Author Archives: Lila

Taxpayers to Paulson: We Don’t Need No Stinkin’ Lemons….

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From Fall Street:

“This is not expenditure.” Paulson
“This is not expenditure.” Bernanke

The initial Paulson/Bernanke bailout plan was all of three pages long and was franticly cooked-up as the markets were collapsing. It reads like it was put together by a bunch of tyrannical toddlers playing with crayons. Are we really to believe given the circumstances that this plan represents an opportunity and not an expenditure for U.S. taxpayers?

“This is not an expenditure of $700 billion. This is a purchase of assets, and if auctions are done properly, evaluations are done properly, the American taxpayer will get a good value for his or her money.” Bernanke

Good value? Well Mr. Bernanke, if buying the garbage stinking up the American financial system is such an opportunity why don’t you partake in this adventure with some of your own capital? (I am quite sure the public would not mind if a few Chinese walls were broken down to allow Hank and Ben to invest some of their own funds in this scheme). Why not call the new plan ‘Opportunity USA’, get the best minds in the industry to run the entity, and entice Greenspan, Bush, Gross, and other proponents of the plan to invest funds. After all, under such a scenario it is not inconceivable that taxpayers dollars would start voluntarily rolling in to also invest.

But alas, the chain of events to create ‘Opportunity USA’ is exactly how the free market works, and the free market has already spoken and told us that the crap to be so graciously purchased by the U.S. taxpayer is indeed crap.

More here.

Bring the Recession On…

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Now here”s the spirit of self reliance:

“Which brings me back to the collapsing markets, the product of fart-in-the-wind economics.

I can foresee on 5th Avenue in Park Slope a beautiful resurgence of shuttered shops, rotted storefronts, the end of money’s welcome in its hypocrite hug, the end of surfeit, a return to normalcy. No more strawberries in January at the store on the corner – the strawberries were never meant to be eaten in winter anyway. Perhaps we might even see a return to the city of people who manufacture something other than air. I will be driven out first – because this screed is all air! So be it!”

Christopher Ketcham at Counterpunch. 

Comment: 

Only problem I have with this essay is the confusion between casino capitalism and the free market..and the reflexive assumptions about what growth is (assumptions our corporatist masters also hold, oddly enough)

Ron Paul and Pro Life

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A reader writes:

“You do realize that Ron Paul is not pro choice. He is not the freedom loving candidate you portray him as. He doesn’t give a shit about individual freedom because if he did he would not have voted against pro choice. It is there in his voting record if you ever bothered to look.”

Comment:

I’ve actually read Ron Paul’s voting record quite thoroughly. It’s exactly what I’d expect from a principled libertarian from his background.

Libertarians believe in state’s rights and decentralization. So I expect Paul, while pro-life, would be quite comfortable with states choosing for themselves what they wanted on that. If you were pro-choice, you’d just move to a state which supported your position.

Pro-lifers believe that life and liberty are non-negotiable, something all libertarians believe. It’s just that libertarian pro-choicers (like me) think where you draw the line that begins life is indistinct, but we respect pro-life as a serious ethical position.

Pro-life isn’t anti-feminist or anti-female, as you suggest. It’s simply a different way of looking at the issue of reproductive rights. In any case, reproductive rights are not the only thing, are they? A uterus does not make a very compelling political philosophy on its own…

Propaganda State: What Happens When You Don’t Listen to Everybody..

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“Two years ago, for example, when the now-beleaguered Morgan Stanley was trumpeting a 61 percent jump in profits, Grant wrote a pessimistic analysis titled “over the cliff with Morgan Stanley.”

Notes the Washington Post.

Comment

Yes, there were lots of people who saw this coming. The Post mentions two of them – Nouriel Rubini from the Stern School of Business and James Grant of Grant’s Interest Rate Observer. I can name dozens: Kevin Phillips, Richard Russell, Bill Fleckenstein (another perma bear, but none the less right), Peter Schiff, Jim Rogers, Marc Faber, The Daily Reckoning crew….

