G8 forecasts global recession

Japan’s energy chief launched a meeting of ministers from the world’s top industrialized nations Sunday by warning that soaring oil prices could trigger a global recession if they’re not checked.

The Group of Eight rich nations met in northern Japan with representatives from China, India and South Korea to discuss oil and gas markets, energy investment, energy security and climate change amid deepening concerns about the world economy.

Oil prices made their biggest single-day surge on Friday, soaring $11 to $138.54 on the New York Mercantile Exchange, an 8 percent increase. On the same day, the United States announced a rise in unemployment.

“The situation regarding energy prices is becoming extremely challenging,” Akira Amari, Japan’s trade and energy minister, warned his colleagues Sunday. “If left unaddressed, it may well cause a recession in the global economy.”

Five top energy consumers — the United States, China, Japan, South Korea and India — urged oil producers on Saturday to boost output to meet growing demand, while pledging to develop clean energy alternatives and increase efficiency.

World oil production has stalled at about 85 million barrels a day since 2005, while global economic growth — boosted by spectacular surges in China and India — has pushed demand to unprecedented levels.

Amari called for a strong message ahead of the G-8 leaders summit in Toyako, Japan, in July. The 11 nations gathered in Aomori account for 65 percent of the world’s energy consumption and emissions of greenhouse gases.

“What actions we take to address the challenges that we face will have an extremely important effect in solving the global energy issue,” he said.

It was unclear, however, what impact consumers will have without action by producers. The current president of the Organization of Petroleum Exporting Countries, Chakib Khelil, has said that the cartel will make no new decision on production levels until its September 9 meeting in Vienna.

The five nations meeting in Japan on Saturday agreed that the sharp surge in oil prices was a menace to the world economy and more petroleum should be produced to meet rising demand. They argued that the unprecedented prices were against the interests of both producers and consumers, and imposed a “heavy burden” on developing countries.

The ministers also vowed to diversify their sources of energy, invest in alternative and renewable fuels, ramp up cooperation in strategic oil stocks in case of a supply shortage, and improve the quality of data on production and inventories available to markets.

The group, however, diverged over oil subsidies. The International Energy Agency has estimated that oil subsidies in China, India and the Middle East totaled about $55 billion in 2007.

The United States, which has its own energy subsidies, urged countries such as China to lower its oil supports, which enable domestic consumers to enjoy cheaper gasoline. Subsidies shield consumers from higher prices, meaning consumption does not decline despite rising expenses.

China and India, while signing on to a statement recognizing the need to eventually phase out such subsidies, argued that removing such supports quickly could trigger political and economic instability.

India is already facing such effects. The government on Wednesday hiked gasoline and diesel prices, triggering protests by angry consumers who blocked rail tracks and roads and shut down businesses.

The real reason why oil prices are rising

By now it is becoming too obvious that the United States is playing the oil game all over again. And this is the desperate gamble of a  country whose economy is neck deep in trouble.

 

Given this scenario, managing prices of oil is central to the US economic architecture. Expectedly, this gamble has been played in a great alliance between the US government, US financial sector and the media.

 

 The impending collapse of the US dollar on account of the inherent weakness in the US economy caused by its structural weakness as reflected in the sub-prime crisis; The repeated softening of the interest rates in the US that has the potency to kill the US dollar; and How the fall in the US dollar suits the US corporate sector, especially its omnipotent financial sector.

 Naturally, since the past few years, the US financial sector has begun to turn its attention from currency and stock markets to commodity markets. According to The Economist, about $260 billion has been invested into the commodity market — up nearly 20 times from what it was in 2003.

 

 Coinciding with a weak dollar and this speculative interest of the US financial sector, prices of commodities have soared globally.

 

 And most of these investments are bets placed by hedge and pension funds, always on the lookout for risky but high-yielding investments. What is indeed interesting to note here is that unlike margin requirements for stocks which are as high as 50 per cent in many markets, the margin requirements for commodities is a mere 5-7 per cent.

 

This implies that with an outlay of a mere $260 billion these speculators would be able to take positions of approximately $5 trillion — yes, $5 trillion! — in the futures markets. It is estimated that half of these are bets placed on oil.

 

 Oil price hike: Govt can’t save you: PM

 

 Readers may note that oil is internationally traded in New York and London and denominated in US dollar only. Naturally, it has been opined by experts that since the advent of oil futures, oil prices are no longer controlled by OPEC (Organization of Petroleum Exporting Countries). Rather, it is now done by Wall Street.

 

 This tectonic shift in the determination of international oil prices from the hands of producers to the hands of speculators is crucial to understanding the oil price rise.

 

 Today’s oil prices are believed to be determined by the four Anglo- American financial companies-turned-oil traders, viz., Goldman Sachs, Citigroup, J P Morgan Chase, and Morgan Stanley. It is only they who have any idea about who is entering into oil futures or derivative contracts. It is also they who are placing bets on oil prices and in the process ensuring that the prices of oil futures go up by the day.

 

 But how does the increase in the price of this oil in the futures market determine the prices of oil in the spot markets? Crucially, does speculation in oil influence and determine the prices of oil in the spot markets?

 

 Answering these questions as to whether speculation has supercharged the demand for oil The Economist, in its recent issue, states: ‘But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of ‘paper barrels,’ but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.’

 

 On both counts — that speculation in oil is not pushing up oil prices, as well as on the issue of the build-up of inventories — the venerable Economist is wrong.

 

The finding of US Senate Committee in 2006

 

 In June 2006, when the oil price in the futures markets was about $60 a barrel, a Senate Committee in the US probed the role of market speculation in oil and gas prices. The report points out that large purchase of crude oil futures contracts by speculators has, in effect, created additional demand for oil and in the process driven up the future prices of oil.

 

 The report further stated that it was ‘difficult to quantify the effect of speculation on prices,’ but concluded that ‘there is substantial evidence that the large amount of speculation in the current market has significantly increased prices.’

 

 The report further estimated that speculative purchases of oil futures had added as much as $20-25 per barrel to the then prevailing price of $60 per barrel. In today’s prices of approximately $130 per barrel, this means that approximately $100 per barrel could be attributed to speculation!

