee beans, have seen prices plunge in recent months because heavy rains in December, which followed a drought in the fall, caused farmers to raise yield estimates from depressed levels."
This development was crucial to Starbucks, the giant coffeehouse operator. It had earlier raised its prices by an average 10 cents a cup for coffee beverages; however, despite huge swings in the prices of beans, Starbucks never lowered prices.
Measure of mismatch
Yet another read for your survival kit is Controlling Currency Mismatches in Emerging Markets by Morris Goldstein and Philip Turner, from Viva (www.vivagroupindia.com). Currency mismatch happens when changes in exchange rate can impact an entity's net worth and/or net income. "The `stock' aspect of a currency mismatch is given by the sensitivity of the balance sheet (net worth) to changes in the exchange rate, and the `flow' aspect is given by the sensitivity of the income statement (net income) to changes in exchange rate."
The authors caution emerging economies that currency mismatches can pose `a serious threat to financial stability and sustainable economic growth.' To help measure the divergence, Goldstein and Turner construct a new measure called AECM or aggregate effective currency mismatch. Using this yardstick, they study 22 emerging economies, including India.
"We see the origins of currency mismatch primarily in past and present weaknesses in economic policies and institutions in emerging markets themselves rather than in imperfections in international capital markets," state the authors. They list seven `national weaknesses' including `inadequate incentives to hedge against currency risk' and `poor credit assessment by banks in the extension of foreign currency-denominated loans to corporate customers with little foreign-currency revenue.'
Original sin hypothesis
Innate frailties are what Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza refer to as the `original sin hypothesis' or OSH. The trio had measured "the degree to which original sin affects a country by (one minus) the percentage of its international bonds and cross-border bank loans that are denominated in the domestic currency." Original sin changed little over time, they declared. Thankfully, though, the book on hand looks at OSH as `far too pessimistic.'
Ideal reads over a leisurely weekend.
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2006, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line