And yours truly way back in 2006, even pointed out that Fanny and Freddie would be at the heart of the problem:

“Why It’s Time to Sell Goldman,” Money Week, July 2006.

Meanwhile, the Chinese government shows a keener understanding of sound money and the free market than our money men:

“According to numerous Chinese state media news sources today, the Federal Reserve’s continued zeal for propping up the market by injecting illusory liquidity is part of an agenda to gain trust and grease the skids for increased government intervention in financial markets. China Finance, China News and Chaobao Financial News, all state owned media outlets, slammed the Fed for taking action that will only make long term economic conditions worse and devalue the dollar by “creating money that does not exist which leads to the inflation of liquidity, ” a policy contrary to China’s position as a holder of vast reserves of US dollars.”

Nice to see that the Chi Coms are more in synch with the best tradition of this country on the need for sound money. Shows you that our worst enemies are right here at home.

And Anatole Kaletsky states the obvious: Paulson was willing to destroy shareholders in Bear and Lehman but he rushed to defend his old firm.

Putting Lipstick on an AIG

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The Paulson plan for the bail out of insurance giant AIG is to going be implemented over the next week, through we are likely to hear some more details this weekend. The piece is at Lew Rockwell and Counterpunch.

Putting Lipstick On An AIG

Hockey moms aren’t the only ones wearing Maybelline. Pigs come in cherry gloss too.

Like the porkers at Wall Street lining up with their lips in a pucker behind Washington’s plush behind. Having pigged out at the public trough for years, they now want their sticky little trotters washed down in the righteous waters of the Potomac.

Tarting up comes natural to our Wall Street-walkers. Turns out these great big masters of the universe were really, well, girly men who couldn’t balance their check-books and put out more than they took in… like any working girl.

Lipstick is especially right for Goldman Sachs, which likes to cross-dress as a devout public servant in after-hours and has at least one set of heels working the floor of the Treasury department during any crisis. Yep, I’m pretty sure Hank Paulson would look good in high-gloss plum. You see, lip shtick is just what Hank’s good at. He was out on Monday flapping his lips with the kind of plummy platitudes you’d expect from semantically challenged mental health workers, not from a Treasury Secretary. A Treas. Sec., mind you, who was once a Goldman CEO not above inserting carefully chosen knives into the ribs of colleagues.

 

“We need to put this behind us,” quoth Hank. “We must move forward.”

“We need to work through this.”

“We need to heal.”

 

We, of course, need to do nothing. There is no we here. This is a Wall Street crisis. And the usual suspects on Wall Street need to line up, bend over and get caned for their misdeeds. Barring that, they need to take the market’s medicine like men.

Instead, they were out in full therapeutic mode, pouting and whining for a change of their soggy diapers by dear Nanny Washington.

 

And Nanny obliged.

 

First there was Fannie and Freddie, the terrible twins, who were taken lovingly into the conservatorship of the state. Translation: they went belly up and the funeral expenses were billed to the tax-payer, though the estate had been sold at private auction a long time before.

 

Oh, those twins.

 

Inhaling the swampy fumes of government but croaking from the terra firma of the market. Owned by individuals, backed by the state. The formula of the managed economy – privatized profits and socialized losses.

 

Created by Congress to expand home ownership by making finance available to a bigger part of the population, the two companies own (or guarantee) around 40 percent of the $8.5 trillion U.S. residential mortgage market. They are the biggest single borrowers in the US, after the federal government. In 2006 they were hit with a $350 million dollar fine, one of the biggest ever assessed by the SEC, as a penalty for accounting malpractice.

Then Fannie even got caught trying to pull Nanny’s strings to discredit the regulator. Which strings were those? We can only guess.

 

Quote: “Goldman Sachs was one of several institutions actively involved in the accounting fraud, its contribution being earnings manipulation through the creation of MBS’s – mortgage-backed securities – in Fannie’s portfolio, a strategy remarkably similar to Goldman’s actions on behalf of Enron. Of note also is the fact that in 2005, while the investigation was ongoing, Congress placed Fannie directly under the Federal Reserve, raising the specter of a surreptitious government bail-out outside the public eye, at some point.”

 

[That’s from an investment report I did on Goldman Sachs in August 2006.

The only thing wrong in it was that the government bail-out took place in full view of the public].

 

That is to say, while Hank blubbers on about how we need more regulation, that’s only now, during bust-time. Way back in bubble-time, Hank’s old firm was busy dabbing rouge on the pork in Fannie’s books and playing hopscotch with regulations.

 

O tempora, O mores.

 

Why, back in bubble time, even the former Fed chairman, the all-but-sainted Alan Greenspan was more prescient. He noted that failure to smack down the bratty twins could lead to “systemic risk” in the capital markets.

 

Of course, he said that after first telling Jane Citizen to go forth and borrow. But that’s because, like the monetary philanthropist he was, Greenspan believed in the widespread giving of ARMs.

 

As public servant Hank today, so public servant Greenspan back then.

 

Greenspan too liked dabbing rouge on pork. He relished painting market bottoms with the varnish of cheap money. It made them look plumper and rosier than they really were. Eventually the bottoms looked up and turned into booms, he reminded us.

The rouge worked. Books got beautified. Risky turned risqué.

 

“The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,” said James B. Lockhart, the acting director of the Office of Federal Housing Enterprise Oversight (OFHEO) when it released its report in May 2006.

In other words Fannie was a pig, even with the lipstick.

Of course, Goldman’s not the only one on Wall Street with a wicked hand for make-up artistry. The ratings agencies haven’t been too bad themselves, with all that triple A gloss they plastered on gangrenous sub-prime debt. What was that about? A little make- over for the corpse before the public viewing?

 

Truth be told. Goldman got good at putting lipstick on porkers long before they dabbed it on Fannie and Freddie. They were doing it in 1999 in ole Hank’s CEO days. Goldman helped Enron’s “smart guys” conduct massive energy futures trading and its leverage, like Enron’s, ballooned. [They had their leverage thang going in those days too].

 

Then, in 1993 Goldman invented a special accounting scheme to perk up Enron’s books – “Monthly income preferred shares” (or MIPS) they called it. MIPS let Enron sell fifty-year securities through specially created off-shore companies. To the IRS, Enron described the preferred stock as “debt” and claimed tax deductions on the interest payments. To shareholders, Enron called the same stock “equity” and counted it in the company’s capital value. Goldman took home massive underwriting fees from the scheme

 

In one year, Goldman had helped 17 companies besides Enron sell 2.7 billion MIPS. There was an offering every week, each dodging IRS rules with more and more finesse. Average commission and interest rates on MIPS ran much higher than on normal debt – between 1 and 1.2%. Goldman made tens of millions.

 

When the IRS, Treasury and the SEC decided to plug the loophole that was costing them hundreds of millions of dollars a year, Goldman and Merrill Lynch, along with the industry trade group, the Bond Market Association, began big time lobbying. Then

Goldman CEO Jon Corzine (later a US senator and NY Jersey governor) made sure the legislation got nipped in the bud and Goldman’s little accounting number actually ended up a chart-busting hit on the financial circuit.

 

So when Hank Paulson rushes to put together a bail-out for Merrill Lynch but brushes Lehman aside, he’s just remembering who he used to jam with in the old days. (Of course, buying up Merrill shares trading at $17 for $29 might not be most people’s idea of a bail-out. But that’s another story).

 

It could be also that when he’s not actually slitting throats, Hank just likes to lend a helping hand to old Goldmanites, like Merrill’s John Thain (a Goldman COO, CFO and President). You see, our Hank is a helping kind of guy. Like the time he helped Thain help himself to Dick Grasso’s seat at the head of the New York Stock Exchange. Oh, those public servants. Never a moment of rest from the helping.

 

That’s probably why Hank is helping out A.I.G.

