Worlds’ greatest paradox

Many years ago, a Law teacher came across a student who was willing to learn but was unable to pay the fees. The student struck a deal saying, “I will pay your fee the day I win my first case in the court”.

Teacher agreed and proceeded with the law course. When the course was finished and teacher started pestering the student to pay up the fee, the student reminded him of the deal and pushed days.

Fed up with this, the teacher decided to sue the student in the court of law and both of them decided to argue for themselves.

The teacher put forward his argument saying: “If I win this case, as per the court of law, the student has to pay me as the case is about his non-payment of dues. And if I lose the case, student will still pay me because he would have won his first case. So either way I will have to get the money”.

Equally brilliant, the student argued back saying: “If I win the case, as per the decision/verdict of court of law, I don’t have to pay anything to the teacher as the case is about my non-payment of dues. And if I lose the case, I
don’t have to pay him because I haven’t won my first case yet. So either way, I am not going to pay the teacher anything”.

This is one of the greatest paradoxes ever recorded in history…

Minister offers a 42 crore crown to Lord Tirupati

TIRUPATI: Karnataka tourism minister and Bellary mine baron Gali Janardhan Reddy will probably be better known for something else: with an offering diamond-studded crown worth Rs 42 crore, he became the biggest donor to Lord Venkateswara at Tirupati since the Vijayanagara kings 400 years ago.

The 20-kg stunner was a “thanksgiving” gesture, the minister said. Sources added that 32kg of `aparanji (pure)’ gold went into its making, besides 70,000 diamonds weighing 4,000 carats. The 2.5-ft crown has a huge 890-carat emerald from Africa engraved in the centre which alone costs around Rs 10 crore.

The crown will be placed the Lord’s idol during Abhishekam seva on Friday morning. It was earlier kept in the Vaibhavotsava Mandapam in Tirumala and special pujas were performed. After a ritual called Sahasra Deepalankara seva, it was taken around on a procession along with the deity, Lord Malayappa Swamy. Around 7pm, the crown was taken inside the sanctum sanctorum.

Keertilal Jewellers of Coimbatore in Tamil Nadu took nine months to fashion the crown.

There are no records of more expensive donations to the temple and Gali’s donation is considered as the costliest gift offered to the Lord after the Vijayanagara kings in the 16th century. The Vijayanagara kings ruled from Hampi not far from modern day Bellary.

With this offering, the total number of crowns placed with the Lord has gone up to seven. This precious crown has been added to the jewel treasury of Lord which holds over 11 tonnes of gold ornaments and vessels.

“I am in this position only with the blessings of Lord Venkateswara. This is only a small offering to the Lord. I believe in Madhava seva (service to the Lord),” said Gali, who owns several iron ore mines. The minister said his Brahmani Steels, once it starts operation, would employ 25,000 people. “This I consider as manava seva (service to mankind),” he said. Andhra Pradesh chief minister YSR Reddy’s son Jagan has a large stake in Brahmani Steel that is coming up in the Andhra chief minister’s home district.

People … Lets gear up for the upswing now…..

In less than a year, that is as 2010 dawns, the Indian economy should be out of the woods and on a clear recovery path. Corporate India should then be in a position to think bold thoughts again and plan for growth and investment. It is therefore necessary to ask right now what will be the likely lessons from the roughly year-long setback the economy will have suffered when sentiment and the growth momentum begin to recover again. This is necessary in order to have a sense of what the strengths and weaknesses will be to take on the new growth challenge. For this we can begin with a look at what were the strengths and weaknesses with which the economy and its corporate engine entered the historic five-year (2003-08) 9 per cent growth phase. In terms of industries, software, pharmaceuticals, biotechnology and automotive components were clearly the most globally competitive parts of Indian business. India’s global A team was made up of the leading firms in these sectors plus globally competitive individual firms from sectors which were not above the benchmark in their entirety. The obvious candidates in this league were firms like Tata Steel, Reliance Industries (petroleum refining), Larsen & Toubro and BHEL. The growth years stand out for two reasons. One is the alacrity with which corporate India was seized first with hubris and then visited by shades of nemesis. The boom years were marked by extensive global acquisitions by the most aggressive among Indian players, with what now is very clearly high leveraging. The national mood was akin to that of Japan in the late eighties when its major conglomerates went on a global buying spree, facilitated by the domestic land and stock price bubbles. The Indian shopping spree was funded not so much by domestic as global easy money. Now those debts are coming home to roost, raising questions as to what really are the long-term competitive advantages of the best Indian firms. The boom years also threw up some new winners and losers. Some of the winners are in the services sector and the most prominent among them would be Bharti in wireless services and the best performing new generation private sector banks like HDFC Bank and Axis Bank. These firms, whose costs and productivities are benchmarked against the best in their class globally, did not need to look beyond the domestic market because of the overwhelming growth opportunity that existed there. Another sector which has a potential to emerge as a global player is commercial air travel and, within it, a leading firm like Jet Airways. When the global economy and with it commercial air travel starts picking up again and is eventually opened up with the demise of bilaterals, it is easy to see leading Indian airlines growing inorganically. But even then the best Indian banks will not go on a buying spree abroad because the opportunity in India will remain mindboggling. The high growth years have also thrown up a clear winner in manufacturing — automobile assembly. India will be the place where more and more cars will be assembled and, what is more, the latest compact fuel-efficient cars that have hogged the limelight at recent motor shows are mostly cars designed with emerging markets like India in mind and likely to be assembled in India for both domestic and global markets. Any number of car and auto components plants are likely to be shipped to India. What is not very clear is the role of Indian firms in this scenario. It is easy to see that Maruti Suzuki will rise and rise but one Nano will not make a summer for Tata Motors, and Mahindra and Mahindra will have to shift focus from SUVs to the broader car market. The boom years have thrown up losers too, the most prominent among them pharmaceuticals and biotechnology. At the turn of the last decade both held great promise, in Indian eyes at least, as future owners of new molecules but while their discovery efforts are yet to bear fruit, their margins have been severely under pressure because of their reliance entirely on generics. The symbol of dashed hopes in this space is Ranbaxy, as much because its promoters proved unequal to continuing the good fight as the indignity that it brought upon everybody through its troubles with the US regulator. Perhaps the biggest change that will confront Indian business in the next decade will be the realisation that the battle field and action will be mostly in India. To be internationally competitive you will not have to be very good at exports, you will have to do a good job of minding your home turf, not so much from imports as from foreign players who have dug roots in India. IBM, for example, will pose a serious challenge to Indian software leaders in India, a challenge which the latter have till now lost by default because of their outward orientation. The clear apprehension today is whether IT leaders will go the pharma way, not in a year or two but maybe in ten, by becoming undifferentiated generics players. The big opportunity and challenge will be in India because it will emerge as one of the world’s key markets. As more and more Indians escape poverty, the opportunity at the bottom of the pyramid, in fact among all except those in the top 20 per cent income bracket, will be phenomenal. Innovating to capture a part of this space will be the key challenge for Indian business when the growth rate picks up again in 2010 and consumer confidence returns across the board.

India Inc signs up for ‘DONT DO’ registry

Don’t serve chocolates or mint to your guests. Don’t use that expensive brand of mineral water. Don’t use colour printers. Don’t buy unnecessary software. India Inc seems to have added more ‘Don’ts’ to its list than ever and the panic has spread wider. Increasing cost pressure, reducing margins and widening credit crunch have forced many companies to not only reconsider their costs, but also rewrite the rulebook.A large American investment bank has stopped providing luncheon coupons to its employees, usually worth a few thousand rupees, to entertain their guests. Employees of a leading Gurgaon-based BPO have been told to make their own travel arrangements beyond a certain distance from office, if working in day shifts.

Other BPO firms have told employees that a cab won’t be provided unless there is a large number of those to be dropped home. If that wasn’t enough, firms are even cutting down on the number of times their premises are
cleaned.

Executives, in large IT companies, who could earlier get cab drops as and when needed for working overtime, are now finding that they need at least three other peers to get a ride back home. Recently, Wipro chief Azim Premji, in an internal letter, asked employees to reduce ‘discretionary’ expenses.

The country’s third-largest tech firm is also learnt to have pruned its marketing spends and discouraged purchase of any software which is not considered essential.

It’s not just IT-BPO and financial services companies that are on a cost-cutting spree. A leading Indian pharma company has already done away with toilet paper at its offices and has changed its brand of bottled water to a cheaper one. A leading Indian bank also asked its entire investment banking division to stop travelling business class within or outside the country, at least for the next 12 months.

Similarly, global banking firm, Deutsche Bank has instructed its employees not to travel unless the trip has been approved by the respective business unit heads. Sources say the decision has been implemented across Asia. When contacted, the bank did not comment. However, a senior company official confirmed the move, adding that such measures are part of a travel policy and employees need to seek approval from their COOs and sometimes Asia heads before travelling.

Others are discouraging use of colour printers and round-the-clock use of air conditioners. “An infrastructure company has asked its employees to switch off office ACs for at least two hours daily to cut electricity bills,” said an industry source. Companies are also reducing the number of newspapers and magazines they subscribe to.

“People anticipate another 6-12 months of trying times. So, things that had become a norm in the past two years, such as business class travel for all, sometimes even for a single meeting, offsite meetings abroad or five-star luncheons at the drop of a hat, are going away.

These have been replaced by video conferencing, domestic offsites and concern for the environment with ‘print only if necessary’ and switching off lights when leaving one’s room,” head-hunting firm Executive Access partner Charul Madan said.

The Oil Bomb – Iran initiates

Iran has really gone and done it now. No, they haven’t sent their first nuclear sub into the Persian Gulf. They are about to launch something much more deadly ?” next week the Iran Bourse will open to trade oil, not in dollars but in Euros.?”Scottish Socialist Voice, issue 264).
The Iranian Oil Bourse (OIB) was registered on May 5 this year. The consequences are horrendous: with the dollar no longer the sole currency with which to trade oil, its credibility as the benchmark has weakened gravely and thrown all world currencies into a tailspin ?” either crashing in value making essential imports unsustainable, as with Pakistan, or increasing in value reducing their exports drastically causing huge trade deficits, as with Europe. There has been a run on non-oil producing Third World currencies as capital flight continues unabated, as in Pakistan too. That is why soft currencies are weakening against all hard currencies while non-dollar hard currencies are strengthening.

The fall in the dollar’s value was one of the triggers of the oil price rise. Three other triggers contributed heavily too: the greed-driven speculation of oil brokers and hedge funds, the Iraq war and the new Iranian oil bourse that caused a further decline in the dollar, raising oil prices even more, like a self-sustaining upward spiral. Now add a fourth trigger: the increasing probability of some kind of strike against Iran. Estimates are that the Iraq war alone trebled the cost of oil. By May the world had spent an extra $6 trillion on higher energy prices alone since the Iraq war. Else the price would have been $40 ?” even less but for greedy speculators and hedge funds. Oil has been trading on two dollar-denominated oil bourses, NYMEX and IPE, both privately owned by US citizens. They play a huge role in determining crude oil prices. The New York Mercantile Exchange Inc (NYMEX) was established more than 135 years ago. London’s International Petroleum Exchange (IPE), now Intercontinental Exchange (ICE), was established in 1980. NYMEX “pioneered the development of energy futures and options contracts in 1978 as [a] means of bringing price transparency and risk management to this vital market.” This is precisely what opened the door to greed-driven speculation that has driven the price of crude unnaturally high. “IPE is one of the world’s largest energy futures and options exchanges. Its flagship commodity, Brent Crude, is a world benchmark for oil prices…” Brent is British North Sea, not OPEC.

This kept the demand for the dollar high as oil producers were paid in dollars that they invested in western, particularly American, banks, stocks, bonds, real estate, in bailing out US corporations (like Saudi Prince Al Waleed once did Citibank and recently the UAE did) and buying billions of dollars worth of useless armaments. It was also necessary for oil-importing countries to have huge dollar reserves to buy oil. But when on May 5 Iran registered its Euro-denominated IOB in competition with the dollar-denominated NYMEX and IPE, and many countries supported it, the dollar took more beating.

This requires some explaining. Iran did this to break free from the tyranny of the dollar. Russia and Europe welcomed the Iranian oil bourse because 70 percent of Europe’s oil is imported from Iran. The two most oil-hungry nations growing hungrier by the day, China and India, also said that they were very interested. Now you see why Iran’s president is “the most dangerous man in the world?” It has nothing to do with the damned nuclear bomb. It has to do with the detonation of the oil bomb that has detonated the dollar bomb. For America this is war, literally, because having left the Gold Standard in 1971 it had, de facto, made oil the commodity on which the dollar is based by ensuring that oil is sold mostly in dollars. (When Saddam said in April 2002 that he was considering selling some Iraqi oil in Euros he signed his death warrant). Came the decline in the dollar came the decline in the value (purchasing power) of oil revenues as well as OPEC’s dollar-based assets. Oil-exporting countries started thinking in terms of selling some oil in Euros. This would put the dollar even more on the skids. President Bush’s first Middle East trip this year, ostensibly a “peace mission”, was actually to deliver what Mike Whitney calls “the horse’s head” (as in the film, The Godfather). “Bush went to the trouble of travelling half-way around the world to tell the Saudis and their friends in the Gulf States that they were going to continue linking their oil to the dollar or they were going to “sleep with the fishes.”

Why did the Arab countries say that they might shift partly to Euro? With the fall in the dollar’s value, OPEC saw the real value of its oil, its dollar surpluses and dollar holdings decline too. Since oil has largely been sold in dollars through NYMEX and IPE, oil sellers put their hordes of surplus “petrodollars” in US banks, real estate and other investments. But now the dollar’s decline has made selling in dollars no longer as valuable as it was. While buying in dollars means that oil-importing countries have to have many more dollars to buy the same amount of oil because not only has the oil price kept rising, its price has also gone up with the erosion of Third World currencies (as has their foreign debt). Oil import bills have doubled and trebled since the oil price rise started, making a mess of national trade balances.

When recently Saudi Arabia announced a small increase in oil output, crude prices should have fallen. Contrarily, they went up instead, underlining the influence of greedy speculators and manipulative hedge funds. Plus the probable attack on Iran. However, Saudi Arabia didn’t say it would increase oil output because of US pressure but for the obvious reason that, like China, its doesn’t wish to kill the geese that lay golden eggs for the oil-producing countries. There is more. Saudi Arabia has not forgotten the lesson from the famous oil price hike of 1973: don’t take the price of oil so high that alternative energy sources become viable. When oil goes beyond $150, American shale oil, heavy crude and Canada’s Calgary oil sands will variously become viable. So will solar power. Once they tap these resources, what then? Plus one cannot rule out the bizarre possibility that Saudi Arabia has been told that Iran will soon be attacked. That would leave Goldman Sachs’ prediction of oil at $200 by year’s end far behind and drive its price up beyond imagination, leading to a global economic meltdown. Better to start reducing prices now by increasing output than wait for the possible fallout. However, this last is only conjecture and will always sound fanciful until it actually happens.

The only way America can strengthen the dollar is by creating a trade surplus. Impossible. That would mean reducing their workers to near-slavery to compete with Chinese wages and other inputs. “What will happen in the US?” asks The Voice. “Chaos for sure. Maybe a workers revolution, but looking at the situation as it is now, it is more likely to be a re-run of Germany post-1929, and some form of an extreme right wing movement will emerge.” The romantic socialist notion of a “workers revolution” aside, there is a point here. The Great Depression of the 1930s caused a rightward swing in Germany and led to the emergence of the Nazis. Yes, America is a democracy because its system works for it, but democracy is fragile. It doesn’t take much adversity to derail it.

Before you get too excited, let me caution you that the assumption that that America will suddenly collapse is wishful thinking. It is we who are more likely to collapse, at least before America does. Sure history is witness to the fall of many civilisations, empires and superpowers. They all collapsed because they ran out of intellectual steam that led to decadence and internal contradictions. Only Britain’s was a managed withdrawal from empire. But America is not the Soviet Union. It is a country crafted by consensus, not force. Its people are proud to be Americans, not sullen like the Soviets were. It is based on the ideals of “life, liberty and the pursuit of happiness.” The USSR was based on an unworkable and increasingly inhuman Leninist-Stalinist totalitarianism. America is dynamic, not decadent. The American Declaration of Independence is one of the greatest pieces of writings by man. In contrast, Lenin’s voluminous works read like a dirge. The first three words of The Declaration of Independence ?” “We the people” ?” bring a lump to the throat because they say it all. Today America is so far ahead in knowledge of all kinds, especially in the sciences, that no country has a chance of catching up unless America loses its great ideals. The problem with America is that it does not accept the right of others to practice those same ideals if it does not consider the outcome to be in its interest or if it threatens its hegemony. Yes, China, Russia and Germany will soon acquire polarity too, but the magnetism of the American pole will still be the greatest because America has primacy over all fours sources of global power ?” knowledge, communications, finance and military. China, Russia and Germany have strengths in only one or two, not all four. That’s the difference.

The writer is a political and economic analyst
Email:humayun.gauhar786@gmail.com

India: Few Bulls, More Cows by Robert Hsu

I have just returned from my first trip to Mumbai, India, and let me just say, it was interesting. I was very excited to see Mumbai—the country’s largest city and its financial and entertainment capital—and what I discovered was a land of contrasts.
 
Although India has a rising number of world-class entrepreneurs, financiers and innovators, most of the country is afflicted by widespread poverty, a mostly poorly educated population, bad infrastructure and a broken government.
 
Wealth vs. Poverty: Four out of the world’s ten richest private citizens are from India—one includes, the Warren Buffet of India, Rakesh Jhunjhunwala, who built his wealth from $100 to $1 billion in just 23 years. But this incredible wealth is a stark difference to the rest of India—the country’s average per capita income is less than $900 a year.
 
Education: India has one of the most respected institutions of higher learning in the world—the Indian Institute of Technology (IIT). IIT is a combination of the U.S.’s Harvard and MIT. Yet, despite India’s top-notch universities, nearly half of the adults in India cannot read or write. India’s adult literacy rate over the past six years was 61%, while China’s literacy rate is 90.9% and U.S.’s is 99%.
 
Infrastructure: The city of Mumbai is comparable to cities like Shanghai and New York City. But in terms of infrastructure, the city is at least a generation or two behind major Chinese cities. Much of Mumbai is filled with old and dilapidated buildings.
 
After observing Mumbai, I couldn’t help but compare Hong Kong and India, especially since I just visited Hong Kong before arriving in India. I was particularly intrigued that two former British colonial cities turned out so differently. And my only conclusion for the stark contrasts was government rule.
 
While India’s current prime minister, Manmohan Singh, desires to mimic China’s success economically and turn Mumbai into another Shanghai, this type of leadership is often short-lived in India. Because despite being the world’s largest democracy, India has suffered from a long history of corruption and isolationism.
 
And today protectionism and government interference still exist in Indian business, which is allowing well-connected Indian business tycoons to amass immense wealth and the poor to fall even deeper into poverty.
 
In contrast, Hong Kong has never had a democratic election of its governor, but the city has enjoyed prosperity under the world’s most free and open economic system. Its leaders are more focused on creating jobs and economic growth. That’s why Hong Kong’s per capita income is over ten times that of Mumbai’s, its education system is growing and its infrastructure is incredible.
What Does It All Mean?
Based on what we just talked about, the picture’s pretty bleak for India. Right now, I believe that India has a long way to go to achieve the level of economic success in China—especially with the country’s inefficient government, poor infrastructure, widespread poverty and poorly educated populace.
 
But India does have one thing going for it. It has a new generation of self-made business leaders, like Rakesh and my friends at Indian investment bank Equirus Capital, who want to and have the ability to spread prosperity to the rest of the country. Actually, Rakesh is staunchly bullish on his country’s future, and his clarity of thinking on the subject was impressive.
 
And, as you might have guessed, made for some interesting conversations.
The biggest thing I took away from my visit to India and my discussions with India’s top financiers and money managers was this: Although there is a huge financial rift between India’s wealthy and poor, the high skill of India’s private sector business leaders is impressive. And it makes me optimistic regarding the country’s long-term future.
 
But it’s the short term that has me concerned. Right now, India is plagued by double-digit inflation, on-going trade deficit and depreciating currency. So we must consider the risk/reward ration that exists there now. Many of these wealthy investors made their fortunes during the recent India bull market, which has now been crippled by record-high inflation—12%—and a slowing economy.
 
In addition, I think that the country has a long way to go before its poverty, education, infrastructure and government improve. And it will be a while before India reaches the level of economic success in China.
 
For all these reasons, I think it’s best to continue to avoid investments in India right now—there are a lot safer and more profitable opportunities in China.

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!