Adam Smith to Amartya Sen

Global Ponzi - IMF, EURO & US Prescription for Debt Woes

2011-10-01T13:04:00.008+05:30

What is a ponzi scheme? Wikipedia terms as " fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation."

In simple words " Its like robbing paul to pay peter". This scheme works till you get enough money from new contributions to pay old contributions. The day that is exhausted, its bust.

Now lets look at current debt crisis.

European Banks have lent enormous funds to countries like Greece, Italy, Portugal & Spain. (but then that is normal practice. All governments do that)
If government runs surplus budgets, they reduce debts. (but then someone raises questions, doesn't government have efficient use of resources(read surplus) other than paying back debt?). So governments runs deficits. (blame J M Keynes to a certain level for this)
To cover the deficits, governments borrow more money.
Now this works fine till we have primary surplus that is interest is less than borrowings. If that is breached, then you borrow to pay interest. (In corporate lingo, you need to have Debt Service Coverage Ratio of 1 or more)

Many of the European nations, particularly PIGS have been having huge deficits and their interest costs soaring very high, which do not seem to be bridged by additional borrowing( means unable to service debt).

I have seen such kind of situation in small mircofinance entities, particularly called as co-operative credit societies. In such institution, you will always find that their loan recovery rate is almost 100%. The truth is nowhere near it. These institutions have their books window dressed to appear clean.
The mechanism works like this:

A microfinance institution, MFIN issues loan of 10,000 to Pawan. The interest rate is 2% per month, which translates to 240 in a year. the tenure of loan is one year
At the close of year, Pawan says, he is unable to pay. Now, the MFIN does not want to show any NPA (Non-Performing Asset).
So they work out scheme saying, Pawan paid 10,240 along with interest on last day of financial year.
MFIN issues new loan to 10,240 on the first day of new financial year or last day of current financial year.
Now this happens only in books, there is no actual money changes hands.
The books represent 100% recovery. Balance Sheet is good.

What happened?

Income(I) which should have been reduced by non-recoverable 10,000 would reflect (I-10,000) now actually represents no losses and income of 240 i.e (I+240).
What is the amount of mis-apprpriation - [(I+240)-(I-10,000)] = -10,240.
What happens, if the is revealed or caught? criminal proceedings for fraud, misappropriation.

Now lets look at Debt Crisis:
1) PIGS is running deficit of mammoth proportions.
2) ECB, IMF suggest we should have EFSF (European Financial Stability Fund). The corpus was recently raised to 440 Billion Euro.
3) How are they gonna use it? Leverage the fund to generate the resources of 1.7 Trillion Euro and lend to nations with debt crisis to help repay debt.
4) So the banks, which will get repaid will be eager to subscribe these new bonds issued by EFSF, so that their existing loans get repaid and no losses are booked.

Does that not sound like the Microfinance institution explained above? Yes, only that was at a scale of 10,000 this is magnified by ratio to 1000 times.
So the misappropriation of profits, funds, mis-representation is of huge mammoth scale. and what happens because of this action? Markets rebound, feel confident of overcoming the crisis. reward the parliamentarians who perpetrated this fraud?

The crisis in the first place was because the Governments leveraged their future earnings by having fiscal deficit (deficit financing as called by Keynes). Keynes said, We are dead in long term. so look for short term solutions. So he said, if the economy is not growing, borrow money and spend it in the economy, which due to money multiplier effect grow the economy in multiples of spend and eventually recover that cost incurred from future tax income.
This is nothing but leveraging your future income(cash flow) with current borrowing with expectation that this will be cancelled out.

This theory was fine. Many countries implemented too. Deficits were norm of the day. Only people forgot was this was solution for short term. When that short term ended and long term started nobody cared. Everybody turned the keynes on his head... to cover one deficit another big borrowing program created. to cover that borrowing, still larger borrowing program created...

This works only till you are able to generate future income to compensate for the losses of current borrowings. What happens after that? Then everything crashes..

Are we in this mode now? or there is still steam left to leverage more? and how long will we able to keep on leveraging our assets?

Is somebody asking these questions?

Debt Worries, Unusual Problems- Unusual Solutions..