Turns out Maurice (“Hank”) Greenberg, the former chair of A.I.G., is an old friend of John Whitehead, another former Goldman head.

The pranks of these Hanks get to be almost as complex as those derivative deals that melt hedge-funds like marshmallows on a grill. But the short of it seems to be that Greenberg jumped ship at AIG after Eliot Spitzer, crusading heavy of the SEC, came sniffing around in 2005. Improprieties,…bid rigging… hissed Spitzer, turning on the heat. Hank (G.) denied it stoutly, but AIG had to restate some of its numbers. It got so warm that even Hank (P.) who left his roost at Goldman Sachs in 2006 to perch at Treasury could smell the flames.

The operative word here is Treasury. That is to say, in the normal run of things, hookers and pols having always gone together like dill and pickles, a married man’s booty calls would provoke no more than a yawn. They certainly wouldn’t have come to the attention of the revenue department. But Spitzer’s zeal had aroused the ire of the banking mafia. And thus it was that no sooner did things get really toasty on Wall Street, then along comes an IRS probe that turns up Spitzer’s sins of the flesh. And thus the public was regaled with the seedy drama of the Emperor’s Club and Eliot. And thus also Wall Street dethroned the hated securities czar and sent him scurrying back to his former life as a mere real estate billionaire.

But now, with Hank (G., not P.) defending AIG as a national treasure fully deserving of taxpayer TLC, you begin to wonder about it all. If AIG was such a treasure, why did Greenberg ever leave? Why did he rail against his successor? And why defend AIG now? Was he thinking about the shares he still has at AIG?

[Maybe he was taking a leaf out of the book of yet another Goldman CEO, Robert Rubin, slated to be Obama’s economic point man, a man who’s made an art out of jumping ship at the right time (read, Citigroup) leaving his successors to hold the sub-prime bag.

It’s a trick Rubin worked at as Secretary of the Treasury in the 1990s, when he (along with St. Alan) was responsible as much as anyone else for blocking regulation of the over the counter derivative trade and for consolidating the banks – misdeeds for which the rest of the financial industry is now paying].

And what about the Starr Foundation, the charity that Greenberg headed, and which Spitzer claimed he also misused? Turns out Spitzer wasn’t so wrong. Greenberg seems to have been using public funds to pursue his own agenda. Maybe Starr is another national treasure in the making… Or is national just what comes in after treasure goes out? You wonder some more.

Just this March, before AIG took ill, Hank (P, not G) came up with a proposal for insurance reform that amounted to an end run by the big insurance players around the state insurance system. Now your wondering becomes positively thunderous.

There is no bigger player than AIG. Yet no private bids were considered. Had they been, AIG would surely have found private buyers. Lehman did.

Instead the Fed bailed it out. Actually, it was the Federal Reserve Bank of New York, the most important of the 12 federal reserve banks and the one responsible for carrying out the Fed’s exchange rate policy, i.e. for buying and selling dollars. It was the same NY Fed which cobbled together the rescue of Bear Stearns. On NY Fed chairman Geithner’s board of directors sits another Goldman chief, Stephen Friedman. Geithner also takes unofficial advice from Goldman alums Gerald Corrigan and the aforementioned John Thain. Then, of course, there’s the man whose bidding Geithner is bound officially to do, the Treas. Sec. himself, His Holiness Hank, servant of the people.

However you cut it, that’s a lot of Goldman.

Which means that however you cut it, the bail-out of the giants of finance is not just a bail out of the economy…or of the banking system….

It’s an evisceration of some banks by others…. a cannibalistic binge billed to the tax-payer.

No matter how much rosy gloss gets slathered on it, it’s a pig-out at the public trough.

Democrats might have racist attittudes? Naaah…..

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“Just 59 percent of her white Democratic supporters said they wanted Obama to be president. Nearly 17 percent of Clinton’s white backers plan to vote for McCain.

