The counties like India whose economic strength and the opportunity to give higher returns to PE players/direct FII investment in core sectors is intact but the global turmoil has dampened the foreign inflow. The high slogans of G-20 heads has limited use as there was no concrete steps to meet the global financial demands and steps to spur the slowing economic growth.
The countries across the world are fascinated to announce that they are facing economic slow down/recession. The top head lines confirm that each day, day after a day, one or the other country either it could be European or Asian proudly announcing the above statement and seeking for help. The G-20 nations at home may reduce the interest rates and increase the money supply to avert the gravity of economic slow down.
The classic rebound from the Diwali Nifty high may produce much required hope to Bulls but the Nifty is currently trading below the support level. Now the concern at home is about the bad debts and the rise. The Govt. shall increase steps to spend more and build confidence to Industry to go for expansion albeit a slower pace. The previous post levels of the companies are not changed but NTPC the sole company in the lot exhibited resilience and made sharp recovery to above 150 levels.
The Nifty will loose the earlier said support at 2630 level and may go down below 2500 level unless the Reserve Bank of India announces the repo rate cut by Wednesday, as the inflationary pressures are showing clear signs of easing. The worst case the RBI can wait for a day, till it finds the clear picture after the announcement of inflation figures on Thursday.
Tuesday, November 18, 2008
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Failing Like Japan
By Bill Mann
November 11, 2008 Comment (55) 209
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In 1990 I spent a heady summer living in a very rural part of Japan. It was an incredible time to be there, the dawning of the age of Japanese hegemony. Japanese land, which comprised less than 0.1% of the world, was being valued at an estimated $20 trillion dollars, or 20% of the world's wealth at that time. Business leaders the world round were flooding into Japan to study the "Japanese Economic Miracle," and sought to implement its keiretsu and zaibatsu corporate structures.
We were in the middle of nowhere, but all around our little town, land was being chewed up to build golf courses that offered memberships primarily to businessmen from Okayama and Osaka, cities that were each a multi-hour ferry and train ride away. The cost of membership ran in the hundreds of thousands of dollars, and there was a long waiting list.
It didn't last.
The trouble with the Japanese miracle was that its basis wasn't management superiority -- though the country had some of the most admired companies in the world, including Toyota (NYSE: TM) and Sony (NYSE: SNE). Rather, the miracle in Japan was based upon over-loaning from the government to industrial conglomerates, which led, inevitably, to a bubble.
Unfortunately, the aftereffects of the Japanese bubble persist to this day, and they have deep implications as the American government considers making bailout loans to the Big Three: General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler.
Why Japan continues to fail
In late 1989 the Nikkei 225, Japan's leading stock index, hit an intraday high of 38,957. Today, 19 years later, it's at 8,800. This multi-decade loss speaks to two things -- one, just how out of control Japan's asset bubble was, and two, for the sake of maintaining jobs, the Japanese government has not made the hard decisions that would have allowed the country to grow.
In the aftermath of the bubble, Japan's government rushed in to prop up its banking system, which was teetering under the weight of nonperforming loans. Rather than letting businesses fail, this has had the effect of propping them up to continue operating. To this day the scope of the problem is still not known.
Without this information, investors both in Japan and outside have made a logical conclusion -- to take their investment dollars elsewhere. Japan's industrial sector has failed to meet its cost of capital over the last 20 years, in large measure because the government has allowed capital-destroying companies to continue to operate. Had these companies been allowed to fail, Japan long ago could have flushed out its system and gotten back on the road to economic health. In the name of protecting jobs, Japan's economy has continued to sputter, punctuated by spectacular bankruptcies in cases where the facade could not hold up. The cost of propping them up has been much, much more economic pain. Japanese call the long economic downturn ushinawareta junen, the lost decade.
Sure, but it's not your job we're talking about
As I look at the pressure being placed on the U.S. government to bail out or even nationalize American auto manufacturers, I see the same faulty logic being used. So desperate is the government to protect these jobs and these massive companies that it is willing to spend taxpayer money to keep Detroit afloat. It might be a good use of capital if the Big Three were thriving companies that had simply suffered from exogenous events that they'd reacted to improperly. But they aren't. These companies are sick and dying, and they have not generated a positive capital return in decades.
It's not as if this were an unpredictable outcome, as I noted in 2003 when GM raised $13 billion in debt to shore up its pension system. To what end would we bail out these companies? To keep them from collapsing? Wake up -- they have already collapsed.
The "end," of course, would be to keep thousands of jobs, particularly in Michigan and Indiana, from disappearing, to keep pensioners from being mauled at a point in their lives when they cannot afford it. These are loyal, good company people. What is happening at the Big Three affects them deeply, and it is both unfair and cruel. To think otherwise would be inhumane. I have some experience here, as my own grandfather's pension withered away as the textile company he devoted his life to collapsed, in no small part because it refused to relocate its factories to cheaper places.
But economic growth only comes when capital is allowed to flow to its most productive uses. I am very sorry, but propping up Detroit's dinosaurs is not productive. They have destroyed capital for a generation. They have too much debt, they have above-market labor costs, they have shown minimal aptitude at developing automobiles that people want to buy at prices that allow the companies to turn a profit. They are losing to Toyota and Honda (NYSE: HMC). Their parts suppliers are, as a group, collapsing, with Dana Holding Corporation (NYSE: DAN) and Visteon (NYSE: VC) teetering on the precipice.
Pain delayed is not pain avoided
There are no good answers here -- none at all. Whichever way we go, there is going to be substantial pain in the American auto industry. But a government bailout of recidivist capital destroyers is a particularly bad idea, as it perpetuates the destruction, and delays capital formation for more productive uses. It is a bitter, bitter pill. Better to let the Big Three take their medicine, attempt to reorganize in bankruptcy and attempt to emerge anew as smaller, more nimble competitors.
At a minimum, it helps keep the Japan scenario off the table. It's been easy to see that the political decisions made in Japan to protect companies and jobs have been destructive. I've often thought that one of the reasons American capitalism is superior is our willingness to allow companies to fail. Now I'm not so sure.
More views on a Big Three bailout:
Why We Shouldn't Bail Out Detroit
Satellite Radio: Too Big to Fail
An Auto Merger Car Wreck
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Bill Mann keeps a framed stock certificate from his grandfather's company, Cannon Mills. He holds none of the companies mentioned in this article. The Motley Fool has a disclosure policy.
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