2011-08-16T23:01:00.007+05:30

Since 2008, when the economic ills were being treated with generous does of liquidity, the core crisis of debt management was postponed for some time. Now those ghosts of the pasts have come back to haunt those economies.

Visit to any of the European countries, you will realise, how clean the roads are, how well built the infr

astructure is, how well maintained the entire country is. The question that I used to ask everytime is, where do they get such money from? how do they fund these projects? why there are so less people and so many facilities? Tell an European to work overtime (after work hours) & you will find a person scowling. Ask him to pay for his medi-aid and he will scream cruelty.

What they did not realise is that, while creating such benefits for the public, governments used debt route to finance it. These measure did help in increasing the government expenditure, which in turn multiplied the effect on the economy. At the same time, it also created huge liabilities for the governments.

These debts now have become the cornerstone of the current crisis. The governments do not have sufficient monies even to service those debts. They have been over-leveraged.

As the solution for it and they will discuss, how fiscal deficits have ruined the economy. what is not realised is that these deficits were financed to create assets (huge infrastructure), which have no or neglible returns. That was a terrible waste of money. How have they solved it? By pumping more money in the economy, which is again raised by debt.

Now everybody wants to reduce deficits, that too not by raising incomes rather by cutting down the expenditure.... Whatta logic?

You reduce expenditure and that leads to reduction in income (as private investment/expenditure is already in doldrums), this will in turn lead to reduced tax revenues of the government. The government responds by reducing more expenditure. (that's cascading)

After long time, really good move was seen in the markets, i.e. reduction of deficit by combination of reducing expenditure and increasing of revenues. This was done by Italy on August 14, 2011.

Raising revenue is a good option. This was further reiterated by calls from Warren Buffett to increase tax revenues from super rich.

Lets hope, such sense spreads to other European and US economists too. One has to know that you cannot get rich by reducing expenses but by increasing revenues.

Reducing expenses will have multiplier effect on economy. Increased revenues will provide room to governments for maneuvering. Mindless austerity measures will not lead us anywhere, it will just shrink the economy. governments not only need to service their debts, they also need to have planned expenditure.

Mandatory Cost Audit - A Necessary Devil?

2011-05-07T11:45:00.000+05:30

So here comes the NEWS. The government has changed the applicability of the Cost Audit from industry/company-specific to generic.

On one had it marks a good attempt to fill the loopholes in existing policy of applicability of cost audit to various sectors and companies but on other, it calls for raising a basic question - "Is cost audit necessary"?

Of course, (nandatory) cost audit is, still, supposed to be one of the vital bases for formulating regulatory/legal framework relating to price control (like pharma, fertilizers), excise and other levies (like cement,agrochem) and other direct or indirect taxation.

But, as a matter of fact, most of the companies coming under applicability of cost audit, take it just as yet-another-compliance statement (it may be noted that the author is a qualified cost accountant having spent three years at cost audits of various industries). No company would like to dilute the information on the productwise cost component split, willingly. I am neither saying that they are correct nor that they have fullest right not to disclose this kind of information. However, I feel that companies will comply with the requirements of section 233B [cost audit], 201 (1) (d) [cost accounting records] of companies act happily only and only if they feel, it is a "value-adding" activity for the company itself (well, the ICWAI has been stressing that it IS a value additive activity, but in fact, it is nowhere visible from the format and ingredients of the Cost Audit Report.

The cost audit, by its nature itself, is quite different from other forms of financial audits like statutory / internal / concurrent / tax. Financial audits have a well defined rules and framework (like Accounting Standards). However, in case of cost accounting records the methodology and parameters for cost measurement or assessment or allocation or apportionment differ from industry to industry (it even differs in companies of different size, operational area within same industry). The existing set of CAS (cost accounting standards are definitely not sufficient to cover them all. Moreover, the industry-specific Cost Accounting Record Rules need a detailed review and serious make-over with the changing situations.

