Jose Thomas

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A WORD OF CAUTION
Sunday 27th May, 2012



     

 

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Dear Friends,

I am still here in the United States on an extended stay. Itís almost two months since I came here. Today is Saturday here, which is the beginning of a long week end where the Americans celebrate Memorial Day. As usual, I was thinking of what I should write about. While many ideas came to my mind, I kept pondering on whether I should write or not. But finally I decided to write about something that I thought my readers should read and pay attention to i.e. the global economy and all thatís happening to it.

I am aware of the fact that many youngsters during the boom time ventured into starting their own entrepreneurship, rather their own business by even quitting high profile jobs. I get the feed-back from many of those who read my blog, and most of them write to me confidentially about some of the challenges that some young business people, newly into business, are going through. I have written in the past about how everybody wants to be a businessman, but one canít become a businessman by just going to one of the best universities and obtaining a degree. Degrees do help. Look at my case. I want most of my readers to know that due to my early start in life where I walked into business at the age of seventeen I had to deny myself the opportunity of going beyond the 12th grade. I have not known what it is like to be in a college nor have I sat in a formal class room listening to a lecture on how to do business. I think it is a bit of talent and desire that encouraged me to make it big.

When I started my life I paid attention to people who knew subjects more than me and I learned a lot from those friends. I learned different subjects; banking, finance, insurance, shipping, construction, IT, accounting, world economy and so on. I normally learn from the best people. I am not trying to say that going to a college or university is not good. They are extremely good especially when it comes to getting a proper degree and that too, from a good University. At the same time, you need to use that inherent talent that you have to make judgments, to make predictions and to work diligently, balancing the actions between risk and the opportunity before you. Jumping to conclusions, jumping into a desire simply because you want to quit your job and starting your own business is not that conducive in todayís world and this is where I thought I should warn the youngsters who are thinking of taking the route that I am talking about.

The world economy got into problems way back in 2008 and many economists started to predict that the problem would go away in two to three years. We are almost half way into 2012 and still there is no stability. The biggest problem was in the United States with sub-prime crisis, bank failures, a rise in unemployment. Fiscal deficits increased and on top of that the war in Afghanistan and Iraq contributed worse factors to the American economy. The American economy according to me is one of the largest consuming economies, providing a big window for exports from emerging markets especially China, India, Brazil and so on. But what I see is, the American government acted in a proactive manner, brought in a stimulus which they are still maintaining and lowered the cost of money.

The Fed Government virtually gives money for nothing here and that was a clear stimulant trying to re-engineer the situation and bring business back. But contrary to all these actions, I feel there is a melt-down. Look at what is happening in Europe. Europe has caught many people unawares. The countries in the Euro Zone especially Greece, Portugal, Spain and countries that are going through major financial challenges. The International Monetary Fund and the funding agencies have clearly prescribed what they should do. Austerity measures, cutting costs, reducing their fiscal budgetary deficits which the common man does not want to pay attention to. See what happened recently. The Greeks and the French went to election and they elected people who advocate against austerity measures and people who lean more towards the left side, creating confusion in the European Union.

Europe is not used to a leftist type of rule but it has happened. Greece is almost on the verge of leaving the Euro Zone. Banks in Spain have major problems which the Central Bank in Spain is probably going to fund the Spanish banks to stay afloat. The down grade of the sovereign rating of France, Italy and a few other countries are creating a lot of confusion. Unemployment in the U.S. is about 8%, but see the unemployment rate in Spain is about 24% and the average in Europe is about 20%. All this is contributing to lesser and lesser consumption which means people are more cautious and they are not buying what they used to and when they donít buy, it impacts trade.

Every country exports goods and imports goods. China exports quite a bit to Europe, India exports quite a bit to Europe and Europe exports quite a bit to China. But what is happening today is, because of these economy pressures and tightening of monetary policies by the bank, banks have stopped lending money to any marginal borrowers, especially with the Basel III norms being implemented. Banks have to actually raise their capital related to the amount of business they do in terms of lending and so some banks or some countries that own banks who are not able to increase capital are reducing their lending. When they reduce the lending to meet the Basel III norms, what is happening? Who is getting hit here? The hit is on the marginal borrower and small time borrowers, start-up companies and small enterpreneurs. You know this is a phenomenon that is happening globally which is hurting small businesses and no government is coming up with any stimulus for these small businesses. I know for a fact that many people are struggling world-wide. I know friends and people who write to me and who are struggling for want of money. Today banks do not want to lend to marginal borrowers who do not have a fat balance sheet. Now, how does this work? Who is going to help these enterprises? Does this mean that the whole world will depend on the big organizations that survive in every country? No, that is not possible, that will lead to serious problems in creating an economy that is stable.

