Posted by
I.V.Subramaniam on
Friday, March 19, 2010
I attended a summit which had speakers like Bill Bonner from Agora and Ajit Dayal from Quantum AMC. This interaction with investors and the insights shared by the speakers presented a contrasting view of the world.
Bill shared a gloomy picture of the western world, where according to him the velocity of money (read as the speed at which money moves from one hand to other) has reduced. In other words, people are hoarding, which can lead to sudden spurt in spending at times and cause Hyperinflation. A hyperinflation scenario would be positive for a commodity like gold and can cause gold prices to improve.
Ajit had a more positive view of India, and the opportunities present here.
Both the presentations clearly highlighted the need for a new economic model.
A few economists influenced the western world and these theories are now being questioned. In fact, some of these theories are actually being thrown out. Ajit questioned the prudence of allowing huge machines such as caterpillars to make roads India, when the need of the hour is to provide employment to thousands of young Indians. If India does not provide employment to the younger generation in the years to come, we may have a huge social problem a few years down the line. Talking about social problems, Bill indicated that labor unions in the western world are increasingly getting active and that some of the governments may adopt ‘protectionism’ to safeguard their economies.
There was no debate, instead a simple consensus that China was going down.
Views can lead to questions, just as it did in my head. If China goes down, will it lead to lower metal prices? How will lower metal prices benefit India? Will lower metal prices lead to lower working capital requirements, as inventory costs will be lower? Will this mean lower credit growth? What will happen to the shipping industry if China goes down?
Lower metal prices means lower price for my future car, or higher profits for the automobile companies?
If hyperinflation is a possibility, will gold prices go up? Should I hold gold in physical form or as ETFs?
What would be the future economic models?
I guessed that CAPM (Capital Asset Pricing Model) was not right when I read it in college and while pursuing my CFA, but I thought I was naïve to conclude on CAPM. However, CAPM is now being aggressively attacked.
What will be the new model to predict returns or stock prices?
These were my thoughts. I would like to hear yours, so feel free to post comments / questions.