There are very few countries in the world which have this kind of mandatory cost audit (and the countries where it is not mandatory or it is not at all existing comprise of all sorts like capitalist, socialist and communist). In India, it was made mandatory in line with socialist principles set by our Government in early days with a view to "general good". It had vital importance in the days of pre-deregulations. The Institute made a good attempts of revising the format of cost audit report in last decade. It needs to cover whole gamut of cost optimisation with respect to ensuring optimum pricing and utilisation of countries resources. For example, when the provision covers Cement industry, it is understood that cement is a basic factor of countries infrastructure. But then, the Realty sector also needs to be covered to ensure that the planned benefit of policy which may be based on the cost audit reports of cement companies, are delivered to the society, the ultimate user and owner of the national resources. Likewise, covering consumer electronics seems beyond reason based on the ideas behind the applicability of cost audit.

The point is not to prove the cost audit redundant or useless. It is an endeavour to make it more comprehensive and useful for the nation as well as the corporates (and ultimately the consumer). I think, let's hope that the current move by the Government is the initial step towards the same.....

What do you think?

RUPAY-- Alternative to VISA & MaterCard

2011-03-26T22:15:00.002+05:30

National Payments Corporation will launch India's very own payment card "RUPAY".

Some data on it:

Name: RUPAY (earlier "IndiaPay")

Conceptualized by: Indian Banks Association (IBA) on instance by Reserve Bank of India (RBI)

Logo By: Ernst & Young

Number of participating Banks: Ten (10)

All done through: NPCI National Payments Corporation of India

NPCI setup in : 2009

All 6 Public sector Banks, 2 Private Banks & 2 Foreign banks own stakes in this.

Amount paid to international cards in 2010 : INR 5 Billion (500 Crore)

Percentage of domestic transactions : 90%

Debit card transactions in January 2011: INR 37.12 Billion (3712 Crore)

Credit card transactions in January 2011: INR 69.35 Billion (6935 Crore)

Leverage : National Financial Switch

Reliance - Shale Cost

2010-06-26T20:13:00.007+05:30

Reliance in past two months has made its presence felt in the emerging Shale Gas business with acquisitions of stake in two companies i.e. Atlas Energy Inc for its marcellus shale acres at pennslyvannia and Pioneer Natural Resources Company for its Eagle Ford Shale acreage.

Reliance has always been reluctant to invest in the international markets as they consider them to be more risky propositions. The thumb rule used while investing is the proposed venture should give them returns of average 20% on the investment. In case of the ventures outside India, they expect the returns to be atleast 10% higher considering the additional political risk involved.

Reliance has agreed to pay $1.699 billion for 40% stake in Atlas Energy's venture & $1.315 billion for 45% stake in the Pioneer's venture. the average acreage accrued by Reliance is 1,37,000 acres and 1,18,000 acres respectively. The average cost per acre is around $11,820 together

we will now view these investments in the above mentioned ventures.

Company : Atlas Energy
Venture : Marcellus Shale
Total acreage : 343,000
Reliance Share : 137,000
Total Cost : $ 1699 million
Cash payment : $ 339 million
Balance : $1,360 million (carry arrangement)
period : 4 years (assumed)
Normal cost per acre : $12,401
discounted cost per
acres : $6,309

If we consider reliance will maintain its rate of return of 30% as expected, then the price appears to be far cheaper. further, the company already has 5 wells running and producing around 28 mmcfe per day.

Now lets look at the Pioneer deal:

Company : Pioneer Natural Resources

Venture : Eagle Ford Shale
Total acreage : 289,000
Reliance Share : 118,000
Total Cost : $ 1315 million
Cash payment : $ 263 million
Balance : $1,052 million (carry arrangement)
period : 4 years (assumed)
Normal cost per acre : $11,144
discounted cost per
acre : $5,428

Keeping this analysis, Reliance seemed to have struck bargain.
am still wondering, why markets have not factored in these gains and only looked at absolute investments and not the discounted ones...

EURO hogwash - Solving problem with a problem

2010-05-15T20:38:00.002+05:30

The Greek crisis has the origins in the excessives of the public expenditure without eye on the proportionate returns from it. What does that mean?

It means the exchequer has spent far more than it can afford to do so. That means the government expenditure far exceeds the income it earns. The crisis-because the income now cannot take care of repayments of debt raised for expenditure.

Till this, we understand what is going on. Now what has EURO package proposed?

Balance of Payments facility to Euro members from 60 billion to 110 billion. that means more debt for the governments;
Increasing Euro guarantees upto 440 billion in the form of Euro stabilization fund. where will this come from? from more debt.
Finally IMF facility of additional 250 billion. this is not free aid. but more debt.

