Vol 3 - Issue 12 | March 2010 | Rs.3.
50
The past month may well mark the
beginning of a turning phase, as public
anger and popular resentment with the
policy orientation of governments,
especially in the developed world, starts
to get expressed in an increasingly visible
manner. The focal point for such trends is
now Greece with the likes of Spain,
Portugal, Italy and U.K, not too far behind.
The genesis is in the high and still-rising
levels of government debt – a risk that is
now integral to the U.S, too. As stimulus
spending and bailouts galore take away
trillions, the burden was, is and will likely
be on taxpayers.
Unemployment looming large means tax
hikes and spending cuts are not going to
be received well. Governments face a
massive dilemma in trying to balance
factors that are almost impossible to
juggle around, but those that will have to
be dealt with at some stage.
That time for Greece appears to have
come, though it may still be able to
postpone real pain, for a bit more, with a
bailout from the European Union. The
signs of unrest emerging as a key variable
are, however, clear.This has implications for
the likely direction of policy making and
the choices are not appealing.
Government debt (triggered by fiscal
deficits) is a problem now, in both the
developed world and several emerging
economies, including India. Across the
world, governments have resorted to
jugglery over the years to mask reality: but
it is easy to put what is on the record and
off the record together to get a picture of
the true state of affairs.
The picture is not pretty by even the
fanciest stretch of imagination. What is
different in the developed world today-
with a few exceptions such as Japan, South
Korea and Canada-is that the trillions
spent or put up as cushion to save the big
banks and an almost complete return to
old ways by them in 2009 has left
governments with little credibility.
Sundaram BNP
Sundaram BNPParibas Asset Asset
Paribas Management: Investment Manager for Sundaram BNP Paribas Mutual Fund / Portfolio Management Services: Sundaram BNP Paribas Portfolio Managers
Management
Bear in mind ‘unrest’
Tax hikes, spending cuts and actions to
curb the influence of unions would have
been easier and carried conviction, if the
banking big wigs had been dealt with in an
objective manner. In the U.S, the
government and central bank are seen to
been on the side of Wall Street and even
Obama, with a message of `Change’ &
`Yes, We Can’, has made no difference to
this perception.
This is true of quite a few other countries,
including the U.K, as well. This lack of
credibility and the divergence in approach
to the big banks and to the man on the
street is not going to help efforts to curb
burgeoning government deficit and debt.
That an eminent scientist such as Stephen
Hawking has threatened to say goodbye
to Cambridge after 50 years to protest
the U.K government’s move to cut
spending on science tells the tale. Stories
abound of cuts in hospitals, army and
universities (even though student fees
continued to be hiked).
Even as we seem to have a veneer of
seeming stability in the financial system
and fleeting signs of a recovery (aided by
massive stimulus and comparison’s with
low base after the tumble in Q3 & Q4
2008 and Q1 2009), we have a complete
loop of tough choices.The sustainability of
this recovery is also very dependent on
stimulus and central bank support.
Governments face rising debt, yet need
to spend big time to sustain the present
recovery (and it is much). Even if
governments want to cushion against
deflation and decide to spend further on
stimulus, they can do it for at best another
year or two.That, too, would be a stretch
of present perilous state of government
finances, and only mean more pain later.
Just take a look at Japan for a reality-
based feedback with experience of 20-
years plus, and counting. Japan today is
the worst placed on the government
debt front in the developed world after
years of wrong choices to fight deflation.
People have continued to suffer deflation;
savings as a percentage of GDP have
plummeted; low rates force more
drawdown of capital by savers to take
care of living expenses; and yet there is no
way out.This state now beckons in other
parts of the developed world, too, which
have already suffered one lost decade.
Tax hikes & spending cuts appear to be
the only way out and public reactions
could be of an unpredictable nature.
Ironically if unrest becomes a big issue,
political pressures will force governments
to go slow on these measures and
postpone the day of reckoning.
This means government borrowings
will rise even further and rates will
have to go up eventually; the rate-
hikes story does not appear to be an
outcome for this year or the next,
barring token increases. This story,
when it eventually pans out, will have
implications for markets.
Now if we add unrest and the
prospect of rising rates eventually to
rising debt burden, the present need
for more stimulus as governments
are unwilling to let reality set in and
the problems faced by savers due to
low rates, you get a heady cocktail.
Compared to this quagmire, the
government of India appears better
placed, as of now, to deal with the
problem of fiscal deficit and
government borrowings.
It does not suffer the present
developed-world problems such as
lost-credibility, lack of growth, financial
institutions in weak shape, bailout
wrath and overburdened consumers,
to name a few.
It has to, however, start dealing with
the issue of government deficit.
Combined fiscal deficit in the states
and centre is in double-digit territory.
First measures have been taken in the
budget, but there is a long way to go.
The three-year road map bristles
with optimistic assumptions, but at
least a beginning has been made.
State finances are an even tougher
story in the Indian context.
We need to get the fiscal house in
the centre and states in order before
unrest becomes a possible risk in
India, too. For now, unrest is a story
to track in developed-world
countries.
T.P.Raman
Managing Director
Sundaram BNP Paribas Asset Management
 Chart of the Month

The Ring of Fire

This chart that caught our eye was Current Annual
published in PIMCO Investment Outlook
Deficit
for February 2010.
10.0
Reading the chart: The burden of debt is
starting to bite the advanced economies. Norway
This Ring of Fire provides a terrific snapshot 7.5
of the risks that lurk. It shows how Greece
is most likely a precursor of what is in store 5.0
for a few other developed markets.
The vertical axis shows fisical deficit (public
Public Sector Deficit (%GDP)

2.5
sector deficit as a percentage of GDP). Bear
in mind that the horizontal axis only shows
government debt or public sector debt as a 0
percentage of each country’s GDP. Sweden
Finland
Powerful as the chart is, the real picture will -2.5 Germany
be when you add private sector debt, too. Denmark
Private sector debt burdens are becoming Australia Canada
-5.0
public sector debt in this financial and Netharlands
Italy
economic crisis via bail-outs, takeover by the
government and purchase of dubious assets -7.5 Japan
France
by central banks across most of the
developed world. -10.0 Spain
On a complete debt (private + public) basis, Ireland USA
you can safely assume that every country
-12.5 UK Greece
will move much further to the right in the
Ring of Fire. Visualise how much more
powerful and potent such a picture would -15.0
look. The implications will obviously not be Outstanding
positive. 0 25 50 75 100 125 150 175
Stock of Debt
– Editor of The Wise Investor Source: Reuters EcoWin, SEBX-asset Research Public Sector Debt (%GDP)

Global Market Snapshot

Market Cap of Global Markets - A comparison in 2007 (close to peak), 2008 (close to bottom), 2009 (recovery) & the present

Market Cap ( $ Billion) Share in World Marke Cap (%) Returns (%) Distance
Region/Country from Peak
End Feb 2009 2008 2007 End Feb 2009 2008 2007 2010 2009 2008
2010 TYD (%)

World 44608 49722 31901 60880 100.0 100.0 100.0 100.0 -10.3 55.9 -47.6 -26.7
United States 13555 13748 10455 17660 30.4 27.7 32.8 29.0 -1.4 31.5 -40.8 -23.2
Canada 1638 1609 992 1749 3.7 3.2 3.1 2.9 1.8 62.2 -43.3 -6.3
Brazil 1229 1326 565 1273 2.8 2.7 1.8 2.1 -7.3 134.7 -55.6 —
Mexico 370 363 247 398 0.8 0.7 0.8 0.7 2.1 46.8 -37.9 -7.0
Chile 236 229 130 208 0.5 0.5 0.4 0.3 3.1 76.0 -37.5 13.5
United Kingdom 2796 2975 1981 4051 6.3 6.0 6.2 6.7 -6.0 50.2 -51.1 -31.0
France 1719 1900 1480 2736 3.9 3.8 4.6 4.5 -9.5 28.4 -45.9 -37.2
Germany 1238 1371 1075 2208 2.8 2.8 3.4 3.6 -9.7 27.5 -51.3 -43.9
Switzerland 1046 1076 848 1217 2.3 2.2 2.7 2.0 -2.7 26.8 -30.3 -14.1
Japan 3553 3488 3268 4545 8.0 7.0 10.2 7.5 1.9 6.7 -28.1 -21.8
Honk Kong 2195 2268 1312 2655 4.9 4.6 4.1 4.4 -3.2 72.9 -50.6 -17.3
India 1260 1294 640 1813 2.8 2.6 2.0 3.0 -2.7 102.3 -64.7 -30.5
Australia 1180 1253 652 1415 2.6 2.5 2.0 2.3 -5.8 92.1 -53.9 -16.6
China + Others 12593 16823 8256 18952 28.2 33.8 25.9 31.1 -25.1 103.8 -56.4 -33.6
Data Source: Bloomberg;The last available figures for each year have been taken; Analysis: Sundaram BNP Paribas Asset Management
End December 2007 figures have been reckoned as the peak as different countries reached the point on different dates.The approximate distance from peak has not
been indicated for Brazil, which peaked only in mid 2008.
Sundaram BNP Paribas Asset Management 2 The Wise Investor March 2010

Satish Ramanathan
Head-Equity
Sundaram BNP Paribas Asset Management
The recent budget marks a new beginning by the Government to reduce
its borrowings and reduce income taxes, and allow consumption to grow
the economy, rather than the stimulus it had earlier offer during the peak of
the financial crisis in the second half of 2008.
Like rest of the world, India had three rounds of stimulus packages to ensure
that the growth momentum is not stalled. Indeed the costs have been high,
and we have come to a break point. The consolidated fiscal deficit for
FY2010 is close to 10%, and needs to be reined in.
The budget is no longer so munificent.
• It has sought increase indirect taxes and reduces subsidies on petroleum
products and fertilizers.
• Import duty on oil has been imposed as also excise duties on all goods
hiked.
• All subsidies are to be paid out as cash rather than bonds, which were
in a sense an off balance sheet item.
From a mere Rs 50,000 crore deficit in 1991, the current deficit is now eight
times that level at close to Rs 4,00,000 crore.
This has in no small measure contributed to the inflationary regime present
in the country.
This alarming situation, along side the recent events in Greece, as well as a
rating downgrade looming large, has prompted the Government to swallow
the bitter pill and take measures to curtail the fiscal deficit and has been firm
about it.
Will they follow the course remains to be seen, as Governments are usually
loathed to swallow debt reduction programs on a long term basis? A few
of the assumptions have been ambitious such as revenues from 3G auctions
Sundaram BNP Paribas Asset Management
India View Equity
Budgets and beyond
and the disinvestment program.
Should the government succeed in its effort to reduce its borrowing, it
paves the way for a more sustainable growth environment in the country.
The total tax collections at the centre and state level are now close to 20%
of GDP, and hence there is a limited room to maneuver on the tax
collection front.
There is a case for tax levels to come down as India has among the higher
tax levels with no social security program to protect the tax payer in the
event of sickness, or unemployment.
The bond markets have been nervous, and have not reacted to the budget
as yet. This appears to indicate that the markets are not biting as yet, and it
will take some more convincing, before it does so. Equity markets have
been a little more optimistic, as there was a correction in global equity
markets prior to that.
The budget has now made it clear that the government’s role in building
assets is diminishing and the incremental asset build up will now have to
come from the private sector.
India in the global context:There are more pressing issues facing the global
financial markets these days. It starts with Greece and its large debt and
fiscal deficit. Most experts are of the belief that the IMF will have to rescue
Greece and administer strong medicine of reducing expenses and increasing
taxes.
A few countries in Europe continue to increase the retirement age in the
hope that they can delay generous pension payments. With many countries
having a high level of debt, the debt pay down will be difficult with intended
and unintended consequences. What may those be?
We think that taxes will increase in many countries, as also many subsidies
cut either directly or indirectly resulting in lower savings and hence lower
spending in many of these countries. This issue appears to be a global one
as almost all countries raked up debt to insulate their economies from the
global slowdown. The unwind of this excess will be slow and painful.
It is in this context that we find the firmness in commodity prices surprising.
Apart from China and India consuming more, almost all other countries are
consuming less. There is also fresh capacity coming up across almost all
commodities such as iron ore, oil and coal. Much of this was planned during
the boom years in 2007 and 2008, and are now getting ready.
Similarly, in oil, we find that there is enough to go around and yet oil prices
are firming up. Some of this may be attributable to commodity exporting
nations being financially well off and not in a distress to sell unlike in the past.
And the other reason could be investments by banks and hedge funds into
commodities.
Some of this could go away, should the so-called “Volcker Rule” go through.
When some of these proposals were discussed, there was a distinct
nervousness in commodity markets.
3 The Wise Investor March 2010
 India View Equity
Outlook: There is a significant chance, of the double dip taking place in
sentiment if not in economic terms, as the favorable base fades away. We
experienced a similar double dip in the period during 1997-2001.
Reduction of fiscal deficits, go a long way in reducing demand also either
directly or indirectly.
A large portion of the demand in consumer durables during the past year
came about due to the Sixth Pay Commission and higher farm incomes.
Some of this income is cyclical, as crop prices soared to a record high on
account of an overall shortage due to a poor monsoon.
There are signs that the Rabi crop is better and food prices are abating.
Farm incomes will also be impacted by higher input costs and wage costs.
The most important aspect to watch would be China’s growth which is
proving to be the perceived engine of growth for the world. China’s per
capita consumption of many commodities, spare oil, are at historic highs.
The US reached a peak per capita steel consumption of 750 kg before
settling at 350 kg. China is currently at 600 kg and is expected to head
higher. Will this continue and how long so? There are murmurs of excesses
coming through, and should these be indeed true, then we could see some
cool off in commodity prices. That could set off deflationary fears once
again.
Most Indian companies are going to see a challenging phase of managing
margins, which are close to their peak levels, and will have increasing
capacities and competition coming through. One of the reasons for higher
inflation has been on account of lower capacity additions during the past five
years, resulting in the current boom in all goods and services.
So, we remain cautious on company profits in the short term. We think
analysts have not factored lower margins adequately in their estimates.
The higher range of short-term uncertainties point to a range bound
market. Any sharp rally may find corrections as well.
India is on a course-correction mode, and this is a structural positive, as it
releases funds for the private sector to expand. The confidence level is also
returning among investors, and the private sector, setting the stage for
continued growth.
The current velocity of money is low and liquidity adequate, hence growth
can be accommodated without impacting interest rates. Also lower
government borrowings will release much needed funds. There is usually a
time lag between a lower fiscal deficit and it translating to actual borrowing
costs, and this is yet to play out. Only then will the credit cycle pickup and
result in a credit based growth coming through.
The Indian investment has always looked fragile on account of its financial
situation, yet investors should buy into the long-term story in India – lower
interest rates due to lower government borrowings, a capacity starved
market that could eventually lead to high margins and a very well balanced
economy that shown remarkable resilience during the crisis.
All of this could get a fillip, if the global investor also begins to see this in the
same way as we are. There are signs of large investments by Japanese
investors, as also other MNC’s setting up shop. This sets the foundation for
growth to surprise all of us on the upside over the next few years.
Sundaram BNP Paribas Asset Management
Snippet
Gary Shilling's Top Trades
Gary Shilling has been one of the many who saw the economic crisis coming
well in advance and he was ahead of most of others who saw it coming.
Gary Shilling has become infamous in the last few years for predicting the
credit crunch and the bear market. The bearish investor still believes
deflation is the dominant force at work and that the credit crunch is in the
process of unfolding.
But he isn’t bearish about everything.
His 6 buys:
• Buy treasury bonds – the safe haven trade will return.
• Buy income-producing securities – high quality dividend names will be a
safe place to hide.
• Buy consumer staples and foods – consumers won’t stop buying the
necessities.
• Buy ’small luxuries’ – consumers are trading down.
• Buy the U. S. dollar – still the world’s safe haven currency.
• Buy Eurodollar futures.
Shilling is generally bearish about stocks and the global economy.
His 11 sells:
• Sell U.S. stocks in general – U.S. stocks are just too expensive.
• Sell home-builder and selected related stocks – home prices will fall 10%
in 2010 and the stocks will tank with it.
• Sell big-ticket consumer discretionary equities- consumers aren’t buying
luxury goods due to the trade down.
• Sell banks & other financial institutions – the days of big bank profits and
bailouts are over.
• Sell consumer lenders’ stocks – consumers will continue to deleverage.
• Sell many low- and old-tech capital-equipment producers.
• If you plan to sell a home or investment house, do so yesterday.
• Sell junk bonds.
• Sell commercial real estate – the real estate bubble is a slow motion train
wreck.
• Sell most commodities – the dollar rally will crush commodities.
• Sell developing country stocks and bonds – there will be no decoupling.
Source: www.pragcap.com
The outside view
It is inevitable that at some point hopes of a normal cyclical recovery in America are going
to be properly demolished. It is also, unfortunately, quite likely that the current decade is
going to end up with even worse statistics than the decade that has just ended.
A final point is the most obvious of all.This is that it is only a matter of time before the
markets’ focus on fiscal deterioration in Euroland switches to the growing fiscal
predicament in America.
But in GREED & fear’s view the crisis will come first in Europe. In the meantime, the
seeming inevitability of a systemic government debt crisis in the West remains the
fundamental reason to remain long gold.
Christopher Wood, Managing Director & Strategist of CLSA Asia-Pacific, an
independent research outfit and author of the weekly report GREED & Fear.
I found it remarkable that at a recent Barron’s roundtable discussion in New York where
a number of prominent strategists and portfolio managers had gathered, India—the
world’s second-most populous country, with more than a billion people and an economy
that is growing at around 8% per annum—wasn’t mentioned once.
I should stress that I am far from certain about current stock prices providing an ideal
entry point; however, given the country’s size and economic potential, investors who
either have no exposure to India’s economy and vibrant corporate sector or are massively
underweight Indian stocks should gradually become more involved in this promising
country.
This is not to say that India is free of problems. Its rapid population growth will be
challenging. India’s land mass is only a third that of China or the United States. India has
just 4% of the world’s water resources and is likely to suffer in future from water scarcity.
Dr. Marc Faber, renowned investor, strategist and author of several books
as well as the monthly The Gloom Boom & Doom Report
4 The Wise Investor March 2010
 IndiaView Bonds

Supply concerns
commercial paper yields, which moved up by 125 bps and 68 bps
respectively. The sharp movement in the shorter-end yields is due to the f
the fiscal year end that is close on hand and the maturity of these
instruments across March.
It is also pricing in a reasonable amount of rate hike in the current year.
There is also a regulatory aspect to this development, as the securities that
mature after six months from April are less preferred by mutual funds now
due to change in valuation norms.
The effect of CRR rate hikes of 50 bps and 25 bps in two rounds has set in
on the overall liquidity in the system. In addition, advance tax outflows in
March, which is expected to be significant due to more robust growth than
K Ramkumar what appeared likely a few months ago, may create pressure on liquidity in
Head – Fixed Income the last fortnight of March.
Sundaram BNP Paribas Asset Management Yields are trending higher due to outlook on the longer end and due to
unending supplies of Certificate of Deposits at the shorter end. The budget
has triggered inflation fears in the markets due a few measures such as hike
In February, the 10-year and 5-year G-Sec benchmark yields moved up by in customs duty and excise duty, fuel price hikes, indirect contribution to
31 basis points (bps – a basis point is 0.01 %) and 44 bps respectively. The inflation of the fuel price hike, service tax on rail freight leading to higher
continued bearishness is due to the uncertainty on account of the fiscal transportation costs and more money in the hands of consumers, leading
deficit envisaged in the budget for 2010-11. to increase in aggregate demand, to name a few.

