NO RECESSION FOR U.S.

AS FORECASTS IMPROVE
The US has likely dodged a recession for now, even though its too early to sound the all- clear for the economy. A string of stronger-than-projected statistics capped by the news on October 7 of a 103,000 rise in payrolls last month has prompted economists at Goldman Sachs Group and Macroeconomic Advisers to raise their forecasts for third quarter growth to 2.5% from about 2%. Thats nearly double the second quarters 1.3% rate and would be the fastest growth in a year. The US economy doesnt look like its double-dipping at all, said Allen Sinai, president of Decision Economics in New York. But it is a crummy recovery. We can skirt a recession, said Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. But if headlines worsen in Europe and cause a major stock-market rout, it could lead to a loss of confidence here on the part of businesses and consumers and make forecasts for a recession a reality. The unsettled outlook may push US treasury bond yields back down as investors seek safety in the debt of the worlds largest economy. The yield on the 30-year bond remains on course to fall to about 2.5 percent, according to Christopher Hine, vice president of technical analysis at Credit Suisse Securities in London. The long bond ended trading at 3.017% in New York on October 7, after touching 2.69% on October 4, the lowest since January 2009. Yields rose as concerns about a recession ebbed. The Standard & Poors 500 Index will face difficulty trading above 1,200 in the next few weeks as investors seek to determine the impact of the European crisis on US corporate earnings, Sinai said. Business with Europe represents about 20% to 25% of operating profits for companies in the S&P, Sinai said. The index slipped 0.8% to 1,155.46 in New York on October 7 after rebounding more than 8 percent from a one- year intraday low on October 4. Early gains on the back of the jobs numbers were erased after Fitch Ratings downgraded the foreign and local currency long-term issuer default ratings for Spain and Italy This article talks about the recent ongoing crisis and its effect on U.S. at all. From this article I can observe that there are very less signs for recession in U.S. and the statements made by various people and analysts that the U.S. will be in double deep recession are wrong. The reason being the growth projection for the third quarter in U.S. raised to 2.5% from 2%. Which is nearly double the second quarters 1.3% rate and it would be the fastest growth in a year if it is achieved. However, JP Morgan has forecasted it to 1.5% which is 1% lower than the 2.5% Government forecast. Also the news on Oct. 7 came out that there was rise of 1,03,000 in the payrolls in the month of September but again it slopped downwards by 80,000 In the month of October and the unemployment rate was narrowed at 9% from 9.2%. The long bond ended trading at 3.017% on Oct. 7 after touching 2.69% on Oct. 4. The yield rose as concerns about a recession ebbed. At current, yield on long bond is 3.13%. private employment climbed 1,37,000 employees. Also the manufacturing accelerated in September and export and production had gone up.

Greece on Edge of Insolvency 24 Centuries After First Default

Historys first sovereign default came in the 4th century BC, committed by 10 Greek municipalities. There was one creditor: the temple of Delos, Apollos mythical birthplace. Twenty-four centuries later, Greece is at the edge of the biggest sovereign default and policy makers are worried about global shock waves of insolvency by a government with 353 billion euros ($483 billion) of debt - five times the size of Argentinas $95 billion default in 2001. There is a monstrously large amount of uncertainty and a massive range of possibilities, said David Mackie, chief European economist at JPMorgan Chase & Co. in London. A macroeconomic disaster could be averted but only by aggressive policy action by central banks and governments, he said. After two international-bailout deals, three years of recession and budget-cutting votes that almost cost him his job, Greek Prime Minister George Papandreou says throwing in the towel now would be a catastrophe. Potential consequences of a national bankruptcy include the failure of the countrys banking system, an even deeper economic contraction and government collapse. The fallout may echo the days following the 2008 implosion of Lehman Brothers Holdings Inc. when credit markets froze and the global economy sank into recession, this time with the prospect that the 17-nation euro zone splinters before reaching its teens. The International Monetary Fund, whose annual meetings start in Washington today, reckons the debt crisis has generated as much as 300 billion euros in credit risk for European banks. Default Risk Greek two-year yields surged above 70 percent today and credit-insurance prices on Greece indicate the chance of default at more than 90 percent. Investors can expect losses on Greek debt of as much as 100 percent, says Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London. People, justifiably, think the crisis is what were living now: cuts in wages, pensions and incomes, fewer prospects for the young, Greek Finance Minister Evangelos Venizelos told reporters yesterday in Athens. Unfortunately this isnt the crisis. This is an attempt, a difficult attempt, to protect ourselves and avert a crisis. Because the crisis is Argentina the complete collapse of the economy, institutions, the social fabric and the productive base of the country. Even if Greece receives its next aid payment, due next month, default beckons in December when 5.23 billion euros of bonds mature, said Harvinder Sian, senior interest rate strategist at Royal Bank of Scotland Group Plc. Too Late Its too late for Greece, Howard Davies, a former U.K. central banker and financial regulator, told Bloomberg Surveillance with Tom Keene and Ken Prewitt. The Greek situation is tumbling out of hand and I suspect Greece will not be able to avoid a substantial default. The introduction of the euro and global financial connections mean previous Greek defaults in the 19th and 20th century, most recently in 1932, dont provide a decent precedent for a failure to satisfy lenders now. Contagion will be violent as the price of the two-year Greek note tumbles below 30 cents per euro, predicts Sian. The European Central Bank would be the first responders through purchases of government debt, he says.