So what are we trying to do? we are trying to stave off the debt crisis by having more debt. so that we can roll over the debt. This means we are just trying to postpone the inevitability. But this is with the assumption that growth will return and the governments will have sufficient debt service coverage ratio.

Now what actions are we taking to make higher growth a reality:

Tightening the belts by reducing the expenditure (public). In any country more than 20% of the GDP is directly or indirectly funded by the government. this action will have impact on the GDP of the country (more probably negative)
This will have impact on huge liquidity surge in the markets as countries will be flush with funds (lower cost). This in return will result in high inflation.

Does anybody still think, we are resolving the issue? Comments please...

Warren Buffet mines Gold with Swiss Re deal

2009-02-09T10:18:00.006+05:30

Warren Buffet has done it again....

Warren has mined gold with previous deals with General Electric and Goldman Sachs when he provided them with desperately needed cash.
The terms of the deal with those have been sweetener to the shareholders of Berkshire Hathway and has also lead an example of bargain hunting.

Warren Buffet has always being limelight for his extra-ordinary sight for bargain deals. He is the fervent disciple of Benjamin Graham, who changed the thinking about the investment in the stock market.

Warren Buffet's call of not investing in last years and sitting on pile of cash has paid off with immensely huge returns.

what you see on the right side is the Head Qaurters of the Swiss Re. Berkshire Hathway has provided cash of $ 2.6 billion to swiss Re (world's second largest re-insurer).

Investment : $ 2.6 Billion

Type of Investment : Convertible Coupons(notes)

Guaranteed Rate of Return (coupon rate) : 12%

Options: Convert @ 25 Francs per share (common stock)

Option Expiry : 3 (three) years.

Other Option : Get perpetual returns of 12% on the loan provided.

Current Interest rate: Almost Zero....

The stock is currently trading at 16 francs.

Warren Buffet has not let an opportunity go unattended. He has taken full advantage of the available opportunity.

A really good example for us to learn to invest.

Recession Causes - More of change in Perceptions

2008-12-17T21:10:00.000+05:30

Economics is not a pure science... it is a social sicence.

So while studying any economic condition, we need to understand the social part of it to gain more understanding of it rather than looking at the abstract (relatively) terms as money supply, demand, supply, etc..

Even while studying demand and supply economics(which also has become obsolete after emergence of indifference curve analysis), the concept of demand has undergone lot of change...

While studying effect of demand on price, we should not loook at demand but "effective demand" So what is effective demand?

Effective demand is that demand that has three features
(a) Demand for the product;
(b) Ability to pay;
(c) Willingness to buy

So when demand is backed by ability and willingness, then it constitutes effective demand, which means demand which can make a difference....

The purpose of explaining all this is that the terms like willingness(which is more of cognitive term) have crept in the field of economics(so called science). This type of analysis has led to emergence of term called behavioral economics....

Now back to causes of recession and boom. The perception of the general public that there is more probability of gain in future as compared to now, leading that speculation and Vice Versa is the root causes of boom and recession...

The term more appropriate for this is "Irrational Exuberance". in fact this phrase was first used by former Fed chairman Alan Greespan to explain the irrational growth in stock markets during 1996-97...

Later Yale professor Robert Schiller came out with the book with same title in 2000 when market fell heavily....

This phrase became a catch phrase to explain the irrational boom. The important part is that this term takes into account the sentiment of public and tries to explain that boom and bust are more because of the sentiment of the public rather than the function of the forces of economics...

I hope I have a made point to you all......

Crisis or a Revolution?

2008-11-17T22:37:00.004+05:30

Crisis or not, times are turbulent, for sure.

The turbulence –one would agree - is not just economic; it is more of socio-economic nature. Insolvencies, recession, cash crunch, interest rates... everything is contributing to the mess to the fullest extent possible. So much so that most of analysts are tempted to go back to 1930s to establish the comparable... well, do we really need to go that much back? (I do not think anyone who would read this blog would have had witnessed the 30s) Does anyone find any such example in recent history?

Perhaps, I do!