Among white Democrats, Clinton supporters were nearly twice as likely as Obama backers to say at least one negative adjective described blacks well, a finding that suggests many of her supporters in the primaries — particularly whites with high school education or less — were motivated in part by racial attitudes….”

More at MSN.

Comment:

What a relief. Democrats are racists too. All along we thought that went with being a Republican, along with with country club membership, subhuman IQ and a multi-million dollar bonus.

When you make caricatures of people and ideas, don’t complain when it comes back to bite you.

(Full disclosure: I vote neither Republican or Democrat)

>

What went wrong with AIG’s swaps: risk assessment…

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Daniel Amerman analyzes the the bonus structure that drove bad risk assessment at AIG.

Analysts are in competition with each other to come up with rosier and rosier scenarios, because their bonuses, which they get to take upfront, depend on it. Bad enough, he says, when the underlying securities are mortgage-related. But terminally dangerous when they are corporate derivatives:

“With corporations you need to assess complex financial structures. You need to look at the industry as a whole, assess the relative competitive standing of the company, look at foreign competition, examine comparative growth rates, subjectively evaluate management capabilities, and dive into the footnotes for clues as to pension and health-care exposure, as well as including a wide array of other risks and factors. All of which require using assumptions. Now, as we saw earlier in this article, assumptions are where the money is made when it comes to derivative securities. When we compare the corporate credit derivatives market to the subprime mortgage derivatives market — there is far more room to make money through making aggressive assumptions with corporate derivatives.”

Comment: 

The two major assumptions that analysts at AIG made (because the incentive system encouraged them to) was that there was no danger of a recession and no danger of systemic risk.

Both, as it happened, were disastrously wrong…

Hacking Sarah Palin: Way to Go, Civil Liberties Champs!

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Update:

Says Yahoo, “According to reports in Knoxville’s Tennessean, Democrat State Representative Mike Kernell admitted that his son, David Kernell is being questioned by authorities in connection with the crime. The Secret Service and the FBI launched an official investigation on September 17. ”

Suggesting it might have come  from a party operative or someone in politics politics wasn’t so far wrong, was it?

_________________________________
“WASHINGTON – Hackers broke into the Yahoo! e-mail account that Republican vice presidential candidate Sarah Palin used for official business as Alaska’s governor, revealing as evidence a few inconsequential personal messages she has received since John McCain selected her as his running mate.”
Comment:

If this hacking proves to have came out of the Obama camp, I must say their claim to be champions of civil liberties is damaged. Whoever the thugs who did this, I hope they realize they are damaging the credibility of their campaign. I haven’t been all that much taken with Ms. Palin. But she is going to get a sympathy vote out of this, and rightly so.

End of an Era: Wall Street Caving In

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“Sept. 14 (Bloomberg) — A group of banks including Bank of America, CitiGroup and JPMorgan Chase & Co. are putting up $70 billion for a borrowing fund aimed at providing liquidity… Each participating financial firm will provide $7 billion to establish the fund and have the ability to borrow up to a third of the total. Other banks include Barclays Plc, Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and UBS AG. The pool could expand as other companies join.

Now, let’s get this straight. Ten banks put up $7 billion for a total of $70 billion. Because any bank can withdraw up to $23.3 billion, if three banks take $23.3 billion each, there will be nothing left for the others. Am I missing something?

There is nothing wrong with the plan, per se. The flaw lies in the flawed character of the participants. These are investment banks and if investment banks can exploit a situation, they will do so. That’s what investment banks do for a living, they exploit situations for their own advantage in order to maximize profits.

Last year when two Bear Stearns highly leveraged funds were in danger of failing, Bear Stearns came to the “rescue” of one of its funds and lent it more capital, albeit with the caveat that Bear now had first claim on the fund’s assets. Then, when the fund collapsed shortly thereafter Bear Stearns exercised its now first-in-line rights to all the assets.

Since self-serving behavior is common among investment bankers, it will be interesting to see how the bankers’ $70 billion fund will fare. After the first withdrawal, there may be a “bank run” on the remaining assets by the remaining banks—a real life version of what will be “the Banker’s Dilemma”.

