Future looks gloomy!

I recently read an article which went by the name “It’s over for dollar and euro; get ready for Sensex 60000” in Firstpost.com. Yeah you read it right, it is no typo it is Sixty thousand. The author clearly seemed to me high on a few gallons of Red Bull, if not smoking Marijuana. Before I go forward let’s get the facts straight. The GDP of US is close to around 14.77 trillion USD. And the debt they are holding as on July 31^st 2011 is 14.32 trillion USD. So that puts the sovereign debt at almost 100% of US’s GDP. And going by the US treasury’s website from December 2010 to July 2011, one can see that the debt has been growing at a rate of 5.48 billion USD per day. So that’s about US. I would not go into how it is posed to service its debt, because S&P clearly seems to disagree with Obama on that at least.

With the S&P lowering US’s debt rating has given clear cut signals that now that debt is more risky. And a more risky investment demands more returns hence higher interest rates. Higher interest rate makes it even more difficult for US to service its debt. Whispers if not clear cut speculations have already started about US going bankrupt. If investors panic and start selling treasury bonds, there would be a large supply of US bonds which will far outstrip the demand thus lowering the prices and hence investors might end up getting peanuts for their investments. Now another fear is that due to such factors Dollar will also weaken and that can lead to countries shifting their Forex to commodities such as gold. Now here is bit of a wild assumption, we are all clear about Europe’s position, specially the PIIGS economies and the apprehensions on Euro. So it might happen that Dollar and Euro as the world’s two universal currencies might crash and international trade might start using commodities such as gold in exchange for traded goods.

Another possibility can be the emergence of Chinese Yuan as the accepted currency for trade, but that will surely take its time as it not that wide used today. But here also lies a problem. China is holding 26% of US’s debt, so if the US goes bust and dollar crashes, it will surely have an impact on China and on the Yuan. So even this also looks like a problematic area.

The reason I thought the article was foolish, because the author said the flight of capital will happen from developed economies and investors will invest in developing economies such as India. But he forgot one thing that when US became a superpower it created a lot of wealth and when it crashes, it will diminish a lot of wealth with it too. The investors all will have their wealth mostly in US dollar and when it crashes; their wealth will also be eroded overnight. So from where will the capital come to take the Sensex to 60,000?

Whatever might happen, one thing is for sure, if another recession comes and hits US hard leading to it being bankrupt, its ripples will be felt much more in India than last time and future does look gloomy!

Eureka........Eureka!

Don’t worry, I was not having a bath when I said the above words nor have I discovered anything new. I was in my usual place in the office doing nothing but some reading and mind thrashing. But during the course of my meditation (of course mind thrashing) I came upon the news of LinkedIn IPO and I could feel the fears of some sceptics and laughs of some lunatics. For the past 6 months or so I been hearing a lot of talk of another bubble in the making from the bubble obsessed people, our now beloved friends Americans. To be more precise another dot com bubble.

The recent events like the takeover of Skype by Microsoft and the LinkedIn IPO helped a lot by giving a lot to talk and write. I couldn’t help but feel that the only reason many of the American watch News is to find another bubble or to create one. So obsessed are they with the idea of a bubble that even after having disastrous consequences twice in a decade they still want another one.

It seems like God has definitely blessed America or Americans as to say by once again listening to them. I have been hearing stories of people driving across States with posters on their cars saying “God give us another bubble”. But this definitely is not a dot com bubble, even if it turns out to be a bubble in the end. This time it’s all about social networking. Be it Facebook, Twitter, LinkedIn, Zygna or Skype. The buzz word is social networking. There are people saying this is not a bubble as all these have sustainable business models generating good revenue year after year. But so were the companies that started the last dot com bubble like Ebay, Amazon and its revenue not profits people.

But this is not where the things go wrong. I read someplace there are three kinds of entrepreneurs. The first are the innovators, the second are the ones who tweak and take it to masses and third are the cheap imitators. The third ones are the one which are most dangerous. It seems that most of the people who run to the markets to invest have either not read or forgotten that “All that glitters is not gold”. The LinkedIn IPO showed how eagerly people wanted an IPO from the social networking breed. With some shares going at double or more the initial price of $45, its valuation went straight away to $8 billion in the trading market from the $2.5 billion it had earlier.

And the Curious Case of Microsoft buying Skype has not helped, but add more fuel to the fire. By no means this looks like a bubble. It when every Tom, Dick and Harry is making social networking sites to make those millions (which I guess is already going on) and the rest of Tom, Dick and Harries think that they can rank in the moolah by investing is when things go wrong. Both things have started, but not risen to alarming propositions. The next year is going to be very interesting to watch whether Facebook or Twitter comes out with IPO and how big of a response come from people (it sure is going to be big). It’s after that, the people who would think that they missed the bus will be interesting to watch. As these will be the gullible ones to burn their hands by investing in the third category of ventures. So let’s wait and watch the movie. From the looks of the initial trailer or teaser or whatever you call, it looks to be an interesting one. I have already bought the popcorns and a nice comfy seat. For the moment GOD BLESS AMERICA!