1. INFINITY BUSINESS SCHOOL
GLOBONOMICS & WEALTH MANAGEMENT
Neeraj Batra
Neeraj Batra 2009-10

2. ISSUES IN GLOBONOMICS
WHITHER US DOLLAR ?
 The US has the Worlds Largest Trade Deficit & Budget
Deficit. After the collapse of the Bretton Woods (1971) the
US has misused its status of the World’s Reserve currency.
 In a World where Everyone stores the USD Imagine the
Fate of the Dollar as the World realises that the US is Broke
 The US will report a Fiscal Deficit of nearly USD 1.75 Tn or
13 % of the GDP for the current year
 In the next 12 months the US has $2 Trillion of short term
debt maturing
 Despite the slowdown it continues to clock a Trade deficit of
USD 35 to 40 Bn a month
 This implies the US is looking to finance nearlly $ 4 Tn or 30
% of the country’s GDP over the next 12 Months
 Who is going to Finance This ?
Neeraj Batra 2009-10

3. ISSUES IN GLOBONOMICS
THE GREENSPAN-GUIDOTTI RULE (1999)
 The US is as Broke as its Banks and lumbering Automobile
companies. Since 1985 it has been a net Debtor to the
World
 In a recent report PIMCO discussed the Greenspan-Guidotti
rule for adequacy of reserves for borrowing countries.
 This was recommended at 100 % of total short term
borrowings (maturing in 12 months) to be maintained in
hard currency assets
 Countries which did not do so were classified as High Credit
default risk candidates
 If the World got shivers with a USD 59 Bn default in Dubai
what will happen if the US cannot successfully rollover its
short term debt ?
Neeraj Batra 2009-10

4. ISSUES IN GLOBONOMICS
ESTIMATED US HARD CURRENCY ASSETS
 The US Govt.holds 8,200 Tns of Gold valued at $ 260 Bn
 Its Strategic Petroleum reserves are 700 mn Barrels valued at
$ 50 Bn
 As per IMF estimates it holds foreign currency reserves of
$136 Bn
 This gives us an estimate of USD 442 Bn or roughly 11.5 %
of the required Greenspan-Guidotti Rule
 How will the US Finance these short debts?
 The annual domestic savings in the US are roughly $600 Bn
 However it is unlikely that this money will chase US treasuries
 Inida,China and Russia are likely to be far more conservative
is building Dollar reserves or making large Treasury
Investments. In fact most are diversifying their Portfolio from $ Neeraj Batra 2009-10

5. ISSUES IN GLOBONOMICS
ESTIMATED US HARD CURRENCY ASSETS
 Although the US will be able to finance its Trade Deficit
relatively easily with its Trade Partners. It will not find external
support for its Fiscal deficit and short term maturities so easily
 Japan is dealing with its own domestic debt and economy.
The Yen has strengthened to well below 90 and that implies
the Japanese would focus on stimulating Domestic demand
 Euro-zone is even more in trouble, The focus is increasingly
on Domestic issues for these countries.
 Brazil,Korea nd Chile are busy buffering up the weak
representation of Gold in their Central Bank Portfolio
 This leaves only one Option Print more currency. Which
implies a really weak USD in the next 12 months.
Neeraj Batra 2009-10

6. ISSUES IN GLOBONOMICS
WHITHER US DOLLAR :PPP (IMF 2008)
Neeraj Batra 2009-10

7. ISSUES IN GLOBONOMICS
WHITHER US DOLLAR ?
• The Japanese market is Export driven. The Govt. keeps the
yen USD rate in a narrow band to avoid Unemployment.
The Worlds Second Largest Economy has had a negative
growth rate in the last three years and expected to grow at
1.40 % in 2010/11
• The Japanese have amongst the lowest interest rates in the
world. Govt debt is 180 % of GDP and expected to exceed
200 % of GDP as The Japanese Govt Announced a USD 1
Tn Budget for 2011 which will cause Public Debt to rise by
USD 485 Bn.
• The Japanese Govt. has a Twin interest to keep interest
rates low due To:
• Avoid deflation and spur investment and domestic demand
and since the Japanese Govt. is the biggest borrower
• Protect employment The Bank of Japan intervenes Neeraj Batra 2009-10
aggressively to keep the yen peak to protect its exports

8. ISSUES IN GLOBONOMICS
WHITHER US DOLLAR ?
• Japan has the second largest USD reserves of
approximately 900 bn
• Between 2001 and 2007 these reserves have grown from
USD 350 bn to 900 bn
• However during this period the JY to USD moved from 104
to 120 (Currently back to 89 an 18 year High)
• Since 2003 Global hedge funds exploited this situation
• They understood fully well that despite low interest rates the
exchange rate will be managed by the Central bank of
Japan
• This resulted in the mechnaics that made the Yen CF Trade
Possible
Neeraj Batra 2009-10

9. ISSUES IN GLOBONOMICS
THE CHINESE JUGGERNAUT
 As per latest statistics the Chinese Gross Fixed Formation to
GDP ratio has reached 50 %. This is very high and built on a
artificial Renminbi to $ exchange rate.
 Given low interest rates China is literally trying to invest its
way out of Global recession to feed its export driven economy
but may lead to overcapacity and Misallocation of resources.
 China is currently in its 12th year of Investment led Growth.
Historically no country has sustained a GFF/GDP ratio
beyond 30 % for more than a decade.(Singapore/Thailand)
 The Credit growth in China is another indication of
overconfidence and overcapacity creation.
 Historically Germany reached a peak GFF/GDP ratio of 27 %
in 1964 (Post world War II) and the Japanese 36 % in 1973.
 In case the Export markets of China rev up this will inevtably
lead to Non performing loans and an economic crisisin the
next 5 years. Neeraj Batra 2009-10

10. ISSUES IN GLOBONOMICS
FLOWS TO EMERGING MARKETS
 GIVEN THE FACT THAT THE USD IS GROSSLY
OVER_VALUED AND THE EM CURRENCIES ARE
GROSSLY UNDER-VALUED
 A) EM STOCKS WILL CONTINUE TO ATTRACT CAPITAL
OVER THE NEXT 5 YEARS
 B) THE COMMODITIES CYCLE IS IN A LONG TERM BULL
CYCLE AND MOST METALS WILL BE REVAUED
UPWARDS
 C) GOLD WILL BECOME A HEDGE AGAINST THE USD
AND WILL BE USED TO TRACK ASSET
VALUATION/INFLATION (IN LIEU OF THE USD) THUS IF
GOLD IS UP BY 36 % THIS YEAR AND THE SENSEX IS UP
BY 80 % THE APPRECIATION OF SENSEX WILL BE
MODERATED TO THE EXTENT OF GOLD’S
APPRECIATION
Neeraj Batra 2009-10