A FRACTIONAL RESERVE SAFETY NET

The investment banks’ $70 billion liquidity fund is predicated on much the same premise that fractional reserve banking is based. While it is understood there may not be enough in the fund to cover all needs, it is assumed that not everyone one will need their funds at the same time.

This thinking/sic assumption is the basis of today’s fractional reserve banking system; because, as in the banker’s “liquidity plan”, there is not enough money in US banks in the event of significant withdrawals by savers.

There is $6.84 trillion on deposit in US banks; but US banks have only $273.7 billion cash on hand. The banks cannot possibly pay back depositors all their money as only 4 % of depositors’ funds are actually available. The rest has been loaned out, i.e. to real estate developers, etc.

The safety net of both bankers and depositors may prove inadequate in the days ahead. Be forewarned….”

 

More by Darryl Schoon.

Indian prospects: Indian Roads and Indian Pros …

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Check out this interview on Indian’s prospects from Today’s Financial News and then check out my own views on the subject from two years ago. Interesting to see that my assessment was pretty much on the mark. I will follow through in my next blog post on how emerging markets might be affected by the collapse of Lehman, Merrill and AIG.

[I just did an interview with The Hindu on the subject which I will post].

——————————————————————————–

From Today’s Financial News, December 2007.

Karim Rahemtulla:

India will never compete directly with China on manufacturing because India does not have a manufacturing base. What India has is more of a knowledge–based economy, and that’s only for a portion of the population. China is basically the world’s factory. They have a ton of labor. They can produce things at a very low cost, and the government in China is very pro-manufacturing. They really couldn’t care less about what happens to the environment as long as they fill their coffers full of dollars. So India will compete in a different sector, not manufacturing.

Laura Cadden:
What sectors do you think will experience the most growth in 2008?

Karim Rahemtulla:
Well, the fastest-growing sector right now is definitely infrastructure and that’s because they don’t have any. There’s probably more paved road in the state of Texas than there is in the entire country of India. So that’s the fastest growing sector, but yet, it is not the sector that you want to look at in terms of profiting. That sector is going to be technology.

And if you look at the Indian stock market, there is a disconnect going on. In the entire market, you’ve got 7,000 companies. Of those 7,000 companies, only 300 of them trade more than $1 million a day, so it’s a very narrow rally. And if then if you look at the most traded companies, of those, the companies in the software sector are the ones that are actually trading at 40 or 50 percent discount to the market. They’ve actually corrected while the market’s going higher.

So if you’re going to look at the Indian market, you want to look at companies like Infosys or Satyam Infoway. These are the two companies whose campuses I visited. And they’re really the companies you want to focus on now because they’re the fastest-growing companies with the most potential, yet they’re trading at a discount to the overall market.

Laura Cadden:
And these are companies that we in the U.S. could invest in.

Karim Rahemtulla:
They trade as ADRs in the U.S., yes. Infosys trades under the symbol INFY, and Satyam is SAY.

_____________________________________

NOW MY VIEWS FROM 2006:

By Far the Weakest Recovery
by Dr. Kurt Richebächer
The Daily Reckoning
Tuesday, August 8, 2006

http://www.dailyreckoning.com/Issues/2006/DRUS080806.html

We have more on the lopsided “recovery” in today’s guest essay…below. And, we’ll have more from Addison tomorrow. He’s in Cannes helping Dr. Richebächer pull together his magnum opus for publication with the Agora imprint at John Wiley & Sons. It is scheduled for release early next year.]*** China is a good bet to replace the United States; it is growing very quickly, with wages rising 15% – 20% in a single year. But India is a good bet, too.