Just two odd decades ago, there was similar situation. Well, it was not of this magnitude; still it was of same importance (the world economy at that time was, definitely not as much interlinked then as it is now). It was... crash Communist economies.
Germany reunion, fall of USSR, China’s turnabout on economic policies, crisis of Cuba...

Was the rise and strengthening of capitalism as a socio-economic system at almost the same time a sheer coincidence? Or was it a corollary of fall of Communism? Or was it an inevitable alternative?

The voice of leftists is rising from hush-hush to growl saying, it is not a fall of one or more economies but of capitalism itself (Impliedly they mean the re-rise of communism - or at least, socialism - as a stronger system).

No, I am no left sympathizer in any way. Still, the point made by them can just not be dismissed since, as yet, there has not come up a single strong model which can analyze the past, explain the present and guide the future with confidence.
________________________________________________________________

This is not an analysis. This is not an opinion. Perhaps just a mention of social vibrations I felt. Afterall, there is always a possibility of a “Third Alternative”!!

I invite your opinions, analyses, views and arguments on this.

Warren Buffet - Goldman Sachs Deal....Resurgence of Debt

2008-09-28T14:50:00.003+05:30

Warren Buffet one of the most Richest man on earth (precisely 2nd richest as in 2008) has struck a Gold mine in the deal with Goldman Sachs.

We all should also look for such deals, if we want to enter into one. Alas these options are rarely made available to common investor instead of persons like Warren Buffet. Only people like Warren Buffet can extract such a beautiful deal and it would have been surprising if somebody else would have been offered such terms and conditions. So Lets take a stock what the terms of the deal are:

Investment: $ 5 Billion;

Type of Investment: Perpetual Preferred Stock;

Guaranteed Rate of Return: 10% p.a.;

Early Redemption Premium : 10%;

Options: Warrants to purchase common stock worth $ 5 Billion @ $115 per Share;

Option Expiry: 5 years

Current Interest Rate: 2.0 Percent (September 26, 2008)

Goldman Sachs Group, Inc. (NYSE)

137.99 +2.49 (1.84%) 26 Sep 4:00pm ET

Open:	132.49
High:	137.99
Low:	129.51

Volume:	15,809,462
Avg Vol:	22,793,000
Mkt Cap:	54.34B

Disclaimer

After Hours: 137.20 -0.79 (-0.57%) 26 Sep 7:59pm ET

Warren Buffet seems to have taken full advantage of the current situation and made a killing in this offering. Though Goldman Sachs gets very important commodity i.e. cash required to bolster their capital, Buffet has benefitted himself with the correct timing of the deal to drive the maximum benefit out of it.

There is lot to learn from such deals entered. This deal also has returned the focus from common stock to debt which provides guaranteed returns (though somebody else then buffet getting such deal would be very rare apart from the promoters).

While looking at investments, only business ethics should drive it and not the emotion.

We also need to look whether common person has access to such deals in India. The deal is constructed very intellectually which has stock and debt option both meshed into each other and providing support in case of any situation.

The above deal gives guaranteed 10% returns at the same time allows to take benefit of the increasing share prices with a add-in warrants struck at specific price. (This warrant is nothing but call option purchased without paying any premium for the same) This is a master stroke by genius of Warren Buffet.

Biggest international heist in Financial History

2008-09-19T23:00:00.001+05:30

Consider This

## Sometime back ##

(a) US denies Dubai Port company to takeover Us Ports company citing security reasons.

(b) Similar voices are heard against chinese companies too (though no official comment on the same)

# Still Sometime Back #

(a) sub prime crisis surfaces.

(b) Lot of financial institutions on shaky ground

(c) Spate of write off follow

(d) Bear stearn crisis, bail out done..

(e) US financial institutions need huge capital to bolster balance sheets.

(f) Fed action follows, credit & liquidity infused. lot of US financial institutions take capital infusion from chinese, Japanese & gulf (basically dubai based) companies.

(though could not verify which gulf company has invested in US Financial institution)

(g) Dollar depreciates, oil rises, world crisis looming.

*** Now ***

(a) US institutions crash

(b) Freddie & Fannie (biggest home mortgage companies) bailed out...

(c) Lehman follows same path.. US refuses bail out

(d) same fate announced for meryll & AIG but bail out package made.