The markets are wary of the system’s ability to absorb massive supplies We expect the 10-year to hover at about 8% levels with markets giving
from the central government in the absence of supporting activities such as support at this point. Markets will be looking forward to the borrowing
Open Market Operations, MSS unwinding, surplus system liquidity, SLR rate calendar with nervousness, as it is expected to be front loaded.
hike, hike in the Hold-to-Maturity cap and lower credit off-take in the year We believe The Reserve Bank of India RBI will be better off announcing
ahead. OMO schedule along with the borrowing calendar, as was done in the
The 3-month and the 12-month treasury bill yields also moved up by 33 previous year. In the absence of this development, yields can move up, even
bps. More significant is the movement in the 3-month and 12-month from these levels.
Optimism dominates budget numbers on fiscal deficit
The current year’s fiscal deficit estimates reveal that in spite of the absolute number going up by around Rs.14,000 crore, the fiscal deficit as a percentage of GDP has declined to 6.7% from 6.8 % projected at the
time of the last budget.This is due to higher GDP numbers estimates.
Similarly according to the Budget Estimates for FY 2011, gross tax receipts is expected to grow at 17.9 % in the year 2010-11 (4.6 % in 2009-10), total expenditure is expected to grow only at 8.5 % (15.6 % in 2009-
10). It is twin optimism on increase in revenues and curtailment in expenditure. That explains the reduction in fiscal deficit numbers to Rs.3.81 lakh crore leading to rate of 5.5 % of the GDP.
This also builds in an extraordinary income of Rs.66,000 crore out of disinvestment and proceeds out of 3G auction. Further, the oil and fertilizer subsidies are to be met in cash and within the budget framework.
The expectation appears to be optimistic on all fronts, and hence disappointment in any will push up the fiscal deficit, government borrowing and interest rates higher
A quick estimate of the fiscal deficit projected in the next three years reveal the following numbers.
2009-10 2010-11 2011-12 2012-13
ESTIMATE PROJECTION PROJECTION PROJECTION
Nominal GDP in Rs lakh crore 61,64,178 69,27,273 78,97,091 90,02,684
Nominal GDP growth 9.75 12.38 14.00 14.00
Fiscal Deficit in % 6.70 5.50 4.80 4.10
Fiscal Deficit in lakh crore 414041 381000 379060 369110
We have projected the Nominal GDP to be at 14% for the years 2011 to 2013. Any disappointment there can lead to higher fiscal deficit as a percentage of GDP.The reduction in deficit as a percentage of GDP is
entirely dependent on the growing strength of the GDP and so much rides on the expected growth coming through.
All these efforts still do not result in the fiscal deficit going lower than what it was ten years before 2012-13. A challenging task that is ahead to achieve these numbers and even after they are achieved to move to
lower levels in a sustainable manner.
Sundaram BNP Paribas Asset Management 5 The Wise Investor March 2010

Martial Godet
Head of Investment Management-New Markets
BNP Paribas Investment Partners
Overview: The composite PMI for the emerging
economies rose again in January, thus confirming that
the manufacturing and service sectors are still
growing and that there is some upward pressure on
input prices. Judging from the ISM’s index on new
orders, we are also likely to see a sharp rebound in
exports over the coming months.
After Turkey last month, the leading indicators of the
major emerging economies (Brazil, China and India)
have passed their turning point and other countries
are very close to their own, suggesting that growth in
these economies has peaked.
Against this backdrop, the increasing flow of news of
monetary policy normalisation has increased
volatility in financial markets. We consider these
measures to be simply adjustments of monetary
policy, not the start of a tightening cycle, as growth in
emerging economies is still below potential.
The sovereign debt crisis in peripheral European
countries should not affect the economic outlook of
the emerging economies. Standard measures of
credit risk, such as yield spreads and the cost of CDS
on emerging debt, have shown little reaction to
European problems.
Of course, if the crisis of confidence continues it
could affect Asian exports to Europe, which do
represent 15% of the total. But there is little risk of
this since the current pick-up in Asian trade is mainly
intra-regional.
Over the past few months we have adopted a
relatively constructive position on Chinese inflation,
which we expect to remain within 3% to 5%. Inflation
in January was only 1.5% year-on-year and therefore
much lower than expected and even less than the
previous month.
If food prices are stripped out inflation is even zero.
Sundaram BNP Paribas Asset Management
Emerging Markets Focus
We have past peak growth
The seasonal effect of the Chinese new year in
January 2009 has clearly been a significant factor.
Although there is little risk that inflation will get out
of hand, prices will clearly be rising.
China: Chinese authorities are keeping a very close
eye on inflation expectations. Indeed, rising food
prices are beginning to have repercussions on other
economic variables. Some coastal provinces have
raised their minimum wage from 10 to 15%, the
government has announced a 10% increase in
pensions and the labour shortage is putting upward
pressure on wages.
Chinese authorities are still highly concerned about
developments on the monetary front. Despite the
increase in the reserve ratio requirement and other
measures to tighten credit, banks lent as much as
they could in January in an effort to use up their
credit quotas before the government changed its
mind. Consumers and businesses are still flush with
liquidity.
Bank deposits are up 27.3% y/y, with deposits by
firms surging 44.2%, while money supply growth is
hardly slowing, despite the government’s
intervention. Given this situation, we expect that the
reserve ratio will be raised again, that credit controls
will continue and that interest rates will be raised in
the second half of the year.
The 21% y/y export growth is not surprising in light
of our indicators, which foresee solid growth for a
few more months. Other leading indicators, such as
imports of semi-finished products and the PMI for
new export orders confirm this assumption. Imports
will even grow at a faster rate and thus reduce the
trade surplus even further, but without however
neutralizing the positive contribution of net exports
to GDP growth in 2010.
The slight decrease in the official PMI (from 56.6 in
January to 55.8) reflects the aggressive measures of
government authorities to discourage property
speculation and stabilise economic growth. Economic
activity will remain robust over the coming months
however, judging from the results of private surveys.
This is the case for example of small and medium-
size Chinese firms, 75% of which have an optimistic
outlook for the next six months and only 5% of
which expect China’s economy to weaken.
Chinese GDP grew 8.7% in 2009. Capital spending
and final consumption made positive 8% and 4.6%
contributions to growth respectively, while net
exports subtracted 3.9%. Even if infrastructure
investment is sharply reduced in 2010 (unlikely) this
loss will be easily offset by the rebound in the trade
surplus. We may therefore see 9.5% output growth
in 2010 if private consumption is stable.
Residential investment is still the most uncertain
factor and a priority for the government, which must
cool speculation in the luxury property market,
where vacancy rates are high and prices are breath-
6 The Wise Investor March 2010
taking while ensuring that standard housing needs
are met.
Indeed, the government’s measures to prevent
bubbles in the property market may have been too
effective, since the volume of transactions has
dropped sharply and prices are starting to fall.
Sentiment has turned and potential buyers are
postponing their purchases until visibility improves.
This situation naturally has repercussions on
residential construction.
Brazil: A sound financial system and robust
domestic demand have enabled Brazil to be one of
the first countries to recover from the global
economic crisis. Although Brazil’s economic
momentum is still quite strong it is beginning to show
signs of slowing. Industrial production, for example,
declined for the second straight month in December,
which reduced output growth from 20% in Q3 to
15% in Q4.
Most of this decline may be explained by the sharp
drop in durable goods production resulting from the
fading effect of the government's measures to
support consumption. We therefore see no
particular cause for concern. Moreover, the
manufacturing and mining sectors continue to post
strong gains. Surveys of business confidence and
activity also point to an improvement.
The country's central bank now also seems more
concerned about inflation, which has increased
slightly to 4.3%. We therefore expect an initial
increase in policy rates in the second quarter.
Russia: Russia's economy ended 2009 on an upbeat
note.The first estimate of GDP contraction is better
than expected, at -7.9%.This surprisingly strong result
seems mainly attributable to the sharp rebound in
exports in the fourth quarter, as domestic demand
remained weak.
Nonetheless, recent data seems to be encouraging:
retail sales are growing for the fourth straight month
and consumer confidence is significantly stronger.
With the price of crude oil now higher and the
global economic environment more favourable, we
expect both domestic and foreign demand to
continue to expand over the first half of the year.
This positive factor will be partially offset by the
increase in the value of imports resulting from the
rouble's likely appreciation. Another encouraging sign
is the PMI's rise above 50 in January, with all index
components stronger. This suggests that Russia's
manufacturing sector should resume growth in the
first quarter.
The steady decline of inflation from 8.8% in
November to 8% in January should also be noted
since this reflects a still substantial output gap. Even if
the economic situation is significantly stronger, we do
not expect growth to return to its potential in 2010.
We therefore anticipate further loosening of interest
rates over the coming months.

Dealing with deficits & government debt burden
Thomas M. Hoenig
President, Federal Reserve Bank
of Kansas City
Concerns about the state of government finances –
from Latvia to Argentina, Spain to Greece, U.K to
Japan and the U.S as well - are mounting. So much has
been spent on bailouts and stimulus with so little to
show by way of sustainable and long-term benefits
that government finances are badly out of shape. In
this perspective,
Thomas Hoenig – the sole credible voice in the U.S
Fed system – shares his concern, the bad choices that
are in the offing and the best & most desirable of the
tough options. He also outlines the one good path to
get out of the mess but highlights it means short-term
pain and long-term gain. The policy today is,
unfortunately, focussed on short-term gain, long-term
pain.
We present edited extracts from an excellent and
comprehensive outline of the solution to the crisis in
government finances. The speech is set in the U.S
context, but bears relevance to India, too, as fiscal
deficits (centre and states) are tilting at the double-
digit territory.
The United States is moving into an era in which
government finance is taking center stage. Fiscal
measures taken to bring the economy out of
recession, mounting longer-term liabilities for Social
Security and Medicare, and other growing demands
placed on federal government have invited a massive
build-up of government debt now and over the next
several years.
Congressional Budget Office (CBO) projections have
the federal debt reaching an unsustainable level of
two to five times our total national income within the
next 50 years, which leads us to an inescapable
Sundaram BNP Paribas Asset Management
conclusion—U.S. fiscal policy must focus on reducing
this debt build-up and its consequences.
The fiscal projections for the United States are so
stunning that, one way or another, reform will occur.
Fiscal policy is on an unsustainable course. The U.S.
government must make adjustments in its spending
and tax programs. It is that simple.
Three ways out, but only one good one: In managing
our nation’s debt going forward, it strikes me that
we have only three options:
• First, the worst choice for our long-term stability,
but perhaps the easiest option in the face of
short-term political pressures: We can knock on
the central bank’s door and request or demand
that it “print” money to buy swelling government
debt.
• Second, perhaps more tolerable politically,
although damaging to our economy: We can do
nothing so long as domestic and foreign markets
are willing to fund our borrowing needs at
inevitably higher interest rates.
• Third, the most difficult and probably the least
palatable politically:We can act now to implement
programs that reduce spending and increase
revenues to a more sustainable level. I recognize
that this last option involves hard choices and
short-term pain. However, in my view it is the
responsible path to sustainable economic growth
with price stability
The alternative options inevitably lead to financial
crisis and greater long-run losses in national income
and wealth.
The goal of policy cannot be to “just get through” the
current challenge, but rather to rebuild the
foundation of a stable and prosperous economy,
looking to our nation’s long-term future. It is in this
context that I appreciate this opportunity to address
what I see as our emerging fiscal challenges.
Lessons from History: Throughout history, there are
many examples of severe fiscal strains leading to
major inflation. It seems inevitable that a government
turns to its central bank to bridge budget shortfalls,
with the result being too-rapid money creation and
eventually, not immediately, high inflation.
I The House-to Bread-Tale from Germany:
German hyperinflation is one classic and often-
cited example, and with good reason.When I was
named president of the Federal Reserve Bank of
Kansas City in 1991, my 85-year old neighbor gave
me a 500,000 Mark German note.
He had been in Germany during its hyperinflation
and told me that in 1921, the note would have
bought a house.
7 The Wise Investor March 2010
Focus Topic
In 1923, it would not even buy a loaf of bread. He
said, “I want you to have this note as a reminder.
Your duty is to protect the value of the currency.”
That note is framed and hanging in my office.
Someone recently wrote I evoked “hyperinflation”
for effect. Many say it could never happen here in
the U.S. To them I ask, “Would anyone have
believed three years ago that the Federal Reserve
would have $1¼ trillion in mortgage back
securities on its books today?” Not likely.
II Spending Leading to Great Inflation of 1970s: If
German hyperinflation seems an unrealistic
example from the distant past, then let’s come
forward in time. Many have noted that in the
1960s, the Federal Reserve’s willingness to
accommodate fiscal demands and help finance
spending on the Great Society and the Vietnam
War contributed to a period of accelerating price
increases.
Although the Federal Reserve was a reluctant
participant, it accepted the view that monetary policy
should work in the same direction as the Congress
and the administration’s goals and help finance at least
part of their spending programs. Monetary policy
accommodation during this period contributed to an
increase in inflation from roughly 1½ percent in 1965
to almost 6 percent in 1970.
It also helped set the stage for the Great Inflation of
the 1970s as inflation expectations gradually became
unanchored.
The Current U.S. Fiscal Imbalance: Today, the United
States is benefiting from policies that were established
in the 1980s to end the Great Inflation. Confidence in
the long-run stability of the U.S. economy and the
Federal Reserve’s commitment to price stability have
kept the demand for Treasuries relatively strong,
allowing the government to borrow at low interest
rates from its citizens and the rest of the world.
It would be a mistake, however, to take this current
ability for granted and to do nothing about the
mounting debt. While the last 30 years have been
relatively stable—at least until recently—our longer-
term history is less reassuring.
From World War II to the present, nominal federal
debt held by the public has increased over 30 fold.
And, supported by steady growth in the money
supply, the price level has increased by a factor of 12.
That’s a huge increase in the general price level, and
it represents a significant reduction in the purchasing
power of the dollar over time.These are matters that
demand our attention as we make choices involving
both fiscal and monetary policy.