Greek Banks The countrys banks, of which National Bank of Greece SA (ETE) is the largest, would be the next dominoes. They hold most of the 137 billion euros of Greek government bonds in domestic hands, a third of the total and three times their level of capital and reserves, says JPMorgan Chase. As those bonds are written down and equity wiped out, banks would lose the collateral needed to borrow from the ECB and suffer a rush of withdrawals that likely triggers nationalizations, said Commerzbank AG economist Christoph Balz. No banking system in the world would survive such a bank run, said Frankfurt-based Balz. A hollowed-out banking sector wouldnt be the only danger to an economy that the IMF says will contract for a fourth year in 2012. The Washington-based lender said this week that Greece will shrink 5 percent this year and 2 percent next year, reversing a forecast of a return to growth in 2012. Unemployment is set to rise to 16.5 percent this year, and to 18.5 percent next year, the highest in the European Union after Spain and dry kindling for potential social unrest. Even after saving 14 billion euros in debt repayments, much depends on what deal Greece could strike with its creditors. Debt Load To restore market confidence the debt needs to be pared to below 100 percent of gross domestic product, Stephane Deo, chief European economist at UBS AG, said in a July study that noted national default was invented in Greece with the Delos Temple episode. At the time, the IMF was projecting the debt to peak at 172 percent next year. The current debt suggests to him a reduction in the face value of outstanding securities -- or haircut -- of about 50 percent, which would pare the burden to around 80 percent of GDP, the same as Germany and France. Citigroups Schofield estimates a writedown of 65 percent to 80 percent, potentially rising as high as 100 percent as the economy slows further. If default is limited to Greece, the fallout may be contained, say Nomura Securities International Inc. strategists including New York-based Jens Nordvig, whose projections allow for an 80 percent haircut. They estimate euro-area banks would lose just over 63 billion euros, with German and French institutions losing 9 billion euros and 16 billion euros respectively. The ECB would face about 75 billion euros in losses on Greek debt it has bought or received as collateral, they say. Large Haircuts Such amounts suggest the losses from Greece-related exposures in isolation look manageable, even in a disorderly default scenario with large haircuts, though the ECB would probably require fresh capital from euro-area governments, Nordvig and colleagues said in a Sept. 7 report. A debt exchange that was part of the second Greek bailout approved by European leaders in July would impose losses of as little as 5 percent on bondholders, according to a Sept. 7 report by Barclays Capital analysts.

The risk is that the rot spreads beyond Greece as investors begin dumping the debt of other cash-strapped European nations, said Ted Scott, director of global strategy at F&C Asset Management in London. Portugal and Ireland have already been bailed out, while speculators have also tested Italy and Spain. Italy, the worlds eighth-largest economy, has a debt of almost 1.6 trillion euros, while Spain, the 12th biggest economy, owes 656 billion euros. Grand Solution Those possible ripple effects explain why policy makers wont let Greece default, said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. He expects them to strike a grand solution in which richer euro countries such as Germany support the weak and begin issuing joint bonds. Policy makers would only allow a Greek default if they think they can contain the fallout, which is a dangerous presumption, said Diebel. If Greece, Ireland, Portugal and Spain all impose haircuts, European banks could lose as much as $543 billion with those in Germany and France suffering the most, according to a May report by strategists at Bank of America Merrill Lynch. Even those figures dont tell the full story because they omit indirect exposure via derivatives such as creditdefault swaps. Economists at Fathom Financial Consulting in London calculated in June that U.K. and U.S. banks hold such insurance on Greek debt totaling 25 billion euros and 3.7 billion euros respectively. Extend that metric to the whole European periphery and U.S. banks have a 193 billion euro exposure. Even Worse Such linkages threaten an even worse crisis than the folding of Lehman Brothers, said Scott. The amount of outstanding debt is more than with Lehman and we dont know the amount of derivative exposure. To support the financial system and stave off an economic slump, Carl Weinberg, founder of High Frequency Economics Ltd. in Valhalla, New York, says governments must create a fund to inject capital into banks as the U.S. did with its $700 billion Troubled Asset Relief Program. If banks fail, or if they fear big losses, they will stop lending, said Weinberg. As things stand today, a credit crunch will corset euroland and a depression will ensue when Greece fails and takes out eurolands banking system. G-20 Signals Signaling efforts to contain the crisis, European officials including French Finance Minister Francois Baroin yesterday said they may be willing to use leverage to boost the firepower of their 440 billion-euro bailout fund. Group of 20 finance chiefs said after talks in Washington late yesterday that European authorities are willing to maximize the funds impact by the time the group next meets Oct. 14-15. The ECB may also intensify its own attempts to support growth and ease financial market tensions as early as next month, Governing Council members Ewald Nowotny and Luc Coene said. Potential measures include the