(e) Oil prices decreasing despite hurricanes & Opec announcing reduction in production

(f) Dollar continues to strengthen against currencies

(g) One analyst finds out that biggest unsecured creditors of lehman brothers are Asian institutions!!!!!! (read this article in "from all street journal" in financial daily "mint")

Why?

What is the best way rob anybody?

Borrow---> Spend---> declare bankruptcy----> lender is finished.

Who is better off?

The person on whom the money is spent.

The person who borrows has nothing to lose as he is where he was earlier

Lender is punished...

Did same thing not happen with US markets? Did US government pull out biggest heist in financial history? Who lost most money in this turmoil? borrowers from those insitutions (i.e. US public who may not pay now to the lehman bros) or the ones who had faith in these institutions and lent them huge monies( Asian & other financial institutions)?

Why is dollar appreciating in such situation?

Land Exchanges -- Efficient Way to Real Estate Trading

2008-05-17T20:25:00.005+05:30

When we talk of investing, the foremost thought that comes to our mind is the shares and the Stock Markets associated with it. We in India have very less options for investing. however we choose the product, the money turns up in the stock market only. Even the funds like Pension funds, employees funds are finding their way in to stock markets. To find the alternative option of investing is a very daunting task. The assets classes other than stocks for investment include Real Estate, Government Securities, Gold Funds, Gold related products, Municipal Bonds (which are non-existent in India), Trading in Insurance policies, reverse mortgages.

With the REIT (Real Estate Investment Trusts) in vogue (after norms being set now), we have found a new of asset to invest into. But how they would be priced? what would be the mechanism of trading? how effectively would they be able to represent the asset class? These questions are yet to be answered.

As the shares of the company represent the holding of ownership in that comapny, in the same vein, the units of the REIT should reflect the ownership of the same asset class i.e. Real Estate. But how would that effected?

Consider this:

01) Every entity holding any real estate i.e. land (developed or undeveloped), buildings of any kind should get that listed at the Property Exchange.

02) Property Exchange would work in the same way as the Stock market works, the only difference will be instead to trading ownership of company, we would be trading ownership of real estate.

03) The unit that will be traded will be a standardised one like one sq ft or sq mt. All the stock will have the same units.

04) The companies listing their real estate will have to submit their ownership proofs of the real estate to the exchange to be listed.

05) The companies will submit reports like

(a) What kind of land do they own (agricultural or non-agricultural)?

(b) Whether that land is developed & to what extent?

(c) Where that land is located & what is the municipal valuation of that property as per ready reckoner.

(d) For what purpose that is used & what is the income earned from it?

06) The units so listed on the exchange should be converted into demat form.

07) The stamp duty on transfer of such units should be rationalised so that trading in the same is encouraged. The state governments would find their stamp duty revenues increasing manifold after that. Same had happened when stock exchanges were dematerialised.

08) Derivative products can later be launched for the same, once the certain level of trading is established to allow more depth to the market.

09) The purchase of single unit of the entity so listed will represent as holding of equivalent real estate by the concerned person.

10) Later on even the Co-operative Housing Societies should be allowed to list their flats. (better would be having a union of multiple societies being listed as single entity) though this can create problems while taking possession of the units.

11) The valuation of such entity would involve a complete diferent kind of dynamics like municipal valuation, location of the property, projected activity by the company owning that property, how much that property is developed and etc..

12) Later on Property Mutual Funds could be allowed who would still make more easy to hold the real estate across the country for small investor.

13) There would be completely new concepts like EPU (Earning Per Unit of Property held), VPU (Value of Per Unit of Property held), TPV (Total Property Value).

This kind of exchange will try to bring more transparency in the property related dealings. It will make real estate market more vibrant. It will also allow small investors to have holdings in the small part of the land.
The market will allow for price discovery mechanism and also create avenue for small investor in real estate.

This step could be a breakthrough in the type of investment avenue available to small investor, which hitherto was not available to him. Small investor can also reap the benefits growth of real estate market without investing huge funds. This would also enable more liquidity to the real estate. Locating of real estate would be more easier. The person holding certain property would find it easy to convert into cash, which now is very difficult. Even the Company's Stock has gone through similar transformation. We should try to extend the same to the real estate too. If we can have Exchange traded Gold Funds, then we can definitely have Property Exchange also.

