Inflation, Interest Rates and Real Estate Crash

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Dear Investor

I sent SMS message to all of my clients and relatives, whose mobile nos are stored in my Mobile on the eve of Diwali.

It was
” Diwali Forecasts for Samvat 2067. I wish Happy Diwali with 3 recommendations for new year.
1. 2011 will turn out to be hyperinflatinoary
2. Deposit rates will reach to around 11%
3. Real Estate will crash in 2011″.

sent on 5th November 2010.

First 2 forecasts are quite visible now. Inflation is spiraling ahead from just food articles to everything we buy.

Interest Rates has also risen steadily and consistently since my forecasts in early part of the year 2010.

Let us review the forecasts.

Inflation:

India’s food inflation still stays close to high point of 17%, fuel price index at 11.53% and more generally known CPI Inflation

(Consumer Price Inflation) sticks to 10%.

I wrote number of times about this last year including my Diwali forecasts and is now coming true
.
You also heard from former Finance Minister Mr. Chidambaram recently that ” No tax is worse than Inflation and Govt has no tool to contain it”.

Why?

There are many reasons for this sticky inflation.

1. As I pointed out in my last mail, lack of proper Infrastructure is the main reason. We had repeated news during monsoon this year that tons of food grain got rotten. India has second largest arable land in world and neither India is behind in using no. of tractors in world. India did receive good enough rain too this year.

Our defamed Agriculture Minister also confirmed in parliament that “Over 11,700 tonnes of foodgrains damaged in FCI godowns: Pawar”
And, we all know, data reveled officially is always fraction of true data.

Millions of tons of foodgrains every year purchased with our taxpayers money gets damaged due to lack of storage facility, when our 40 cr fellow citizens live on income of $2 a day and 20 crore live on daily wages of Rs. 20 only.

It is really shameful. What is the use of world’s highly learned prime minister at the helm of affairs who is also doctorate in economics and respected for his monetary policy and economic wisdom.

Unless, We improve better storage and better communication and connectivity between mandies, FCI and Consumer. Tonnes of foodgrains will get damaged every year leaving country with higher inflation.

2. Scams
All know, under the leadership of defamed Agri minister, this sector is full with scams. It is difficult to choose, which scam to discuss and which not. But, let me put recent figures and spreads of the scam.

Foodgrain scam: Total size may be Rs 2 lakh cr
What is staggering is the reach of the scams. It spreads across five countries including Nepal, Bangladesh, Pakistan , South Africa and Bhutan, apart from a total of 34 of the 71 districts in Uttar Pradesh. It involves over 450 Class-I government officials and another 800 middle and lower rung subordinates apart from some 10,000 private entities and may require 5,000 FIRs to cover the scam in totality.

Mind well, 2 lakh Crore is figure for the state of Uttar Pradesh only.

Corruption and Black money is the bigger factor than any other factor thought out by experts in alleviating food and property prices.

3. Catastrophic year 2010
In 2010, we had massive floods across the world. Almost, every nation experienced record breaking heat during summer followed record breaking floods, which still continues now engulfing Australia. Area of the combined size of Germany and France is still inundated under water.

Last year, in which extreme weather caused devastating floods in Pakistan and China and a heatwave in Russia, tied as the warmest year since records began, a U.S. government agency said in 2010.

PAKISTAN FLOODS – Pakistan had its worst flooding in its history after exceptional monsoon rains, killing more than 1,500 people and displacing more than 20 million.

RUSSIAN HEATWAVE – Russia had its most severe heatwave, with average temperatures for Moscow a scorching 7.6 degrees Celsius (14 F) above normal in July. About 11,000 excess deaths in summer were attributed to the extreme heat in Moscow alone. The heatwave caused forest fires and drought led to crop failures that contributed to drive up world food prices. Finland, Ukraine and Belarus also had extreme high temperatures at the time

Earlier this year, south-east China endured its worst drought in living memory, but in the past week, some places have been inundated with three times the average rain for this period.

India also had worst floods on record in all states one by one. Floods in Yamuna river devastated crops in lakhs of hectares of land in Punjab and Hariyana( the most fertile zone of India), the worst floods of Leh etc…

And National Climate Data Center declared
2010 was tied for Earth’s warmest year on record

Due to hot summer followed by heavy floods, sowing patterns across the globe changed and caused severe imbalances of food supply.

4. Printing out of thin air
We saw massive doses of printing in last 2 years. World economies to gather printed close to $14 tn from 2008 till 2010 via fiscal stimulus, different subsidized schemes. And, Central Banks also infused massive capital by slashing interest rates and reserve ratios across the world.

When too much money chase goods, prices do escalate on higher side. That was the reason in 2010 almost all metals and commodities kept on climbing though western world, 2/3 of global economy, were merely trying to cover up from recession and consumption was at lower level.

Remember, everything is priced in currency. When supply of currency increases , its value goes down and it buys less and lesser as it is printed more and more.

Internationally, all commodities and metals are priced in dollar, when dollar went down in 2010, prices had to readjust higher to compensate the loss of purchasing power of dollar due to excessive printing and future inflationary expectation built in price.

Now, none of this action, from above four, can be reversed without consequences.

I believe, now it should be clear to you
why we are into hyperinflatinary zone? and why hyperinflation is here to stay in 2011, too?

Interest Rates
I had been writing on higher interest rates since mid of 2010 forecasting 11% deposit rate by mid of 2011.

RBI has very limited tools to tame inflation because much of our agri sector trades in cash or say black money market. Hence,it falls out of reach of central bank to great extend.

Its a vicious cycle. Higher inflation leads to higher interest rates. Which drives more foreign money to India to take benefit of higher interest rates and this money kills very much purpose of RBI of squeezing credit by jacking up rates and fuels inflation further higher.

Click on below link to read my exclusive article on India Interest Rate for details
https://investmentacademy.wordpress.com/2010/05/17/india-interest-rate-scenario-part-i-3/

Real Estate Crash
Deposit rates have now reached around 10% with many banks. And, soon it will head higher towards 11-12% by mid of year. RBI is very much decided to focus on inflation rather than 0.5 to 1% higher GDP growth.

Banks have been facilitating teaser rate loans since last year but RBI has repeatedly warned them to match their lending with borrowing cost.

We have seen that normally Banks keep 2% spread between lending and borrowing cost and that is the profit and protection against NPA of the banks.

When Deposit rates would reach to 11%, no bank can hold back the rise of lending rates.

And, it is obvious if my borrowing cost reaches to 12%, I would defer buying home till rate decreases.

If I have invested in residential or commercial property, and my loan rate rises from 8% to 12-13%, I would better sell it off than increasing the cost of owing the asset.

In India, we have reached to 50-50% investment vs owning ratio. We have now more than 50% property not owned for one’s own use but for the purpose of investment. 50% is a staggering figure. Dubai property market crashed when investment vs owning was around this level.

Commercial real estate properties are lying completely vacant since last 2 -3 years offering abundant supply.
Market was still held well because of 2 chief reasons, One due to sixth pay commission and Second RBI reduced rates drastically enabling banks to offer teaser rate loans at 8%. These factors extended the rally or say helped to sustain artificially alleviated higher prices of the properties.

I have no doubt about Real Estate crash in 2011. It should bring down prices by 25-40% by end of 2012.

Hence,if you still have investment in real estate, you can try to come out at your desirable price and if can not, would recommend to compromise on price.

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com

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