Tag Archives: economy

Is Dollar dull again?

Soaring Gold & Silver along with the escalating US-China Trade war may lead to Dollar fade its value. A weaken Dollar & surge in the inflow of capital towards India can help appreciate the value of Rupee.

So, what exactly does Strengthen Rupee or Weaken Dollar mean for the Economy & for you as a Consumer? Let us discuss it Today.

Strong Rupee Impact –

  • Cost of Production Rises as raw materials become expensive.
  • Exports become costlier which may mean Business like textiles, IT etc may lose to its competitors. IT sector earnings may decline, as most of them serves the clients abroad.
  • Imports are cheaper. The appreciation may help in reducing prices of imported consumer goods like your iPhone, Computer or TV etc.
  • Strong rupee may impact the job creation and the overall growth.
  • The stock market gains from foreign inflows, funds keep coming in, and the additional liquidity keeps stock prices high.
  • Also Foreign investors, who can borrow cheap abroad, for example ~1% in Japan, & invest that money in Indian bond market, with yields ~7%, can gain from a strong rupee.
  • Strong Rupee helps Government manage inflation on the lower side and the fiscal deficit.

Weak Dollar Impact –

  • A week Dollar may mean higher prices of commodities like Oil, Iron, Copper etc as they make up for the downfall in dollar.
  • Rising prices of commodities increases the cost for producers which ultimately pushes the prices of goods further downstream like Food, Gas etc, directly feeding into Inflation and off-course making a hole in your wallet.
  • Prices of Imported goods rise and foreign Travelers may need to scale back on Vacations. Topmost imported goods in US are (Consumers watch-out)-
    • Electrical Machinery (including computers and hardware)
    • Vehicles and Automobiles
    • Pharmaceuticals
    • Medical equipment and supplies
    • Furniture, lighting, and bedding
    • Plastics and plastic goods
    • Oil and petroleum products
    • Gems and precious metals
  • Some Business are more likely to take hit than others like Luxury products. When consumers tighten their belts, the first industries to take hit are those manufacturing luxury items and nonessential products.
  • Fuel prices may surge, when the dollar weakens the price of gasoline increase because the nation depends at least in part on imported oil.
  • Exports are more competitive in the global market gaining market shares and at times saving U.S. jobs in the process.
  • Multinational Companies and the Shareholders may gain from the Weakening Dollar.

Lastly let’s look at the Factors that help Influence a Currency Strength –

  • Policies Anti-Inflationary monetary policies and Fiscal discipline helps a Strong Currency by keeping debt and inflation in check.
  • Stability- A well-established, strong & stable government boosts the confidence of Investors, which in turns promote the Currency.
  • Interest Rates- Investors seeking a higher rate of returns are attracted by higher interest rates, and their Investments help promote a Country’s Currency.
  • Geo-political factors- Apart from the factors mentioned above, other external factors like Trade wars, trusted partnerships & support from other Nations can also impact a Nation Currency.

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Bubble, oh no!

Time for some practical: Pour a cup of dish soap into 6 cups of water & stir it well. That is how Bubbles are formed, now you burst it!

Oh no!, not the Bubble Minku loves. Lets do it again.

Increase the price of an asset significantly surpassing way beyond its true value, and make the majority believe the price will continue to rise at least in the foreseeable future. There you go, that is exactly how Financial Bubbles are formed. Eventually the reality kicks in, and like every bubble it bursts!

Welcome to riteFinance, this is your host SalRite, With some saying the current Stock Market is in Bubble, today lets discuss about Financial Bubbles.

As per the legendary Investor Warren Buffet, Bubbles form when “People see neighbors ‘dumber than they are’ getting rich“.

Financial or Economic Bubble is not a new thing, in fact the official history of the first ever recorded Bubble dates back to as far as mid 1630s, though the term itself was coined around the 1720 AD. To dig a bit deeper, lets understand the five stages of an Economic Bubble with the example of what is known as ‘Tulip Mania’ of mid 1630s.

Stage 1 – Tulip comes to Vienna from Turkey, are soon distributed to Netherlands and becomes a status symbol in Dutch community. With a saturated intense petal color that no other plant had, and a profusion of varieties, Tulip soon becomes a coveted luxury item, increasing its asset value. This stage is referred to as ‘Substitution‘.

