Agora Financial’s Rude Awakening

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Goa, India

· The epic battle between the ‘flations gets set for a spectacular climax,
· How Obama’s men are likely to effect the power of the dollars in your wallet,
· A quick first glance around southwestern India and plenty more…

Joel Bowman, reporting from Goa, India…

Inflation is alive and well…at least here in the old Portuguese colony of Goa in India’s verdant southwest.

After we sent out yesterday’s edition of your Rude Awakening, your nomadic editor retired his laptop for the evening and wandered up to the beachfront to sample some of the local fare. The area is famous for its spiced seafood and magnificent sunsets.

Each afternoon, the locals set up their tables and chairs in the sand out front of their restaurants, ready for the evening crowd. Waiters light scented candles and stock the bar while musicians tune their sitars and sing a few notes for the passersby. The coastline stretches along to the north until it runs into a great headland, dotted with the lights of resorts and cafes. To the south the fishing boats return to shore after the long day at sea.

After dipping our toes in the Gulf, we moseyed up to the string of brightly colored eateries lining the coast.

The Lobo Souza Hotel is famous in these parts for its tiger prawn masala and giant kingfisher curries. You can actually watch the local fisherman drag the nets ashore while you enjoy a pre-meal cocktail as the final hours of light slip behind the horizon. It is truly a wondrous experience.

Dinner for two, including a sharing platter of fresh oysters and fried mussels, mains of spiced crab and biriyani rice, marinated vegetables, a few of the local Kingfisher beers and a round of cocktails, came to a little over 1,500 rupees, or about $40.

This might seem like a bargain to those of us more accustomed to the prices in Dubai, New York and London, but here in Goa, it is actually quite expensive. During high season, which lasts from December through March, prices at restaurants like Lobo Souza more than double.

In this way, the visitors act a bit like a central bank, flooding the economy with dollars, euros, pounds and currencies from abroad. The surplus of monies push prices higher and the profits help to sustain the locals through the “deflationary” period from the end of March to November, when monsoons and unbearable humidity keep foreigners away.

In recent times, however, that dynamic has been shifting.

The prices are still drastically inflated for the holiday season, but it is not the westerners who are providing the currency injection. That role now largely falls to the affluent young couples from Mumbai, just a few hours north, who sprawl down here for weekend getaways. Although a few hippies and western tour groups still frequent the seedier bars, it is far more common to see Indian women in saris, draped in gold, shuttled to and from the higher-end resorts.

Westerners suffering under the global economic slowdown are beginning to realize that their lifestyles may need downsizing. The suits of Wall Street and The City are trading in their international getaways for weekend trips to Brighton Beach and Cornwall. Meanwhile, 300 million emerging middle class Indians are spicing up the taste in Goa and enjoying the sunsets and seafood they once sold to the world.

Also interesting is the gradual easing of India’s massive “brain drain”. Faced with fewer job opportunities and lower pay in the contracting economies of the west, the IT experts and medical specialists that India once exported are increasingly opting to stay at home, setting up telecommunication businesses, software companies and clinics to service the growing domestic market.

McKinsey Research estimate India’s middle class will grow from about 5 percent of the population to more than 40 percent over the next two decades, creating the world’s fifth-largest consumer market. That’s a lot of Goan holidays and Kingfisher beers!

As with many emerging markets, India is certainly not without its long list of problems. The stock market, Bombay’s Sensex Index, has lost more than 50% this year, for instance, and many expect the bear market to last at least into early 2009. The country is also in need of a major infrastructure overhaul and, sadly, poverty is still very much a problem.

But some of these problems also present India’s new middle class with some very real opportunities. Much of the stock market decline here, for instance, is due to the massive withdrawal of foreign direct investment. A report compiled by Astaire & Partners estimates that foreign institutional investors sold a record $13.5 billion in India during 2008, a far cry from the $17.4 billion they invested last year.

Western hedge funds, under stress to cover massive losses in their home countries, have been forced to deleverage speculative emerging market positions at fire sale prices. That leaves Indian’s increasingly sophisticated middle class with a bargain hunter’s buffet of cheap, fundamentally sound stocks.

According to Astaire & Partners, the average bear market since the 1991 economic reforms – when India really began to “open up” to western capital – lasted around 15 months and typically bottomed out when shares hit about 10x earnings. Today the Bombay Sensex sells for about 9.9x earnings.

It’s not quite kingfisher-fillet-in-July prices just yet, but it’s getting pretty cheap.

While we set off to roam this neck of the woods a little more, Dan Denning takes a look at the epic battle between inflation and deflation a little closer to the U.S. Please enjoy his column below…

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All the President’s Men
By Dan Denning, Australian Daily Reckoning

It’s been a tough market to trade. There’s no real momentum. No one really knows what’s going on. One day, you’re up three percent. The next, down four.

Who knows why these things happen. The story making the rounds in the papers is that traders “cheered” the news that Tim Geithner, President of the New York Fed, would be Barrack Obama’s new Treasury Secretary. He’d replace “Bazooka” Hank Paulson.