The immediate concern is the size of the deficit.The
CBO projects the deficit was almost 12 per cent of
GDP in fiscal year 2009 and will be almost 8 per cent
in the current fiscal year-extraordinarily high levels by
historical standards.
In the entire history of the United States, the
government has run deficits over 10 percent of GDP
in only a few instances, and usually only during or
immediately following a major war.
As troubling as these deficits appear, even more
disconcerting is the longer-term outlook for the
federal debt caused by the accumulation of these
deficits over time. A key part of the problem stems
from rapid growth in entitlement spending, including
spending on Social Security and, especially, Medicare.
Over the next 30 years, the Government
Accountability Office (GAO) estimates the present
value of future expenditures on all social insurance
programs exceeds future revenue by over $50 trillion.
That is nearly four times the size of GDP and clearly
unsustainable.
Path One Forward-Monetize: One option for dealing
with a fiscal imbalance is for the central bank to
succumb to political pressure and monetize the debt.
As deficits and debt levels within a country rise
relative to national income, interest rates tend to rise
as well.
In this instance the central bank is often pressured to
keep rates low and encouraged or required to assist
the markets in facilitating the government's funding
needs. If the central bank succumbs to this pressure,
its balance sheet will expand, bank reserves will grow,
and inevitably the money supply will increase.
This process often appears benign at first, but if it
goes on unchecked, the outcome is almost always
higher levels of inflation and ultimately a loss of
confidence in the value of the currency and the
economy.
Walter Bagehot’s famous dictum about banks holds
equally true for governments—once their soundness
is questioned, it is too late. At that moment,
governments and their citizens are forced to make
sizeable, painful fiscal adjustments.
An example of both the political pressure that can be
exerted on the central bank, as well as the inflationary
consequences of debt monetization is currently
playing out in Argentina.
The president of Argentina recently forced out the
Governor of the Central Bank because he would not
transfer reserves held at the central bank to repay
Argentinean debt. Inflation in Argentina is currently
running near 8 percent and will almost certainly
increase.
Path Two Forward-Policy Stalemate: The second
path forward is a stalemate between the fiscal and
monetary authorities.
• In such a stalemate, the fiscal imbalance grows
while an independent central bank maintains its
focus on long-run price stability.
• Although the U.S. government is currently
privileged to borrow at favorable rates, the fiscal
outlook would inevitably undermine this privilege
Sundaram BNP Paribas Asset Management
and its risk premium on debt would increase.
• Also, as the government competes with private
borrowers for funds, the potential exists for the
fiscal imbalance to drive up the real cost of
borrowing and capital to the private sector as
well.
• Eventually, this combination of large debt, and high
cost of borrowing and capital weakens economic
growth and undermines confidence in the
economy’s long run potential.
• Slowly, but inevitably, if the fiscal debt goes
unaddressed, the currency weakens, as does
access to global financial markets.
• And the cycle worsens, leading ultimately to a
financial and economic crisis.
An interesting example in this respect is Canada in
the first half of the 1990s. During this period,
Canadian federal debt increased from about 55
percent of GDP to roughly 70 percent. At the same
time, following a joint agreement between the
government and the Bank of Canada, the Bank
targeted a steady downward path for inflation from 3
per cent at the end of 1992 to 2 per cent at the end
of 1995.
With no monetary accommodation from the central
bank, unsustainable government deficits and debt
caused real interest rates in Canada to climb. While
Canadian inflation was below that of the United
States throughout this period, Canadians paid a
substantial risk premium over U.S. rates to borrow.
Moreover, the Canadian dollar came under persistent
pressure.
Overall economic performance suffered, with GDP
growing very sluggishly in the recovery from the
1990-91 recession and unemployment climbing as
high as 12 percent.
Path Three Forward: Equitable Fiscal Discipline: The
Canadian experience in the second half of the 1990s
is suggestive of the third—and the only responsible—
way to resolve our growing fiscal imbalance by
addressing its source in an environment of price
stability.
In the United States, the Federal Reserve’s policies in
the early 1980s provide a vivid example of the
benefits that arise from the exercise of central bank
independence. During this time, high interest rate
policies designed to lower inflation were deeply
unpopular both among elected leaders and the broad
public.
But the Federal Reserve was able to exercise its
independence and pursue long-term goals, which
systematically reduced inflation and changed the
psychology of the nation regarding its expectation
about inflation’s path. As a result, the United States
has had nearly three decades of low inflation.
All seem to agree this is the way we would prefer to
go, but of course the devil is in the details.
• At the outset, it requires an institutional
framework committed to having an independent
central bank. This discourages the fiscal authority
from turning to its central bank and should it do
so, strengthens the bank’s ability to say “no.”
8 The Wise Investor March 2010
Focus Topic
• Knowing inflation is not an acceptable alternative
to strong fiscal management, a government faced
with rising debt levels must provide a credible
long-term plan to re-establish fiscal balance.
• The plan must be clear, have the force of law and
its progress measurable so as to reassure markets
and the public that the country has the will and
ability to repay its debts in a stable currency.
• To be broadly accepted, the plan must be seen as
fair, in which there is a sense of shared sacrifice
across all segments of the economy.
• Without being specific, these requirements
suggest an approach in which we are willing to
disappoint a host of special interests.
• It means, for example, controlling budget
earmarks, trimming subsidies to numerous
economic sectors and resolving our banking
problems.
• It means resolving our banking problems and the
perception that Wall Street is favoured over Main
Street, all of which would otherwise foster
mistrust and cynicism among the public.
• Leaving these issues unaddressed will undermine
the essential popular support required for the
tough decisions needed to bring our federal
budget into balance.
• Finally, there are no short-cuts.We currently must
adjust from a misallocation of resources. There is
no way to avoid some short-term pain in fixing
the fundamentals in our economy.
• Outlining a credible course for managing our debt
will accelerate the restoration of confidence in
our economy and contribute importantly to
sustainable capital investment and job growth.
Needed, significant and permanent fiscal reforms:
Eventually, government budgets that are severely out
of balance are inevitably reformed—either by force of
the markets or, preferably, by choice. Unfortunately,
nations often must experience a profound crisis to
focus the government’s attention on taking corrective
action.
Usually it is at this point that governments re-establish
fiscal discipline and renew their commitment to an
independent central bank. Ironically, however, these
generally are precisely the reforms that would have
prevented a crisis in the first place.
The only difference between countries that
experience a fiscal crisis and those that don’t is the
foresight to take corrective action before
circumstance and markets harshly impose it upon
them. In time, significant and permanent fiscal reforms
must occur in the United States.
I much prefer this be done well before anyone feels
an irresistible impulse to knock on this central bank’s
door. Only the third will resolve the imbalances
without eventually causing inflation to accelerate or
precipitating a financial and economic crisis.
Source: Edited extracts from `Knocking on the Central
Bank’s Door’ by Thomas Hoenig, President, Federal
Reserve Bank of Kansas City, at the Peterson-Pew
Commission on Budget Reform Policy Forum Washington,
D.C. February 16, 2010 http://bit.ly/ajxnvu
 BuffettSpeak
Every year, legendary investor Warren Buffett (Chairman of Berkshire Hathaway) writes a detailed letter to shareholders
explaining the operations of the company and providing views key aspects of the economy and financial markets. His
letter for 2009 was published on February 28. 2010. We carry select quotes from the detailed communication that can
be accessed at www.berskshirehathway.com.The letter is a recommended read and the quotes published here may be
viewed only as a precursor to the real thing. (Topic of the quotes in italics has been provided by the Editor of this
Publication to provide context).

1
Standard of performance measurement: From

2
Worth more than book value yet we prefer it:
the start, Charlie Munger (Vice-Chairman of
In aggregate, our businesses are worth
Berkshire Hathaway) and I have believed in
considerably more than the values at which
having a rational and unbending standard for
they are carried on our books. In our all-
measuring what we have – or have not –
important insurance business, moreover, the
accomplished.That keeps us from the temptation
difference is huge. Even so, Charlie and I believe
of seeing where the arrow of performance lands
that our book value – understated though it is –
and then painting the bull’s eye around it. Our
supplies the most useful tracking device for
book value since the start of fiscal 1965 has
changes in intrinsic value.
grown at a rate of 20.3% compounded annually.

3
What businesses we avoid: Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the
past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and
television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those
industries. Even the survivors tended to come away bleeding. Just because Charlie and I can clearly see dramatic growth ahead for an industry does not
mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with
businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes

4 5
Our defense better than offense: We have
never had any five-year period beginning
with 1965-69 and ending with 2005-09 –
and there have been 41 of these – during which
our gain in book value did not exceed the S&P’s
gain. Though we have lagged the S&P in some
years that were positive for the market, we have
consistently done better than the S&P in the
eleven years during which it delivered negative
results. Our defense has been better than our
offense, and that’s likely to continue.
Size shrinks performance advantage: The big
minus is that our performance advantage
has shrunk dramatically as our size has
grown, an unpleasant trend that is certain to
continue. To be sure, Berkshire has many
outstanding businesses and a cadre of truly great
managers. Charlie and I believe these factors will
continue to produce better-than-average results
over time. But huge sums forge their own anchor
and our future advantage, if any, will be a small
fraction of our historical edge.

6
Too-big-to-fail is not Berkshire: We will never become dependent on the kindness of strangers.Too-big-to-fail is not a fallback position at Berkshire.
Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity.
Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.When the financial system went
into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we
poured $15.5 billion into a business world that could otherwise look only to the federal government for help. We pay a steep price to maintain our
premier financial strength.The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.

Source: www.berkshirehathaway.com

Sundaram BNP Paribas Asset Management 9 The Wise Investor March 2010
 BuffettSpeak

7 8
Management style: We tend to let our many
subsidiaries operate on their own, without
our supervising and monitoring them to
any degree. We would rather suffer the visible
costs of a few bad decisions than incur the many
invisible costs that come from decisions made
too slowly – or not at all – because of a stifling
bureaucracy. Charlie and I will limit ourselves to
allocating capital, controlling enterprise risk,
choosing managers and setting compensation.
State of U.S Housing market: Within a year
or so residential housing problems should
largely be behind us, the exceptions being
only high-value houses and those in certain
localities where overbuilding was particularly
egregious. Prices will remain far below “bubble”
levels. Indeed, many families that couldn’t afford
to buy an appropriate home a few years ago now
find it well within their means because the bubble
burst.

9
Blinkered vision: I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by
high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company
being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never
have I heard the investment bankers (or management!) discuss the true value of what is being given.There is only one way to get a rational & balanced
discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with fee contingent on deal not going through.

10
Risk control is not delegated: The
dangers that derivatives pose for both
participants and society – dangers of
which we’ve long warned, and that can be
dynamite – arise when these contracts lead to
leverage and/or counterparty risk that is extreme.
It’s my job to keep Berkshire far away from such
problems. Charlie and I believe that a CEO must
not delegate risk control. It’s simply too important.
If Berkshire ever gets in trouble, it will be my fault.
It will not be because of mis-judgments made by
a Risk Committee or Chief Risk Officer.
11
Responsibility of risk management: In
my view a board of directors of a
huge financial institution is derelict if it
does not insist that its CEO bear full
responsibility for risk control. If he’s incapable of
handling that job, he should look for other
employment. And if he fails at it – with the
government thereupon required to step in with
funds or guarantees – the financial consequences
for him and his board should be severe. The
CEOs and directors of the failed companies,
however, have largely gone unscathed.

12
Tap dancing to work: At 86 and 79, Charlie and I remain lucky beyond our dreams. We were born in America; had terrific parents who saw
that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to
prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-
being. Moreover, we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Indeed, over the
years, our work has become ever more fascinating; no wonder we tap-dance to work. Nothing, however, is more fun for us than getting together with
our shareholder-partners at Berkshire’s annual meeting

14
Behavioural change is needed: Their

13
An ideal period of investors: We’ve put
a lot of money to work during the
chaos of the last two years. It’s been
an ideal period for investors: A climate of fear is
their best friend. Those who invest only when
commentators are upbeat end up paying a heavy
price for meaningless reassurance. In the end,
what counts in investing is what you pay for a
business – through the purchase of a small piece
of it in the stock market – and what that business
earns in the succeeding decade or two.
(CEOs) fortunes may have been
diminished by the disasters they
oversaw, but they still live in grand style. It is the
behavior of these CEOs and directors that needs
to be changed: If their institutions and the
country are harmed by their recklessness, they
should pay a heavy price – one not reimbursable
by the companies they’ve damaged nor by
insurance. CEOs and, in many cases, directors
have long benefited from oversized financial
carrots; meaningful sticks now need to be part of
their employment.

15
Save Ajit even if it means sacrificing Charlie and me: A hugely important event in Berkshire’s history occurred on a Saturday in 1985. Ajit
Jain came into our office in Omaha – and I immediately knew we had found a superstar. (He had been discovered by Mike Goldberg,
now elevated to St. Mike.) We immediately put Ajit in charge of National Indemnity’s small and struggling reinsurance operation. Over
the years, he has built this business into a one-of-a-kind giant in the insurance world.
Staffed today by only 30 people, Ajit’s operation has set records for transaction size in several areas of insurance. Ajit writes billion-dollar limits – and
then keeps every dime of the risk instead of laying it off with other insurers.Throughout the world, he is known as the man to call when something
both very large and unusual needs to be insured. If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.
Source: www.berkshirehathaway.com
Sundaram BNP Paribas Asset Management 10 The Wise Investor March 2010

Professor Muhammad Yunus
Professor Muhammad Yunus delivered the second
Annual Hirendranath Mukerjee Memorial Parliamentary
Lecture at the joint-meeting of the members of Lok
Sabha and Rajya Sabha of India in Delhi on December 9,
2009. This is the second and concluding part of edited
extracts from his lecture.
A social business is a business where an investor aims to
help others without taking any financial gain himself.
At the same time, the social business generates enough
income to cover its own costs. Any surplus is invested in
expansion of the business or for increased benefits to
society.
The social business is a non-loss, non-dividend company
dedicated entirely to achieving a social goal.
Will anybody in the real world be interested in creating
businesses with selfless objectives? Where would the
money for social business come from?
Judging by the real human beings I know, many people
will be delighted to create businesses for selfless
purposes. Some have already been created.
Like any good idea, the concept of social business needs
practical demonstration. So I have started creating social
businesses in Bangladesh. Some of them are created in
partnership with large multi-national companies.
• The first such joint-venture with a multi-national
company was created in 2005, in partnership with
the French dairy company Danone. The Grameen-
Danone social business is aimed at reducing
malnutrition among the children of Bangladesh. The
Grameen-Danone company produces a delicious
yogurt for children and sells it at a price affordable to
the poor. This yogurt is fortified with all the micro-
nutrients which are missing in the vitamins, iron, zinc,
iodine, etc. If a child eats children’s ordinary diet two
cups of yogurt a week over a period of eight to nine
Sundaram BNP Paribas Asset Management
Vision, a social stock market
months, the child gets all the micro-nutrients he or
she needs and becomes a healthy, playful child. As a
social business, Grameen-Danone follows the basic
principle that it must be self-sustaining, and the
owners must remain committed never to take any
dividend beyond the return of the original amount
they invested. The success of the company will be
judged each year not by the amount of profit
generated, but by the number of children getting out
of malnutrition in that particular year.
• We have a joint-venture social business with Veolia, a
large French water company to bring safe drinking
water in the villages of Bangladesh where arsenic
contamination of water is a huge problem. Villagers
are buying water from the company at an affordable
price instead of drinking contaminated water.
• BASF of Germany has signed a joint-venture
agreement to produce chemically treated mosquito-
nets in Bangladesh as a social business.
• Our joint-venture social business with Intel
Corporation, Grameen-Intel, aims at using
information and communication technology to help
solve the problems of the rural poor.
• Our joint-venture with Adidas aims at producing
shoes for the lowest income people at an affordable
price to make sure that no one, child or adult, goes
without shoes.
As these examples show, social business is not just a
pleasant idea. It is a reality, one that is already beginning
to make positive changes in people’s lives. Many more
social businesses are on the way. One attractive area of
social businesses will be in creating jobs in special
locations or for particularly disadvantaged people.
Designing each small social business is like developing a
seed. Once the seed is developed, anybody can plant it
wherever it is needed. Since each unit is self-sustaining,
funding does not become a constraint.
The owners of social businesses can direct the power of
technology to solve our growing list of social and
economic problems, and get quick results.
Regarding the source of funds, one source can easily be
the philanthropy money going for creating social
businesses. This makes enormous sense. One problem
of charity programmes is that they remain perpetually
dependent on donations.
They cannot stand on their own two feet. Charity
money goes out to do good things, but that money never
comes back. It is a one-way route.
But if a charity programme can be converted into a social
business that supports itself, it becomes a powerful
undertaking. Now the money invested is recycled
endlessly.
A charity taka has one life, but a social business taka has
endless life. That's the power of social business.
Besides philanthropists, many other people will invest in
social businesses just to share the joy of making a
11
By Invitation
difference in other people's lives. People will give not
only money but also their creativity, networking skills,
technological prowess, life experience, and other
resources to create social businesses that can change the
world.
Once our economic theory adjusts to the
multidimensional reality of human nature, students will
learn in their schools traditional money-making-and
colleges that there are two kinds of businesses
businesses and social businesses. As they grow up, they'll
think about what kind of company they will invest in and
what kind of company they will work for.
And many young people who dream of a better world
will think about what kind of social business they would
like to create.Young people, when they are still in schools,
may start designing social businesses, and even launch
social businesses individually or collectively to express
their creative talents in changing the world.
We May Create Social Stock Markets: The good
ideas will need to be funded. I am happy to say there are
already initiatives in Europe and Japan to create Social
Business Funds to provide equity and loan support to
social businesses.
In time, more sources of funding will be needed. Each
level of government-international, national, state, and city-
can create Social Business Funds to encourage citizens.
Foundations can earmark a percentage of their funds to
support social businesses. Businesses can use their social
responsibility budgets to fund social businesses.
We'll soon need to create a separate stock market for
social businesses to make it easy for small investors to
invest in social businesses. Only social businesses will be
listed in this Social Stock Market.
Investors will know right from the beginning that they'll
never receive any dividends when they invest in social
stock market. Their motivation will be to enjoy the pride
and pleasure of helping to solve difficult social problems.
Social business gives everybody the opportunity to
participate in creating the kind of world that we all want
to see. Thanks to the concept of social business, citizens
don't have to leave all problems in the hands of the
government and then spend their lives criticizing the
government for failing to solve them.
And let’s dream that by 2030 we'll have a range of
creative and effective social businesses working
throughout South Asia to solve all the remaining social
problems.
Does this dream sound impossible? If it does, it means it
is likely to come true if we believe in and work for it.
That’s what the history of the last fifty years teaches us.
Source: http://www.muhammadyunus.org
Note: By Invitation features articles solicited by The Wise
Investor from experts. It may, on occasions, showcase
excerpts of exceptional papers/speeches, which are
available in the public domain or published with permission.
The Wise Investor March 2010

