View from my glasses: August 2011

Another morning I wake up to find this irresistible urge to go back to my bed and dump my face in my pillow. Sleep is not the luxury I can afford now. This thought takes me back to the day where I just paid for the ticket to enter into this awesome, bumpy, exhausting, thrilling , exhilarating ride of MBA.

It was 30th March,2011 the day I took admission into NMIMS. I was finding my way to Admissions Department on 8th Floor when I spotted few students wearing this dark midnight blue coloured t-shirt. This T-shirt said it all. It had a palm engraved on the front depicting 6 firsts in the life of a student at NMIMS. These six were : First Day at NMIMS, First Job, First promotion, First takeover, First BMW, First Greek Island. I felt taking an admission and being part of this journey called MBA is destiny. It is written. I gave NMAT thrice during past three years. In first year I missed it by 1 mark. In second year, I missed it by two questions.

The first day at NMIMS was the day when Dean and Vice-Chancellor were going to address us. I was all excited and geared up. A strong count of around 500 people ready to be addressed before they tie their seatbelts. Indeed a flight of time. I can never imagine how fast the time flew by. The induction days made it pretty clear when we were starting the first day of induction by waking up at 4 ‘O Clock in the morning. It was one of the most friendly crowds. These are the few days I can describe with vivid memories.

The academic rigour began when we were almost losing our little bit left brains to figure out the balance of balance sheets, to find out the Marketing mix before getting mixed by the Demand Supply Curves or understanding indifferent curves( How can somebody be indifferent to Curves !) or just remembering the holy grail of Statistics with no. 30 as the correction factor for finite population or trying to sustain ourselves in the Corporate Social responsibility. What responsibilities can be weighed on an individual leader with ethics!

Else time just refuses to stop and let me savour every moment of it with utter delight. It’s such an exhilarating part I want to live every moment thoroughly.

Gyaniji Says : Many People take this home!

US on Tuesday 2^nd August increased the limit of Sovereign Debt Limit. US has a Sovereign Debt Limit of 14.294 trillion$. To present before you some facts, figures and interpretations, it becomes pertinent that we throw some light on certain facts that lay foundation of this situation.

In 1917, US began borrowing to finance its entry into World War I. The borrowing spree gathered momentum from the era of Reagan borrowing from Treasury more than 1 trillion $. During the eight years of Bush’s regime, the total borrowing crossed more than 6 trillion $. It was hugely because of the wars waged on Afghanistan and Iraq. US presently has spent more than 3.5 trillion $ on the restructuring to be done of Wars in Iraq and Afghanistan.

What does it mean if US defaults on Sovereign Debt limit. It would imply when the private institutions are about to default there would not be anyone else other than US government to help them but in case of Sovereign Debt Default even US government will not be able to provide loan or bailout packages to private organisations. The government will have to rely on other sources of revenue like tax collection. The Bureau of Economic Analysis tells that total US spending has increased from 27% of GDP in 1960 to 37% of GDP today. The Tax Foundation shows that between 1986 and 2009 the average number of zero tax payers or negative tax payers increased from 18.5% to 51%.There can be closing of certain public offices. Mean while, the US gross debt as percentage of GDP increased from 42 % of GDP in 1980 to 100 % of GDP in 2011. Thus, the prevailing conditions aided by this scenario would bring the whole economy into global melt down.

Thanks to America’s decision of increasing the upper cap of Sovereign Debt Limit, there has been a boost in investors’ confidence. But this also indicates fears of global meltdown. Hence investors are taking out their money from market and investing in safer havens like gold, silver and other precious metals like Platinum and Palladium. The global meltdown is further fuelled with European Debt crisis. Hence, investors vary of their wealth and trying to switch to safer havens which include US government security bonds. US will continue to remain safer haven because of innovation and academic strength in economy. On an average daily average trading in US bonds is approximately 518 billion$ in contrast to British gilts of 34 billion $ and German bunds of 28 billion $. All these figures show the investor confidence in US government security bonds in spite of the fact that not a long ago the US, the UK and Germany enjoyed credit rating of AAA.

On 5^th August, S&P downgraded its rating of AAA to AA+. In 1917, Standard and Poors gave US AAA rating. Since then it has enjoyed a patriarchal status and investor confidence. It has been able to maintain this status because of its academic strength and innovation. A rating of AA+ increases the element of risk relatively in an investment. To retain the continuing investment, US Government is supposed to increase the interest rates. Since an investment at greater risk ought to give better returns. This would imply higher costs of taking a loan. This will curb the liquidity in the market.

China holds approximately 25.7% of US Treasury securities at 1.159 trillion $ till May 2011. China’s state controlled credit rating agency Dagong Global Credit Rating Co. has already reduced the credit rating of US implying severe cuts in China’s investment in US bonds. Moody and Fitch still maintain the AAA rating for US Warren Buffet’s majority share holder in Moody ( S&P’s rival ) maintains that this debt crises will not affect the US as investment shore denying any fears of double dip recession.

What this holds for India, India has 0.9% of US Treasury securities which is negligible when compared with economies of scale. Goldman Sachs expects India to grow at the rate of 7.3% from previous rating of 7.5%. RBI expects the country to grow at 8%. Emerging markets are still a safe bet for FIIs but the sentiment will find place in heart of investors with time. The present decline is because of removal of foreign money from Hedge Fund Managers/Investors and private investors vary of their funds. Sensex was the worst performer vis a vis global indices. Meanwhile, Goldman Sachs has upgraded India rating to Market weight from the previous underweight rating for past one year. The future cannot be predicted but with Indian Foreign investment policies and growth rate we can be assured that recession shocks will come to India after passing through these buffers.

World Countries by S&P’s Credit Rating Legend just before US Debt Crisis