reintroduction of 12-month loans to banks, while JPMorgan Chases Mackie said today he expects the central bank to cut its benchmark interest rate of 1.5 percent next month. BofA-Merrill Lynch economist Laurence Boone calculates a disorderly Greek default with spillover into Spain and Italy could mean the euro-area contracts 1.3 percent in 2012, using the Lehman Brothers episode as a benchmark. Rebounds After shrinking 10.9 percent in 2002 following its decision to default and devalue, Argentinas economy grew eight years straight, exceeding 8 percent in every year aside from 2008 and 2009. Russia was growing in double digit just two years after defaulting on $40 billion of local debt in 1998. In contrast, facing only hard choices, EU officials have taken half-measures in the hope that the situation would somehow turn around, said Rodrigo Olivares-Caminal, senior lecturer in financial law at the University of London. What they have done so far is a patchwork approach, he said. Now things are much worse. Its becoming more expensive not only in economic terms but also in social terms for Greek citizens because now there will be redundancies, now there will be more taxes there will be less jobs and things will get worse.

Joke is on China as USs AAA Becomes Laughable

Suddenly that $3 trillion of currency reserves looks like a bad idea. Make that very bad for China, as investors display an obvious preference for yen over dollars. That the IOUs of a debt-ridden, aging, politically adrift nation smarting from a huge earthquake and nuclear crisis seem safer than U.S. Treasuries says it all. Many investors still see Chinas monster currency stash as a strength. They reason that China is fortified against financial Armageddon. In reality, China is trapped and struggling to find exits that dont exist. Sell dollars for Greek debt? Right. Swap into Italian commercial paper? Perhaps not. Find enough spare Swiss francs to diversify into? Good luck. Theres always Japan. Two immediate problems come to mind. One, 10-year bonds yield a piddling 1.06 percent, about a third of the return on comparable U.S. bonds. Two, with about 95 percent of Japans debt outstanding tucked under tatami mats at home, China couldnt get its hands on enough to make the exercise worthwhile. Bond markets elsewhere in Asia are either too small or too illiquid to help. As 2011 unfolds, the Bretton Woods II architecture that Asia created after the 1997 crisis isnt just crumbling -its putting trillions of dollars of state wealth at risk. Romantic notions about returning to the original Bretton Woods world of the gold standard are unrealistic in a global system as leveraged and nontransparent as ours. So is saving its successor, which saw Asia establishing de facto pegs to the dollar and amassing mountains of reserves to protect them. Chinas Got Game

No one played that game with greater skill and alacrity than China. An undervalued yuan is the glue that powers the worlds No. 2 economy. But its getting harder to keep it up as Federal Reserve Chairman Ben S. Bernanke flirts with another round of quantitative easing, or QE3, and Treasury Secretary Timothy Geithner borrows to the hilt. Whats more, its getting more expensive by the day. Nothing makes that clearer than recent warnings by Standard & Poors and Moodys Investors Service. Both are considering yanking the U.S.s AAA rating. Its great to see S&P and Moodys not only showing some spine, but also being out in front of the U.S.s deteriorating fiscal condition. The idea that any economy deserves a top rating today is just laughable. More and more, Chinese officials are realizing the joke is on them. The $1.2 trillion in U.S Treasuries held by China is but one part of the punch line. The other is the enthusiasm with which China has been buying debt issued by Greece, Portugal and other weak euro links. Fascinating Diplomacy All this has led to fascinating diplomacy. China now implores the U.S. to safeguard the dollar. When Secretary of State Hillary Clinton visits Beijing, U.S. debt is as much on the agenda as human rights. Europe looks to China to help its ailing economies avoid the need for an International Monetary Fund bailout. Japan curries favor with Washington with pledges not to dump its own dollar holdings. Just as China was a huge winner after the Sept. 11 terrorist attacks on the U.S., it has thus far come out on top since the 2008 financial crisis. The U.S. spent the years after the attacks waging pointless and pricy wars and alienating much of the world. China made the most of that time cultivating friends and scoring energy and commodity contracts. Now, China is again filling the void, building roads, bridges and power grids around the world to strengthen ties. Financial Danger Loading up on European debt is a case in point. The motivation is more politics than economics. Yet economics tends to trump the programs of politicians and their calculations. Such was the case with the domino effect in Asia in the late 1990s. In Indonesia, it unseated President Suharto. In South Korea, financial chaos helped a former dissident, Kim Dae-Jung, ascend to the presidency. Its the paradox of our times. Those who want a share of the global economy must be willing to be ruled by the whims of the millions of nervous investors who drive markets. Europe is learning that lesson as credit raters trip over themselves to issue sovereign debt downgrades. The U.S., too, is seeing the limits of its ability to placate S&P and Moodys. Thats what happens when lawmakers play politics over the U.S. debt limit. China and the rest of Asia are caught in the middle. The regions penchant for hoarding dollars was never a good idea, and is coming to look like nothing so much as the worlds biggest pyramid scheme. If China tried to sell, markets would crash. So, its dollar purchases add to a financial bubble the likes of which the world has never seen. Well, historys most audacious foreign-exchange trade may be about to go bad. And its no laughing matter.

Fund Outflows Top Lehman at $75 Billion

Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks. About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehmans bankruptcy, the data show. Bears say investors are abandoning stock managers because theres no end in sight to the decline that pushed the Standard & Poors 500 Index within 2.1 percentage points of a bear market in August. Bulls say the retreat by individuals has been a reason to buy since the bull market began in March 2009 and withdrawals mean money is available to buy stocks in the future. In the past, when were getting close to a market bottom, the phone starts ringing off the hook and our clients want us to sell everything, Bruce McCain, who helps manage $22 billion as chief investment strategist at the private-banking unit of KeyCorp, said in a phone interview on Sept. 14. Market bottoms are less about an improvement in the fundamental situation, whether the economy or outlook for earnings, and a lot more about getting rid of all the anxious investors. Fund Outflows About $177.7 billion has been removed during the past 30 months from mutual and exchange-traded funds that invest in U.S. shares as the benchmark gauge for American equity rallied as much as 102 percent, before falling 17.9 percent through Aug. 8. Investors pumped in $18.7 billion during the first four months of 2011, before removing about four times that amount since, according to the average of data from EPFR and ICI, the money managers trade group. The August estimate doesnt include ETF data from ICI. Bond funds added $42.3 billion from the end of April through July and started posting weekly outflows last month, according to ICI. Since the bull market began, fixed-income managers have received a net $666.4 billion. The last time equity fund outflows exceeded $40 billion during a four-month period was in August 2010, the data show. The S&P 500, which completed a 16 percent decline the previous month, went on to gain 13 percent through November. Monthly outflows in the last two years exceeded $10 billion seven different times. The S&P 500 advanced the next month in five of those cases, according to Bloomberg data. AllianceBernstein The stock index dropped 1 percent to 1,204.09 at 4 p.m. New York time today. AllianceBernstein Holding LPs assets under management slipped 5 percent to $433 billion in August, with retail in particular affected by the months volatile capital markets, the New York-based company said in a

Sept. 13 statement. Invesco Ltd.s equity assets fell 7.8 percent to $276.4 billion from July, reflecting the effects of negative market returns. Withdrawals accelerated in September and October 2008 as Lehmans bankruptcy, the biggest in U.S. history, dragged down shares and spurred the worst financial crisis since the Great Depression. The S&P 500 dropped 30 percent in two months. Investors never got over that shock, said Walter Bucky Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. Banking Crisis Concern Now, concern Greece will default and spur a banking crisis has driven the S&P 500 down 11 percent since April, leaving it trading at 13.3 times reported earnings, 20 percent less than the last trading session before Lehman fell. Its the once burnt, twice shy phenomenon, Hellwig said in a telephone interview on Sept. 12. Investors are much less risk tolerant than they have been in the past. You would think that someone would say, I can take a little bit of risk, look at the P/E, but they just want to stay on the sidelines. The benchmark gauge for U.S. equities advanced 5.4 percent to 1,216.01 last week, the third-biggest rally since 2009, after central bankers said they would provide dollar loans for European lenders and French President Nicolas Sarkozy and German Chancellor Angela Merkel said theyre convinced Greece will remain in the euro area. The index has lost 3.3 percent in 2011 and is now up 80 percent from its March 2009 low. Manufacturing Contraction Bears say the withdrawals foreshadow more declines. Stocks have fallen four straight months, losing 5.7 percent in August after economists lowered forecasts for global economic growth, manufacturing in the Philadelphia region contracted by the most in more than two years and a debate in Congress over the budget deficit prompted S&P to strip the U.S. of its AAA credit rating. The average investor is less financially and psychologically prepared for this increased volatility, Jason Brady, a managing director at Thornburg Investment Management Inc, who helps oversee about $76 billion from Santa Fe, New Mexico, said in a Sept. 15 telephone interview. Theyre staying out and theres something of a secular move to a demand for income and safety. Chances the global economy enters a recession have risen to 1-in-2, Nobel-prize winning economist Paul Krugman said Sept. 8. JPMorgan Chase & Co. sees the chance of the second recession since 2007 at 40 percent, according to a Sept. 7 note. Bigger stock swings are leading individuals to sell shares, Brady said. The VIX, the benchmark measure of U.S. equity derivatives, surged 50 percent to 48 on Aug. 8 for the biggest increase since February 2007 after S&P lowered its rating on U.S. long-term debt to AA+. The VIX has averaged 20.43 over its 21-year history. Frustrating Investors

The individual investor is very frustrated and at their wits end with the equity market, and its hard to blame them, Walter Todd, who helps manage $940 million at Greenwood Capital in Greenwood, South Carolina, said in a Sept. 16 telephone interview. Its certainly not going to help push the market higher if youve got that constant drain. While BNY Mellon Wealth Managements Leo Grohowski says he understands the aversion to equity price swings, valuations are too low to justify more selling. Of the 500 companies in the benchmark equity index, 331 had price-earnings ratios at the end of August lower than they were when the year began, data compiled by Bloomberg show. Lack of Confidence There is this lack of confidence in equities as an asset class just due to the volatility, Grohowski, the chief investment officer for BNY Mellon, which oversees $171 billion, said in a telephone interview on Sept. 15. But for investors who are long term and intermediate term, the market is undervalued. Now would not be a wise time to be reducing equity exposure because theres an awful lot of bad news or expectations already priced in to the market. Outflows following September 2008 lasted through March 2009. During the last three months of 2008, companies were reporting their fourth quarter of shrinking earnings and the U.S. jobless rate was halfway through its climb to the highest level since 1983. Gross domestic product slid 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the most of any recession since the 1930s, according to Commerce Department data. Now, investors are withdrawing funds after companies beat profit estimates for 10 straight quarters. The worlds largest economy posted two years of growth and economists are calling for GDP to expand 1.6 percent in 2011 and 2.2 percent in 2012, according to the median estimates compiled by Bloomberg. Hoarding Cash Corporations have been hoarding cash and paying down borrowings. The S&P 500s net debt to earnings before interest, tax, depreciation and amortization ratio is down to 2.5 from 5 in the second quarter of 2008, data compiled by Bloomberg show. This years earnings will increase 18 percent to a record $99.57 a share and break $100 next year, according to the data. DirecTV (DTV) in El Segundo, California, is trading at 14.4 times reported earnings, a valuation 14 percent below the level at the end of 2008. Since the third quarter of 2009, profits at the largest U.S. satellite-television provider increased an average 64 percent each quarter. Theyre forecast to rise 26 percent next year, according to analyst estimates compiled by Bloomberg. Earnings at Dow Chemical Co. (DOW) retreated during the financial crisis. While profits more than doubled in every quarter of 2010, the shares are down 17 percent this year. The largest U.S. chemical maker fired workers, shut plants and sold assets to bolster earnings. Since 2009, the Midland, Michigan-based company has posted better-than-estimated sales in all but one period.

When fund flows show investors bailing out of stocks at the rate they are now, its usually bullish, Brian Barish, the Denver-based president of Cambiar Investors LLC, which oversees about $8 billion, wrote in a Sept. 15 email. The five months after Lehman were an epic buying opportunity, yet investors liquidated en masse, Barish said. Retail unfortunately tends to time things poorly. I dont expect the current situation to be all that different.

The I in the BRIC Shows Some Cracks

It was the prospect of sustained economic growth that prompted an economist to coin the word BRIC to describe four emerging market nations.But Indias problems seem to be different from those of Brazil,Russia and China,with high inflation and a weak rupee taking a toll on growth,says Gayatri Nayak The Reserve Bank of India breaks from the rest of the central banks in monetary policy stance to raise interest rates.The Indian Rupee plunges the most among major emerging currencies.Inflation in India is the worst among the so called BRIC nations.Current account deficit is a concern.Fiscal deficit is a worry.Fresh investments are stalled despite creaky infrastructure.Probably,for the first time in a decade since Jim ONeill of Goldman Sachs coined the acronym, BRIC is weakening with the I in it turning shaky.It was the prospect of sustained economic growth,based on demography and entrepreneurial energy that prompted ONeill to come up with one of the most successful investment themes of the recent past.But suddenly,there seems to be a jolt to it from the Indian side,at least for the short term.When RBI governor Duvvuri Subbarao raised interest rates last week drawing criticism,the move could be read in one of the two ways -- either India is strong and different that the global crisis wont have much impact on it, or Indias crisis is different,which requires a different treatment.It could be the latter.The first letter of India is part of the BRIC acronym,but there are many differences between these countries and economies,including when it comes to the monetary policy cycle, says Leif Eskesen,chief economist for India & Association of Southeast Asian Nations (Asean),HSBC.Compared with these countries and Asian peers,India faces a more severe inflation problem. The foremost problem is the speed at which the prices are rising -- from assets to commodities to manufacturing to services.This could deal a long term blow to businesses, making them unviable Prices have been gaining more than 8% for more than a year now.The main reason for the fall in profitability at companies is rising input prices and not finance charges as it is made out to be.Hence,a will to contain demand was essential and thats what the RBI has shown.But even as the efforts to tame prices,at least at the monetary policy level,continue,the general weakness in macro fundamentals is reflected in currency movements.We are more concerned about the long-term risks to the rupee,stemming primarily from the persistence of high inflation,which has begun to erode Indias competitiveness, said Taimur Baig and Kaushik Das at Deutsche Bank.India is less integrated with the global economy was the argument then.While it may still be true when compared with many Asian emerging economies,this advantage has narrowed down over the years.While the overseas debt has gone up to $306 billion at the end of March 2011 from $221 billion at the end of March 2008,the cushion of foreign exchange reserves went down to $305 billion from $310 billion over the same period.Though the consumption-led boom in India might have helped corporates reap profits for many years now,extended fiscal sops and low interest rates for a prolonged period have weakened the macro economy.The rupee has been the worst performer against the dollar,just behind the Vietnamese currency,crossing the Rs 48 mark recently.Oil companies have for the first time reacted so swiftly in raising petrol prices as the weak rupee made imports costlier.The rupee has depreciated,which may have adverse implications for inflation, Subbarao said last Friday a day that drowned in the cacophony over yet another rate increase.India,which imports more than two-thirds of its total oil needs,will