Sunil Subramaniam
Executive Director-Sales & Marketing
Sundaram BNP Paribas Asset Management
In our last discussion, we had discussed how the yield
curve (which basically describes the connection
between short-term and long-term interest rates)
should normally be upward sloping, implying that
interest rates for longer tenors should be higher than
those for shorter tenors. This fits perfectly with our
intuitive understanding of interest as a price to be paid
for foregoing the desire for immediate consumption
and hence such upward-sloping yield curves are also
referred to as normal yield curves.
We had also explained how yield curves can be ‘other
than normal’ in which long-term rates are lower than
short-term rates. We had explained that this is
because the market expects interest rates to decline
in the future – mainly because inflation is expected to
be lower (to refresh your memory - Nominal Interest
Rate = Real Rate + Expected Inflation). We had also
used a numerical example to explain how this occurs.
Continuing this thread of discussion, we also could
witness sometimes a flat yield curve. By now, you will
easily answer this by saying that market expects
inflation rates to be stable in the future!!! Excellent.
Can there be there be shapes other than upward
sloping, downward sloping and flat to the yield curve?
To complicate your life further, let me answer:Yes.
To understand this, we first need to know that there
are a range of maturities in a continuum from short
term to long term. Hence there are various time
Sundaram BNP Paribas Asset Management
Knowledge Centre
Mutual Funds Demystified
buckets which determine the data points on the yield
curve ie 3 months, 6 months, 1 year, 2 years, 3 years, 5
years & 10 years, to name a few.
So when we speak about inflation expectation for the
future it is actually an expectation for each one of
these data points. However no expert will be able to
precisely forecast inflation for each time period given
that there are so many variables which affect this.
Hence there is generally possible to have an only
estimate of the direction of inflation rates in the future.
This is what explains how the three shapes of the yield
curve are arrived at.
In reality, market participants are forced to decide on
borrowing rates for each time-bucket based on the
demand for and the supply of money.This is because
a borrower generally has a requirement of money for
a specific period only. Similarly a lender may be able to
lend his surplus only for a specific time frame, after
which he may need the money for his own needs.
The actual rates of interest at which these lending-
borrowing transactions take place are a result of the
negotiation process between lender and borrower.
These participants use the existing shape of the yield
curve as a starting point for the negotiations. Where
the borrower is the government, this takes place
through an auction process. In the case of private
transactions, the negotiations are conducted on a one-
to-one basis.These actual rates then become the data
points which form the new yield curve.
It is the result of this negotiation process – otherwise
referred to in economics as the demand-supply
equilibrium that leads sometimes to a yield curve
distortion- a shape that is not upward sloping, nor
downward sloping or flat.
To explain this we will again use a numerical example.
Let us start with a normal’ yield curve (an upward
sloping yield curve)- short-term (1 year) rates are 3%,
medium term (5 years) rates are 4% and long-term
(10 years) rates are 5%.
Let us suppose that a company is putting up an
expansion project which should be able to recover its
capital investment in about 5 years. Naturally, the
company would seek to finance the project with a 5-
year loan and with this in mind he approaches various
lenders.
12
• 25 •
Suppose we find that, since the economy is in a boom
phase, there are quite a few companies in a similar
situation. Then we could face a situation where the
lenders are inundated with a lot of similar borrowing
requests.
Essentially we might be facing a situation of scarcity of
lenders willing to lend money for a 5-year timeframe.
Then we can easily envisage a situation where the
initial set of borrowers have exhausted the available
lendable resources in the market at the rate implied
by the yield curve ie 4%.
Then what does a company which has just finalized its
expansion programme do? It has no choice, but to
offer a higher rate of interest to tempt a few lenders
into diverting their surplus funds to him. This rate is
determined by the negotiation process ie the level of
desperation of the borrower.
The rate has to be high enough to force the lender to
back out of financing some other project or
alternatively it should be high enough to change the
mindset of a short-term or long-term lender and
tempt him to lend for a medium term tenor.
Let us assume that this transaction happens at a rate
of 6 %. Obviously this becomes the new data point for
the yield curve.
Now we come to the important point – does this
new data point imply that the rates for the 10-year
period also goes up correspondingly to say 7% ? Not
necessarily, because there may be no borrowers for
10-year money at 7%.
In fact the lenders with an outlook of 10 years may
be sometimes forced lend at even lower rates of say
4%, unless he is willing to shorten his investment
horizon and jump into the 5-year bandwagon because
of the higher interest rates.
Thus we could envisage a situation such as the
following : 1-year rate at 3%; 5-years rate at 6% and
10-years rate at 4%. Such a yield curve can only be
explained as a humped yield curve.
We have now introduced the idea that inflation
expectation is not the only factor that differentiates
short-term and long-term interest rates.
This type of behavoiur is also referred to as the
segmentation theory of interest rates.
On this rather heavy note we will end today’s
discussion.
The Wise Investor March 2010
 Investing Environment

Risk–Reward Spectrum
Equity Funds Fixed/Liquid Funds
High
Micro Cap Monthly Income Plan

Sector Specific Equity Linked FMP

Small Cap Dynamic Bond

Thematic Flexi Debt

Muti-Cap (Mid-& Small-Cap

Gilt Funds
Bias)

Pure Mid-Cap Long & Medium-Term Bond

Risk-Reward Spectrum

Flexi-Cap Short-Term Debt Funds

Capital Protection
Index Funds (Broad Market)
Orientation Plan

Index ETFs (Broad Market) Arbitrage

Multi-Cap (Large Cap Bias) Floating Rate

Concentrated Large Cap Ultra Short-Term

Diversified Large Cap Treasury Funds

Nifty/Sensex Index Funds Liquid Funds

Nifty/Sensex ETF Funds Overnight/Call

Low
For Equity Linked Savings Schemes (Tax Planning Funds), their position in the risk-return spectrum has to be evaluated based on where the portfolio is consistently positioned
in the categories indicated in the chart.The ordering is only indicative and is not intended as investment advice.

Sundaram BNP Paribas Asset Management 13 The Wise Investor March 2010

Financial sector cannot be an island or an illusion
Duvvuri Subbarao
Governor
Reserve Bank of India
Several top officials of the Reserve Bank of India make speeches that offer vital insights
into the thinking of the central bank, the state of the economy and policy approaches.
These insights influence policy and markets. Starting this month, we pick views from
several speeches by RBI officials and provide a concise summary on a range of key issues.
The selection presented this month is from four speeches of Dr D Subbarao and views
expressed by him in a conference call after the monetary policy announcement, the RBI’s
first such initiative.
Why India was affected by the global financial crisis?
Almost every country in the world has been impacted, although to a different extent.
India was no exception.
Largely driven by the then intellectually fashionable decoupling theory, there was dismay
in India that we were hit by the crisis.This dismay arose from two factors.
• First, there was surprise that we were hit by a crisis with origins in the banking system
even as our banks, and indeed our entire financial system, had minimal exposure to
tainted assets.
• Second, there was also concern that we were hit by global recession even though our
export sector, at 15% of GDP, was relatively small.
The answer to both these points is that India was hit by the crisis because we are more
globally integrated than we tend to acknowledge.We were impacted through all channels
- the financial channel, the real sector channel and the confidence channel.
The impact of crisis on India was, however, relatively muted. India’s financial sector
remained safe and sound, and our financial markets continued to function normally
highlighting the stability enhancing features of our policy and regulatory framework.
India’s approach to safeguarding financial stability
On financial globalization, our stance has been gradualist.
• We view capital account liberalisation as a process and not an event. The extent of
opening is contingent upon progress in other sectors.
• Our policy framework encourages equity flows, especially direct investment flows.
Debt flows are subject to restrictions, and these are reviewed and fine-tuned
Sundaram BNP Paribas Asset Management
India RBI-Speak
periodically.
• The exchange rate is largely market-determined and we intervene in the foreign
exchange market in times of excessive volatility.
• Our approach to financial sector regulation has been informed by the fact that our
system is dominated by commercial banks. Thus, as early as mid-1990s, the Reserve
Bank instituted the prudential framework governing banks, especially commercial
banks, as a part of the overall structural reforms. As of April 2009, all our commercial
banks are Basel II compliant.
• The Reserve Bank has been proactive in adopting a counter-cyclical approach to
financial regulations. Notably, in the years before the crisis, we increased the risk
weights and provisioning norms on a selective basis.
• The intent was to limit the exposure of the banking system to sensitive sectors of the
economy posting high credit growth and thereby prevent mis-pricing of risk.
• Again, in another counter cyclical measure, as part of crisis management, we reversed
the earlier tightening and normalized the risk weights and provisioning norms to
facilitate credit flow to these sectors.
One little known aspect of capital flows, what could perhaps be called the
law of capital flows, is that they never come in at the precise time or in the
exact quantity you want them.
• India’s banking system has remained remarkably well capitalized with capital to risk
weighted asset ratio (CRAR) much above the minimum prescribed under Basel II.
• The asset quality post-crisis also remained sound though there has been a slight
deterioration in recent months.
• In recognition of the fact that banks should build up provisioning and capital buffers
in good times which can be used for absorbing losses in a downturn, recently, banks
have been advised to ensure that the provisioning coverage ratio, i.e., the ratio of
provisioning to gross NPA, is not less than 70 per cent.
• In view of the heightened concerns with regard to financial stability during the recent
years, the Reserve Bank is retooling itself to safeguard financial stability.
• We have also set up a Financial Stability Unit which will make regular and systematic
assessment of the stability of the Indian financial system.
Crisis when financial sector growth outstrips real sector
A study of financial crises shows that almost every crisis is preceded by, if I may use what
is by now a cliché, ‘irrational exuberance’ of the financial sector with the growth of the
financial sector outstripping the growth of the real sector engendering a belief, bordering
on hubris, that real value can be created by sheer financial engineering.Take this crisis for
example.
In the world that existed before the crisis - a benign global environment of easy liquidity,
stable growth and low inflation - profits kept coming, and everyone got lulled into a false
sense of security in the firm belief that profits will keep rolling in forever.
Herb Stein, an economist, pointed out the truism that, "if something cannot go on for ever,
it will eventually stop." But no one paid attention.
The magic of the financial sector gave it such a larger than life profile that we began to
believe that for every real life problem, no matter how complex, there is a financial sector
solution. Now, of course, we know better – for every real life problem, no matter how
complex, there is a financial sector solution, which is wrong.
14 The Wise Investor March 2010

Financial sector cannot grow in isolation
Take the case of the United States. Over the last 50 years, the share of value added from
manufacturing in GDP shrank by more than half from 25 per cent to 11 per cent while
the share of financial sector more than doubled from 3.6 per cent to 7.5 per cent.
The job share of the manufacturing sector declined by more than half from 29 per cent
to 11 per cent while the job share of the financial sector increased by over a third from
3.5 per cent to 4.6 per cent.The same trend is reflected in profits too.
Over the last 50 years, the share of manufacturing sector profits in total profits declined
by more than half from 49 per cent to 21 per cent while the share of profits of the
financial sector increased by more than half from 17 per cent to 27 per cent.
Clearly, the excessive risk-taking behaviour of the financial sector raised the value-added
of the sector beyond a sustainable level making the melt down, in retrospect, inevitable.
Forgotten in the euphoria of financial alchemy is the basic tenet that the financial sector
has no standing of its own; it derives its strength and resilience from the real economy. It
is the real sector that should drive the financial sector, not the other way round.
WPI, CPI, Growth & RBI’s struggles
WPI inflation number is the best known and most widely used, but we have said several
times the Reserve Bank looks at not just the WPI inflation but we look at the four CPI
indices and we look at a host of other indicators.
As some people in RBI keep telling me ours is a multiple indicator approach, which
includes indicators beyond inflation. Now, you are right that services do not enter WPI,
but they enter CPI and that is one of the reasons for the divergence between the CPI
and WPI.
The other reason for divergence is of course the higher weight for food items in CPI
versus WPI. I have also been told that some commodities are better represented in WPI.
For example, metals are there in WPI, they are not in CPI.
So, we are aware of all this. In fact, over the last two years, since this divergence between
CPI and WPI has widened we have been sensitive to tracking both the trends in WPI and
CPI, studying the reasons for divergence and factoring in those inferences in our policy
calculus.
Our policy dilemma is that we need to tighten in order to manage inflation, but we also
have to be very mindful of the fact that growth is yet to consolidate. So, we need to
manage this over the next few months carefully, so that growth takes place in a manner
sufficient.
Yes, there is going to be government borrowing program, and it is not possible even for
the government to scale down the fiscal deficit abruptly, but these are realities and
challenges of our economy. As Reserve Bank, we do not have a magic wand and we are
struggling with this.
Dealing with capital flows
Emerging market economies (EMEs) saw ‘sudden stop’ capital outflows during the crisis
as a result of global deleveraging.
Now the trend has reversed once again and many EMEs are seeing net inflows - a
consequence of a global system awash with liquidity, the assurance of a low interest rate
regime in advanced countries over an ‘extended period’ and the promise of growth in
EMEs.
One little known aspect of capital flows, what could perhaps be called the law of capital
flows, is that they never come in at the precise time or in the exact quantity you want
them.
Managing these flows, especially if they are volatile, is going to test the effectiveness of
central bank policies of semi-open EMEs.
If central banks do not intervene in the foreign exchange market, they incur the cost of
currency appreciation unrelated to fundamentals.
If they intervene in the forex market to prevent appreciation, they will have additional
systemic liquidity and potential inflationary pressures to contend with.
If they sterilize the resultant liquidity, they will run the risk of pushing up interest rates
which will hurt the growth prospects.
Capital flows can also potentially impair financial stability.
Sundaram BNP Paribas Asset Management
India RBI-Speak
How EMEs manage the impossible trinity - the impossibility of having an open capital
account, a fixed exchange rate and independent monetary policy - is going to have an
impact on their prospects for growth, price stability and financial stability.
Role of central banks in preventing asset price bubbles
A dominant issue in the wake of the crisis has been the role of central banks in preventing
asset price bubbles. The monetary stance of studied indifference to asset price inflation
stemmed from the famous Greenspan orthodoxy which can be summarized as follows.
• Asset price bubbles are hard to identify on a real time basis.
• The fundamental factors that drive asset prices are not directly observable.
• A central bank should not therefore second guess the market.
• Monetary policy is too blunt an instrument to counteract asset price booms.
• Central banks can ‘clean up the mess’ after the bubble bursts.
The surmise therefore was that the cost-benefit calculus of a more activist monetary
stance of “leaning against the wind” was clearly negative. In other words, it is not the job
of central bankers to remove the punch bowl no matter that the party is getting wild.
The crisis has dented the credibility of the Greenspan orthodoxy.
The emerging view post-crisis is that preventing an asset price build up should be within
the remit of a central bank. Opinion is divided, however, on whether central banks should
prevent asset bubbles through monetary policy action or through regulatory action.
• On one side, there is a purist view that the case for monetary tightening to check
speculative bubbles is questionable.
• Opposed to this is the argument that a necessary condition for speculative excesses
is abundant liquidity, and that controlling liquidity should be the first line of defence
against ‘irrational exuberance’.
• Some economists take a more granular position on this, and the argument goes as
follows. It is important to differentiate between speculative excesses fuelled by bank
lending and those that are not such as, for example, the IT bubble.
• Central banks have a role in preventing “bank centred” bubbles, but the instrument
for this is not monetary policy but regulatory intervention.
No matter how this debate settles, if it will at all, what is beyond debate is that central
banks’ efforts to check asset price bubbles demand not just analytical capability but
mature judgement of the nature of the risk.
Managing monetary policy in a globalizing environment
The crisis has clearly demonstrated the challenges of macroeconomic management in a
globalizing world. Even as governments and central banks acted with unusual show of
policy force, they found that they were not able to get the situation under control
because of the interconnectedness of the financial system.
The question is, with the benefit of that hindsight, how are central banks going to manage
the challenges from globalization to their macroeconomic policies. Experience shows that
external developments interact with domestic macro variables in complex, uncertain and
even capricious ways, and central banks need to deepen their understanding of these
interactions.
Is the challenge posed by globalization similar for all central banks? Obviously, the more
open the economy, the greater the impact of globalization on domestic policies. Beyond
that, it seems logical to conjecture that the broader the mandate of a central bank, the
larger the influence of globalization on the effectiveness of its policies.
There is a view that open economies can retain strong control over the medium and long
term inflation trends even in the face of globalization.This is a debatable proposition, and
at best true only in the case of pure inflation targeting central banks.
Central banks with wider mandates need necessarily to factor in external developments
into their domestic policy calculus.
Globalization is not new; its risks and rewards are also not new. What is new, and what
the crisis has revealed, is the ferocity with which the forces of globalization can strike and
the diversity of channels through which they can transmit across borders.
The challenge for central banks is to better understand the interplay of global factors and
domestic variables, and factor that into their policy calculus.
Source: www.rbi.org.in
15 The Wise Investor March 2010

John Mauldin
Best-Selling Author, Recognized Financial Expert
and Editor of Thoughts From The Frontline
Path dependence explains how the set of
decisions one faces for any given circumstance is
limited by the decisions one has made in the past,
even though past circumstances may no longer
be relevant. In essence, history matters.
With regard to the future, the choices we make
determine the paths we will take. As I have been
writing for a long time, we have made a series of
bad choices, often the easy choices, all over the
developed world.
We are now entering an era in which our choices
are being limited by the nature of the markets.
Not only are we in a path-dependent world, but
the number of paths from which we may choose
are becoming fewer with each passing year.
Our economic future is more and more a
product of the political choices we make, and
those are increasingly difficult. We have no good
choices.
We are left with choosing the best of bad
options. Some countries, like Greece, are now
down to choices that are either dire or disastrous.
There is no "easy" button.
Let's look at how Greece came to its current
rather dismal predicament. And we will look at
why it may be even worse than many pundits
think.
First, we need to go back to the creation of the
euro. Most of the Mediterranean countries that
are now in trouble were allowed into the union
with an exchange rate that overvalued their
currencies relative to the northern countries, but
especially to Germany.
Sundaram BNP Paribas Asset Management
Thoughts From The Frontline
It’s more than just Greece
That meant that Greek consumers could buy
products and services that previously may have
been out of their reach. Plus, with government
debt at low rates, the Greek government could
borrow more to finance deficit spending, without
the threat of higher interest rates.
And Greece began to increase its debt with
abandon.
Additionally, as it now turns out, Greece basically
lied about its finances in order to gain admission
to the union. It never complied with the fiscal
discipline that was required for entrance.
With the high exchange rate, however, came the
consequence of higher labor costs relative to,
above all, Germany. While reviewing some
economic facts about Greece, I came across the
factoid that Greek workers had the second
highest level of actual hours worked. But even
with that, Greece was running a trade deficit that
is currently 12.7% of its GDP.
And with the onset of the current recession, their
fiscal deficit went from bad to worse. Their total
debt is now €254 billion, and they need to finance
another €64 billion this year, €30 billion of it in
the next few months.
Bottom line, without some help or a bailout, they
simply will not be able to borrow that money.
And since a lot of that money is for "rollover"
debt, that means a potential for default if they
cannot borrow it.
European leaders said today that Greece will not
be allowed to fail, hinting of a bailout. But there
are a lot of "buts" and conditions.
Between Dire and Disastrous: While
German Chancellor Merkel has indicated a
willingness to help, the German finance minister
and other politicians are suggesting German
cooperation will either not be forthcoming or
only be there at a very high price; and the price
is a severe round of "austerity measures,"
otherwise known as budget cuts.
Greece is being told that it must cut its budget to
an 8.7% deficit this year and down to 3% within
three years.
Let's put that into perspective. That is the
equivalent of a $560-billion-dollar US budget cut
this year and another such cut next year.
And yet, that is what the Greek government is
being asked to do as the price for a bailout.
A few facts about Greece: Some 30% of its
economy is underground, meaning it is not taxed.
In a country of 10 million people, only 6 (!!!!)
people filed tax returns showing in excess of €1
16
million in income. Yet over 50% of GDP is
government spending, and Greece has one of the
highest public employee levels as a percentage of
population in Europe. And its unions are very
powerful. Nearly all of them have gone on strike
over this proposal.
A National Suicide Pact: Now, here is where
it actually gets worse. If Greece bites the bullet
and makes the budget cuts, that means that
nominal GDP will decline by (at least) 4-5% over
the next 3 years.
And tax revenues will also decline, even with tax
increases, meaning that it will take even further
cuts, over and above the ones contemplated to
get to that magic 3% fiscal deficit to GDP that is
required by the Maastricht Treaty. Anyone care to
vote for depression?
And add into the equation that borrowing
another €100 billion (at a minimum) over the
next few years, while in the midst of that
recession, will only add to the already huge debt
and interest costs. It all amounts to what my
friend Marshall Auerback calls a "national suicide
pact."
We are in the fullness of time approaching
the End Game. In country after country, the
choices that have been made over the last
decades will yield a Greek situation, where
there are no good choices. And the longer the
hard choices are put off, the more difficult
they will become.
Normally, a country in such a situation would
allow its currency to devalue, which would make
its relative labor costs go down. But Greece is in
a currency union, and can't devalue. Or it would
restructure its debt (think Brady bonds) to try
and resolve the problem.
• The dire predicament is the one where
Greece cuts its budgets and more or less
willingly enters into a rather long and deep
recession/depression.
• The disastrous predicament is where they do
not make the cuts and are allowed to default.
That means the government is plunged into a
situation where it has to cut the entire deficit to
what it can get in the form of taxes and fees,
immediately. As in right now. And defaulting on
the interest on the current bonds wouldn't be
enough, although it would help.
Why not just let Greece go under? Part of the
argument has to do with moral hazard. If
Germany bails out Greece, Ireland, which is
The Wise Investor March 2010

actually making such cuts to its budget, can
legitimately ask, "Why not us?" And will Portugal
be next?
And Spain is too big for even Germany to bail
out. At almost 20% unemployment, Spain has
severe problems. Its banks are in bad shape, with
large amounts of overvalued real estate on their
books (sound familiar?) and a government fiscal
deficit of almost 10%.
While Spanish authorities say they can work this
out, deficits will remain high.
The fear is one of contagion. Some argue that
Greece is only 2.7% of European GDP. But Bear
Stearns held less than 2% of US banking assets,
and look what happened.
The recent credit crisis was over a few trillion in
bad, mostly US, mortgage debts, with most of that
at US banks. Greek debt is $350 billion, with
about $270 billion of that spread among just
three European countries and their banks.
Make no mistake, a Greek default is another
potential credit crisis in the making. As noted
above, it is not just the write-down of Greek debt;
it is the mark-to-market of other sovereign debt.
That would bankrupt the bulk of the European
banking system, which is why it is unlikely to be
allowed to happen. Just as the Fed (under
Volcker!) allowed US banks to mark up Latin
American debt that had defaulted to its original
loan value (and only slowly did they write it
down; it took many years), I think the same thing
will happen in Europe.
Or the ECB will provide liquidity. Or there may
be any of several other measures to keep things
moving along. But real mark-to-market is unlikely.
The entire EU is faced with no good choices. It is
coming down to that moment of crisis predicted
by Milton Friedman so many years ago. And there
is no agreement on what to do.
There is talk among some in Europe of a more
centralized control of some countries that do not
stay within guidelines, which means that Greece
might be asked to give up some of its sovereign
freedoms in exchange for bailout funds.
French President Sarkozy emphatically stated that
no member of the EU would be allowed to
default. But he did not bring a checkbook to the
press conference. Selling this to a variety of
national parliaments will not be easy, when they
have their own problems.
And Merkel has problems on the home front.
There are reports she is putting the brakes on a
bailout, as she is getting pushback from her
constituency.The Frankfurter Allgemeine Zeitung
warned the chancellor that offering Greece any
kind of bailout would be a betrayal of the trust of
the Germans who so reluctantly traded in their
marks for the euro.
"If the no-bailout clause of the Maastricht Treaty is
going to be abandoned, then the last anchor of a
stable euro will be destroyed," warned the front-
page editorial in the conservative newspaper.
Sundaram BNP Paribas Asset Management
Thoughts From The Frontline
"Chancellor Merkel has to be hard now so that
the euro doesn't become soft."
Ultimately, this is a political decision for the Greek
people.They have roughly four options.
• They can accept the austerity measures and
sink into a depression for a few years. This
would mean the total amount of debt would
go up rather significantly, putting a very large
crimp on future budgets. Debt is a constraint
on growth. Debt-to-GDP is already over
100%.
• The second option is that they can simply
default and go into a depression for more
than a few years. This would have the
advantage of reducing the debt burden,
depending on what terms the government
settled on. Would bond holders get 50 cents
on the euro? 25 cents? Stay tuned.
But it would also most assuredly mean they
would not be able to get new debt for some time
to come, forcing, as noted above, severe cuts in
government spending. From one perspective, it
has the potential advantage of reducing
government's share of the economy, which is a
long-term good but a short-term nightmare.
But it also keeps Greece in the euro zone, which
does have advantages. However, it does little to
deal with the labor-cost differential.
• The third option is that they could vote to leave
the European Union. While this is unthinkable
to most Europeans, it is an option that may
appeal to some Greeks. They could create
their own currency and effectively devalue
their debt. It would make their labor and
exports cheaper.They would still be shut out
of debt markets for some time.
Any savings left in Greece would be devalued
overnight.Those on pensions would find their
buying power cut by a great deal. It is likely
that inflation would become an issue. And it
would be a full-employment act for legions of
attorneys.
Most people scoff at this notion, but money is
flying out of Greek banks into non-Greek
ones, and to my way of thinking that is a
suggestion that some Greeks think secession
might be a possibility. It is also causing severe
stress at Greek banks.
• The final option is to promise to make the
budget cuts, get some form of guarantee on
their bonds, and borrow enough to make it
another year - but not actually cut as much as
promised; just make some cuts and then
promise more next year if you will just bail us
out some more.
That just kicks the problem down the road for
another year or two, until European voters
(mostly German) get tired of taking on Greek
debt.
The market is not going to let Greece continue
to borrow without showing some serious efforts
at cutting their deficit, and probably not even then
17
without some external guarantees.
The history of Greek debt is not a good one.
They have been in default 105 years out of the
last 200.
There are some optimists, however. Good friend
and fishing buddy David Kotok thinks that this will
all turn out OK. Writing this week, he said, "Taxes
will rise. Public sector employment benefits and
compensation will be pressured to compress, and
the workers will resist but eventually
compromise. By the way, that will also happen at
the federal level in the United States and with the
50 sovereign state debtors that make up our
country.
Think of us as a US dollar zone, just as we think
of them as a euro zone. They are new at it. We
have had a century of practice and need only
another few hundred years to get it right."
My objection to that is, US states generally have a
mandate to balance their budgets, so that the
"debt-to-GDP" of a state is comparatively rather
small. And a US citizen is ten times more likely to
move from one state to another to find a job
than a European will move to another country.
As one person I read commented about
unemployed Spanish workers in Madrid, "They
won't even move to Barcelona!"
It's More than Just Greece: The lesson here
is that this is not just a Greek problem. Debt and
out of control deficits are a problem all over the
developed world.The Greeks are just the first. As
Niall Ferguson wrote this week in the Financial
Times, the contagion is headed to US shores
unless we get our budget house in order.
You cannot spend your way out of a fiscal crisis.
The current path is simply unsustainable. At some
point, we can become Greece. Yes, we have the
advantage of having our debt denominated in
dollars, but that is only an advantage up to a
certain point.
We are in the fullness of time approaching the
End Game. In country after country, the choices
that have been made over the last decades will
yield a Greek situation, where there are no good
choices. And the longer the hard choices are put
off, the more difficult they will become.
For some countries it could mean deflation. For
others, it will look like inflation on steroids.
Countries with sensible budgets and policies will
thrive.
For most of the last two decades, investors have
ignored country risk in the developed world.That
is no longer a safe option.
John@FrontLineThoughts.com
Copyright 2009 John Mauldin. All Rights Reserved
John Mauldin, Best-Selling author and recognized
financial expert, is also editor of the free Thoughts
From the Frontline that goes to over 1 million
readers each week. For more information on John or
his FREE weekly economic letter go to:
http://www.frontlinethoughts.com/learnmore
The Wise Investor March 2010
 Economic Crisis Effects

Life in the time of Great Recession

The title is not original. It is a take off from Love in the Time of Cholera by Gabriel Garcia Marquez, Nobel Prize
winning author from Columbia, who was also recently selected as the most influential writer of the past 25 years for this
book. Pardon that indulgence on our part, but we felt this best captures what you are about to read.
Even as equity markets led by Wall Street have charted a major bear-market rally on the back of liquidity since
March 2009, the ground reality on Main Street is different. Read this ninth part of how the Great Recession is touching lives
in many-a-different way.
Use of Temps No Longer Signals Permanent
Hiring: It's not the signal it used to be. When
employers hire temporary staff after a
recession, it's long been seen as a sign they'll
soon hire permanent workers. Not these days.
Companies have hired more temps for four
straight months. Yet they remain reluctant to
make permanent hires because of doubts
about the recovery's durability. Even
companies that are boosting production seem
inclined to get by with their existing workers,
plus temporary staff if necessary.
"I think temporary hiring is less useful a signal
than it used to be," says John Silvia, chief
economist at Wells Fargo. "Companies aren't
testing the waters by turning to temporary
firms.They just want part-time workers."
More Generations Living Under Same Roof:
The trend will deepen as families grappling
with near double-digit unemployment share
expenses, a study showed.
Demand is escalating for multi-generational
housing as buyers scale down during the
deepest housing crisis since the Great
Depression, according to a survey by Coldwell
Banker Real Estate in Parsippany, New Jersey.
Thirty-seven percent of the company's real
estate agents polled in January said that in the
past year, buyers were increasingly shopping for
homes that fit more than one generation.
Almost 70 percent of the agents said they
expect economic conditions will drive still
greater demand for this type of housing over
the next year.
"More buyers are pooling investments,
considering bringing mom and dad into it," said
Diann Patton, a Coldwell Banker real estate
consumer specialist based in Grass Valley,
California.
Buyers were primarily driven by financial
concerns when deciding to combine
generations in a household, the survey found.
Health concerns were the second most
common reason and strong family bonds a
distant third.
This shift in homeownership comes as
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unemployment hovers just under 10 percent
and many consumers are being dealt wage
cuts. College graduates unable to get jobs are
often returning to their parents' homes.
Newer inmates & strained shelters, an
alarming trend: Homelessness in rural and
suburban America is straining shelters this
winter as the economy founders and
joblessness hovers near double digits — a
"perfect storm of foreclosures, unemployment
and a shortage of affordable housing," in one
official's eyes.
"We are seeing many families that never before
sought government help," said Greg Blass,
commissioner of Social Services in Suffolk
County on eastern Long Island.
"We see a spiral in food stamps, heating
assistance applications; Medicaid is
skyrocketing," Blass added. "It is truly reaching a
stage of being alarming."
The federal government is again counting the
nation's homeless and, by many accounts, the
suburban numbers continue to rise, especially
for families, women, children, Latinos and men
seeking help for the first time. Some have to be
turned away.
"Yes, there has definitely been an increased
number of turnaways this year," said Jennifer
Hill, executive director of the Alliance to End
Homelessness in suburban Cook County,
Illinois.
Dumped! Brand names: Brand names are
fighting to stay in stores. Don't be shocked if
you can't find your favorite salad dressing or
mouthwash on your next trip to Wal-Mart.
Large retailers -- including Wal-Mart, world's
biggest -- are wrestling with having too many
types of brand-name products. At the same
time, shoppers are buying less and looking for
bargains.
So unless a particular brand is a top seller in its
category, it's getting knocked off the shelf --
and sometimes getting replaced by a cheaper
store brand.
Bill Pecoriello, CEO of market research firm
ConsumerEdge Research, expects Wal-Mart
18
and other sellers will trim several name-brands
across categories in coming months, or
negotiate deals to get better pricing.
According to Pecoriello, those categories at
greatest risk of losing brands are everyday-type
purchases such as household products,
toiletries and food staples. These are also
categories in which retailers have aggressively
pushed their own house brands.
"If you consider the economics of this, if Wal-
Mart can build customer loyalty for its own
brand, which is also cheaper-priced and
cheaper to stock than name-brands, then it
will," he said. Moves such as this are significant
given Wal-Mart's heavyweight status in the
retail industry.
"Any change that Wal-Mart makes with its
product assortment has enormous
implications for the entire industry," said Ali
Dibadj, senior analyst with Sanford C. Bernstein
& Co.
In good economic times, product variety is a
must for retailers. But in down times, when
shoppers aren't buying much, variety can be a
burden. As a consumer, she asked, "Do I really
need to decide between 15 different types of
toothpaste when I go to a store?"
Elderly placed under stress, as dentures,
diapers are out: Poor people eligible for free
Medicaid health care no longer would receive
eyeglasses, dentures, hearing aids or as many
adult diapers under the $109 million in social
service spending reductions proposed by Gov.
Jim Gibbons in Nevada.
`We are down to the ugly list of options of
where we can cut," Department of Health and
Human Services Director Mike Willden told
members of the Legislature's Interim Finance
Committee.
The state would save $829,304 by reducing
the number of adult diapers that incontinent
disabled and elderly people would receive.The
reduction was mentioned repeatedly as the
most horrendous example of a budget cut.
Eligible people now receive 300 diapers per
month; that would be cut to 186, which,
The Wise Investor March 2010

according to the Health and Human Services
agency, is in line with national standards.
But Washoe Legal Services lobbyist Jon Sasser
predicted that elderly people will be spending
hours per day "with poop in their diapers."
"It is abhorrent to be discussing this," Buckley
said. "Are we really going to tell the elderly we
are cutting them off dentures and hearing aids
and diapers? I don't know how we can look
the elderly in the eye."
Rash of Retirements Pushes Social Security
to Brink: Social Security's annual surplus
nearly evaporated in 2009 for the first time in
25 years as the recession led hundreds of
thousands of workers to retire or claim
disability.
The impact of the recession is likely to hit the
giant retirement system even harder this year
and next.The Congressional Budget Office had
projected it would operate in the red in 2010
and 2011, but a deeper economic slump could
make those losses larger than anticipated.
"Things are a little bit worse than had been
expected," says Stephen Goss, chief actuary for
the Social Security Administration. "Clearly,
we're going to be negative for a year or two."
Social Security took in only $3 billion more in
taxes last year than it paid out in benefits — a
$60 billion decline from 2008, according to
federal data. The slide in revenue occurred
sooner than Social Security actuaries had
expected, for three reasons:
Hard Times Push More Women to Strip
Clubs: She’s stunning, even in sweats. But
Leilani Burkhead’s got her work cut out for her.
It’s 9 p.m. on a weeknight, time to hit the stage
at Atlanta’s Magic City strip club.
She slips out of her sweats and half-jokingly
mumbles something about getting geared up
to work the room. It’s an about-face from a
few years ago when money rained down on
dancers at this and other Atlanta adult-
entertainment clubs like free-flowing Dom
Perignon.
Like the rest of the economy, adult dance clubs
feel the pinch.The sluggish economy and closer
police scrutiny have put about a dozen out of
business in the past decade. And the regular
patrons aren’t so regular anymore.
But that hasn’t slowed the would-be dancers
lining up to apply for the $350 permit to work
in the city’s 19 clubs, Atlanta police say.
Among the usual aspiring actresses and
dancers, there are more college students, single
mothers trailing toddlers, health and office
professionals and even a few age-defying
grandmothers — all looking for well-paid work
in a city with unemployment above 10 percent.
While there are no hard numbers, Atlanta
police say they’ve seen a spike in applications
for adult-entertainment permits in the past
year or so due to the recession and the recent
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Economic Crisis Effects
change in Georgia law that allows nude
dancers to be as young as 18.
Plight of Long-Term Unemployed: They still
wait for recovery to arrive. Curtis McKenzie
keeps hearing that the economy is getting
better, most recently with news that
unemployment fell to 9.7% in January.
But he's still waiting for the recovery to reach
his doorstep in Tulsa. McKenzie, 40, has been
out of work since he was laid off from a
$60,000-a-year job at a small technology
company last March. "The only jobs I have been
offered won't even allow me to cover bills," he
says. "You build a lifestyle around the job you
think you're going to have forever."
McKenzie, his wife and two boys don't go out
much anymore.They think twice about visiting
friends to watch football, which would mean
spending money on gasoline, beer and snacks.
Millions of Americans are sharing McKenzie's
pain: In January, a record 6.3 million people —
41.2% of the unemployed — had gone
without jobs at least 27 weeks. The average
unemployed American has been jobless more
than 30 weeks, another grim record.
"It's a deep recession," says Kevin Hassett,
director of economic policy studies at the
conservative American Enterprise Institute.
"Everything's been unusually bad." The
Economic Policy Institute figures there are 6.4
jobless people for every job opening. "It's a
cruel game of musical chairs," says Lawrence
Mishel, president of the liberal think tank.
Man-cession is recession effect on both
sexes: Both sexes are worse off than they
were before the downturn, but men have
suffered more. For the first time in recorded
history, women outnumber men on the
nation’s payrolls.
This benchmark is bittersweet, as it comes
largely at men’s expense. Because men have
been losing their jobs faster than women, the
downturn has at times been referred to as a
“man-cession.”
Women’s new majority in the nation’s
workplaces comes decades after women first
began trading in their aprons for pantsuits in
droves, and it reinforces expectations that
women will continue on the path to pay parity.
“Important milestones remain to be achieved,
but women’s surpassing 50 percent of
employment is something that historians will
note for years to come,” said Casey B. Mulligan,
an economics professor at the University of
Chicago who has been tracking the recession’s
effects on both sexes.
It was the recession that finally pushed women
into the majority. As in previous recessions,
male workers have borne the brunt of the job
losses in the last two years. Since the recession
began in December 2007, men have lost 7.4
million jobs on net, whereas women have lost
19
3.9 million jobs.
The types of jobs held by men and women
help explain the shift. Men are more likely to
work in industries like manufacturing, which
rise and fall with the economic cycle. Women
are more likely to work in government, health
care and education, among the safest
categories in a downturn. Health care
employment has been among the strongest of
any type during the recession.
The Human Recession: Unable to find jobs,
kicked off welfare, women in Connecticut are
forced to sell food assistance to buy basic
necessities.
Since she was 16, Eva Hernández has worked
a string of low-wage jobs. She’s prepared
chicken at KFC, run the register at Dunkin
Donuts, packed and sealed boxes at a produce
company, and held other similar jobs in
Hartford, Connecticut, where she was born
and raised.
In March 2009, in the midst of the worst job
crisis in at least a generation, Eva opened the
last welfare check she will ever receive. She is
one of a growing number of people in the
United States who can’t find work in this
recession but don’t qualify for government
cash assistance, no matter how poor they are
or how bad the economy gets.
Without the help of welfare, Eva doesn’t have
enough money left at the end of each month
to feed her daughters full meals. It is the first
time in her life, she said, that she hasn’t had
enough money for food. Now, with no other
source of income, Eva breaks the law, selling
her food stamps to pay for the rent, phone bill,
detergent and tampons.
On the first day of each month, when her food
stamps arrive, she walks to the convenience
store up the street, buys food for her family
with her food stamp card and uses it to pay off
the debt she accumulated the previous month
after she ran out of money. She then trades in
the remaining balance for cash. About 6 million
people receiving food stamps report they have
no other income.
Recession permeates kids at kitchen tables:
Kids are being told about the Great Recession.
Seven out of ten parents with children
between the ages of 6 and 16 said their kids
know we’ve been in a recession, according to a
just released survey by American Express.
“This number suggests that talks about the
current economic environment are happening
at kitchen tables across the country,” said a
news release about the poll’s results.
Hmmm. Seems like more proof to me that
those highly paid Wall Street "experts," who
are allegedly "in the know," don't know jack.
Source: Reuters, Associated Press, CNN Money,
USA Today, New York Times, Alternet, Mish Global
Economic Analysis and Financial Armageddon.
The Wise Investor March 2010