Stage 2 – This is when the news of Tulips start spreading, and becomes a topic among the majority . It is now that the Speculative purchases happen, and the bets are placed on the future value. As the flowers grew in popularity, professional growers paid higher and higher prices. Buy now, sell later at a higher price becomes the motive for Investors. This is referred to as ‘TakeOff

Stage 3 – Exuberance – a state of unsustainable euphoria. This is when the asset overshoot its intrinsic value leading to a jump in the portfolio of several. A few lucky/rational Investors sell at this stage, while the majority continue to buy in. At this stage Tulip becomes over-valued. At its peak, value one Tulip bulb was equivalent to a House. By around 1636, the tulip bulb became the fourth leading export product of the Netherlands, after gin, herrings, and cheese. Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day on paper (it is the time when future markets appeared in Dutch Communities).

Stage 4 – Critical stage – a state where some begin to sell. When the market realizes that an asset is over leveraged and way too over valued, some begin to lose faith and starts selling. This is when they realize there aren’t enough buyers. For Tulip it was the revelation of their true value. In around February of 1637, for the first time in a routine auction no buyers were available for the Tulips. This time coincides with the outbreak of Bubonic Plague in some European Cities. This lead to the 5th and last stage of a Bubble.

Stage 5 – Crash (pop) – Burst of the bubble, and the reset for the economy. In case of Tulip, Bubonic plague probably acted as a needle that led to the demise of its Market. With no buyers available sellers were left with nothing but a flower.

A few hundreds years later, now a Tulip is worth a few bucks and can be ordered online, but nevertheless bubbles keep forming and keep popping. As we humans are irrational beings. This leads to another story, this one more recent.

2008 Housing Bubble

This was the result of irrationality of the masses combined with financial engineering of the elite few, the Bankers. Lots of Subprime loans were made between 2004 to 2006 rising from 8% to around 20% in the United States, at the same time NINJA loans (No Income, No Jobs, and No Assets) grow in popularity and many of the Millennial with lesser Income would write a higher figure in the application, that no one in Banks would verify and they will easily sanction a loan. The greed of the Bankers didn’t stop here they combined all the A, B and C rated loans packaged them into something called CDOs (Collateralized Debt Obligation – a type of structured asset-backed security that include mortgages, loans or bonds), and sold it to the Investment Banks, betting further on loans. As if this wasn’t enough the CDOs were swapped for Insurance what is called as Credit Default Swaps. CDS acted as a financial instrument that could hide these risky investments (to read more on CDOs or CDS click here) Even the rating Agencies like S&P didn’t downgrade the bonds & kept ratings high. Couple this all with Inadequate regulations by the policy makers, and you see a Huge Economic Bubble.

Eventually, the home owners defaulted on their payment, this meant the riskier loans, CDOs hold by Investment Banks all lost their values, and suddenly the whole Financial system collapsed on its weight. Lehman Brothers the fourth largest investment bank in US back then filed for bankruptcy. And the Market corrected itself, not exactly though, the fed came in, and bailed us out. Enforcing strict regulations, and making much required policy changes combined with Quantitative easing kept the US Economy on its track.

Even before 2008 crisis, which is the most recent one (prior to this pandemic) there were several Economic Bubbles. One such was the dot com bubble of 2000, caused by excessive speculation in Internet-related companies. While several big companies like pets.com went out of Business, it was not the end for all, with growth in the technology sector stabilized a few like Amazon.com, eBay saw rise in their Market Share following the crash.

Another Bubble that can be looked at, dates back to 1840s Great Britain. Referred to as Railway Mania, this was the period when the shares of Railway Companies soared in their value, only to be declined later. Following the crash, the larger railway companies such as the Great Western Railway and the nascent Midland began to buy up strategic failed lines at a discounted price to expand their network. So what was the down fall of some, became an Opportunity for others.

Bubbles are primarily of two types –

  1. Equity Based – characterized by easy liquidity, tangible and real assets like tulip mania, railway mania and dot-com bubble.
  2. Debt Based – characterized by intangible or credit based investments with little ability to satisfy growing demand in a non-existent market like United States Housing Bubble (of 2008).

Can we predict these bubbles?

Well, we may not be able to predict accurately nevertheless we can identify it, based on the over leveraged asset price, high risk lending or borrowing practices, and when the people tend to rationalize borrowing, lending and purchase decisions based on expected future price rather than the ability to repay.

What can we learn?

There are few things that these Bubbles teach us –

  1. In every crisis lies an Opportunity, only if one knows how to capitalize on it.
  2. Bubbles are natural, every Economy goes from a Boom & Bust Cycle.
  3. Certain theoretical research models states that bubbles (as long as they do not burst), raise economic efficiency and welfare.
  4. Regulations have a big role to play in an Efficient Market.

If you want to read more about how the Bubbles work, there is a great article you can refer here.

Thanks for Reading, Lets us know what you think about the current Stock Market scenario in the comments below? Do follow us for more @ritefinance