Colleague Lila Rajiva updates us:

“The India investment story is still hot, but to avoid pitfalls, investors should stay tuned to the nuances. In a recent Forbes piece, for instance, Carl Delfeld, head of the global advisory firm Chartwell Partners, had an explanation of why the Indian tiger might soon be mauling the Chinese dragon. Delfield gives the usual reasons – the Indian tradition of property rights and legal protections, widespread familiarity with English among educated people, a stock market that goes back to 1870, a young population (50% under the age of 25), and growth that is more balanced and less dependent on foreign investment.

“Delfield is right on all counts, but there’s one crucial thing he doesn’t mention. And that is that the Indian population has a high level of technical skill in a number of fields. Computer technology has got the most press so far, but investors should know that India also has an enormous pool of well-trained finance professionals, lawyers, and doctors that it hasn’t yet fully tapped. In contrast, low-wage labor, which is more important to manufacturing, seems to do better in China. That could be partly because India’s low-wage workers have to contend with rigid local labor laws. Or, it could be because of weak primary education and facilities.

“But whatever the cause, the divergence between high-wage professionals and low-wage workers is something to mull over when picking Indian investments. Industries and sectors that depend on skilled professionals are simply a better bet. This means computers and information technology, of course, but it also means financial services, pharmaceuticals, and consulting.

“This angle of the Indian-growth story leaps out at you when you look at something like the Forbes list of the 40 richest Indians. It included 27 billionaires this year, more than double last year’s number. The “fat 40” had a total net worth of $106 billion. That’s up from $61 billion last year, and more than two and a half times what China’s fattest cats are worth ($26 billion).

“Now, check this out. Of the Indian 40, an astonishing one-third makes his money, all or mostly, from information technology, telecommunications, and the media. Their companies include such familiar names as software exporter Wipro, and media giant Zee TV, of course. But, you also see less well-known players, like the Internet casino company, PartyGaming. And, notice that almost one-quarter of these richest 40 Indians are involved in medicine in some way – from Ranbaxy, the pharmaceutical giant, to hospital chain, Fortis.

“That’s the big clue for investors looking for sectors and stocks likely to outperform. Stick with India’s professional knowledge base. Delfeld, for instance, recommends Dr Reddy’s Laboratories (NYSE: RDY) and HDFC Bank (NYSE: HDB). But there are also lesser-known IT stocks, like Satyam Computer Services (NYSE: SAY). And, in medicine, you could look at a generics producer, such as Cipla – or Dabur, which makes herbal products.

“In India, pick the professionals…”

______________________________________________________________

AND MORE ON INDIAN INFRASTRUCTURE:

Beyond Fear and Greed
by Dan Denning
The Daily Reckoning
Thursday, June 22, 2006

http://www.dailyreckoning.com/Issues/2006/DRUS062206.html

“When you leave your hotel, the sights and sounds are so overpowering you can barely stand it. And when you get back, you’re exhausted and don’t want to go out again. We saw people who never left the calm and comfort of the lounge or the liquor bar.”

We have never been to India. Nor have we ever ridden in one of Tata’s automobiles. Perhaps it is better that way. Friends, recently returned from the subcontinent, report that it is a wild and wooly place.

Still, it is in wild and wooly places that businesses boom and fortunes are made. And India is booming. All the reports say so. The economy has been growing at more than 6% per year for the last 15 years. And it seems to be picking up speed. GDP growth over the last three years has averaged more than 8% per annum.

How did this happen? We will not venture our own opinion here. We merely note that many observers credit the new boom to reforms that eliminated the worst constraints of the “license raj” – as India’s painful system of government permits and regulations was called.

We admit we know little of India’s history. And what little we do know comes to us almost as oral history from Mohatma Gandhi’s grandson, a dear reader of The Daily Reckoning, who lives in retirement in Massachusetts and corresponds with us from time to time.

