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December 5, 2005
India has reached another peak, Mon., Dec. 5, 2005, 6:54 AM
Study these charts closely, and ask yourself how much money has been made since August 12, 2005 in the India stock market if you happen to be an American trader?
Then have a look at the currency chart of the USD priced in India Rupees.
Since August 12, the currency market has gone from 43.40 Rupees to 46.11 Rupees to 1 USD. That's a deflation of 6.25 pct in just over three months.
Why is the date August 12 important?
Well it's not, unless you recall the words of a successful investment strategist who on that day wrote:
I'm going to forecast that the closed-end Morgan Stanley India Investment Fund (NYSE: IIF) has reached a peak, and will now either decline or sidetrack for many months from this point."
Here is the Aug-12-05 article.
Here is another, when I first started to write about India, on Aug-11-05.
How many talking heads have you heard tell you how wonderful is the booming Indian economy? Yesterday, I told you that India has a problem. My friends in India didn't tell me; I figured it out mathematically.
While most countries have controlled inflation, a few like India have done a fair to middling job, and others have not.
But this year, India has announced that its inflation rate is now 4.32 pct on an annual basis, due, they say, to tobacco and textile prices.
In October, the Reserve Bank of India raised its short-term interest rate by 25 basis points to 5.25 percent. Then they said the inflation pressures were caused by high oil prices. Next month it will be something else.
As interest rates are raised in India, the public will be unhappy. There are over 1 billion of them. That's going to be a lot of unhappy campers.
But the current strength of the Bombay 30 index is linked to a strong USD, which means a weak Rupee. In this case it is a plummeting Rupee. And as the Rupee takes a further swan dive, the cost of imports get more expensive. In a country with a huge trade deficit, that is a problem.
China also has an inflation problem, but they bought into a concept called dollarization, which has kept their people happy, and the U.S. Administration unhappy.
Funny how those things work. For years CNBC's Larry Kudlow would spout at his international audience, beseeching all countries to peg to the USD. Of course he would since that would mean the U.S. Administration gets to control the monetary policy of other nations. Then China came along and used U.S. debt to build its own nation.
To which I now have to laugh at the irony of old joke: There those Americans go nation building again".
In any event, here is what the CIA World Factbook says about the Indian economy, which is growing at a rate of about 6.4 pct Y/Y, slightly down from its 10-year average:
Despite strong growth, the World Bank and others worry about the combined state and federal budget deficit, running at approximately 9% of GDP. The huge and growing population is the fundamental social, economic, and environmental problem."
I had this nagging feeling as Saturday I spend the day looking to which of the world's emerging economies might run into early problems, and I recalled India's red hot stock market, and the article I had written a few months ago.
Clearly I am no expert on India, but I can look at the big picture, and this is where I see a potential problem spot. Not his month or possibly in the next year, but soon.
As you know, India has been the world's major beneficiary of outsourcing from America. But, if I am reading the current situation correctly, American legislators are pressuring Corporate America to keep those jobs at home. There could possibly be a swing in this outsourcing trend, which would not help a country like India.
Foreign investors, too, will shy away if their capital is returned in partial dollars. Yes, India might be growing at a healthy 6.5 pct annual rate, but if its currency is going to deflate by 6.25 pct in just over three months, why invest?
Didn't Canadian and U.S. investors get their capital whacked in Brazil in previous years when inflation got out of control there too?
For those who are looking into the possibility of short-term market trend reversals and long-term economic problems, India could be a place to look.
Posted by Posted by Bill Cara on December 5, 2005 06:51:34 AM | Category: India