 

 But the report found a serious loophole in the US regulation of oil derivatives trading, which according to experts could allow even a ‘herd of elephants to walk to through it.’ The report pointed out that US energy futures were traded on regulated exchanges within the US and subjected to extensive oversight by the Commodities Future Trading Commission (CFTC) — the US regulator for commodity futures market.

 

 In recent years, the report however pointed out to the tremendous growth in the trading of contracts which were traded on unregulated OTC (over-the-counter) electronic markets. Interestingly, the report pointed out that the trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron into the Commodity Futures Modernization Act in 2000.

 

 The report concludes that consequential impact on account of lack of market oversight has been ’substantial.’

 

 NYMEX (New York Mercantile Exchange) traders are required to keep records of all trades and report large trades to the CFTC enabling it to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. In contrast, however, traders on unregulated OTC electronic exchanges are not required to keep records or file any information with the CFTC as these trades are exempt from its oversight.

 

 Consequently, as there is no monitoring of such trading by the oversight body, the committee believes that it allows speculators to indulge in price manipulation.

 

 Finally, the report concludes that to a certain extent, whether or not any level of speculation is ‘excessive’ lies entirely in the eye of the beholder. In the absence of data, however, it is impossible to begin the analysis or engage in an informed debate over whether our energy markets are functioning properly or are in the midst of a speculative bubble.

 

 That was two years back. And much water has flown in the Mississippi since then.

 

 Now to answer the second leg of the question: how speculators are able to translate the future prices into spot prices. The answer to this question is fairly simple. After all, oil price is highly inelastic — i.e. even a substantial increase in price does not alter the consumption pattern. No wonder, a mere 3-4 per cent annual global growth has translated into more than a 40 per cent annual increase in prices for the past three or four years.

 

 But there is more to it. One may note that the world supply and demand is evenly matched at about 85 million barrels every day. Only if supplies exceed demand by a substantial margin can any downward pressure on oil prices be created. In contrast, if someone with deep pockets picks up even a small quantity of oil, it dramatically alters

 the delicate global demand-supply gap, creating enormous upward pressure on prices.

 

 What is interesting to note is that the US strategic oil reserves were at approximately 350 million barrels for a decade till 2006. However, for the past year and a half these reserves have doubled to more than 700 million barrels. Naturally, this build-up of strategic oil

 reserves by the US (of 350 million barrels) is adding enormous pressure on the oil demand and consequently its prices.

 

 Do the oil speculators know of this reserves build-up by the US and are indulging in rampant speculation? Are they acting in tandem with the US government? Worse still, are they bordering on recklessness knowing fully well that if the oil prices fall the US Government will be forced to a ‘Bears Stearns’ on them and bail them out? One is not sure.

 

 But who foots bill at such high prices? At an average price of even $100 per barrel, the entire cost for the purchase of this additional 350 million barrels by the US works out to a mere $35 billion. Needless to emphasise, this can be funded by the US by allowing it currency printing presses to work overtime. After all, it has a currency that is acceptable globally and people worldwide are willing to exchange it for precious oil.

 

 No wonder Goldman Sachs predicts that oil will touch $200 to a barrel shortly, knowing fully well that the US government will back its prediction.

 

 And, in the past three years alone the world has paid an estimated additional $3 trillion for its oil purchases. Oil speculators (and not oil producers) are the biggest beneficiaries of this price increase.

 

 In the process, the US has been able to keep the value of the US dollar afloat — perhaps at an extra cost of a mere $35 billion to its exchequer!

 

 The global crude oil price rise is complex, sinister and beyond innocent economic theories of demand and supply. It is speculation, geopolitics and much more. Obviously, there is a symbiotic link between the US, the US dollar and the oil prices. And unless this truth is understood and the link broken, oil prices cannot be controlled.

10 investing rules to become rich

An old saying goes, “You can’t build wealth by buying things you don’t need, with money you don’t have, to impress people you don’t like.” So how do you build wealth? Read on…

There are basically only four roads to wealth:
You can marry it (don’t laugh, some do);
You can inherit it (others do that);
You can get a windfall (from a lawsuit settlement, lottery, or some other unexpected good fortune); or
You can accumulate it.

Most of us are stuck with option #4 - accumulate it. To do so, you need to understand how to manage cash flow. First, look at your annual earnings and multiply that figure by your working years. Not counting inflation (that is, pay raises along the way), the result may total several million dollars.
Whether you will have that several million dollars by retirement, though, depends on how you manage your cash flow - and how you answer the following questions: What do you need now, what do you want now, and what can you save and invest for the future?

Here are ten time-tested rules that can weather the stormiest market cycles.

