INFINITY BUSINESS SCHOOL

  GLOBONOMICS & WEALTH MANAGEMENT




Neeraj Batra
                                     Neeraj B...
ISSUES IN GLOBONOMICS
               WHITHER US DOLLAR ?


   The US has the Worlds Largest Trade Deficit & Budget
    De...
ISSUES IN GLOBONOMICS
    THE GREENSPAN-GUIDOTTI RULE (1999)

   The US is as Broke as its Banks and lumbering Automobile...
ISSUES IN GLOBONOMICS
    ESTIMATED US HARD CURRENCY ASSETS

   The US Govt.holds 8,200 Tns of Gold valued at $ 260 Bn
 ...
ISSUES IN GLOBONOMICS
    ESTIMATED US HARD CURRENCY ASSETS

   Although the US will be able to finance its Trade Deficit...
ISSUES IN GLOBONOMICS
WHITHER US DOLLAR :PPP (IMF 2008)




                                    Neeraj Batra 2009-10
ISSUES IN GLOBONOMICS
               WHITHER US DOLLAR ?

•   The Japanese market is Export driven. The Govt. keeps the
  ...
ISSUES IN GLOBONOMICS
               WHITHER US DOLLAR ?

•   Japan has the second largest USD reserves of
    approximate...
ISSUES IN GLOBONOMICS
           THE CHINESE JUGGERNAUT
   As per latest statistics the Chinese Gross Fixed Formation to
...
ISSUES IN GLOBONOMICS
       FLOWS TO EMERGING MARKETS
   GIVEN THE FACT THAT THE USD IS GROSSLY
    OVER_VALUED AND THE ...
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Greenspan guidotti