Aternative to Common stocks as inflation Hedges---Benjamin Graham

2008-02-11T23:34:00.000+05:30

Book: The Intelligent Investor
Author : Bejamin Graham
Edition: 1971-72

Chapter 2 The Investor and Inflation

"Alternatives to common stocks as inflation hedges

The standard policy of people all over the world who mistrust their currency has been to buy and hold gold. This has been against the law for American citizens since 1935---luckily for them. In the past 35 years the price of gold in the open market has advanced from $35 perounce to $ 48 in early 1972-- arise of only 35%. But during all this time the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage. Obviously, he would have done much better with his money in a savings bank, inspite of the rise in the general price level.

The near-complete failure of gold to protect against a loss in the purchaing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation by putting his money in "things". Quite a few categories of valuable objects have had striking advances in market value over the years-- such as diamonds,paintings by masters, first editions of books, rare stamps and coins, etc. But in many, perhaps most, of these cases there seems to be an element of the artificial or the precarious or even the unreal about the quoted prices. Somwhow it is hard to think of paying $67,500 for a U.S. silver dollar dated 1804 (but not even minted that year) as an "investment operation." We acknowledge we are out of our depth in this area. Very few of our readers will find the swimming safe and easy there.

The outright ownership of real estate has long been considered as a sound long term investment, carrying with it a goodly amount of protection against inflation. Unfortunately, real-estate values are also subject to wide fluctuations; serious errors can be made in location, price paid, etc.; there are pitfalls in salesmen's wiles. Finally, diversification is not practical for the investor of moderate means, except by various types of participations with others and with the special hazards that attach to new flotations--- not too different from common-stock ownership. This too is not our field. All we should say to the investor is, "Be sure it's yours before you go into it." "

Indo Japan Currency Swap...

2007-08-27T21:53:00.000+05:30

India and Japan have entered into currency swap agreement. This agreement specifies that in the event of either country facing currency/forex crisis can swap local currency for dollars with the other country. That means, if any BOP or forex crisis arises for India, then Japan will buy Indian Rupee and sell Dollars to India and vice-a-versa.

Japan has entered into similar arrangements with other asian countries also. In the current scenario, the deal does not have any importance as almost all the asian countries are holding huge forex. But the significance of deal will realised in the event, crisis like that of Asian Financial crisis in 1997 and recent Indonesian forex woes.

Currently Chinese Remnibi is gaining ground and along with that inflation is also galloping in china, this could lead to adverse effect on chinese trade surplus (nevertheless china is experience huge upsurge in its trade surplus---thanks to artifical limit on chinese yuan)
Inflation in china may lead to increase in demand for imported goods vis-a-vis home manufactured goods.

anyways, if that happens, that would mean good days for Indian products as the cost advantage of chinese products may get eroded. The current inflation ion china is around 7%.

How to become a crorepati?

2007-08-10T23:52:00.000+05:30

The setting objectives plays an important part in any individual's quest to achieve various goals in life. Objectives help channelise the thought process and thereby initiate appropriate action, which is in line with the goal that the individual has set out to achieve.

With respect to financial planning and youth, financial objectives play an important part in helping individuals achieve their dreams and goals in life. Financial objectives act as the first step towards determining the course of action needed to achieve various goals.

For example, youth can aspire to become Crorepatis (millionaires) one day. And through erfectly legal means! We are not trying to advocate any kind of illegal activity like going to a casino and gambling with your money or betting on horse races (which is legal by the way!). This goal is very much achievable in our view provided individuals plan their finances wisely. This article outlines a strategy for the youth of today to become a Crorepati.

Suppose an individual aged 25 years wants to become a Crorepati by the age of 40. This means he has 15 years to achieve the goal. He wants to know how much he will need to save per month/annum to achieve the target.

Assuming a rate of return of 15% per annum (p.a.) and an investment tenure of 15 years, the individual will need to save Rs 210,171 every year to become a Crorepati (refer Table 1 at end of article. Effectively, the individual would need to invest Rs 16,414 every month.