Rules #1: Live within your means
This includes managing debt and learning to budget. Such boring topics may not be the most exciting things about becoming wealthy, but they may be the most critical.
Consumer-driven economies relentlessly hammer away at why we must buy this item or that gadget so we can have the appearance of being successful, happy, and altogether “with it.” So it takes financial discipline and sensible behavior to successfully accumulate money and grow wealthy.
Possibly the biggest trap out there is easy credit, which lets us buy numerous things we might not need. Comedians have pointed out the foolishness: “You buy something that’s 10 per cent off and charge it on a 20 per cent interest credit card!” And US newspaper columnist Earl Wilson opined, “Nowadays there are three classes of people - the Haves, the Have-Nots, and the Have-Not-Paid-For-What-They-Haves.”
Learning to live within your means leads to a freer life - debt can be a mean master instead of a worthy servant. Save first, spend second. If you do so, building wealth will be a lot easier for you.
Rule #2: Save aggressively
This does not mean “invest aggressively.” Rather, it means making it an absolute priority to set aside 10 per cent of your income right off the top, and even more if your goals tell you to do that. The longer you wait to start saving, the larger the percentage of your current pay you will have to save to reach your goal.
If you can save aggressively, you will be surprised how that “nest egg” will start to compound. Look at any chart of compounding. It has been said that it’s the last compounding that makes you wealthy.
In other words, $20,000 becoming $40,000 doesn’t seem like a lot of headway, but when the $40,000 compounds to $80,000, and the $80,000 to $160,000, and finally the $160,000 to $320,000, we’re now talking about some serious money. Two more “doublings” and this account will be worth over $1.2 million. Those who spend first and save later inevitably end up working for those who have learned to save first, spend second.
Rule #3: Dollar-cost average
When buying shares, remove emotions from your investing by automatically buying more shares or equity mutual fund units when they are cheap. Emotional investing gets too many people in trouble. Statistics continue to show that we tend to buy when things are going up and sell when they are going down - in other words, we tend to buy high and sell low. Dollar-cost averaging not only removes emotions from investing, but it helps you buy low. Here’s how:
By putting a constant amount into the market, as the price slips, you buy more and more number of cheaper shares or fund units and thereby reduce your average cost.
For example, let’s say you are investing $100 a month into a fund. In the first month, the price of the fund is $10 per share and you buy 10 shares. The next month, the price has dropped to $8 per share, so your $100 buys you 12.5 shares. The next month, the price has fallen again, to $5 a share, and you buy 20 shares. In the fourth month, the price ticks back up to $7 per share. Your total investment so far is $400.
If you’re like most people, though, when you look at your statement and see that by the end of the third month the price has fallen to half, you would probably think you were losing money hand over fist. Especially after a fund continues to decline month after month, investors lose patience and start to bail. They’re looking for “better returns,” but they don’t understand what’s going on with the math.
At $5 a share, it feels as though you’re down 50 per cent (because the price started at $10 per share). However, you own 42.5 shares, which, when multiplied by $5 a share, equals $212.50 - and you’ve invested $300. In the fourth month, the price gets back up to $7 per share. Although it might feel as though you’re still down because the price started at $10 per share, you’re actually within a couple of dollars of your break-even point. You own 56.79 shares, which when multiplied by $7 equals $397.53, on an investment of $400.
Of course, if the fund or market continues to go down and never comes back up, you can’t be guaranteed a profit. But this would happen rarely, if ever. Dollar-cost averaging - by investing a fixed amount in regular intervals - is the best way to make money in a variable market over time.
The most difficult part is having the discipline to keep doing it. Investors should be willing to consider their ability to invest over an extended period of time. Remember, you need a longer time horizon when investing in the stock market.
Rule #4: Diversify
No investment is risk free; only a diversified portfolio can mitigate the risks of market cycles. We’ve all been warned against putting all our eggs in one basket; even Warren Buffett said, “It’s better to be approximately right than definitely wrong.” By “approximately right,” he was referring to diversification.
If one piece of your portfolio is doing substantially better than other parts, the natural inclination is to load up on the part doing the best and forsake those not doing well. But the result will be an under-diversified portfolio that will probably be much more volatile - and the risks may be on the downward side.
Also, proper diversification does not mean any old bunch of mutual funds or stocks, but a proper allocation among stocks, bonds, real estate, fixed assets, and other investments. It also means diversifying within those investment categories.
For example, your stocks should include a mix of midcap, large-, and small-cap stocks as well as growth, blend, and value stocks. You should have bonds that are long, medium, and short term, as well as high grade, mid grade, and low grade.
A mutual fund may offer more diversification than you could afford by owning the same stocks individually. But owning a handful of mutual funds may not offer the diversification you seek unless you research the funds’ holdings carefully. That’s because many funds have substantial “overlap.” In other words, fund A from mutual fund family X may have many of the same stocks as fund B from fund family Y.
Rule #5: Be patient
Warren Buffet says, “The market has a very efficient way of transferring wealth from the impatient to the patient.”
But waiting is very hard to do. How long are you willing to hold an asset that is not performing well? One year? Two, three, or four? If you look at the history of asset classes over time, you will see that an asset can be “out of favor” for several years in a row.
You have to be prepared to wait. Don’t think you can time when bonds will perform and stocks will get hot. If someone really could do that, he would own the world by now. So remember: Time in the market is more important than timing the market.
Rule #6: Understand volatility
Very few people truly understand the risk and volatility inevitably baked into every investment portfolio. Without getting into its complexity, every variable investment has produced a range of returns over its lifetime, and this range, or deviation, can be plotted on a chart.
So, it’s important to understand what the investment category’s “average” annual return means in order to prepare yourself for its volatility. For example, does a 10 per cent average mean the investment was up 73 per cent and down 30 per cent and happened to average 10 per cent? Or was it up 15 per cent, and then down 5 per cent to average 10 per cent?
Many investors are fooled by averages - they chase the 70 per cent return after it has happened, when the likelihood of a repeat performance is slim (which we’ll discuss more in Rule #7). Yogi Berra is rumored to have said, “Averages don’t mean nuthin”. If they did, you could have one foot in the oven and the other in a bucket of ice and feel perfectly comfortable.”
Over time, returns from investments regress to a mean. “Regression to the mean” simply means that highs and lows will average out so that your return regresses to a certain number or range. Understand an investment’s range of returns so you know what to expect annually, and over time.
Markets move from fear to greed, and back to fear. So there are times when the market is “overvalued” and other times when it is “undervalued.” Warren Buffett said of the stock buying and selling decisions made at his company, Berkshire Hathaway, “We strive to be fearful when others are greedy, and greedy only when others are fearful.”
Rule #7: Don’t chase returns
If we know from Rule #6 that a 10 per cent average annual return does not really mean a 10 per cent return each year, why do we still fall for an ad touting a fund that produces 20 per cent annually or some other phenomenal return?
Human nature. And maybe we even convince ourselves that for the chance to experience a year or two of 70 per cent gains, we’re willing to stomach the years of 30 per cent losses that also fall within the fund’s range of returns.
So, before chasing that incredible return, find out how the investment did during the last bad market for that asset class. Find out its risk, and ask yourself whether you can stomach a bumpy ride over the long term.
Another Buffettism: “The dumbest reason in the world to buy a stock is because it is going up.” So before chasing a return, always consider how likely it is that the investment will continue to produce that return - and whether it’s really worth the cost of cashing out of another, perhaps only temporarily depressed, investment to do so.
Rule #8: Periodically rebalance your portfolio
You may decide that your investment mix should be, for example, 50 per cent growth stocks, 20 per cent value stocks, and 30 per cent bonds. But asset classes vary in performance over time, so after a year or so, the portfolio balance will start to shift as one asset “overperforms” and another one “underperforms.”
Emotions would tell you to sell the underperformers and buy the overachievers. If you want to remain adequately diversified, however, you would rebalance by selling some of the overperformers and buying some of the underachievers - probably just the opposite of what your emotions will tell you.
So, if you strive to put your portfolio back to its original allocations from time to time (annually, semi-annually, or possibly even quarterly), you will be taking gains from the best-performing assets (selling high) and buying those temporarily out of favor (buying low). But it takes discipline to keep your emotions in check.
Rule #9: Manage your taxes
Have you ever considered how taxes are your biggest expense in life - more than mortgage expense, education expense, or any other expense? So, you must take advantage of all tax breaks available - each and every single one of them.
Rule #10: Get advice
Never underestimate the value of good advice. Someone who manages investments full time certainly will find things you have overlooked or done wrong. A good financial adviser is like a personal trainer for your finances and can get you on track and keep you there until your goals are met.
And even more critical than getting the advice is being sure you consistently follow your game plan. The greatest problem for most people is procrastination and erratic investment behavior. So get started, get advice, and get going down the road to wealth - and steadfastly follow through.
(Excerpt from the book, Investing Under Fire)

