The China Puzzle

Nothing has baffled traders more in recent times than the price moves in Chinese Stock markets. Forever the favorite of value investors and analysts, the broader A-share market has underperformed almost all the other major markets. And to top it all, its precariously close to its 2008 low even today, when most of the other big global markets have almost doubled from their lows. 

What a difference a few years make, and it seems almost yesterday day when the market was going bonkers with Shanghai Composite making crazy new highs. The world had at last discovered China, and at its peak it traded at valuations above 60 (Price/Earnings). We are now far away from those times, and currently the market in spite of being a darling of many a traders, have failed to move higher. Much of it has to do with lack of domestic buying support, and very small QFII limits - so foreigners still can't buy much in the market. However, things seem to be changing with talks of further increase in QFII quotes in times ahead. We may see foreigners being allowed to purchase more of the market, and given the high growth rate in the economy, won't be surprising to see buyers queuing up for it. Even today, only a small proportion of the A-share market is owned by foreigners, and as the market opens up, there will be a re-valuation of the market. It may happen in 2013, with the leadership transition behind us. I think we would see a gradual up move in the Shanghai Composite, and can see the index bouncing off soon from its 2000 levels. 

It would further take a few more economies up alongside, notable ones being Australia and Taiwan. AUD is already trading at high levels (above 1.04), and can see further strength in the market on the back of china bottoming out. Taiwan being a big trading partner of China would see some demand as well, and things should improve there as well. 

This year end, should try to invest some in China dedicated funds - expecting the market to pick up some time around Q1 next year, and see the market reaching 2500 before 2013 year end. 

Brain Drain: A Tale of Two Centuries

Whenever we hear the term ‘Brain Drain’, we usually think in terms of migration of labor to developed economies. We associate it in terms of geographical movement of ‘brain’. However, equally important is the phenomenon of Brain Drain between industries, though it is much less talked about.

Automobile sector to IT sector
I remember receiving a chain mail long ago which compared the rate of innovation between the automobile industry and the IT industry. It went on to say that if the pace of innovation in automobile was as good as IT, then the current generation cars would be much better than what they are.

If automobile technology had improved at the same rate since 1960, a new car would cost less than an entry fee to the cinema hall, and we could drive through the length of our own country on less than a litre of petrol or diesel.

There was a huge shift in skilled labor from the automobile industry to the IT industry in the 1960s– and this led to the huge growth in technology over the past few decades. No other sector was able to match the rate of innovation, and companies came out with real surprises every now and then. However, now the IT industry finds itself in the shoes of automobile industry, and it too has been relegated to the ‘second choice’ employer status. Currently leading the pack are Goldman and the likes. And if we see the innovation across different sectors, we realize the impact of these changes.

IT sector to Finance sector
When I first learnt about the securitization business, I was dumbstruck. In the traditional model of banking, banks acted as the intermediaries between people with surplus cash, and people who needed cash. They used to take deposits from the public, and use the same to make loans. The sole purpose for the existence of banks was the match the source and need of funds – and they earned a margin for this. Also, they used to bear the counter-party risk in case of default, and the world largely was unaffected.
In the world of securitization, the banks sold-off these loans to institutions as well as public – in various forms (but lets not get into that). So, essentially, banks were accepting deposits as earlier, but not giving out loans in the same way. They used to give loans, but later sell them off to get the money which they further lent (and it went on and on). So, in the current scenario, banks weren’t matching those who had cash with those in need of it, but rather they redistributed everything. So, it was like a giant network where everything was connected to everything else. And banks were just acting as agents providing operational support to the whole system. In this system, everyone depended upon others, and if one link failed, the whole system would collapse. This was the ultimate dream for any bank – a vast ocean of people who lent money to each other, more directly than ever before – and these guys just controlled this massive spider web. In terms of IT sector, this is very close to the concept of Grid Computing. And whereas the concept is still in early stages in the IT industry, it has been done to death in the financial circles. And if the brain drain continues, very soon IT sector would also be left to the same fate as that of Automobile sector – and die a slow death. 

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Over the last few years, the financial industry has been the top choice for most of the fresh graduates and post-graduates. Hence, its no wonder that they have been miles ahead of other sectors in terms of innovation.

Automobiles Sector Basics: 101

Market Movers

This is not amongst the largest sector in the Index (~3% weight), and is affected by news flow.

1. Monthly numbers: Vehicle sales numbers are declared on 1st of every month
2. Interest Rates: Lower interest rates mean higher sales for the industry - as loans would be cheaper
3. Capacity Addition/Suspension: Affects the supply and competition in the industry
4. Economy: Related to economic growth as well, over the medium term

 

Reading the Statements

1. Auto-stocks are most sensitive to EBITDA margins (as volumes are known beforehand).
2. Primary costs are Raw Material expenses - 70-75% of net sales

 

Long Term Concerns/Factors

1. GDP Growth
2. Loan Growth - and interest rates
3. Tax Cuts - