Diminishing Marginal Productivity of Debt - Nathan's Economic Edge

Here is the link to my last post on the Marginal Productivity of Debt, where I quoted Prof. Antal E. Fekete.

LINK : THE MARGINAL PRODUCTIVITY OF DEBT.

Here is an a recent post from Nathan's Economic Edge - a blog that I have added to my blog list. It' an excellent blog that is definitely worth a read.
The Diminishing Marginal Productivity of debt :THE Most Important Chart of the CENTURY















Here is Nathan's explanation for the the above chart.

'''''''''''''''''''''''' This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

This is mathematical PROOF that debt saturation has occurred. Continuing to add debt into a saturated system, where all money is debt, leads only to future defaults and to higher unemployment.

This is the dilemma created by our top down debt backed money structure. Because all money is backed by a liability, and carries interest, it guarantees mathematically that there will be losers and that the system will eventually reach the natural limits, the ability of incomes to service debt. '''''''''''''''

Clearly, Prof. Fekete and Nathan are trying to highlight the 'fatal danger' we face due to the diminishing marginal productivity of debt.

Sadly, most economists and finance ministers around the world, see further debt accumulation of debt as a solution to the current crisis, rather than the root cause of the chaos we face in financial markets today.

Clive Maund on Gold

Clive Maund has a new gold update at Kitco, 22 March 2010.
http://www.kitco.com/ind/maund/mar222010.html


















I have not added to gold positions recently, and remain slightly wary of a ''summer sell off'' in equity markets that may trigger a sell off in the precious metal markets.

The USD has been trending upwards, aided by the turmoil in the Eurozone; that has kept the EURO in check.

But I must say that inspite of the strength in the USD, gold prices have continued to consolidate.

David Rosenberg on S&P 500 returns

GREECE & the EUROZONE

Here's a fantastic cartoon by John Trever from the Albuquerque Journal.
SOURCE: Image dated : 03/11/10
http://www.cagle.com/working/100311/trever.jpg

HATCHBACK CARS IN INDIA

The hatchback car market in India looks all set for a fresh round of cut - throat competition.
Below is a clipping from last week's TIMES zigwheels. www.zigwheels.com

Ford India has launched the Ford Figo at a super competitive price of Rs. 3.49 lakhs (approx USD 7755, at 1USD = INR 45) for the base model.

The Indian government is also rolling back excise duty benefits on the sale of small cars and the Reserve Bank of India is also hinting at a tighter monetary policy going forward.

The Indian hatchback market is dominated by Maruti Suzuki & Hyundai Motors.

Maruti Suzuki is the dominant player and is the manufacturer of the legendary Maruti 800, the Suzuki Wagon R ( since relaunched as the Suzuki Ritz) and the Suzuki A star ( formerly the Suzuki Alto).

Hyundai India also makes the popular Hyundai Santro and the Hyundai i 10.

Tata Motors makes the Tata Indica & the Tata Nano!

Volkswagen, Ford, Fiat and GM are new entrants in the hatchback space.
In the past Fiat and GM have tried to enter this space, and were not very successful.

The hatchback segment is getting rather crowded in my opinion.

While this is great news for the customer, it means that the car makers will face margin pressures going forward.

Car makers will also have to compete with a growing second hand car market and second hand cars that are refurbished by the car companies themselves.

Consequently, investors in auto companies like Maruti Suzuki need to take note of the changing dynamics of the low margin high volume hatchback car market.

Investors in auto ancillary companies will also have to deal with shrinking profit margins. Raw material prices (steel, glass, rubber etc) are rising and car companies will look to cut costs to boost their own profitability.

A price war is great for the customer, but drastically reduces the profitability of the car makers.

REAL ECONOMY vs PAPER ECONOMY

Came across 'Planet Real vs Planet Paper' in the Taipan Daily, 24th February, 2010.

At a time when Wall Street seems to be totally ignoring Main Street, it's always worthwhile to take a step back and analyse the 'real' vs 'paper' economy.

Indian Government Bonds : 10 year benchmark yield crosses 8 percent

Growing government borrowing requirements and a tighter monetary policy will be factors driving the Indian Government Bond Market this year.

Rising yields will expose public sector banks to losses on the 'Available for sale' part of their government bond portfolios.

The strong Indian Rupee may begin to pressure exporters as well.

Interest rate sensitives will feel the pinch of the rising cost of credit, and credit offtake may slow still further

The public sector Oil companies are still awaiting a government decision on subsidy sharing. A strong Rupee somewhat cushions their under recovery on sale of retail fuels.

FINANCIAL CHAOS - Sir John Templeton, June 15, 2005.

Just came across this via an update from equitymaster.com.
Written in June 2005, by the the late Sir John Templeton, he makes a really accurate forecast!

Source Link: Sir John Templeton's Last Testament: Financial Chaos

LOW VIX SUGGESTS COMPLACENCY !

As the rally in global equities continues, investors seem to be ever ready to take on more risk!

Nevermind the chaos in the job market or the troubles in the Eurozone, or the rickety finances of states like California & Illinois in the U.S.A.

The VIX is trending to new lows for 2010. I think it's high time that investors hedge their portfolios or just take some chips off the table.

These are uncertain times, and there's a lot of ''not so normal'' stuff going on!

FEDERAL SPENDING AS A PERCENT OF GDP

UNEMPLOYMENT

INDIA's PETROLEUM SUBSIDY CONUNDRUM & the Kirit Parikh Committee Report

The Kirit Parikh Committee Report on subsidies in the Petroleum Retailing sector has made quite a few headlines in local news.
Link: http://petroleum.nic.in/reportprice.pdf

Recommendations include -

• Free market pricing of Petrol and Diesel. The Kirit Parikh report suggests an additional levy of Rs. 80,000 on a diesel vehicle, citing that the higher excise must offset benefits vis-a-vis petrol vehicles. The report submits there is no need to subsidise users of diesel cars and SUVs, vehicles which are used for personal purposes.

• Allowing periodic price increases for cooking gas (LPG) and Kerosene, based on performance of the agricultural sector and the rate of expansion of rural electrification. This will help rural India gradually adjust to the price hikes. Kerosene is used for lighting purposes in rural areas, so expanding rural electrification will reduce dependence on kerosene for lighting purposes

• Excluding GAIL - the gas transmission behemoth from the under recovery subsidy burden.

All in all, the ever expanding petroleum sector subsidies are proving to be a real drain on the finances of the Indian government.
Oil subsidies are currently treated as an ''off balance sheet item''.
Implementation of these recommendations will thus present a ''truer'' picture of India's fiscal deficit.
To give you an idea of just how large the oil subsidy has been: -
From 2003-04 to 2008-09 total under recoveries amounted to Rs. 2,99,222 crores.

The market capitalization of India's largest private sector Giant - Reliance Industries is Rs. 3,23,235 crores!!!

The market capitalisation of the Benchmark BSE SENSEX index is Rs. 24,81,009 crores!

Question is : Does the Government have the political will to work past all the implementation issues and carry out these recommendations in the current inflationary environment?

Everyone knows that something need to be done.
The current pricing mechanism is just not sustainable with Crude Oil prices trading at $80!

Oil subsidies are the single biggest ''stimulus'' package that the government has provided to the economy.

But there is no free lunch!!

The balance sheets of government run oil sector companies are in bad shape.
The government too is struggling with 'oil bond' issues.

So can or will the government bite the bullet or continue to avoid tackling the issue head on, just as the Finance Minister chose to avoid discussing any specifics on implementing the Kirit Parikh report in the current Union Budget.

DAVID ROSENBERG : On the FED's non traditional programs and exit strategy!

David Rosenberg explains why the FED's exit strategy is going to be quite complicated!

Just take a closer look at the FED's asset purchases highlighted below.

After all that, things aren't back to normal!!!

Makes Dubai's $85 billion debt troubles look like a drop in the ocean!

TRENDING SIDEWAYS : Where are the markets headed?

Since mid October 2009, the markets seem to have got caught in trading range. No new highs!!

I selected the 19th of October 2009, simply to emphasise my point. All of the above indices are stagnating.

( S&P 500 in blue, Bovespa in red, BSE Sensex in green, FTSE 100 in orange, Shanghai Composite in brown and CAC 40 in green)

Perhaps, the ''sugar high'' of multiple stimulus packages is starting to wear off, and issues like sovereign solvency and corcerns over ever expanding government debt have resurfaced.

To be fair, markets have had a fantastic run from their March 2009 lows.
As thing currently stand, stock market valuations seem to have factored in a total recovery, while ignoring many troubled components of the global economy!

Markets face a strong headwind in 2010, and the risk reward ratio clearly does not favour the long only investor.