feel the pinch as crude prices may rise due to the cheap money policies adopted by Western central banks even if the demand outlook remains weak.Public sector oil marketing companies led by Indian Oil raised petrol prices by more than.3 a litre last week,in possibly the swiftest ever reaction to currency movements.Indias both external and domestic sector balance sheets do not compare favourably with those of its BRIC counterparts.Also,they have slipped over last years levels.The April-July fiscal deficit at.2,28,800 crore is already at 55% of.4,12,800 crore budgeted for the year.Fiscal deficit was just.90,900 crore in the year-ago period.Current account deficit is set to deteriorate further,going by the trend so far.In April-July 2011,trade deficit rose to $42.62 billion from $37.52 billion in the year-ago period.Near term we believe headwinds are still strong for India given the external uncertainties and stubbornly high inflation.Corporate earnings are likely to disappoint on higher costs.Earnings pressure could come from both globally sensitive and domestic sectors, said Philip Wee,a forex strategist at Singapore-based DBS.Foreign funds have pulled out $1.7 billion in August and their net investment this year aggregated to $4.4 billion,compared with $21.4 billion same time time last year.Research wings of major global banks such as Goldman Sachs,Morgan Stanley and Citi have already scaled down their growth forecasts for FY12.Even the Reserve Bank of India has retained its growth forecast for FY12 with a downward bias.Indian stock indices have been the worst performers in Asia,with them even slipping into a bear market for a brief while.The indices threaten to fall further as the government grapples with policy paralysis.But international investors still believe that India has a long term story The India story is not selling as strong as it did two years ago.Another major measure of the countrys economic health the movement of the rupee against the dollar has been disappointing.The rupee has by and large been range bound since the crisis of 2008.It has slipped the most against the dollar ever since ratings firm S&P downgraded the sovereign debt outlook for the US.The real worry is that we still don't know when inflation will peak and growth will trough.The absence of clarity on how the economic cycle is evolving will continue to hold back investment, said Jahangir Aziz,senior Asia economist,JP Morgan Chase.For investors to believe in the India story again,the government may have set its house in order,announcing policy measures and stringent control over its expenses.But there are no signs that the government is acting on the promises.A recent meeting of ministers on reducing subsidies on cooking gas had to be abandoned due to opposition from allies in government.In this scenario,the only hope for India remains a dramatic fall in commodity prices globally.You really wanna buy Indian equities on a long-only basis when you start to see the commodities correct more sharply, says Chris Wood,MD & chief analyst at CLSA,a research firm specialising in economic analysis and equity strategy in Asia pacific Some intriguing and potentially unsettling shifts have been taking place in macro asset allocation decisions over the last few weeks, which have been somewhat overshadowed by the relative strength of US equity markets, and perhaps more recently obscured by developments in Egypt, Tunisia and Yemen. The striking observation that needs to be made is that global investors are losing their appetite for the BRIC economies, indeed there are cracks in the BRICs which are beginning to point to a potential hard landing for such previously buoyant markets as China, Brazil and India. First of all we need to state in simple terms the extraordinary growth that these last three economies have shown in the last several years. Martin Wolf, the respected FT columnist included the following helpful illustration of how, despite the financial crisis of 2008, the BRIC economies have surged ahead in recent years, especially in relation to the advanced economies. He demonstrated this with reference to a notional GDP index for several key economies here: If one were to set GDP at 100 in 2005, it was 105 in the US in 2010, 104 in the Eurozone and 102 in Japan and the UK. But in Brazil it was 125, in India 147 and in China 169.