People have been talking about the growth potential of the BRIC Nations Ė Brazil, Russia, India and China. Even China was growing at the rate of 12% which they are now projecting at 8%, India was growing at the rate of 9% and now they are projecting 7% and so it is all on a downward trend. Now what does this mean? This means the world economy is shrinking. So, what is it that we need to do? I think it is time for each person reading my blog, belonging to various countries to carefully reconsider what he or she is doing. If you are having a stable job, I think you need to stick to it. Give some time to take larger risks because this is not the apt time for doing that. According to me, the European crisis is a serious problem which is slowly hurting China and India.

Now, let me talk about India. As you can see, Indian exports are falling. Imports are going up. There is a serious trade deficit. The currency against the U.S Dollar is weakening day by day and there is a serious budget deficit which is again putting pressure on India. The main import that India does is fuel and then comes gold. No measures are even talked about by anybody in India about conserving fuel. No campaign is introduced. More and more automobiles are being produced, more and more vehicles are on the road. Fortunately or unfortunately Indians have been used to products from all parts of the world. In the 80ís, India could not import any luxury goods whereas today you see you can virtually import anything and everything that is not a banned item. So today people are used to wearing better shoes, better sneakers, better watches, better jewellery, and even travelling overseas for vacations and so on. For all this you need hard currency and I think India is struggling today.

The policies and policy makers are not doing the right thing which means there is no direct investment coming into India. So, what are the main resources that a country like India has? Exports, Deposits from Indian residents who live outside India and the direct investment by businesses. All these areas are weak and I feel that the policy makers are not stepping in and taking measures where more confidence is built in the international market or a situation to bring in more investments into India by opening up various industries and businesses. India is still looking at a closed economy, which I thought should change otherwise, I foresee problems. Europe is having problems but America is taking measures for improvement Ė the unemployment rate is dropping, the spending is getting better, the retail spending is getting better, the housing market is getting better but it is not stable yet.

A new President will be elected in the U.S.this year in November. God alone knows what will happen after that, which means there are a lot of uncertainties. The fuel price fortunately is coming down a bit. It had almost crossed $105 a barrel which now is about $80 to $90 a barrel. So my friends, this is more like a sure advice. I am writing this because I have gone through this. I have seen the Asian currency crisis in 1996. That was the time I remember I was very active in my construction business. I saw problems coming. I knew it was happening. I got the feel and I started to take measures early enough. In fact I remember I had some land holdings that were earmarked for building some projects. But I got out of it. In fact I had to dump some of the properties at a loss to get out of it and prepare myself to face the worst, which I did. If I had not taken those actions in 1996 ,97 to curtail projects, give up projects, sell the land I held, I would have been in deep problem today. These were the actions I took and some of these measures were not very pleasant. Even the colleagues in my organization said that I was giving away prime property which should not be disposed. You cannot hang on to something that you believe will give you results tomorrow. You need to handle things today. This is what I tell everybody.

You need to take into account what is surrounding us and what is coming ahead of us. To me there is a global melt down which I would call, a Tsunami that is going to hit the whole world and there is going to be a shrinking process, an effect which is going to reduce commerce world-wide, impact every industry, the airline industry, the tourism industry, the service industry, the manufacturing industry, etc. There are a lot of youngsters coming out of colleges with higher and bigger aspirations, trying to get jobs and that too with very high salaries. Some of them have those high salaries and they are used to life styles which I doubt are sustainable as we go forward into this situation that is going to confront all of us.

So friends, hope for the best and prepare for the worst. Do not take un-necessary risks, measure your risk and stay calm and if you have to offload some holding that you are having, let it be gold, bonds, property, etc; try to be reasonable with yourself. Offload them and get cash. Cash is something that you can fall back on every time. You can always use cash to do something else when things get better. Friends, take a re-look at what you are doing. Start reading, see the world, watch the economy in every nation that you live and belong to. Be careful. Letís see how things go, letís hope for the best. Friends, this is a word of caution. Go slow, a bit, at least for the next one year and watch how things turn around after the American election, after some more European re-union happens, after Greece makes a decision and see how the financial health of all businesses world-wide gets better and falls into a track where the public can feel safe and the economy can roll back to more stability.

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Responses to
 K K Jagannivasan says:
Good. Informative outlook on current world scenario. Thanks. -Jagan
 
 Parmod Kumar says:
Such a wonderful piece of advice. thank you JT.
 
 Anurag Khanna says:
Its a realistic & factual piece highlighting the state of affairs across the globe. These times are for retention be it customer retention, job retention. As Europe again teeters on the brink of disaster & the US recovery lurches along, the growth slowdowns in China & India augur rough times ahead for the world economy.
 
 darshan shankar says:
an amazing insight. thanks very much for sharing. cheers & god bless!
 
 Binu P says:
Sir, When i was in your organization, often wondered about you and your vast knowedge in all subject than the person who studied about it from univercities. Even now after 11 years i used to convey it to my friends. you are truly blessed by the almighty.