Wake Up Mr. Reddy-Raise Interest Rates and Burn The Speculators. Otherwise You Will Be Presiding Over Double Digit Inflation Soon…..

Nearly all the pieces are now in place for inflation to strike with increasing speed and fury, catching Wall Street by surprise, throwing government policy into turmoil and, at the same time, opening up broad opportunities for investors.
 
I know. I’ve seen this movie once before. And the script will forever be ingrained in my mind.
 
It was 1978. Jimmy Carter was president. Oil prices had been surging for nearly seven years. Other commodities — including silver, gold and food — were following closely behind. Wholesale prices, import prices and the price of critical resources were climbing swiftly.
 
Most important, the Fed’s pipe-smoking Chairman Arthur Burns, fearing a chain reaction of financial failures, pumped up the money supply with wild abandon, slashed interest rates — and set the stage for the worst U.S. inflation since the Civil War.
 
I saw it all, but I didn’t believe it. I assumed Burns would come to his senses, see the obvious danger of inflation and reverse course.
 
But I assumed wrong.
 
Burns plowed ahead regardless of all the signs. He gave lip service to fighting inflation, while continuing to print money. And sure enough, about a year and half after he left the Fed, consumer price inflation was roaring at double-digit rates. 

Today, 30 years have gone by.
Instead of Burns, we have Bernanke; instead of Carter, we have Bush.
 
And while I marvel at how much the world has changed, it never ceases to amaze me how little the Fed has learned.
 
Like the Burns Fed of the 1970s, the Bernanke Fed is trying to avert a chain reaction of failures. Like the decision-makers under Burns, the team under Bernanke is talking the talk of moderation, while walking the walk of inflation.
 
Can’t they add up the numbers? Don’t they see the handwriting on the wall? Maybe, maybe not. But all that matters is their actions — and the consequences of their actions …
 
Already, U.S. producer prices have risen by almost 7% over the past year. And right now, they’re surging at an annualized pace of 13.2%.
 
Already, U.S. import prices have catapulted 14.8% compared to a year earlier. And in the most recent month alone, they rose at an annualized rate of 33.6%!

 And already, critical energy and food prices are rising at a pace that makes some of the 1970s surges seem small by comparison:
Just in the past 12 months, for example, corn is up 70%, sugar is up 72%, and the all-important price of crude oil is up by an astounding 102%.
 
In sum, with all of these prices jumping and with inflation clearly invading the daily life of average Americans …
 
 
It Would Be the Epitome of Complacency to
Assume Double-Digit Inflation Is Not in the Cards
 
Indeed, by many of the measures I’ve just cited — producer prices, import prices and commodity prices — we already have double-digit inflation in the U.S. today.
 
So isn’t it suspicious that the only measure that does not yet reflect surging inflation — the Consumer Price Index — also happens to be the yardstick with the most immediate political implications?
 
Isn’t it a bit worrisome when all measures of inflation are flying higher except the one that means the most for millions of Americans?
 
Until now, the discrepancy between actual inflation and the government’s Consumer Price Index (CPI) was largely an academic debate few people paid much attention to.
 
Now, however, with real-world consumer prices jumping right before our eyes … while the government’s distorted CPI still lingers near the 4% area, the gap between the two is about to burst onto the scene as a scandalous cover-up.
 
According to John Williams’ Shadow Statistics, the premier source of unadulterated U.S. economic indicators …
While the March year-over-year change in the official CPI was only 3.98% …

The true CPI, based on the same standards as those that prevailed before the Clinton administration, is now 11.58%!

This means that the gap between the official CPI and the alternate CPI is now a whopping 7.6 percentage points.
 
 
In other words, the U.S. government could now be understating the CPI by a full 7.6%! 
 
 Moreover, over the years, this gap has widened dramatically. Until January 1982, there was no gap whatsoever; and until November 1986, the gap was usually less than 1%. But then, it started widening like mad, and has been getting bigger ever since. Ironically …
 
Despite the Shenanigans in
The CPI, the Government Still
Can’t Keep the Number Down!
 
Even at just 4%, the official CPI inflation has clearly exceeded the Fed’s target range. And even at this artificially low level, it is already triggering a gusher of concern.
 
In a Thursday posting to his blog, “Officials Ratcheting up Their Inflation-Fighting Rhetoric,” Mike Larson showed you just a few examples:
Kansas City Fed President Thomas Hoenig: We are now facing “inflation psychology to an extent that I have not seen since the 1970s and early 1980s.”

IMF Deputy Chief John Lipsky: “This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability.” A return to 1970s-style high inflation and rising price expectations “cannot be discarded out of hand.”

