Category: Your Money

NREGA is evil

Farmer plowing in Fahrenwalde, Mecklenburg-Vor...

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I have always maintained that the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is evil. Its evil both philosophically and by intent. It was sold as a scheme to create productive job opportunities for rural labor during the non-farming season and was supposed to be active in districts with acute unemployment problems. However, it has morphed into a major boondoggle.

I blame NREGA on our persistently high inflation and our seeming inability to grasp that  unproductive transfer payments always end in tears for the tax payers. And now, Morgan Stanley concurs:

This program has had an adverse impact on domestic inflation for three reasons:

  1. it discouraged workers to go to farms;
  2. local governments that did not have the administrative setup to run this program ended up transferring payouts to workers without getting the full productive utilization of the workers’ time; and
  3. those receiving these transfers ended up spending more on food (particularly protein items), since this represents a large proportion of their consumption basket.

Labour Bureau statistics indicate that, over the last three years, agricultural wages in India have risen by a cumulative 105%, compared with nominal GDP growth of 64% in the agriculture sector.

So the rural farm sector sees an unproductive increase in wages while the urban labor productivity weakens due to global economic slowdown and purchasing power decreases due to the Reserve Bank hiking rates 13 times in a row!

I call NREGA evil precisely because it prevents the movement of labor from unproductive sectors to productive ones. If the goal is to keep the poor unproductive and to pull down the lower middle classes back into poverty, then NREGA has been an unprecedented success. When will this madness end?

Why Gold?

This is the first of three posts by Abhishek Preetam on why he is bullish on the yellow metal. Please welcome him to StockViz and enjoy the post!

Gold has been in news for quite some time. With prices touching their highest values recently, the yellow metal is becoming red hot day by day. What is causing this sudden spur in the price?

Let’s look at the trend of gold prices (In USD and Euro) for the last 3 decades:

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Prices were initially range bound nearly for two decades. Starting from 2001, prices have risen almost non-stop and have been on an absolute tear since 2003, rising over 325% and 150% since 2007. Following the trend, Gold just reached an all time high of $1813.5 an ounce on August this year. Let’s look for the reasons of this trend.

Supply side

Historically gold and silver were used as currencies and it was not until a few centuries ago that fiat currencies came into existence. The value of gold and silver did not lose their actual values, but instead were looked as commodities (a barter resource) and not actual money. Almost all currencies around the world are now fiat currencies.

Gold and silver are non-renewable resources, and with their production decreasing, the supply side of market looks shallow. Looking at the long term production level of gold, we can see the dipping production levels from 2000 till 2007. clip_image004

Mining on an average contributes 63% of gold production; the rest comes from recycling of gold. Recycling takes place majorly in South East Asian countries. In the Q2 2011, 429.3 tons of gold was recycled. This is 3% down Y-O-Y and slightly above for the trailing 10 months average of 407.3 tones.

Global demand report from WCG for Q2 2011 states “Over the ten years that preceded the 1997/98 Asian financial crisis, net new jewelry and investment demand amounted to more than double the tonnage accumulated during the ten years to the end of 2010. This suggests a considerably lower stock of gold to supply the market through recycling.”

As per the data from World gold council, supply of gold for the year 2010 increased by 1.81% whereas the demand shot up by 10% compared with 2009. For Q1 11, supply decreased by 4% whereas demand increased by 10% compared to year ago period.

Demand Side:

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Gold is used for 3 main purposes – Jewelry, Technology (Electronics and Dentistry) and Investments. Pre 2008, Jewelry formed 69% and % investments formed 11.5% of the total demand, but after that they form 53% and 25% respectively.

For the last 2 year central banks have turned into the net buyers of gold. Even European countries have started buying up gold for their reserves. The central banks currently stand as the largest holder of gold at 16.5% of all the gold produced.

Finally, applying simple economics lesson of supply and demand on gold, the future looks promising. With almost stagnating supply (mining and recycling) and continuous rise in the investment related interest of central banks and also various end users, there will be a huge gap to fill. There might be some correction in the short run, but long term outlook of the asset seems bright.

So, whether paper or real, they should form some part of your portfolio.

Lady Leverage

Hussman’s Weekly Market Comment is a must read for anyone interested in finance. Here’s a choice quote from his latest:

European leaders have announced “We have agreed to solve our debt problem, leveraging money we do not have, to create a fund, which will then borrow several times that amount, in order to buy enormous amounts of new debt that we will need to issue.”

 

On a side note, MF Global’s 40:1 leveraged $6 billion bet on PIIGS debt, an itch that Corzine had to absolutely scratch, is probably going to result in a bankruptcy filing and a sale to Interactive Brokers. So much for becoming the next Goldman Sachs…

Nifty 50 the best and the worst months ever

Planet's cheapest car, the Nano xj.

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This has been a dog year for Indian stocks. I am ready to wave goodbye to this year. Can I have 2003 (India Shining) back?

The best months:

March-09

11.79%

September-07

12.52%

June-03

12.72%

August-03

13.91%

July-06

14.57%

April-09

14.60%

August-08

14.85%

December-03

16.04%

October-07

17.37%

May-09

26.65%

And the worst:

October-08

-27.39%

October-05

-22.63%

May-04

-16.99%

June-08

-16.89%

January-08

-15.93%

May-06

-15.42%

June-06

-14.35%

August-05

-11.10%

January-11

-10.67%

August-11

-10.26%

Now that the Greek can has been kicked down the road and the rest of the PIIGS (PIIS?) yet to work in their demands for a haircut, here’s hoping for a Santa Claus rally by years end. Fingers crossed!