As Wolf remarks for policy makers in the BRIC nations there is a temptation to ask laconically Crisis? What crisis? However, the cracks which are now appearing in the BRICs and three of the equity markets referenced in the acronym are revealing that despite, perhaps even because of the remarkable growth rates which have been seen in these super economies of the future, all is not well. Global asset allocators and other investors are exiting these markets in a hurry now, and this is confirmed by data published in a report from Emerging Portfolio Data Reseach (EPFR) and which is referenced in this recent article also from the Financial Times: Investors have pulled more than $7bn from emerging market equity funds in the past week, the biggest withdrawal in more than three years.Violence on the streets of Egypt and a jump in oil prices to more than $100 a barrel set off a wave of anxiety across developing markets. But the fund outflows also reflected deeper unease about economic overheating in China, India, Brazil and other big emerging economies. Emerging markets attracted record investor inflows of $95bn last year as they became a defining investment theme in the wake of the financial crisis. The latest figures have raised concern that the bull run may be about to end as investors look for value in beaten-down markets in the west. Since the fourth quarter, the perception of where the value lies in the equity markets has shifted pretty decisively toward the developed markets, said Cameron Brandt, global markets analyst at EPFR, which tracks the fund movements. However, as with most sudden rushes for the exits, there were early warning signs of a retreat in the BRICs, and these have been evident for some time. In fact, the case will be made that the tide turned for these markets in November of last year, and that two related events could be behind the shift away from the stellar performers during most of 2010. The two events are - on the one hand - the persistence of the elevation in commodity prices which has been associated with an unwillingness of, and indeed a need for, the BRIC monetary authorities to take measures to address troublesome inflation, particularly in food prices. And on the other hand, the decision by the US Federal Reserve to continue with its policy of QE. Somewhat counter-intuitively, the US dollar also registered a multi-year low in November 2010 which adds further credence to the notion that FX traders in particular decided to sell on the rumor (of QE prolongation) and buy on the fact i.e. when Bernanke officially confirmed the QE2 program at the beginning of November. The chart below shows the trajectory taken by the US dollar index, as reflected in the price of the exchange traded fund, UUP, over the last year. Evident on the chart is the low seen in early November, which was also accompanied by a positive technical divergence in momentum. One could argue that the last move down in early November was the final thrust by FX traders keen to set up better levels for taking long positions on all of the key dollar cross rates as the implications of further QE became the focal point in markets. Adding to the notable bounce in the dollar was also the fact that Chairman Bernanke limited himself to only $600 billion, rather than the $1 trillion or more which some had been projecting. Even though the US dollar registered a significant low, the continued appetite from investors and traders for most commodities, and the accusations by the Chinese that QE2 was in effect a deliberate debasement of the US currency and attempt to trigger inflation, added further impetus to the incipient currency war which moved to center stage in late 2010. The events in the Eurozone, with Ireland's need for a rescue operation, also deflected some attention away from the fact that Chinese authorities were becoming more concerned about the fact that their own equity market was showing signs of fatigue. Mounting concerns about rising food prices and commodity pressures in general, in the wake of too much global liquidity - at least that is the view of the PBOC - and the possibility that this might lead to civil unrest is an alarming prospect for the second largest economy in the world, which is now responsible for 10% of global GDP. As China morphs even more into an urban economy, where the acquiescence of the working classes toward rising food prices, rents and their willingness to accept evidence of blatant social inequality cannot be taken for granted.

The chart below for the Shanghai Composite index shows that this key BRIC index topped out around 3200 in early November 2010. Since this most recent peak the index has retreated by almost 600 points, touching an intraday low of 2661 on January 25th of this year. The decline in the Shanghai index has been, from a technical perspective, remarkably in conformity with certain key fibonacci levels. The move down from the top in November to the low seen on January 25th was almost exactly 62% of the range between the high and low values seen on the chart. The recovery back towards the 38% level will be especially critical for this index, as this level is also an area of technical resistance. The 50 day moving average (exponential) has intersected with the 200 day average, and if, in fact, the index fails to maintain its recovery mode and there is a crossing of the shorter term average below the longer term average, this would actually constitute a so called death cross which, as the name suggests, is not a healthy development in technical terms. The way in which prices develop on this index in the coming weeks will be vital to monitor as the trend line up from the lows seen in the summer of 2010 has clearly been violated, and the risk is that if the index fails to regain the levels seen in mid December, a succession of lower highs would suggest that the correction has further to run. The relatively weak performance of Chinese equities sets the backdrop for the remainder of this discussion which will focus on two other BRIC markets. Recently I presented charts showing the negative reaction in two of the other key BRIC markets in a televised slot for Reuters Insider which can be seen here. The first chart to consider is that for the Mumbai Sensex index which has fallen by more than 15% since reaching a high above 21,000 on November 5th (recall that this was almost exactly to the day that the US dollar index turned upwards after the QE2 ratification). The key factors with regard to the Mumbai index are the notable failure in mid January - shown as B on the chart - for the index to reach back to its November peak - marked A on the chart. Also evident is the recent price action which has brought the index to the somewhat critical 18,000 level. The index closed on Friday (Feb 4th) just above this level, which also is a 62% retracement of the entire high/low range seen on the chart. Moving beyond the technical patterns there are undoubtedly some key concerns that are undermining the confidence of global and local investors in Indian equities. There is a real concern about the accelerating rise in food inflation which is now above 17% on an annualized basis, and this is putting increasing pressure on New Delhi to take tougher steps to keep food prices in check in India. It is worth noting that in an economy where 80% of the 1.2 billion population lives on less than $2 a day, the impact of higher prices for basic foodstuffs is far more profound than it is in a more heterogeneous market, where consumers have more discretionary income. The following comments from the Indian government which were reportedrecently by BBC News, highlight the risk that the Sensex index, precariously poised at 18,000, may come under further pressure as India's central bank seems destined to keep raising rates. Indias prime minister has warned that the countrys rapid economic growth is under "serious threat" from inflation. Manmohan Singh said getting inflation under control was a matter of urgency, raising the prospect of an eighth interest rate rise in under 12 months. Emerging markets like India, where GDP growth is running at 8.5%, are helping to drive global economic recovery. But Mr Singh said Indias inflation rate of 8.4% - and food price inflation of 17% - was unsustainable. "Inflation poses a serious threat to the growth momentum. Whatever be the cause, the fact remains that inflation is something which needs to be tackled with great urgency," he said. Analysts believe that surging food and oil prices mean that Indias central bank may have to raise interest rates before its next policy meeting, which is scheduled for 17 March. Indias stock market has fallen this year on fears that high inflation will scare off foreign investors.

