Beware; you aren’t decoupled from Uncle Sam’s balance sheet yet

Who is Uncle Sam? http://en.wikipedia.org/wiki/Uncle_Sam

Just 8 months back (around Dec 07), 

1. Everybody believed Asian economy is decoupled now & the US slowdown won't affect the Asian growth story

2. NASSCOM was predicting 30% YOY industry growth for the IT sector

3. I believed getting the H1B/L1 is the big deal and once it is through, every thing else is fixed

4. My friend (Sid) believed getting a seat in one of the US universities would fix up his career

But from two months back (around April 08) lot of things changed drastically,

1. Everybody is convinced that if Uncle Sam has a head ache then the rest of world should at least feel the body pain!

2. NASSCOM has cut down the IT sector growth projection for this year to just 14% YOY, Infy & TCS results are in line with the projections.  IT major Infy says they are cautions in the medium term for another 4 to 5 quarters!

3. I being a student of the economics also realize that it’s not about getting the H1B/L1 approved but its all about Uncle Sam’s balance sheet (my project which was a cash cow in the recent past for the team as well as my company got closed down all of a sudden due to cost cutting)!

4. But Sid still wasn't agreeing with me till 10 days back when our project got closed down. I think he is sort of convinced now; he is still a baby you know!

Sid wasn't the only one in my circle who didn't realize that their fortune in the near future is based on Uncle Sam’s balance sheet. It’s really not a joke, now I realize (not only me, :):):) ) a slowdown in the US economy which contributes to 44% of the global GDP isn't something which can be taken for granted.

May be if it was a general cyclical business slowdown our old belief's like the Asia decoupling would be valid even today, but what people really didn't see was the washout of huge (HUGE) amount of money that the global investment banks (investors!) bet on the US sub-prime market ("GREED"). 

Normally when there is slowdown in one part of the world which usually happens over a considerable period of time, investors take their money and invest in some other part of the world. What happened this time is investors suddenly realized huge portion of their investment just got eroded within anytime! Resulting in panic pull back from all parts of the world where they had invested just to make sure they don't lose what remains! ("FEAR"), leading to a bad cash crunch in the global financial system. Believe me, a cash crunch can bring down/burn any big giant; but Bernanke (one of the smartest student of Great Depression, the current Federal Reserve Chairman) managed to save the global economic system.

Greed & fear didn't stop there; few guys who were still cash rich like sovereign wealth funds started investing into the commodities especially oil market which was already heating up due to economic growth in the BRIC. Result: Oil was up almost 100% in a year’s time.

So what??? Well, commodities are being major raw material for everything that happens in the world; rise in the price of commodities started showing up in almost everything we use waking up the inflation dragon in every corner of the world, even in Japan that was suffering from deflation for most of the last decade. You can imagine what it would then be for a major oil importing country like India.

People are saying Dr. Singh & Mr. FM are responsible for double digit inflation without realizing that Uncle Sam is the real culprit. As for as India is concerned; certain level of inflation is acceptable for a country that clocked 9% growth consecutively for the last three years from a theoretical stand point.  Though it’s a killer for the major portion of our population which lives with less than a $ a day which is not acceptable from the political & humanity stand point. Also from the trade deficit stand point!

Finally we are in a state where the global economy is slowing down; inflation is up at unacceptable levels leading to a condition called stagflation (slow growth combined with rising inflation) which would take considerable amount of time to get fixed.

I am not sure how & why none of the models/risk models that the economists or stock market pandits around the world build didn't reveal this worst situation before it really reached this point. Probably that’s why people argue economics is not science & it’s more of an art! 90% of the time models goes wrong especially when there is fear around.

Coming back to the point; just be aware that nothing is decoupled from Uncle Sam’s balance sheet, if he has a problem you better be prepared unless you are (still) financially independent. Most of us, including my partners Mukesh & Anil (we lost 30% of one portion of our wealth in last 6 months) should be worried about Uncle Sam and should be praying for him to recover soon.

As of this writing oil is at $114.30, lowest since May 1st 08; if this happens to be a stable oil retreat then we can hope for things to start getting better in the local ground. India would surely be back on track to clock 8+% growth if oil starts stabilizing around $100. For us who are doing direct business with Uncle Sam; we also need the US housing market starting to stabilize before we plan any aggressive moves. Let’s hope for the best.