ECB president Jean-Claude Trichet: “There’s no time for complacency in any respect” as far as inflation expectations are concerned.
But talk is cheap. At the Fed — and in many countries — the only action that’s under consideration is no action. In other words, keeping interest rates at their current low levels.
 
And with inflation surging, the only way they can keep interest rates down is by stepping up the flood of freshly printed money into the economy.
 
To Better Understand What’s Really
Happening, Here’s What to Watch …
 
Set aside, for the moment, all the debate about the CPI. Bypass, for now, the various notions of how much money the government is pumping into the economy. And above all, take with a grain of salt the official rhetoric that they’re “fighting inflation.”
 
All that is just talk. What counts is action. And the one single measure that best distills the true action is the level of real interest rates (interest rates minus inflation).
 
Example:
 
Interest rate: 5%
Inflation rate: 4%
Real interest rate = 1%
Real interest rates tell you if the Fed is just BS-ing or actually acting.
Real interest rates help give you a solid preview of whether inflation is likely to accelerate or not.
And real interest rates will be your best warning of a possible end to the inflationary cycle, when and if that time comes.
 
The reason: Real interest rates represent the true price of the most important “commodity” of all: Money.
Here’s the scoop in a nutshell …
When real interest rates are high, money is expensive. If it persists, the days of inflation are numbered.

When real interest rates are low, money is cheap. And with cheap money chasing scarce goods, inflation is bound to continue.

Worse, when real interest rates are zero, money is not just cheap, it’s effectively free. And free money chasing scarce goods puts inflation into overdrive.

Worst of all, when real interest rates are below zero, money is not just free — but borrowers are, in effect, actually getting paid to take the money. And it’s the abundance of this kind of highest-octave money that is the ultimate prelude to double-digit inflation.
That’s what we have today: The Fed has dropped the fed funds rate to 2%. But the CPI inflation, even with all its distortions, is now close to 4%. So the real interest rate is …
 
2% minus 4% = 2% below zero!
 
With this upside-down state of affairs, it matters little what the Fed says. Fed Chairman Bernanke could go before Congress. He could get down on his hands and knees. He could swear until he’s blue in the face that he will “fight inflation.”
 
But until and unless the level of real interest rates rises back above zero — and beyond — nothing Bernanke says will make much of a difference.
 
Oil and commodity prices will continue to surge. Import prices will continue to jump. The dollar will continue to lose value. And inflation will continue to spiral upward.
 
This is precisely what happened in the mid-1970s under Burns:
 
He pushed short-term rates down dramatically.
 
He ignored the fact that consumer prices were rising at a faster clip.

And as a result, real interest rates plunged to zero … 2% below zero … 4% below zero …
 
ultimately as low as 5.2% below zero in February 1975 (red areas to the left side of chart).
 
And above all else, it was this super-money (borrowers virtually getting paid 5% to borrow it) that was the prelude to double-digit inflation in the late 1970s.
 
Now, here we are again — in the same place and with the same danger! Here we go again with real interest rates far below zero (red areas to the right side of chart)!
 
Does it matter that real interest rates today aren’t quite as low as they were 30 years ago? No. What’s more important is the fact that they’ve been kept at these low levels for so long.
 
And remember: The true inflation rate, stripped of the government’s cover-ups and shenanigans, could be as much as seven full percentage points higher. That means that the red areas in the chart today could actually be much deeper in the danger zone than prevailed under Burns.
 
Bottom line: Brace yourself. Double-digit inflation is on the way.
 
What to Do Next
 
Step 1. If you haven’t done so already, buy inflation hedges. Back in the 1970s, it was often cumbersome and inconvenient. Investors scrambled to buy gold bullion bars. Or they hoarded bags of silver coins. And when inflation eventually reversed itself, many got stuck with essentially illiquid investments.
Today, the instruments available are far more liquid. You can simply buy exchange-traded funds (ETFs) that own (or track) the inflation hedges of your choice, such as StreetTRACKS Gold Trust (GLD) or iShares Silver Trust (SLV).
 
Step 2. Also consider energy-related investments. Oil, natural gas and alternative energy sources are in the vanguard of this round of inflation, with no end in sight. Stocks and ETFs tied to their rise are bound to continue to benefit.
 
Step 3. Diversify out of the U.S. dollar by buying the strongest foreign currencies. Although the dollar could enjoy a nice rally in the near term, the long-term outlook remains negative. Even if the Fed pauses its recent rate-cutting … even in the Fed actually raises rates … as long as real interest rates in the U.S. remain below zero, it’s unlikely to provide lasting support for the dollar.
 
Step 4. For more details and further instructions, watch the video recording of our blockbuster online event, “American Armageddon: How to Win the Epic Battle for Your Wealth.” It goes offline Wednesday. So this could be your last chance to see it.
 
Good luck and God bless!

Where Wal-Mart went wrong….