No word on whether Geithner is as good for Goldman as Paulson. But he has been one of the three big wheels behind the various bailout plans engineered by the Wall Street/Treasury Axis. He’s a known known, as Donald Rumsfeld might say. And since we’re going with the Roman metaphor, we’d say Geithner has been Caesar to Ben Bernanke’s Pompey and Paulson’s Crassus.

Of course the first Triumvirate coincided with the beginning of the end of the Roman Republic. It was never official. Just three men calling the shots from behind the scenes.

But it certainly marked the beginning of the Empire and dictatorship. Crassus was one of Rome’s richest men. He’d put down the slave rebellion led by Spartacus in 74 BC (still one of Kirk Douglass’ best performances, if you ask us). But he died fighting the Parthians at the edge of Empire at the Battle of Carrahae in 53 BC.

Pompey lasted longer. He gained fame in Rome after defeating pirates in the Mediterranean in 67 BC. He formed an alliance with Julius Caesar in 59 BC and cemented it by marrying Caesar’s daughter Julia.

But when Caesar famously crossed the Rubicon in 49 BC and brought his armies into Italy for Civil War, he put Pompey on the run. Caesar chased Pompey all over Italy for a bit, eventually defeating him in battle and driving him to Egypt, where he was promptly assassinated by his own friends and beheaded.

Tough place, ancient Rome.

But back to the modern world. There are no financial Rubicons left to cross that we can see. They’ve all been crossed already. And we believe they all lead to inflation in 2009. The New York Times reports that Senator Charles Schumer wants the new stimulus plan to be around U.S. $700 billion. That would match the TARP, providing some classical symmetry.

Gold must’ve noticed. After some magnificent weekend rallies, it’s back up over, $820 in the sport market. By the way, Australian gold production fell by 8% in the third quarter, according to Bloomberg. Australia is the world’s third largest gold producer. But high production costs are biting.

In the bigger picture, gold traders and investors realize that the Great Fiscal Stimulation of 2009 is being prepared as we speak. President-elect Obama is conversing with his fiscal and monetary generals. He is marshalling his armies of inflation to go forth and multiply the money supply.

If gold investors are right (and we think they are), the upcoming war on deflation should unleash the epic inflation we’ve all (except for Bob Prechter and Marty Weiss) expected.

Obama and his Consuls Geithner, Summers, and Bernanke are preparing the public for operation GFS 2009. “We now risk falling into a deflationary spiral that could increase our massive debt even further,” the President-elect told Americans in a speech a few weeks back.

He’s right. The rising value of cash (in a deflation) makes debt harder to pay back (especially when you plan on adding so much more). That’s why all governments everywhere prefer the policy of soft, slow-motion inflation. Obama does not represent change here. Just more of the same borrowing and spending we’ve had for years.

Inflation gradually erodes the value of accumulated debts by allowing you to pay them off in an increasingly weaker currency. If you’re having trouble with that idea, think about this way. Say you borrowed $1,000 twenty years ago. Twenty years ago, $1,000 had more purchasing power than it does today. If you inflate steadily enough, it gets easier to pay back your accumulated debts. $1,000 ain’t what it used to be.

The United States also enjoys the luxury of paying off its debts in a currency it prints. So inflating the debt away is easier than, say, defaulting on it because you don’t have enough of the currency in which the debt is denominated. There is no reason to default, in fact, when you can print the currency in which your debts are owed.

This is why we increasingly think inflation is coming. Up until now, the best laid plans of Paulson and his team have been focused on recapitalizing banks and keeping the financial system from imploding. Deflating financial assets have chewed up that new capital, and prevented it from becoming new lending in the economy.

But the next step is the reflation of household balance sheets. Wall Street got its bailout. Now it’s Main Street’s turn.

Already, Obama’s team has indicated it will let the Bush tax cuts expire naturally in 2011, rather than repealing them now. Expect an expanded foreclosure mitigation effort too. And eventually, a new government-backed refinancing plan will be floated to try and put a floor under U.S. house prices.

Yep. 2009 is shaping up to be quite the year if you love big spending government with big plans.

Here are a few problems to think about until next time. First, if you’re a large owner of U.S. dollars and a major creditor to the U.S. government, and you see that the U.S. won’t default on its debt but instead, inflate it away, what do you? What policy levers can you pull to exert influence on your debtor?

Second, what happens to the world’s stock of available savings when governments start hoovering it all up to be used as fiscal stimulus? Does it crowd out private investment, leading to fewer new jobs, and a prolonged crisis? In other words, is the big government push to “fight the crisis” actually setting it up to be much longer and more painful than it otherwise might?

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[Rude Endnote: Could yesterday’s decision by the Fed to slash rates to the 0-0.25% range be the turning point in the war of the ‘flations we’ve been writing about recently? Will “quantitative easing” be the death knell for the once almighty buck?

The greenback slipped against most major currencies, with the exception of the British Pound, which was lashed by news of a greater-than-expected rate cut by the BoE. Gold also sensed the dollar vulnerability, rocketing to near $860 per ounce.

Profit-taking took some of the sheen of the precious metal, as it fell off to around $845, before rising again to trade at $858 as we write this morning.

The stock market, as usual, took news that money is now cheaper as a good thing and rallied 4.2%.

Here we go again!

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com