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World will be tilted or stay Flat moving forward? September 29, 2008

Posted by Bipin Agarwal in Global Economy, Politics and economy, Real Estate Development in Global Economy.
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It seems like, everybody in US, administration, congress, senate and two presidential candidate have agreed to support the rescue package of 700 Billion dollars over weekend but just got voted down on Monday. This may turn out to be the best outcome as it will help clean up the market rather then delay the process.

While the ink is not even dry, Fortis has been bailed out in Europe. Bradford and Bingly is being rescued in Europe, Wachovia in US. There is more to come both in US and Europe. The risk is that Asian financial institution may also have substantial undisclosed exposure that they have to admit in next few weeks. Just because most of the failures have happened in US and Europe, does not mean that financial institutions in Asia, middle east or other part of the world are smart. it was just timing, luck and stage of maturity of the market. We sure hope that other will learn from this, however the history does not support the strategy of hope.

There are several question it raises:

  1. How the capital market will look like in the future in US and across the world?
  2. What will be the impact on the financial institutions across the wold
  3. How different industries will be impacted?
  4. Impact on Real Estate

Capital Market – Champion of the free market, in particular republican party in US or conservative in other part of the world will have to give it a cooling time of at least two to three years before advocating it again.  Capital market will have to live though the new found love for regulation and some of them are needed anyway. Derivatives, Credit default swap, futures, short sell, etc. Some of these financial innovations or as Warren Buffet calls them, Financial weapon of mass destruction (FWMD) have to be destroyed or buried. This time the risk is that market and/or administration may deny the existence of these weapons unlike the position taken during the Iraq War.

Financial Institutions – Shareholder value creation has been a huge driver for the growth of financial institution around the world. While lots of people did create wealth during the process, it is not clear shareholders wealth was created on net-net basis. Just look at the shareholder wealth destroyed during the last twelve months, you will start wondering if the current structure of the financial institutions is the right one for the world. What about the government owned funds like Singapore, or China, or middle east, or government owned banking and insurance institutes like in India? What is wrong with the government owned financial institutions and franchise owned by individual, community or local companies, just like McDonald. In olden (Golden) days only the guy with money could lend, you could not borrow and then lend using the arbitrage. They call them Mahajan in India and PAwn Shop in US. Is anybody willing to admit that there could be failure of J P morgan, Bank of America, Citibank and as a result government and world financial system could collapse? This is the tough one and has be discussed and reviewed in more detail.

Industry Impact – industries that are dependent on the export and import (movement of people and product) for the growth are at the biggest risk. Shipping industry, manufacturing, travel.  Industry that have better co-relation with the local consumption because of population are better positioned. Energy, value added consumer items. Biggest unknown is the dollar value moving forward. Believe it or not, lot of import/export across the world is because of the arbitrage in the currency. Once dust settles down regarding the direction of the currency and financial suystem, we will discuss it more.

Real Estate -IT will take at least couple of years for real estate in US to stabilize. Given the public nature of real estate companies in US, there will be more cross border deal in this sector. In general, US based companies doing deals with India and China company to get a local partner and expand. We all know that the real estate in Asia is very in-efficient. This creates lot of opportunities for affordable housing. Biggest issue the land acquisition in these countries, cross border deal involving a public company in west with land banks in Asia.  Affordable housing will be the focus. That is where the growth is.

Will the world be flat as described by Friedman or will it be titled forever.

At this time we can only make a guess based on the limited understanding, actual outcome will be shaped by lot of political, financial and non-financial events. We will keep you updated. Inclination is that world is tilted toward Asia for now.

If you have a question, about Global economy and Politics correlation, feel free to ask.

http://www.redhawkinvestments.com

Bipin Agarwal
https://twentyminutelifestyle.wordpress.com/about/

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US Bailout – Is it good and enough for US, and World economy September 22, 2008

Posted by Bipin Agarwal in Global Economy, Politics and economy, Real Estate Development in Global Economy.
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There have been lot of people calling to ask my opinion about the recent event in US market and in particular about the bailout. After we talk about as to what is happening in the bail-out, real question is that enough or systematic problem is not being discussed.

Let us be clear, when we talk about bailout, we are talking about:

  1. AIG loan is not a bail out and it may turn out to be the best investment by US tax payers and gov.
  2. Fannie bailout- US gov did not have much choice given the balance sheet they have. If they did not bail out the two institution, US will loose lot of credibility in the world and interest rate will have to go through the roof to support the expanding debt.
  3. Now the mother of all bail-out of 700 plus billion. First of all it is not clear that should we even call it a bail-out until the details of the plan are public. It the plan is structured along the lines of AIG, it could be the best solution. In that situation it is not a bail out and just a stop gap financing for toxic assets in the balance sheet of the financial institutions. If the plan is designed to keep the next election in mind or is designed to help only selected financial institutions, it could be the great tragedy. There is already complaint from BOA that the plan will help Goldman and Morgan.

What is interesting is that no presidential candidate has opposed the plan. If the plan can be put in place with reasonable safeguard for US tax payers, that is good news. Long term impact of the plan will be high US interest rate, weak dollar against major currencies, particularly the currency of the countries that have a huge foreign reserve such as Russia, China, Middle east.

Real impact of the policy can not be determined until the US election are over and the policy of the next administration are clear. Also, never underestimate the power of US.

If you are a investor, it is time to re-balance with more international exposure, more bonds (both high yield domestic and highly rated inernational) and with ample cash to invest further in next three to six months.

There is another policy decision that can accelerate the recovery of the US economy, US should allow massive immigration of the educated work force. Immigration of 10 million people will solve the housing bubble and create more jobs. Remember, educated people create jobs.

Now the question is bailout that is being talked about enough? Real problem is not the toxic asset that are sitting on the balance sheet of the financial institutions, Bigger risk is about Credit Default Swap (CDS). No body has started to put their hand around the scope of this problem and its impact. I am sure once, bailout is passed, market will go down again and focus on the CDS.

If you have a question, about Global economy and Politics correlation, feel free to ask.

http://www.redhawkinvestments.com

Bipin Agarwal
https://twentyminutelifestyle.wordpress.com/about/