Quick takes from across the world
Germany: Facing the crisis
• Employment has been relatively unscathed given
the reduction in GDP. However, slower growth
has affected the labour market through a cut in
the number of hours worked.
• Lending conditions improved in the fourth
quarter of 2009, but the worsening financial
health of companies will hold back the recovery
in investment.
• The financial and economic crisis has dented the
potential growth rate of the German economy.
This is now around 0.75% per year between 2009
and 2011.
South Korea: Banking withstood the crisis
• In late 2008-early 2009, South Korean banks
proved extremely vulnerable to the global
liquidity credit crunch while the deep economic
contraction at home let fear a major
deterioration in their asset quality.
• One year later, banks operate in a much better
environment thanks to South Korea’s strong
growth rebound and significant improvement in
its external liquidity position.
• The authorities have been very active in
implementing a series of fined-tuned support
measures, which have helped attenuate the
impact of the global shock on the domestic
economy and the banking system.
• As a result, banks’ performance did not weaken in
2009 as much as initially feared.
• Their solvency remained sound, local- and
foreign-currency liquidity rapidly returned to
adequate levels and asset quality deterioration
was not overly severe.
• The banking system still faces high credit risks
stemming from persisting vulnerabilities in the
SME and household sectors. However, overall, it
seems on a good track to report an improving
performance in the medium term.
Greece: Explicit EU support
• Europe has sent a clear message to the financial
markets: everything will be done to preserve the
financial stability of the euro zone.
• Under current circumstances, that has legitimately
been interpreted as amounting to explicit
support for Greece, which has also been placed
under strict surveillance.
• The technical details of a possible support plan
will be provided at a Eurogroup meeting at the
beginning of next week.
• The current crisis surrounding the debt of a
number of euro zone countries has revealed once
again the zone’s structural problems. These
Sundaram BNP Paribas Asset Management
BNP Paribas EcoWeek
require economic reforms of course, but they
also probably require institutional reforms.
CEEC: Public finance under pressure
• Due to the crisis, the situation of public finances in
Central & Eastern European Countries (CEECs)
has worsened in 2009.
• The restoration of fiscal balances could be
hampered by the lack of political visibility in the
zone in 2010 and, on the longer term, by the
problem of demographic ageing.
• The situation of public finances is particularly
tense in Hungary, with a level of public debt close
to 80% of GDP and pressure on sovereign
spreads.
US: Public finances, a transatlantic concern
• The release of the draft 2011 budget once again
highlighted the drastic impact of the recession
and of the measures adopted by Congress on
public finances. The Obama administration
projects a further increase in the federal
government deficit in 2010, up to 10.5% of GDP.
• Throughout the decade, the deficit-to-GDP ratio
is expected to exceed 3.5%, a far higher level than
recorded in the past and too high to prevent an
increase in the federal government’s debt. In the
years and decades ahead, in the absence of major
reforms, the rapid increase in the cost of public
healthcare and retirement programmes could
prevent any clean up of public finances.
• In a context of markedly deteriorating public
finances, the main risk generally taken into
consideration is the possibility of higher interest
rates.Yet the rapid rise in debt and the associated
risks must be kept in perspective, at least in the
short term.
• First, America’s current debt load is not
exceptionally high compared to the debt of other
developed countries. Moreover, the ease with
which the US government has so far managed to
finance its needs is reassuring.
• Although it is surely too early to tighten budget
policy, the government could nonetheless indicate
the mechanisms it plans to use in the years ahead
(debt targets, corrective measures) to reduce the
uncertainty shrouding its fiscal plans and to
reassure
Indonesia: Another large emerging market
• Like China and India in Asia, Indonesia avoided
recession in 2009. Its GDP grew a sustained 4.5%
after 6.1% in 2008 and should expand by 5.5%
this year.
• The 2008 global financial crisis left Indonesia’s
rather sound economic fundamentals (public
20
finances, balance of payments, and banking
system) largely unscathed.
• Private consumption is the main growth engine,
supported last year by accommodative economic
policies, and contained inflation.
• The country did not suffer from a significant rise
in unemployment.
• Rising standards of living, demography and
urbanisation are accelerating the development of
the large domestic market. However, to lift
potential growth further, Indonesia needs to raise
investment spending.
• But the business climate remains poor, with deep-
rooted corruption and inefficient legal framework,
though things are changing slowly in the wake of
reforms lunched in 2004.
ECB: No major changes
• The ECB is likely to confirm its analysis of the
state of the economy.
• Inflationary pressures are very mild and are likely
to remain low in both 2010 and 2011. Available
survey data confirm the ongoing economic
recovery, but there are incipient signs that growth
is peaking.Activity could ease throughout the year.
• Against this backdrop, the ECB will probably leave
the refi rate unchanged, at least until the end of
2010.
• Liquidity in the money market will remain well
above needs at least until the end of June. If
liquidity demand is still strong at the next 6-
month LTRO to be conducted in March, then
excess liquidity is likely to persist through the end
of the third quarter.
Greece: Banks under threat of sovereign risk
• Recent economic and financial developments
suggest that the Greek banking system could have
tough times ahead over the next few quarters,
with slight decrease in outstanding loans,
escalating cost of risk and a higher risk of
refinancing, among other factor.
• Greece's commercial banks seem, however, to be
sufficiently robust to avoid losses and make it
through this critical period, with solid solvency
and liquidity ratios, low private debt, no property
market bubble and strong potential for growth.
• Greek banks are therefore likely to see a decline
in earnings over the next few quarters, mainly due
to an increase in the cost of risk. Notwithstanding
any exceptional events, their solvency and long-
term profitability do not seem to be in threat.
Source: BNP Paribas EcoWeek, a publication of the BNP
Paribas group www.bnpparibas.com
The Wise Investor March 2010

A five–step guide to contagion
Todd Harrison
CEO
Minyanville
Why European debt matters to the
United States
Times are tough and those struggling to make
ends meet have focused their efforts close to
home.
That's a natural instinct but it doesn't change
the fact that problems on the other side of
the world affect us all.To fully understand the
depth and complexity of our current
conundrum, we must appreciate how we got
here.
It is widely accepted that grieving arrives in
five stages: denial, anger, bargaining, sadness,
and acceptance. If we apply that psychological
continuum to the financial market construct,
it offers a valuable lens with which to view
this evolving crisis.
Denial: In April 2007, policymakers assured
an unsuspecting public that housing and sub-
prime mortgage concerns were "well
contained." Minyanville took the other side of
that trade and argued that the nascent
contagion extended all the way around the
world. (Read more in Well Contained?)
In August 2007, as the Dow Jones Industrial
Average traded near an all-time high,
Canadian officials told investors it would
"provide liquidity to support the stability of
the Canadian financial system and the
continued functioning of the financial
markets" before systemic contagion ensued.
(See also The Credit Card)
In March 2008, Alan Schwartz, CEO of Bear
Stearns appeared on CNBC to assuage
concerns that his firm was facing a liquidity
crisis. "Some people could speculate that Bear
Stearns might have some problems since
we're a significant player in the mortgage
business," he said, "None of those
speculations are true."
On January 28 of this year, Greek Prime
Minister George Papandreou offered that
Greece was being victimized by rumors in
the financial markets and denied seeking aid
from European partners to finance the
country's budget deficit, according to
Bloomberg. As we know, European issues are
Sundaram BNP Paribas Asset Management
now staking claim as the next phase of the
financial crisis.
Anger: Two of my Ten Themes for 2010 are
relevant to this discussion.
The first is the "tricky trifecta," or the
migration from societal acrimony to social
unrest to geopolitical conflict. Populist
uprising, the rejection of wealth, and an
emerging class war are symptomatic of this
dynamic, as is the unfortunate fact economic
hardship traditionally serves as a precursor to
war.
The other theme is the notion of "European
Disunion," as I wrote in early January:
The European Union is committed to the
regional and economic integration of 27
member states, with sixteen countries sharing
a common currency. That was a fine idea
when it was first founded but the economic
fallout of the financial crisis will put loyalties to
the test.
Look for the Union to adopt more stringent
guidelines in the coming year, including but
not limited to distancing itself from the
weaker links such as Greece and Ireland.
Sovereign defaults, as a whole, should jockey
for mind-share.This could conceivably spark a
rally in the US Dollar, which could have
ominous implications for the crowded carry
trade.
European discontent continues to simmer
with labor strikes and social strife as efforts
are made to map an amenable plan before
€20 billion ($28 billion) in Greek debt comes
due in April and May.While that amount is far
smaller than what financial firms faced in
September 2008, the dynamic is eerily
reminiscent. (Read also Pirate's Booty)
Bargaining: By the time it was evident sub-
prime mortgage woes weren't contained, the
damage already occurred. Our government
reactively responded to the crisis by
consuming the cancer in an attempt to stave
off a car crash. (See also Shock & Awe)
As the European Union and International
Monetary Fund wrestle with how to address
the sovereign mess, our financial fate can be
drilled down to one very simple question:
Will we see contagion, as we did with Fannie
Mae, Freddie Mac, AIG, Bear Stearns and
21
Insight
Lehman Brothers, or will the current
congestion be contained in the context of an
evolving globalization?
The bulls will offer that corrections must feel
sinister if they're to be truly effective.They're
right, of course, but I will remind you of a
salient point made by Professor Peter
Atwater on Minyanville.
If sovereign lifeguards saved corporations
when the financial crisis first hit, who is left to
save the lifeguards?
Over the last few weeks, we've seen
significant widening in overseas credit spreads,
including Hong Kong, Switzerland, Indonesia,
Malaysia, Portugal, and New Zealand. As
markets are fluid and policy takes time, the lag
must be factored into the fragile equation,
particularly as the European Union is
structurally interlinked.
Sadness: We can talk about how the capital
market construct forever changed, how our
constitutional rights have been challenged or
how the lifestyles of the rich conflict with the
struggle to exist.
While those dynamics remain in play, they
miss an entirely more relevant point for
purposes of this discussion. (See The
Declaration of Interdependence)
Social mood and risk appetites shape financial
markets.
One of the greatest misperceptions of all
time was that The Crash caused The Great
Depression when The Great Depression
actually caused The Crash.
It's been a full year since Minyanville fingered
Eastern Europe as a modern day incarnation
of a sub-prime borrower. The question is
therefore begged, what if Greece is Fannie
Mae, Portugal is Freddie Mac, Spain is AIG,
Argentina is Wachovia Bank, and Ireland is
Lehman Brothers? (Also read Eastern Europe,
Subprime Borrower)
Contagion, by definition, arrives in phases and
we must remember that Greece is a
symptom of the problem, not the problem
itself. Regardless of what IMF or Euro Zone
"cross border solution" we see, it'll simply buy
time, much like the bearded nationalization of
Fannie and Freddie pushed risk out on the
time continuum.
The Wise Investor March 2010
Given the trending direction of social mood
and the discounting mechanism that is the
market, the perception that defines our
financial reality must remain front and center
in the mainstream mindset.
Acceptance: In September 2008, we
offered that the government invented fingers
to plug the multitude of holes that sprang
open in the financial dike.That imagery would
again apply if there were viable fingers
attached to a healthy and able arm.
While many dismiss the notion that Greece
or Portugal "matter" in the global financial
construct, I'll explain why they might.
Concerns in the Euro zone could manifest
through a "flight to quality" in the US Dollar,
as it has to the tune of 8% in the dollar index
(DXY) since the December low.
Those hoping for a stronger greenback
should be careful for what they wish, much
like the "lower crude will be equity positive"
crowd learned in 2008. In an "asset class
deflation vs. dollar devaluation" environment,
a weak currency is a necessary precursor to
-- but no guarantor of -- higher asset class
prices. (See Hyperinflation vs. Deflation)
The hedge fund community currently has the
carry trade on in size. If the greenback
continues to strengthen, the specter of an
unwind increases in kind. Should that occur,
asset class positions financed with borrowed
dollars would come for sale across the board.
The point of recognition will eventually arrive
that our debt issues are cumulative; when that
happens, the contagion will no longer be
contained. In the meantime, as we edge from
here to there, be on the lookout for the
unintended consequences of European
austerity initiatives, including but not limited
to social unrest and the abatement of risk
appetites.
Takeover is: risk management over reward
chasing as we together find our way.
Author Background: Todd Harrison is the
founder and CEO of Minyanville
(www.minyanville.com), a community of
analysts and traders. Minyanville offers
running commentary by dozens of analysts
on what's happening in the markets real time.
There is something for everyone, even a
place to help teach your kids about money
and finance. (Edited version of description by
John Mauldin in his Outside The Box
newsletter).
Source: John Mauldin’s Outside The Box
JohnMauldin@InvestorsInsight.com
Sundaram BNP Paribas Asset Management
Eleven lessons from Iceland
Thorvaldur Gylfason
What can be done to reduce the likelihood
of a repeat performance – in Iceland and
elsewhere? Here are eleven main lessons
from the Iceland story, lessons that are likely
to be relevant in other, less extreme cases as
well.
# 1 We need effective legal protection
against predatory lending just as we
have long had laws against quack
doctors. The problem is asymmetric
information. Doctors and bankers
typically know more about
complicated medical procedures and
complex financial instruments than
their patients and clients.
# 2 We should not allow rating agencies to
be paid by the banks they have been
set up to assess. The present
arrangement creates an obvious and
fundamental conflict of interest and
needs to be revised. Likewise, banks
should not be allowed to hire
employees of regulatory agencies,
thereby signalling that by looking the
other way, remaining regulators may
also expect to receive lucrative job
offers from banks.
# 3 We need more effective regulation of
banks and other financial institutions;
presently, this is work in progress in
Europe and the US.
# 4 We need to read the warning signals.
We need to know how to count the
cranes to appreciate the danger of a
construction and real estate bubble
(Aliber’s rule). We need to make sure
that we do not allow gross foreign
reserves held by the central bank to fall
below the short-term foreign liabilities
of the banking system (the Giudotti-
Greenspan rule). We need to be on
guard against the scourge of persistent
overvaluation sustained by capital
inflows because, sooner or later, an
overvalued currency will fall. Also,
income distribution matters. A rapid
increase in inequality – as in Iceland
1993-2007 and in the US in the 1920s
as well as more recently – should alert
financial regulators to danger ahead.
# 5 We should not allow commercial
banks to outgrow the government and
Author Background: Thorvaldur Gylfason is Professor of Economics at the University of Iceland and
Research Fellow at CEPR (Centre for Economic Policy Research) in London and CESifo (Center for
Economic Studies) at the University of Munich
Hyperlink to this article: http://www.voxeu.org/index.php?q=node/4612
Source: www.voxeu.com (VoxEU.org is a policy portal set up by the Centre for Economic Policy Research
(www.CEPR.org) in conjunction with a consortium of national sites)
22
Insight
central bank’s ability to stand behind
them as lender – or borrower – of last
resort.
# 6 Central banks should not accept rapid
credit growth subject to keeping
inflation low – as did the Federal
Reserve under Alan Greenspan and
the Central Bank of Iceland.They must
distinguish between “good” (well-
based, sustainable) growth and “bad”
(asset-bubble-plus-debt-financed)
growth.
# 7 Commercial banks should not be
authorised to operate branches
abroad rather than subsidiaries if this
entails the exposure of domestic
deposit insurance schemes to foreign
obligations. This is what happened in
Iceland. Without warning, Iceland’s
taxpayers suddenly found themselves
held responsible for the moneys kept
in the IceSave accounts of Landsbanki
by 400,000 British and Dutch
depositors.
# 8 We need strong firewalls separating
politics from banking because politics
and banking are not a good mix.This is
why their belated privatisation was
necessary. Corrupt privatisation does
not condemn privatisation, it
condemns corruption.
# 9 When things go wrong, there is a need
to hold those responsible accountable
by law, or at least try to uncover the
truth and thus foster reconciliation and
rebuild trust.There is a case for viewing
finance the same way as civil aviation:
there needs to be a credible
mechanism in place to secure full
disclosure after every crash. If history is
not correctly recorded without
prevarication, it is likely to repeat itself.
# 10 When banks collapse and assets are
wiped out, the government has a
responsibility to protect jobs and
incomes, sometimes by a massive
monetary or fiscal stimulus.
# 11 Let us not throw out the baby with the
bathwater. But private banks clearly
need proper regulation because of
their ability to inflict severe damage on
innocent bystanders.
The Wise Investor March 2010