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Greenspan guidotti

  1. 1. INFINITY BUSINESS SCHOOL GLOBONOMICS & WEALTH MANAGEMENT Neeraj Batra Neeraj Batra 2009-10
  2. 2. ISSUES IN GLOBONOMICS WHITHER US DOLLAR ?  The US has the Worlds Largest Trade Deficit & Budget Deficit. After the collapse of the Bretton Woods (1971) the US has misused its status of the World’s Reserve currency.  In a World where Everyone stores the USD Imagine the Fate of the Dollar as the World realises that the US is Broke  The US will report a Fiscal Deficit of nearly USD 1.75 Tn or 13 % of the GDP for the current year  In the next 12 months the US has $2 Trillion of short term debt maturing  Despite the slowdown it continues to clock a Trade deficit of USD 35 to 40 Bn a month  This implies the US is looking to finance nearlly $ 4 Tn or 30 % of the country’s GDP over the next 12 Months  Who is going to Finance This ? Neeraj Batra 2009-10
  3. 3. ISSUES IN GLOBONOMICS THE GREENSPAN-GUIDOTTI RULE (1999)  The US is as Broke as its Banks and lumbering Automobile companies. Since 1985 it has been a net Debtor to the World  In a recent report PIMCO discussed the Greenspan-Guidotti rule for adequacy of reserves for borrowing countries.  This was recommended at 100 % of total short term borrowings (maturing in 12 months) to be maintained in hard currency assets  Countries which did not do so were classified as High Credit default risk candidates  If the World got shivers with a USD 59 Bn default in Dubai what will happen if the US cannot successfully rollover its short term debt ? Neeraj Batra 2009-10
  4. 4. ISSUES IN GLOBONOMICS ESTIMATED US HARD CURRENCY ASSETS  The US Govt.holds 8,200 Tns of Gold valued at $ 260 Bn  Its Strategic Petroleum reserves are 700 mn Barrels valued at $ 50 Bn  As per IMF estimates it holds foreign currency reserves of $136 Bn  This gives us an estimate of USD 442 Bn or roughly 11.5 % of the required Greenspan-Guidotti Rule  How will the US Finance these short debts?  The annual domestic savings in the US are roughly $600 Bn  However it is unlikely that this money will chase US treasuries  Inida,China and Russia are likely to be far more conservative is building Dollar reserves or making large Treasury Investments. In fact most are diversifying their Portfolio from $ Neeraj Batra 2009-10
  5. 5. ISSUES IN GLOBONOMICS ESTIMATED US HARD CURRENCY ASSETS  Although the US will be able to finance its Trade Deficit relatively easily with its Trade Partners. It will not find external support for its Fiscal deficit and short term maturities so easily  Japan is dealing with its own domestic debt and economy. The Yen has strengthened to well below 90 and that implies the Japanese would focus on stimulating Domestic demand  Euro-zone is even more in trouble, The focus is increasingly on Domestic issues for these countries.  Brazil,Korea nd Chile are busy buffering up the weak representation of Gold in their Central Bank Portfolio  This leaves only one Option Print more currency. Which implies a really weak USD in the next 12 months. Neeraj Batra 2009-10
  6. 6. ISSUES IN GLOBONOMICS WHITHER US DOLLAR :PPP (IMF 2008) Neeraj Batra 2009-10
  7. 7. ISSUES IN GLOBONOMICS WHITHER US DOLLAR ? • The Japanese market is Export driven. The Govt. keeps the yen USD rate in a narrow band to avoid Unemployment. The Worlds Second Largest Economy has had a negative growth rate in the last three years and expected to grow at 1.40 % in 2010/11 • The Japanese have amongst the lowest interest rates in the world. Govt debt is 180 % of GDP and expected to exceed 200 % of GDP as The Japanese Govt Announced a USD 1 Tn Budget for 2011 which will cause Public Debt to rise by USD 485 Bn. • The Japanese Govt. has a Twin interest to keep interest rates low due To: • Avoid deflation and spur investment and domestic demand and since the Japanese Govt. is the biggest borrower • Protect employment The Bank of Japan intervenes Neeraj Batra 2009-10 aggressively to keep the yen peak to protect its exports
  8. 8. ISSUES IN GLOBONOMICS WHITHER US DOLLAR ? • Japan has the second largest USD reserves of approximately 900 bn • Between 2001 and 2007 these reserves have grown from USD 350 bn to 900 bn • However during this period the JY to USD moved from 104 to 120 (Currently back to 89 an 18 year High) • Since 2003 Global hedge funds exploited this situation • They understood fully well that despite low interest rates the exchange rate will be managed by the Central bank of Japan • This resulted in the mechnaics that made the Yen CF Trade Possible Neeraj Batra 2009-10
  9. 9. ISSUES IN GLOBONOMICS THE CHINESE JUGGERNAUT  As per latest statistics the Chinese Gross Fixed Formation to GDP ratio has reached 50 %. This is very high and built on a artificial Renminbi to $ exchange rate.  Given low interest rates China is literally trying to invest its way out of Global recession to feed its export driven economy but may lead to overcapacity and Misallocation of resources.  China is currently in its 12th year of Investment led Growth. Historically no country has sustained a GFF/GDP ratio beyond 30 % for more than a decade.(Singapore/Thailand)  The Credit growth in China is another indication of overconfidence and overcapacity creation.  Historically Germany reached a peak GFF/GDP ratio of 27 % in 1964 (Post world War II) and the Japanese 36 % in 1973.  In case the Export markets of China rev up this will inevtably lead to Non performing loans and an economic crisisin the next 5 years. Neeraj Batra 2009-10
  10. 10. ISSUES IN GLOBONOMICS FLOWS TO EMERGING MARKETS  GIVEN THE FACT THAT THE USD IS GROSSLY OVER_VALUED AND THE EM CURRENCIES ARE GROSSLY UNDER-VALUED  A) EM STOCKS WILL CONTINUE TO ATTRACT CAPITAL OVER THE NEXT 5 YEARS  B) THE COMMODITIES CYCLE IS IN A LONG TERM BULL CYCLE AND MOST METALS WILL BE REVAUED UPWARDS  C) GOLD WILL BECOME A HEDGE AGAINST THE USD AND WILL BE USED TO TRACK ASSET VALUATION/INFLATION (IN LIEU OF THE USD) THUS IF GOLD IS UP BY 36 % THIS YEAR AND THE SENSEX IS UP BY 80 % THE APPRECIATION OF SENSEX WILL BE MODERATED TO THE EXTENT OF GOLD’S APPRECIATION Neeraj Batra 2009-10

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