What we gather is that as with so many British colonies that became independent, India was left to start her new life with an enormous administrative bureaucracy, to which the Indians themselves added enthusiastically. Much of it soon outlived any use it once possessed and began strangling the newborn country. Unfortunately, the new Indian leaders were also attracted to the progressive economic ideas of the period – all of them: Fabianism, Marxism, Socialism, Nationalism, and Keynesianism. Rather than simply choosing one or the other, they took up a bit of each, overlaying hornswoggle over boondoggle, stirring it all up with a dash of ethnic flavoring and a generous helping of linguistic chauvinism, and finished off with a dollop of regional power-brokering. Then, they allowed the whole spicy curry to ferment in the hot climate. Is it any wonder that the result was a rancid mess?

But India is a large, diverse country with a lot of smart people. By the 1980s, , enough smart Indians were tired of the mess that they decided to get out the brooms and dustpans. Many of the worst regulations were swept away, in a clean-up effort led by Manmohan Singh. Then, he was finance minister. Now, he is prime minister.

Since then, the country has been booming. The economy is throwing up droves of new millionaires and expanding the size of its middle class at a furious pace. Huge office complexes spring up every day in the big cities and the roads are crowded with more and more new cars. Rich Indians are splashing out on luxury items; wages are rising.

That is not to say that India is a country on a smooth road to the future, mainly because in India, roads are one of the biggest problems. According to the Economist, it takes eight days for a truck to make the trip from Kolkata (Calcutta) to Mumbai (Bombay) – a trip that includes 32 hours of waiting at checkpoints and tollbooths. But the problem is so obvious and irritating that India is bound to build new highways. And Indians are bound to buy more cars. And India’s low-cost car manufacturers are bound to get much of the new business.

At our London office, we recently entertained two Indian businessmen who had raised about $3 million to start an auto business. In the Western world, the effort would have been laughably amateurish. But in India’s freewheeling world, the two are already making more money than General Motors!

Colleague Lila Rajiva fills us in on some details:

“Bill – on an Indian road, there is no room for fence-sitting, you are either one of the quick or the dead. The `road show´ in India is just that, a spectacular show – overcrowded buses with dashboards wreathed with jasmine garlands, compact Maruti cars, lorries (what you call trucks) painted pink and green, three-wheeled auto-rickshaws careening wildly from side to side, legions of scooters and cycles with saris or dhotis (the native dress most Indians wear) streaming behind them in the dust, oblivious pedestrians, bullock-carts, un-tethered donkeys, beggars, urchins, even a few random monkeys crossing the street. No observable lanes or rules. And all this on worn pot-holed roads that wash away or flood with every monsoon. The amazing thing is that people still get where they are going.

“But all that is changing rapidly.

“First, we now have the Golden Quadrilateral – an ambitious new highway project consisting of nearly 6000 kilometers of four to six lane expressways. It connects Delhi, Mumbai, and Kolkata (in the north) with Hyderabad, Bangalore, and Chennai (in the south) and costs about $12 billion. It’s due to be completed this December, and it’s going to be a major boon to drivers, car manufacturers, and businesses in India and abroad.

“Second, according to a BBC report in February 2006, the Indian car market is set to grow 10% this year

“That’s not only because of burgeoning middle-class salaries. It’s also the result of a change in habits: Indians have always been big savers, but they are now comfortable as big spenders as well. Last year, they proved it by buying more than one million cars.

“Third, manufacturers – domestic and foreign – are gearing up. The same report notes that Korean car maker Hyundai is planning to double its production in India and that Ford has become the fastest-growing car maker there this year, ahead of General Motors as well as the domestic giant, Maruti Udyog. Even Jim Cramer is betting on the Indian road, listing Tata Motors as one of his favorites in emerging markets. But I should tell you, Bill, that Tata´s growth is likely to be less about increased consumer demand than about increased commercial activity. Tata´s main business is making the lorries that carry things around.

“There is one more line of work that will boom, too. Hindu temples are going to be getting a lot of business going their way, too, because it’s traditional in Hindu culture to invoke the patron deity of any undertaking, and the patron god of new vehicles is Ganesh. You’ve probably seen him – the cheerful, pot-bellied, elephant-headed god who rides…a mouse.

“That makes him a good fit for the new rat-race on the Indian road.”

More below, but first, the news…