Conversation With My 14 Year Old Son: I
do not have a son, nor daughters. However, I did
receive an email from "Clyde" who does:
Clyde Writes ...Good day Mish. I had an
interesting moment with my 14 year old son the
other day. I had gone to the US Debt Clock
website and was taking a minute to just watch the
numbers roll up and down in the various
amounts.
The site breaks down the debt into a per person
amounts. It is quite depressing.
My 14 year old son walked by and I had him take
a look at it all, explaining that someday my son, all
this will be yours.
His first words were "Why the hell should
I have to pay that back?"
I found that comment interesting in that he does
have a point. It's not like the money that has been
borrowed in the past has been used to create
world class infrastructure or world class anything.
The vast majority of all the money borrowed by
the government decade after decade has been
just thrown down every conceivable rat-hole.
Imagine if his entire generation comes to the
same conclusion someday.
Best, Clyde
Hello Clyde: You have a very bright son. His
generation should not have to pay that debt back.
Indeed, his generation cannot possibly pay that
debt back even if they wanted to.
Given enough time, his generation will be in
charge and decide enough is enough and default
on that debt.
I expect a crisis long before that.The result will be
anything but inflation. What cannot be paid back
won't be paid back. What obligations cannot be
paid won't be paid. That process is deflation, not
inflation.
Changing attitudes are proof enough. We are in
the grips of deflation now, led by pension
promises that simply will not be met while
millions look for jobs that do not exist.
Blog: Mish Global Economic Analysis
http://bit.ly/ca5l98
10 Reasons to Fade the Recovery: This is
NOT a business cycle: this is a one-time reversal
of twenty years of inflation of the household
balance sheet. An aging population needs a 10%
savings rate (at least) to meet minimum funding
requirements for the biggest retirement wave in
US history (comparable to Japan’s retirement
wave during the “lost decade” of the 1990s).With
17% effective unemployment, many Americans
are dis-saving, after a $6 trillion shock to home
equity.
10) There is no recovery at all in Europe.
Sundaram BNP Paribas Asset Management
Why should I pay back?
European growth ground to a halt during the
fourth quarter and German business
confidence unexpectedly fell in February.
9) China won’t collapse, but government efforts
to stop overheating by raising reserve
requirements make clear that the world’s
second-largest economy can’t be the
locomotive for world growth.
8) Greece and its prospective rescuers in the
European Community are at loggerheads
over conditions for EC help.
7) State fiscal crises continue to worsen. On top
of this year’s $200 billion deficit, states face a
trillion-dollar shortfall in pension funds.
6) Commercial real estate is nowhere near
bottom, with some sectors (example: hotels)
at delinquency rates of nearly 10%.
5) Regional banks continue to drop like flies,
with 702 banks holding assets of $403 billion
on the danger list.
4) Bank credit continues to shrink. Total bank
credit is still falling at a 5% annual rate, an
unprecedented decline:
3) What bank credit is available is funding the
US Treasury deficit in the mother of all
crowding-out, replacing commercial loans on
banks’ balance sheets:
2) Industrial production has bounced of the
bottom, but manufacturing is only 15% of US
employment.
1) Employment won’t come back. Today’s
consumer confidence number is one more
nail in the coffin of exaggerated hopes for a
cyclical recovery.
Blog: Inner Workings http://bit.ly/d6WQUV
A Question of Cultural Failure: I’ve said this
before in different ways, but I will say it once
more, “Governments are smaller than markets;
markets are smaller than cultures.” The reasoning
is simple:
• Governments can only control a fraction of
what an economy or culture does.
Governments that are overbearing on an
economy or culture may gain greater
proportional control, but the size of the pie
will shrink. More of the economy or culture
goes into hiding, away from the prying eyes of
the government.
• Markets only express a fraction of what
mankind does. They cover the tradeable
aspects of what we do, but typically do not
give us our deeper goals or desires for
ourselves, and the culture as a whole.
When I look at the biggest economic
problems facing the world today, many of
them stem from deeper cultural problems.
23
Blog Picks
* Greece got into the Eurozone via subterfuge;
they lied about the true status of their
indebtedness, and Wall Street (with its
counterparts in European investment
banking) helped them do it. So did a number
of the other nations in the EU that are
presently under stress.
Now, the core members of the Eurozone wanted
the Euro to grow as a currency-they were
committed to an ever-wider and -deeper union.
The dream of a united Europe made them
willfully blind to the low probability that the
nations which were fiscal basket cases had
genuinely changed.
The core should have been skeptical, and now
they are paying the price, though not paying any
money, yet.
The core nations that could pay or guarantee to
help Greece are playing a tight game. They act as
an internal European IMF, insisting on reductions
in the Greek budget deficit. Greece does its part
by saying it hasn’t asked for aid, which is unlikely.
At the same time, reductions in the Greek budget
deficit bring the competing political factions inside
Greece out in force. Protests! Strikes! There are
few arguing for what is best for Greece overall,
and many arguing for a larger piece of what is a
shrinking pie. In a situation like this, it might be
better for outsiders to let Greece fail, but they
won’t do that. Why?
The banks in the core nations can’t afford a
default by Greece if by contagion it leads to
defaults in Portugal, Spain, Italy, and Ireland. A
failure of the banking system does not conduce
well to maintaining power for elites.
• Dubai is a place where anything can get done.
Anything indeed, but who pays the bills?
Dubai is a place of big ideas and little
responsibility. It is a moral flaw to bite off
more than you can chew, particularly if you do
so on behalf of others.
• Many US States and Municipalities are in a
world of hurt, because they compromised
their long-term financial position to solve
short-run budget crises. That is the nature of
the crises that we face today.
• The same is true of the current US
government — they fight for short term
political advantage, rather than the long term
good of the nation. Who will favor the long-
term and sacrifice for the greater good?
A simple summary statement here is “Greed is
not good.”
Societies that are willing to sacrifice self interests
have a much better probability of succeeding than
societies that pursue self interest.
Blog:The Aleph Blog http://bit.ly/by8ThS
The Wise Investor March 2010
 The Book of Choice
This Time Is Different
triggered by a credit crisis.
If you wish to understand the implications of a recession
triggered by a credit crisis, the first port of call should be
`This Time is Different: Eight Centuries of Financial Folly’ by
Carmen M Reinhart & Kenneth Rogoff.
Based on extensive research of credit crisis across the
world and across time, the authors offer the detailed view
of the consequences. Deep in analysis, rich in charts and
insightful in commentary, This Time Is Different is a must-
have reference for all time and a must read now.
In the panel on the right, we present edited excepts from
Growth In A Time of Debt, a draft paper published by the
authors of the book in January 2010, which takes forward
their thought process. Here we present, select extracts
from the book:
• Perhaps more than anything else, failure to recognize
the precariousness and fickleness of confidence-
especially in cases in which large short-term debts need
to be rolled over continuously-is the key factor that
gives rise to the this-time-is-different syndrome.
• Highly indebted governments, banks, or corporations
can seem to be merrily rolling along for an extended
Every time there is a financial and/or economic crisis, the period, when bang!-confidence collapses, lenders
first tendency is look for patterns in the past. For such crisis, disappear, and a crisis hits.
precedence is rich and hence the rush to seek comfort in • What one does see, again and again, in the history of
the past. Even if you take the ongoing financial and financial crises is that when an accident is waiting to
economic crisis, realms have been written by sell-side happen, it eventually does.
strategists comparing it to the Post World War II recessions.
• When the international agency charged with being the
Then we have the bloggers (a community in which many global watchdog (IMF) declares that there are no risks,
saw the crisis coming) comparing it to the Great there is no surer sign that this time is different.
Depression and rubbishing the Post World War II • When debt-fueled asset price explosions seem too
comparisons. good to be true, they probably are. But the exact timing
There are differences between a recession that is part of can be very difficult to guess, and a crisis that seems
the normal business cycle and a recession that is triggered imminent can sometimes take years to ignite.
by a credit crisis. The implications for the economy and • Outsized financial market returns were in fact greatly
markets are significantly different, based on the type of exaggerated by capital inflows, just as would be the case
recession at hand. And what we have today is a recession in emerging markets.
Growth In A Time of Debt
The sharp run-up in public sector debt will likely prove one of the most enduring legacies of the 2007-2009 financial crises in the United States and
elsewhere. We examine the experience of forty four countries spanning up to two centuries of data on central government debt, inflation and
growth.
Our main finding is that across both advanced countries and emerging markets, high debt/GDP levels (90 percent and above) are associated with
notably lower growth outcomes. In addition, for emerging markets, there appears to be a more stringent threshold for total external debt/GDP
(60 percent), that is also associated with adverse outcomes for growth.
Seldom do countries simply “grow” their way out of deep debt burdens.
We note that even aside from high and rising levels of public debt, many advanced countries, particularly in Europe, are presently saddled with
extraordinarily high levels of total external debt, debt issued abroad by both the government and private entities.
In the case Europe, the advanced country average exceeds 200 percent external debt to GDP. Although we do not have the long-dated time series
needed to calculate advanced country external debt thresholds as we do for emerging markets, current high external debt burdens would also
seem to be an important vulnerability to monitor.
Sundaram BNP Paribas Asset Management 24
• Capital inflows pushed up borrowing and asset prices
while reducing spreads on all sorts of risky assets
• What could in retrospect be recognized as huge
regulatory mistakes, including the deregulation of the
sub prime mortgage market and the 2004 decision of
the Securities and Exchange Commission to allow
investment banks to triple their leverage ratios (that is,
the ratio measuring the amount of risk to capital),
appeared benign at the time.
• The outsized U.S. borrowing from abroad that occurred
prior to the crisis (manifested in a sequence of gaping
current account and trade balance deficits) was hardly
the only warning signal. In fact, the U.S. economy, at the
epicentre of the crisis, showed many other signs of being
on the brink of a deep financial crisis.
• Measures such as asset price inflation, most notably in
the real estate sector, rising household leverage, and the
slowing output - standard leading indicators of financial
crises - all revealed worrisome symptoms.
• Indeed, from a purely quantitative perspective, the run-
up to the U.S. financial crisis showed all the signs of an
accident waiting to happen.
• The United States was hardly alone in showing classic
warning signs of a financial crisis, with Great Britain,
Spain, and Ireland, among other countries, experiencing
many of the same symptoms.
• The most significant hurdle in establishing an effective
and credible early warning system, however, is not the
design of a systematic framework that is capable of
producing relatively reliable signals of distress from the
various indicators in a timely manner.
• The greatest barrier to success is the well-entrenched
tendency of policy makers and market participants to
treat the signals as irrelevant archaic residuals of an
outdated framework, assuming that old rules of
valuation no longer apply.
• If the past we have studied in this book is any guide,
these signals will be dismissed more often that not.
• Policy makers must recognize that banking crises tend
to be protracted affairs. Some crisis episodes (such as
those of Japan in 1992 and Spain in 1977) were
stretched out even longer by the authorities by a
lengthy period of denial.
Book: This Time is Different: Eight Centuries of Financial
Folly by Carmen M Reinhart & Kenneth Rogoff; Hardcover:
496 pages Publisher: Princeton University Press; ( First
Edition September 11, 2009) ISBN-10: 0691142165 ISBN-
13: 978-0691142166 Price: latest quote is $ 20.47 at
www.amazon.com (delivery charges will have to be paid)
and Rs 1437 at www.flipkart.com (a discount of 15% and
free delivery in India).
Comment and pick of extracts by S.Vaidya Nathan
The Wise Investor March 2010

No, Not The India Budget
What caught the eye over the past month is the Economic Survey, and we,
also, do not wish to inflict a few more words on the budget on readers.
The focus on the Economic Survey is not choosing for the sake of doing so,
but a recognition of a high-quality document that has been put by the
Government of India led by Dr Manmohan Singh. His imprint as well as that
of the New Economic Advisor is reflected through the Survey.
The Economic Survey has, over the years, been perceived as a routine
document that precedes the budget. There has been an improvement in
depth and breadth over the years.
The Economic Survey presented on February 25, 2010 was, however, a
best-in-class document for content, quality of information, quality of
presentation, the level of detail on economic matters, the depth in outlining
the direction of policy, rich in telling charts and as usual, a deep statistical
information.
The degree to which, inclusion, has become an integral part of the
economic agenda is evident from the fact that the Chapter on Micro-
foundations of Inclusive Growth was accorded the pride of place in the
document as Chapter 2 after a summary of the state of affairs in the first
chapter.
Interestingly, a priced edition of The Economic Survey is to be released by
the Oxford University Press, India. This is a first and there is bound to a
robust market for the book, given the rising importance of India in the
calculus of global investors and economists.
Even as a marketing document for India as a destination, the quality of this
survey should pack a punch. The survey also is a treasure trove of
information on India, even for those who are not looking for hard-nosed
economic facts.
You can find the survey at http://indiabudget.nic.in/es2009-10/esmain.htm.
Book mark this site and also download the document for ready reference.
This small part from Chapter 2 provides a clue on the underlying quality
of the document.
• Hard-nosed Government documents usually make no mention of the
role of social norms and culture in promoting development and
economic efficiency.
• There is, however, now a growing body of literature that demonstrates
Sundaram BNP Paribas Asset Management
Taking note of
how certain social norms and cultural practices are vital ingredients for
economic efficiency and growth.
• Groups and societies that are known to be honest and trustworthy
tend to do better than societies that do not have this reputation.
• There have been broad cross-country studies and also laboratory
experiments with the “trust game” that illustrate this.
• More generally, what is being argued is that a nation’s success depends
of course on its resources, human capital and economic policies, for
instance fiscal and monetary policies, but also on the cultural and social
norms that permeate society.
• We go through life striking hundreds and thousands of minor contracts
and deals. You give a person money one day and the understanding is
that that person will repair your plumbing the next day or it can be the
other way around (the person repairs your plumbing today and expects
you to pay him the following day); you supply garments to a store and
the store then pays you for it; someone gives you a hair-cut and, after
that, you pay her. It is difficult to have such minor contracts enforced by
a third party or some formal legal/bureaucratic machinery.
• If we try to do it that way, as we have on occasion in India, the result
will be a cumbersome bureaucracy that is anyway unable to deliver.
• Societies that are endowed with personal integrity and trustworthiness
have the natural advantage that no third party is required to enforce
contracts.
• For outsiders the mere knowledge that a particular society is
trustworthy is reason to do more business and trade with it.
And this from Chapter 5 on Financial Intermediation & Markets:
The recent experience from the global financial crisis, has however, shown
that, despite the variety of instruments and the sophistication of the
markets, they may not remain immune to crisis, if the investors/institutions
do not pay adequate attention to the fundamentals or if the pricing of risk
and the ratings for these instruments are not transparent, and if the
regulatory oversight is poor.
An efficient and healthy financial market, should therefore avoid the
shortcomings as gleaned from the experience of the global financial markets
in the last couple of years.
25 The Wise Investor March 2010
 Voices
Jeremy Grantham is the Co-Founder and Chief Investment Strategist of GMO. He has been among the most prescient in evaluation
economic trends for long years now. His quarterly newsletters are always a must read. We present edited extracts from his letter titled
`What A Decade’ published in late January 2010. We would recommend you make reading his quarterly letters a habit and you could do
so by registering at www.gmo.com.

One minute Paul Volcker, the only financial administrator not called Brooksley Born who has shown any real backbone in the last 30
years, is so out in the cold that his toes must have frozen off, and the next – hey, Presto! – his ideas are put forward lock, stock, and
barrel and Geithner and Summers are left scrambling to take some credit for the plan and pretend they hadn’t been dissing Volcker
up until eight seconds ago for what they thought were his antique and unnecessary ideas that were far too harsh on our poor banking
system. Wow! Well, these new ideas are all good stuff as far as I’m concerned, and entirely justified.

Going into this next decade, we start with the U.S. overpriced, so do not be conned into believing that every bad decade is followed
by a good one. It happened historically because when bull markets peak at only 21 times, a bad decade’s return will always make them
cheap.This does not necessarily apply to a decade that started at 35 times! A decade’s poor performance can still leave you expensive
(as this one has) when it starts so overpriced.

My view of the economy’s future is boringly unchanged: “Seven Lean Years.” I still believe that after the initial kick of the stimulus, we
will move into a multi-year headwind as we sort out our extreme imbalances.This is likely to give us below-average GDP growth over
seven years and more than our share of below-average profit margins and P/E ratios; it would feel more like the bumpy, but not so
disastrous 1970s than the economically lucky 1990s and early 2000s.

All investors should brace for the chance that speculation will continue for longer than would have seemed remotely possible six
months ago. I thought last April that the market (S&P 500) would scoot up to 1000 to 1100 on a typical relief rally. Now it seems
likely to go through 1200 and possibly higher.The market, however, is worth only 850 or so; thus, any advance from here will make it
once again seriously overpriced

The real trap here, and a very old one at that, is to be seduced into buying equities because cash is so painful. Equity markets almost
always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly.

If the equity markets are indeed driven higher in the next six months, which, unlike my view of last summer, now looks to be at least
50/50, we will very slowly withdraw equities: eight times bitten, once shy, so to speak, for in these situations we typically beat a much
too rapid retreat.