The key macro-financial question has to be asked - how likely is it that the Indian government will be able to contain the damage being done by increasing food prices simply by base rate increases in its domestic financial markets? A compelling argument can be made that global liquidity - driven mainly by easy money and ZIRP policies in many "advanced" economies - is the principal dynamic, along with weather related and geo-political unrest, behind the relentless increase in the cost of basic agricultural and industrial commodities. To imagine that the Indian government can counter these dynamics by local interest rate increases is analagous to the notion that one can tame a King Kong like gorilla by administering a mild sedative. The final market to consider in this overview of unsettling developments in the BRIC's is Brazil. The extent of food price inflation in Brazil, according to the official government statistics, is far less alarming than the 17% figure seen in India, and is currently estimated to be around 6% on an annual basis; but there are unofficial estimates that place the figure considerably above this level. The losses seen on the Bovespa index have so far been less than 10% but the potential exists for a further slide in this index. The inflation-targeting program established by the Brazilian government requires that above target inflation has to be held in check, and this will almost certainly lead to further interest rate hikes. The base rate in Brazil is already at 11.25%, and in a recently released central bank survey, Brazilian economists have projected a rise to 12.50% by the end of 2011. The usefulness of fibonacci retracement targets in forecasting potential price targets and support / resistance levels is well illustrated in relation to the weekly close for Brazils Bovespa Index. On February 4th the index closed at 65,269, which was almost exactly the level indicated in the broadcast slot above and in my daily commentary which was published early on February 3rd and which is available here. The thesis being proposed is that the three BRIC economies examined in this piece have all reached key retracement levels where there are two contrasting outcomes. The more positive outcome would be that one would expect, on the assumption that asset allocators remain optimistic about the continued economic out-performance of the BRIC's in contrast to the sclerotic growth in the mature economies, that equity market rebounds are most likely. Moreover, if one subscribes to the view that global de-coupling is valid, and that there is a long term macro negative correlation between the appetite for the dollar and BRIC/EM assets, then one would have to remain skeptical regarding the US dollars appearance of forming a base at present (i.e. in early February 2011). If, on the other hand, the attrition in the BRIC markets continues and risk appetite for BRIC assets is in retreat, one must be tempted to reach the conclusion that there are the beginnings of a real aversion by investors to the inflation genie. Not only is it out of the bottle but fund managers may suspect that containing the damage arising from mounting agricultural and other strategic commodity prices, will be a painful affair for the BRIC's and perhaps eventually for the "advanced" economies too. The question then becomes one of de-coupling again but under a different guise this time than that usually depicted. If the most dynamic economies of the world where final demand is increasing more rapidly than in North America, Japan and most of Europe are being forced to tighten monetary policy to preserve purchasing power of their currencies, and to avoid the political and social fallout of higher food costs, then for how much longer is it safe for the USA, UK and Eurozone to maintain theconfidence trick that ZIRP is not a hazardous policy which will eventually lead to troubling and ubiquitous global inflation? There are several ETFs that enable investors to have exposure to some key emerging markets and these include EWZ, which tracks the MSCI Brazil index; INP, which tracks the MSCI India Index; IDX, which tracks the MSCI Indonesian market; ILF, a fund which tracks the Top 40 Latin American equities, and which provides exposure to Brazil as well as Mexico. These are all relatively large and liquid exchange traded funds and there are also inverse funds for taking a short position with respect to BRIC and emerging markets in general.