Of course, the above figures would vary with a change in the 'given' set of variables. For example, assuming that the individual had 20 years to become a Crorepati; he would need to invest a sum of Rs 97,615 per annum (or Rs 7,624 per month), other variables remaining the same. If we were to reduce the rate of return to 12% p.a. and the tenure were 20 years, then it would need an investment of Rs 138,788 p.a. (or Rs 10,974 per month).

Individuals could also be faced with another kind of dilemma; they know how much they can invest but would like to know the time it would take for them to become a Crorepati. An illustration would make things easier to understand. six months to achieve the magic figure of Rs 1 crore (refer Table 2). Conversely, if his investments were to increase to Rs 100,000 p.a. and his expected rate of return were to fall to 12%, it would take him 22 years and six months to achieve his target.

However, the numbers given above assume certain factors to be 'given'. For example, it is assumed that the individual Let us suppose an individual can invest Rs 50,000 p.a. and his expected rate of return is 15% p.a. on his investments. It will take him approximately 24 years and will be a disciplined investor and he will continue to invest the specified amount(s) diligently every month/year and that he will not deviate from his investment plan. If viewed differently, it
takes patience, discipline and belief on part of the investor to stay on course of the journey the entire distance.

Individuals therefore need to bear the minute details in mind before embarking on their journey to becoming a Crorepati. As we have shown, becoming a Crorepati is not 'mission impossible'- in our view, it is 'mission achievable'!

* Rs 1 crore = Rs 10 million

Source: personalfn.com. To download full article click here.

How costly can the delay in filing tax returns be?

2007-07-30T13:15:00.000+05:30

First, what are the due dates?
Assessees having income from salary have to file return of income before July 31 of the assessment year. This is the ‘due date’ prescribed in section 139(1) of the Income Tax Act, 1961.
Self-employed businessmen and professionals, and those deriving income from let-out property too have to file their returns by this date.
However, businessmen and professionals with aggregate turnover/annual receipt exceeding Rs 40 lakh (in the case of business) and Rs 10 lakh (in the case of profession) have time up to October 31 for filing their return of income.

Are there any benefits in filing by the due date?
An assessee filing return by the ‘due date’ provided in the statute is eligible to file a revised return if he discovers any omission or wrong statement therein. Time limit for filing revised return is one year from the end of the assessment year or before completion of assessment. No penalty would be levied for filing a revised return on voluntary basis.

So, by filing late, does one lose the revision option?
Yes. If an assessee does not file his return within the ‘due date’ and files his return subsequently, he cannot have the benefit of revising the return, as the return filed beyond the ‘due date’ is treated as ‘belated return’.

Any other advantages of sticking to the deadline?
The taxpayer gets the advantage of carry forward and set off of losses, such as loss from business and loss under the head ‘capital gains’. If the return is filed beyond the ‘due date’ mentioned in section 139(1), these losses cannot be carried and set off against the income of subsequent years.
Yet another advantage of filing return before ‘due date’ is the eligibility for interest on tax refund from April 1 of the assessment year.

Can delay, therefore, be wasteful for ‘refund’ cases?
Yes, because where the return is filed after the ‘due date’, interest on refund is paid only for the period from the month of filing the return to the date of refund. In other words, no interest is paid for the period from April 1 of the assessment year to the date of filing the ‘belated return’.

Do those with ‘nil’ tax liability have anything to fear?
Where the return is filed beyond the ‘due date’, the taxpayer has to pay interest if any, on tax liability existing beyond tax deducted at source (TDS) or tax collected at source (TCS) or the advance tax paid. The question of interest does not arise where tax due for payment is ‘nil’, as would be in the case of most salaried people who pay their taxes through the TDS route. Legally, a taxpayer can file his return before the end of the assessment year without any penalty (however with penal interest under section 234A). Again, the question of penal interest does not arise in the ‘nil’ cases discussed above. For the assessment year 2007-08, return of income could be filed up to March 31, 2008.

How costly can delay in filing IT return be?
Apart from interest and penal interest, there are other implications. If the return is filed after March 31, 2008 but before March 31, 2009 the AO (Assessing Officer) could levy a penalty of Rs 5,000 under section 271F. Even when there is no further tax payable on the income admitted, penalty under section 271F is leviable for the delay. If the return is filed after March 31, 2009 then such return would become an invalid return.

source: HINDU