The Fed’s balance sheet is unrecognizably bad, and the government debt literally looks as if we have had a replay of World War II.The
consumer, meanwhile, is approximately as badly leveraged as ever, which is to say the worst in history. Given this, we would be well
advised to avoid a third go around in the bubble forming and breaking business. But I realize the Fed is unwittingly willing to risk a third
speculative phase, which is supremely dangerous.

Let us say that by 1965 – the middle of one of the best decades in U.S history – we had perfectly adequate financial services. We’re
debating the razzmatazz of the last 10 to 15 years.
Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is
overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It
slows you down.

For 100 years the GDP Battleship grew at 3.5%. (Even the Great Depression did not change that trend.) But after 1965 the GDP
growth rate ex-finance fell to 3.2% a year. After 1982 it fell to 3.1%, and after 2000 to 2.5%, with all of these measurements to the end
of 2007 before the current crisis. From society’s point of view, this additional 4.5% burden works like looting or an earthquake. Both
increase short-term GDP through replacement effect, but chew up capital.

We have never in our lifetime seen a financial and economic bust such as the one we just had. We have never had two great asset
bubbles break in the same decade. We have never wiped out so much wealth in all asset classes as we have this time: $20 trillion at
its worst point, on our reckoning.We have never experienced such rapid deterioration in the government’s budget and in the balance
sheet of the Fed, nor witnessed such moral hazard, with bailouts flying around like this.What hope do we really have in making accurate
predictions of how the world will recover from all of this, and in what ways it will be changed? Very little
Source: www.gmo.com
Sundaram BNP Paribas Asset Management 26 The Wise Investor March 2010
 Analysis

Broad–Based Sector Profile Emerges in Ten Years

How the sector profile of Indian markets has changed over the past 10 years (share of total market cap on the NSE)

GICS Sectors Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Average
% % % % % % % % % % %

Consumer Discretionary 6.6 5.3 5.3 6.8 6.6 7.8 7.4 5.9 5.2 6.9 6.4

Consumer Staples 16.7 18.4 12.7 8.1 6.2 7.0 5.7 4.0 6.6 5.1 9.1

Energy 13.9 16.9 23.4 25.6 19.4 18.0 14.1 15.1 16.5 15.3 17.8

Financials (Banks & Financial Services) 7.7 9.1 12.2 13.6 13.8 14.1 13.2 14.8 15.6 14.6 12.9

Financials (Real Estate) 0.4 0.1 0.1 0.1 0.1 0.2 2.0 6.0 2.6 2.4 1.4

Health Care 7.0 8.3 7.0 7.0 7.0 5.3 4.5 2.9 4.3 4.0 5.7

Industrials 5.5 5.5 6.4 8.2 8.0 11.9 13.3 14.8 11.0 12.3 9.7

Information Technology 28.0 20.6 18.0 11.1 14.9 14.5 14.5 7.5 7.2 9.7 14.6

Materials 9.2 9.2 9.6 12.1 12.0 10.4 12.2 13.3 11.6 16.1 11.6

Telecommunication Services 3.0 3.4 2.5 3.1 3.9 3.9 7.2 6.8 7.9 3.6 4.6

Utilities 2.1 3.0 2.9 4.5 8.1 7.0 5.8 8.9 11.4 9.9 6.4

At least a five-percentage point swing in each sector during the past 10 years indicates massive structural shifts in economy & markets
Dec 10-Year Swing Distance from Change in key phases
GICS Sectors 2009 Average High Low (Hi-Low_ High Low Average 2004-2007 2008 2009
% % % % Percentage Points Percentage Points

Consumer Discretionary 6.9 6.4 7.8 5.2 2.5 -0.8 1.7 0.5 -0.8 -0.7 1.7

Consumer Staples 5.1 9.1 18.4 4.0 14.4 -13.3 1.1 -3.9 -2.1 2.5 -1.4

Energy 15.3 17.8 25.6 13.9 11.7 -10.2 1.5 -2.5 -4.3 1.4 -1.2

Financials (Banks & Financial Services) 14.6 12.9 15.6 7.7 8.0 -1.0 6.9 1.7 1.0 0.9 -1.0

Financials (Real Estate) 2.4 1.4 6.0 0.1 5.9 -3.6 2.3 1.0 5.9 -3.3 -0.3

Health Care 4.0 5.7 8.3 2.9 5.4 -4.3 1.0 -1.8 -4.1 1.4 -0.4

Industrials 12.3 9.7 14.8 5.5 9.3 -2.5 6.8 2.6 6.8 -3.8 1.3

Information Technology 9.7 14.6 28.0 7.2 20.8 -18.3 2.5 -4.9 -7.4 -0.3 2.5

Materials 16.1 11.6 16.1 9.2 6.8 0.0 6.8 4.5 1.3 -1.7 4.5

Telecommunication Services 3.6 4.6 7.9 2.5 5.4 -4.3 1.1 -0.9 2.9 1.1 -4.3

Utilities 9.9 6.4 11.4 2.1 9.3 -1.5 7.8 3.6 0.7 2.5 -1.5

Data Source: Bloomberg; Analysis: In-house Analysis: Satish Mahadevan

Sundaram BNP Paribas Asset Management 27 The Wise Investor March 2010
 Performance Tracker Global
Index Year-To-Date One Month Three Months Six Months One Year Three Years Five Years
Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank
S&P 500 -1.0 3 2.9 8 0.8 10 8.2 15 50.3 19 -21.5 21 -8.2 23
Dow Jones -1.0 4 2.6 10 -0.2 12 8.7 14 46.2 20 -15.8 19 -4.1 22
Nasdaq Composite -1.4 7 4.2 5 4.4 3 11.4 10 62.4 15 -7.4 14 9.1 18
Nikkei 225 -4.0 14 -0.7 20 8.4 1 -3.5 25 33.8 24 -42.5 -13.8 25
Dax -6.0 21 -0.2 17 -0.5 14 2.4 24 45.7 21 -16.6 20 28.7 17
FTSE 100 -1.1 5 3.2 7 3.2 5 9.1 12 39.8 23 -13.2 17 7.8 19
S&P GSCI Index Spot -1.4 6 6.4 2 1.0 8 14.0 7 53.9 17 15.4 8 45.4 11
MSCI World -3.0 12 1.2 14 -1.4 18 4.4 21 50.9 18 -24.0 22 -3.7 21
MSCI Europe -3.3 13 -0.4 19 2.6 6 4.0 22 41.2 22 -32.9 23 -8.9 24
MSCI Asia ex-Japan -5.8 18 0.4 16 -1.7 20 8.9 13 79.9 9 2.3 10 47.8 10
Crude -0.7 2 8.8 1 -1.6 19 11.5 9 70.7 12 26.4 4 52.9 8
Gold 1.2 1 2.8 9 -5.2 23 17.0 3 18.1 25 66.5 1 155.1 2

Emerging Markets (MSCI Indices)

BRIC -5.9 19 1.7 12 -4.5 22 14.2 6 92.6 8 16.3 7 116.6 6

Brazil -7.1 23 4.4 3 -5.9 24 20.0 2 102.7 5 56.1 2 181.7 1
Russia -3.0 11 -5.2 24 0.2 11 23.2 1 121.9 2 -33.7 24 40.3 13
India -4.1 15 1.3 13 -0.8 15 14.4 5 119.3 3 22.9 6 129.9 4
China -6.6 22 2.2 11 -6.2 25 6.5 18 67.0 14 23.5 5 128.4 5
Korea -5.9 20 -1.1 21 1.9 7 7.9 16 104.3 4 -7.5 15 34.8 14
Taiwan -9.9 25 -3.7 23 -2.2 21 9.7 11 68.7 13 -13.8 18 -0.2 20
Singapore -5.3 16 0.9 15 0.9 9 6.5 19 71.8 11 -12.9 16 31.4 15
Honk Kong -2.9 10 3.8 6 -0.9 16 7.8 17 57.6 16 -2.1 12 29.7 16
Indonesia -1.7 8 -3.7 22 3.7 4 15.0 4 159.9 1 51.0 3 148.8 3
Mexico -2.3 9 4.2 4 -0.4 13 11.8 8 97.6 6 -7.0 13 71.3 7
South Africa -5.8 17 -0.4 18 -1.1 17 5.2 20 77.3 10 -1.0 11 42.0 12

Turkey -7.9 24 -9.4 25 8.0 2 3.4 23 93.7 7 8.4 9 50.7 9

Top Performer Gold Crude Nikkei 225 Russia Indonesia Gold Brazil
Worstt Performer Taiwan Turkey China Nikkei 225 Gold Nikkei 225 Nikkei 225

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage and in U.S. Dollar terms for each period and not on an annualised basis. Analysis: A Preetha
Sundaram BNP Paribas Asset Management 28 The Wise Investor March 2010
 Performance Tracker India
Index Trailing Year-To-Date One Month Three Months Six Months One Year Three Years Five Years
12m P/E Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank Return Rank
Cap-Curve Indices
BSE Sensitive Index (Sensex) 24.6 -5.9 20 0.4 12 -2.9 20 4.9 18 84.8 19 27.0 18 144.7 9
S & P CNX Nifty 24.4 -5.4 18 0.8 10 -2.2 19 5.6 17 78.1 20 31.4 17 134.0 12
Nifty Junior 20.4 -2.7 5 1.1 8 1.7 6 18.2 6 153.7 5 50.2 7 130.2 15
Nifty 100 23.7 -4.9 15 0.9 9 -1.6 15 7.4 14 87.6 17 34.2 13 — —
CNX Mid-Cap 16.9 -3.6 9 -0.5 15 0.3 10 17.2 8 125.7 11 46.9 9 140.5 11
BSE Mid-Cap 17.6 -4.8 14 -1.7 17 -0.3 11 8.8 11 131.9 7 16.1 20 104.8 19
BSE Small-Cap 15.1 -3.5 7 -2.0 18 7.2 3 15.3 9 159.7 3 20.3 19 116.3 17
BSE 100 24.5 -5.1 17 0.6 11 -1.8 17 6.5 16 93.9 15 34.2 12 142.5 10
BSE 200 23.1 -5.0 16 0.3 13 -1.6 16 7.3 15 98.3 13 34.1 14 130.7 13
BSE 500 22.5 -4.7 13 0.1 14 -1.0 14 7.8 12 101.7 12 32.0 16 130.7 14

S & P CNX 500 20.9 -4.7 12 -0.7 16 -0.4 12 7.5 13 95.4 14 32.8 15 125.9 16

Sector Indices

BSE Auto 50.5 -3.6 8 3.1 3 2.2 5 22.0 4 167.3 2 40.3 11 158.0 5
BSE Banks 15.2 -2.0 3 1.8 7 -2.1 18 17.8 7 131.8 8 53.4 3 151.0 6
BSE Capital Goods 32.7 -4.5 10 2.7 6 1.2 7 2.5 20 128.5 10 52.5 4 299.6 1
BSE Consumer Durables 19.3 5.7 1 5.3 1 14.7 1 21.4 5 159.4 4 14.0 21 165.7 4
BSE FMCG 30.1 -4.6 11 -2.3 19 -7.3 22 4.3 19 30.3 23 49.1 8 149.9 7
BSE Healthcare 54.7 -2.1 4 3.1 4 3.1 4 25.9 2 89.2 16 40.4 10 88.6 21
BSE IT 22.7 -0.2 2 3.9 2 8.8 2 24.0 3 146.8 6 6.2 22 91.7 20
BSE Metal — -5.7 19 2.8 5 0.7 9 32.5 1 249.6 1 92.7 1 147.4 8
BSE Oil & Gas 18.0 -8.4 22 -3.4 22 -6.7 21 -1.8 22 58.2 22 52.4 5 202.5 2
BSE Public Sector 17.7 -3.3 6 -2.7 20 0.8 8 9.9 10 84.8 18 61.3 2 106.8 18
BSE Power 29.8 -7.1 21 -3.3 21 -0.6 13 -1.0 21 69.1 21 51.3 6 176.4 3

BSE Realty 17.5 -16.1 23 -7.5 23 -11.6 23 -26.7 23 129.0 9 — — — —

Top Performer BSE BSE BSE BSE BSE BSE BSE

Consumer Durables Consumer Durables Consumer Durables Metal Metal Metal Capital Goods
Worst Performer BSE Realty BSE Realty BSE Realty BSE Realty BSE FMCG BSE IT BSE Healthcare

Source: Bloomberg; P/E: Price-to-Earnings ratio; P/B: Price-to-Book ratio; 12-M: 12 Months; Returns is in percentage for each period and not on an annualised basis. Analysis: A Preetha
Sundaram BNP Paribas Asset Management 29 The Wise Investor March 2010
 Equity Chart Book
MSCI World MSCI Emerging Markets

1600
1600
1400
1400
1200

1200 1000

800
1000
600
800
400
600 200
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Open 1422 High 1682 Low 689 Close 1133 Open 496 High 1338 Low 246 Close 936

MSCI Brazil MSCI Russia

5900

1600

3900
1100

1900
600

100
-100
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Open 874 High 4728 Low 278 Close 3369 Open 223 High 1642 Low 139 Close 772

MSCI India MSCI China

800 100
700
600
500
400 50
300
200
100
0 0
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Open 160 High 694 Low 701 Close 450 Open 34 High 104 Low 13 Close 61
The horizontal in each graph indicates the average level of the respective index since January 2000 Source: Bloomberg

Sundaram BNP Paribas Asset Management 30 The Wise Investor March 2010
 Commodities Chart Book
Crude Oil Gold
170 1200
150
1000
130
$/bbl

110 800

$/oz
90
70 600

50
400
30
10 200

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Open 23.2 High 145.7 Low 16.6 Close 76.7 Open 289.0 High 1215.7 Low 255.6 Close 1117.6

Baltic Freight Index LME Metals Index

21700 5000

18700 4500
4000
15700
3500
12700
3000
9700
2500
6700 2000
3700 1500
700 1000
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Apr-00

Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09
Open 1772 High 19687 Low 830 Close 3674 Open 1268.1 High 4556.6 Low 958.3 Close 3313.3

S & P Goldman Sachs Commodity Index CRB Non-Energy Index

1000 700
900
600
800
700 500
600
400
500
400 300
300
200
200
100 100
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
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Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
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Jul-08
Jan-09
Jul-09
Jan-10

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

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Jan-09

Jan-10
Jul-00

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Open 256.3 High 1014.9 Low 198.1 Close 806.7 Open 160.5 High 499.2 Low 149.6 Close 332.4

The horizontal in each graph indicates the average level of the respective commodity index since January 2000 Source: Bloomberg

Sundaram BNP Paribas Asset Management 31 The Wise Investor March 2010
 In a lighter vein
In a lighter vein features incidents from 1930s to reflect the atmosphere of the times – the only period that was, as of now, worse than now.
• "First Chorine - Did you tell anybody of your secret marriage? Second Ditto - No, I'm waiting for my husband to sober up - I want him to be the first to
know."
• A Chicago actress entered a lawyer's office and asked what the fee would be for a divorce. "Five hundred dollars" was the reply. "Nothing doing," retorted
the lady. "I can have him shot for ten."
• "'How d'yer like yer new boss, Mame?' asked one stenographer of another on the elevator. 'Oh, he ain't so bad, only he's kind of bigoted.' 'What yer mean,
bigoted?' 'He seems to think that words can only be spelled in his way.'
• Very rich lady's will: "And to my nephew Percy, for his kindness in calling every week to feed my darling goldfish, I leave my darling goldfish."
• Judge - But how could you marry a known burglar? Witness - Well, he was so quiet around the house.
Source: http://newsfrom1930.blogspot.com/ Being a daily summary based on reading of The Wall Street Journal from the corresponding day in 1930.

BackPage Investment Quiz

1 Who is the head of the Bank of International Settlements?

Compiled by S. Vaidya Nathan

2 13 Bankers is a book authored by…..

3 Which fund house launched India’s first dedicated small-cap fund?

4 Who was most recently appointed Deputy Governor of the Reserve Bank of India? (The RBI cannot have more than four Deputy Governors).

5 What is the significance of the Herengracht canal in the history of financial markets?
P
R Answers must be mailed to iq@sundarambnpparibas.in
I The first 25 responses with correct answers to all questions will receive a prize. Please mention your mailing address in your e-mail. Employees of Sundaram BNP Paribas
Z Asset Management, its Sponsors and Associates & Group Companies of the Sponsors shall not be entitled to prizes even if they participate and mail correct answers.
E

Answers for February 2010 Quiz

1 Name the foreign investor who picked up a small stake in Reliance Mutual Fund, a couple of years ago? Andrew Ross Sorkin
Eton Park Capital Management 4 What is the maximum fee + expenses that a fixed-income fund can charge according to SEBI regulation?
2 The currency of this Latin American country was devalued by its government steeply last month. Which currency and country are 2.25%
we referring to? 5 Which fund house was the first in India to launch an exchange-traded fund to track gold? Also which was the first fund launched
Bolivar & Venezuela to track gold-mining stocks?
3 Who is the author of Too Big To Fail? (We had in November 2009 asked for the author of Too Big To Save) Benchmark. DSP BlackRock World Gold Fund was the first fund launched to track gold-mining stocks?

Disclaimer
Mutual fund investments are subject to market risks. Please read the Statement of Additional Information of Sundaram BNP Paribas Mutual Fund and
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securities investments are subject to market risks. There can be no assurance or guarantee that a scheme's objective will be achieved. NAV may rise or decline, depending on factors and
forces affecting the securities market. There is risk of capital loss and uncertainty of dividend distribution. General Disclaimer: The Wise Investor, a monthly publication of Sundaram
BNP Paribas Asset Management, is for information purposes only. The Wise Investor is not and should not be construed as a prospectus, scheme information document, offer document,
offer solicitation for an investment and investment advice, to name a few. Information in this document has been obtained from sources that are reliable in the opinion of Sundaram BNP
Paribas Asset Management. Opinions expressed by authors may not necessarily represent that of Sundaram BNP Paribas Asset Management or Sundaram BNP Paribas Trustee Company
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Sundaram BNP Paribas Asset Management 32 The Wise Investor March 2010