Late 2006, Mukesh Ambani-promoted Reliance Retail opened its first store in Hyderabad. Around the same time, Wal-Mart Stores Inc, the world’s largest retailer in terms of sales, announced its partnership with Bharti Enterprises to begin operations in India. 
Eighteen months hence, Reliance Retail is a 600-store chain, while Wal-Mart, which had planned to start operations by the year-end, has deferred the launch to 2009.
“Our August announcement (to start by 2008-end) was a statement of intent,” said a Bharti Wal-Mart spokesperson. “As we get closer to execution, we are investing significant resources to better understand the nuances of the market and closely studying the existing supply chain infrastructure.”
In fact, Wal-Mart showed extreme alacrity when it overtook British supermarket chain Tesco Plc, which was earlier in talks with Bharti. In November 2006, the US retailer was able to clinch the deal with the Indian business house in a record three months, rendering Tesco’s over a year-long talks futile.
Nonetheless, it took the two companies 10 months just to decide the formats in which the joint venture would roll out the operations. Ambani opened its first retail store five months after the initial announcement.
Ending the speculation of Bharti being the franchisee for Wal-Mart’s front end operations, the  companies signed an agreement to establish Bharti Wal-Mart Private Ltd, an equal joint venture for wholesale cash-and-carry and back end supply chain management operations in India in August 2007.
“In the case of one or two clients, we saw that it takes a long time in such joint ventures to even synchronise the calendar for every one for discussions,” said Arvind K Singhal, chairman of Technopak, a business consulting firm. “These international retailers are also facing some degree of crisis in some of their markets, which would take away their attention,” he added.
Wal-Mart argues that the delay is because India is the first market that it is entering organically in the last 10 years. “It took us time to understand the nuances of the market through customer research and get our agreements in place,” said the Bharti Wal-Mart spokesperson.
However, analysts have a different opinion about the slow pace of Bharti Wal-Mart’s rollout plan. “It took time because Wal-Mart was evaluating if it could be brought to the front end,” said an analyst with a leading domestic brokerage.
Wal-Mart inked the pact with Bharti when the industry was expecting some amount of foreign direct investment (FDI) in multi-brand retailing and Tesco was seen taking the lead from Wal-Mart.
The government allowed 51 per cent FDI in single brand retail stores in 2006 and some amount of FDI was also expected in multi-brand retail. However, FDI in multi-brand retailing was not allowed amidst opposition from political parties expressing concern of negative impact on small kirana shops.
However, 100 per cent FDI in the wholesale cash-and-carry model remained intact. This left only one route for multi-brand international retailers, such as Wal-Mart, Tesco, and Carrefour, to open its stores under own brand name: to find a franchise. The franchise route has been open for the foreign retailers.
However, it did not attract Wal-Mart and it chose to partner Bharti for the cash-and-carry operation, which it could have gone alone under government guidelines. However, Wal-Mart insists that its India joint venture is out of choice and not compulsion.
Bharti Enterprises, through a separate subsidiary, also moved into front end retailing under the brand name Easy Day, which opened its first store only last month in Ludhiana. It has got three stores now and more will follow.
The Bharti group looks little behind  conglomerates A V Birla Group and Reliance Industries [Get Quote].
A V Birla group started its retail operation with the acquisition of south India-based Trinethra Super Retail in January 2007 and followed it up with its own retail store under the brand name More in the next four months.

Oil Spill at the NSE & Humpty Dumpty

Humpty Dumpty (bulls) sat on a wall (or a cliff??) and they all had a great fall.
 
The battle on the edge of the cliff of 5000 was clearly won by the bears yesterday, and bulls gave up without a fight.
 
This in a nutshell, is the story of what happened yesterday.
 
BUT…………there seems to be more than meets the naked eye. All the TV channels and business newspapers will only say that the Nifty fell by 78.9 points to close at 4946.55.
 
However, what the common man does not see is the market internals. I am presenting a startling piece of information below.
 
ONGC has one of the top weightages in the Nifty.
 
- The traded volumes in ONGC yesterday were the 3rd highest ever in its history.
- The volumes were the highest after 27th April 2006, and 86,12,528 shares were traded in ONGC yesterday. This is way above its daily volumes.
- Turnover in this stock alone accounted for Rs. 778 crores in NSE cash segment.
- The volumes in ONGC were 2301% above the 5-day average of 358767.
 
This is not all……………………
 
- Out of the 86.12,528 shares traded in ONGC yesterday, 76% of this volume was traded in JUST 2 trades
- first at 12.59 pm which saw volumes of 45,15,526 (52% !!!) and
- the other at 3.24 pm which saw volumes of 20,11,558 (24%).
 
- THESE 2 TRADES ALONE ACCOUNTED FOR A TURNOVER OF RS. 600 CRORES!!
 
In spite of such huge volumes, ONGC fell only from 910 to 900 in the first trade and then 901.95 to 900 in the second trade. Moreover, there was hardly any change in volumes in ONGC futures.
 
Readers are requested to post their views on this amazing volume shocker.
 
Coming back to our markets. Now what…after the cliff?
 
Interpreting a chart is like one of those optical illusions that one gets in emails. You can see some concrete facts, and then leave the others to your imagination skills. 
 
I can see 2 scenarios, as mentioned on the chart.
 
Nifty can take support either at 4910 - 4915, or finally at 4800 - 4810.
 
If 4800 does not hold (quite unlikely), then we might be going straight towards 4470 - 4200.
 
If 4910 holds, we might see a good bull run, which if 5200 is crossed, can go all the way up to 5925 (in few weeks, not days).
 
One may start buying Hindustan Unilever, with a stop loss of 225, for a good move in the next couple of weeks.

Always be ready for plan B

India: Choice Between 10 % Inflation & Bankruptcy

Let the Retail price of Motor Spirits rise, then see where goes India’s inflation.

Nearly all the pieces are now in place for inflation to strike with increasing speed and fury, catching Wall Street by surprise, throwing government policy into turmoil and, at the same time, opening up broad opportunities for investors.

I know. I’ve seen this movie once before. And the script will forever be ingrained in my mind. It was 1978. Jimmy Carter was president. Oil prices had been surging for nearly seven years.

Other commodities — including silver, gold and food — were following closely behind. Wholesale prices, import prices and the price of critical resources were climbing swiftly.

Most important, the Fed’s pipe-smoking Chairman Arthur Burns, fearing a chain reaction of financial failures, pumped up the money supply with wild abandon, slashed interest rates — and set the stage for the worst U.S. inflation since the Civil War.

I saw it all, but I didn’t believe it. I assumed Burns would come to his senses, see the obvious danger of inflation and reverse course.
But I assumed wrong.

Burns plowed ahead regardless of all the signs. He gave lip service to fighting inflation, while continuing to print money. And sure enough, about a year and half after he left the Fed, consumer price inflation was roaring at double-digit rates.

Today, 30 years have gone by.

Instead of Burns, we have Bernanke; instead of Carter, we have Bush.
And while I marvel at how much the world has changed, it never ceases to amaze me how little the Fed has learned.

Like the Burns Fed of the 1970s, the Bernanke Fed is trying to avert a chain reaction of failures. Like the decision-makers under Burns, the team under Bernanke is talking the talk of moderation, while walking the walk of inflation.

Can’t they add up the numbers? Don’t they see the handwriting on the wall? Maybe, maybe not. But all that matters is their actions — and the consequences of their actions …

Already, U.S. producer prices have risen by almost 7% over the past year. And right now, they’re surging at an annualized pace of 13.2%. Already, U.S. import prices have catapulted 14.8% compared to a year earlier.And in the most recent month alone, they rose at an annualized rate of 33.6%!

And already, critical energy and food prices are rising at a pace that makes some of the 1970s surges seem small by comparison:

Just in the past 12 months, for example, corn is up 70%, sugar is up 72%, and the all-important price of crude oil is up by an astounding 102%.

In sum, with all of these prices jumping and with inflation clearly invading the daily life of average Americans …

It Would Be the Epitome of Complacency to
Assume Double-Digit Inflation Is Not in the Cards

Indeed, by many of the measures I’ve just cited — producer prices, import prices and commodity prices — we already have double-digit inflation in the U.S. today.

So isn’t it suspicious that the only measure that does not yet reflect surging inflation — the Consumer Price Index — also happens to be the yardstick with the most immediate political implications?

Isn’t it a bit worrisome when all measures of inflation are flying higher except the one that means the most for millions of Americans?

Until now, the discrepancy between actual inflation and the government’s Consumer Price Index (CPI) was largely an academic debate few people paid much attention to.

Now, however, with real-world consumer prices jumping right before our eyes … while the government’s distorted CPI still lingers near the 4% area, the gap between the two is about to burst onto the scene as a scandalous cover-up.

According to John Williams’ Shadow Statistics, the premier source of unadulterated U.S. economic indicators …
While the March year-over-year change in the official CPI was only 3.98% …
The true CPI, based on the same standards as those that prevailed before the Clinton administration, is now 11.58%!
This means that the gap between the official CPI and the alternate CPI is now a whopping 7.6 percentage points. In other words, the U.S. government could now be understating the CPI by a full 7.6%!

Moreover, over the years, this gap has widened dramatically. Until January 1982, there was no gap whatsoever; and until November 1986, the gap was usually less than 1%. But then, it started widening like mad, and has been getting bigger ever since. Ironically …

Despite the Shenanigans in
The CPI, the Government Still
Can’t Keep the Number Down!

Even at just 4%, the official CPI inflation has clearly exceeded the Fed’s target range. And even at this artificially low level, it is already triggering a gusher of concern.

In a Thursday posting to his blog, “Officials Ratcheting up Their Inflation-Fighting Rhetoric,” Mike Larson showed you just a few examples:
Kansas City Fed President Thomas Hoenig: We are now facing “inflation psychology to an extent that I have not seen since the 1970s and early 1980s.”

IMF Deputy Chief John Lipsky: “This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability.” A return to 1970s-style high inflation and rising price expectations “cannot be discarded out of hand.”

ECB president Jean-Claude Trichet: “There’s no time for complacency in any respect” as far as inflation expectations are concerned.
But talk is cheap. At the Fed — and in many countries — the only action that’s under consideration is no action. In other words, keeping interest rates at their current low levels.

And with inflation surging, the only way they can keep interest rates down is by stepping up the flood of freshly printed money into the economy.

To Better Understand What’s Really
Happening, Here’s What to Watch …

Set aside, for the moment, all the debate about the CPI. Bypass, for now, the various notions of how much money the government is pumping into the economy.

And above all, take with a grain of salt the official rhetoric that they’re “fighting inflation.”

All that is just talk. What counts is action. And the one single measure that best distills the true action is the level of real interest rates (interest rates minus inflation).
Example:
Interest rate: 5%
Inflation rate: 4%
Real interest rate = 1%
Real interest rates tell you if the Fed is just BS-ing or actually acting.
Real interest rates help give you a solid preview of whether inflation is likely to accelerate or not.
And real interest rates will be your best warning of a possible end to the inflationary cycle, when and if that time comes.
The reason: Real interest rates represent the true price of the most important “commodity” of all: Money.
Here’s the scoop in a nutshell …
When real interest rates are high, money is expensive. If it persists, the days of inflation are numbered.

When real interest rates are low, money is cheap. And with cheap money chasing scarce goods, inflation is bound to continue.

Worse, when real interest rates are zero, money is not just cheap, it’s effectively free. And free money chasing scarce goods puts inflation into overdrive.

Worst of all, when real interest rates are below zero, money is not just free — but borrowers are, in effect, actually getting paid to take the money. And it’s the abundance of this kind of highest-octave money that is the ultimate prelude to double-digit inflation.
That’s what we have today: The Fed has dropped the fed funds rate to 2%. But the CPI inflation, even with all its distortions, is now close to 4%. So the real interest rate is …

2% minus 4% = 2% below zero!

With this upside-down state of affairs, it matters little what the Fed says. Fed Chairman Bernanke could go before Congress. He could get down on his hands and knees. He could swear until he’s blue in the face that he will “fight inflation.”

But until and unless the level of real interest rates rises back above zero — and beyond — nothing Bernanke says will make much of a difference.

Oil and commodity prices will continue to surge. Import prices will continue to jump. The dollar will continue to lose value. And inflation will continue to spiral upward.

This is precisely what happened in the mid-1970s under Burns:

He pushed short-term rates down dramatically.

He ignored the fact that consumer prices were rising at a faster clip.

And as a result, real interest rates plunged to zero … 2% below zero … 4% below zero … ultimately as low as 5.2% below zero in February 1975 (red areas to the left side of chart).

And above all else, it was this super-money (borrowers virtually getting paid 5% to borrow it) that was the prelude to double-digit inflation in the late 1970s.

Now, here we are again — in the same place and with the same danger! Here we go again with real interest rates far below zero (red areas to the right side of chart)!

Does it matter that real interest rates today aren’t quite as low as they were 30 years ago? No. What’s more important is the fact that they’ve been kept at these low levels for so long.

And remember: The true inflation rate, stripped of the government’s cover-ups and shenanigans, could be as much as seven full percentage points higher. That means that the red areas in the chart today could actually be much deeper in the danger zone than prevailed under Burns.

Bottom line: Brace yourself. Double-digit inflation is on the way.

Even if the Fed pauses its recent rate-cutting … even in the Fed actually raises rates … as long as real interest rates in the U.S. remain below zero, it’s unlikely to provide lasting support for the dollar.

World’s first billion dolar HOME… that too INDIAN !!

While visiting New York in 2005, Nita Ambani was in the spa at the Mandarin Oriental New York, overlooking Central Park. The contemporary Asian interiors struck her just so, and prompted her to inquire about the designer.

Nita Ambani was no ordinary tourist. She is married to Mukesh Ambani, head of Mumbai-based petrochemical giant Reliance Industries, and the fifth richest man in the world. (Lakshmi Mittal, ranked fourth, is an Indian citizen, but a resident of the U.K.).

Forbes estimated Ambani’s net worth at $43 billion in March. Reliance Industries was founded by Mukesh’s father, Dhirubhai Ambani, in 1966, and is India’s most valuable firm by market capitalization. The couple, who have three children, currently live in a 22-story Mumbai tower that the family has spent years remodeling to meet its needs.

Like many families with the means to do so, the Ambanis wanted to build a custom home. They consulted with architecture firms Perkins + Will and Hirsch Bedner Associates, the designers behind the Mandarin Oriental, based in Dallas and Los Angeles, respectively. Plans were then drawn up for what will be the world’s largest and most expensive home: a 27-story skyscraper in downtown Mumbai with a cost nearing $2 billion. The architects and designers are creating as they go, altering floor plans, design elements and concepts as the building is constructed.

The only remotely comparable high-rise property currently on the market is the $70 million triplex penthouse at the Pierre Hotel in New York, designed to resemble a French chateau, and climbing 525 feet in the air. When the Ambani residence is finished in January, completing a four-year process, it will be 550 feet high with 400,000 square feet of interior space.

The home will cost more than a hotel or high-rise of similar size because of its custom measurements and fittings: A hotel or condominium has a common layout, replicated on every floor, and uses the same materials throughout the building (such as door handles, floors, lamps and window treatments).

The Ambani home, called Antilla, differs in that no two floors are alike in either plans or materials used. At the request of Nita Ambani, say the designers, if a metal, wood or crystal is part of the ninth-floor design, it shouldn’t be used on the eleventh floor, for example. The idea is to blend styles and architectural elements so spaces give the feel of consistency, but without repetition.

Antilla’s shape is based on Vaastu, an Indian tradition much like Feng Shui that is said to move energy beneficially through the building by strategically placing materials, rooms and objects.

Pricey Pad

Atop six stories of parking lots, Antilla’s living quarters begin at a lobby with nine elevators, as well as several storage rooms and lounges. Down dual stairways with silver-covered railings is a large ballroom with 80% of its ceiling covered in crystal chandeliers. It features a retractable showcase for pieces of art, a mount of LCD monitors and embedded speakers, as well as stages for entertainment. The hall opens to an indoor/outdoor bar, green rooms, powder rooms and allows access to a nearby “entourage room” for security guards and assistants to relax.

Ambani plans to occasionally use the residence for corporate entertainment, and the family wants the look and feel of the home’s interior to be distinctly Indian; 85% of the materials and labor will come from outside the U.S., most of it from India.

Where possible, the designers say, whether it’s for the silver railings, crystal chandeliers, woven area rugs or steel support beams, the Ambanis are using Indian companies, contractors, craftsmen and materials firms. Elements of Indian culture juxtapose newer designs. For example, the sinks in a lounge extending off the entertainment level, which features a movie theater and wine room, are shaped like ginkgo leaves (native to India) with the stem extending to the faucet to guide the water into the basin.

On the health level, local plants decorate the outdoor patio near the swimming pool and yoga studio. The floor also features an ice room where residents and guests can escape the Mumbai heat to a small, cooled chamber dusted by man-made snow flurries.

For more temperate days, the family will enjoy a four-story open garden. In profile, the rebar-enforced beams form a “W” shape that supports the upper two-thirds of the building while creating an open-air atrium of gardens, flowers and lawns. Gardens, whether hanging hydroponic plants, or fixed trees, are a critical part of the building’s exterior adornment but also serve a purpose: The plants act as an energy-saving device by absorbing sunlight, thus deflecting it from the living spaces and making it easier to keep the interior cool in summer and warm in winter. An internal core space on the garden level contains entertaining rooms and balconies that clear the tree line and offer views of downtown Mumbai.

The top floors of entertaining space, where Ambani plans to host business guests (or just relax) offer panoramic views of the Arabian Sea.

A crorepati who lives in a hut!

His story is an inspiration for millions. A self-made entrepreneur, his mission is to help the poor through job creation. E Sarathbabu hit the headlines after he rejected several high profile job offers from various MNCs after he passed out of IIM, Ahmedabad two years ago.

He instead started a catering business of his own, inspired by his mother who once sold idlis on the pavements of Chennai, worked as an ayah in an Anganvadi to educate him and his siblings. As a child, he also sold idlis in the slum where he lived. “We talk about India shining and India growing, but we should ensure that people do not die of hunger. We can be a developed country but we should not leave the poor people behind. I am worried for them because I know what hunger is and I still remember the days I was hungry,” says Sarathbabu.

In August 2006, Sarathbabu’s entrepreneurial dream came true with Foodking. He had no personal ambition but wanted to buy a house and a car for his mother. He has bought a car but is yet to buy a house for his mother. The “foodking” still lives in the same hut in Madipakkam in Chennai. Today, Foodking has six units and 200 employees, and the turnover of the company is Rs.32 lakh a month. But it has not been a bed of roses for Sarathbabu. After struggling and making losses in the first year, he managed a turnaround in 2007.

How has his experience as a ‘Foodking’ been in the last two years? Sarathbabu shares the trial and tribulations of an exciting and challenging job in an interview with Shobha Warrier.

A tough beginning
As I am a first generation entrepreneur, the first year was very challenging. I had a loan of Rs 20 lakh by the end of first year. I had no experience in handling people in business, and it was difficult to identify the right people. Though I made losses in the first year, not even once did I regret my decision of not accepting the offers from MNCs and starting an enterprise of my own. I looked at my losses as a learning experience. I was confident that I would be successful one day.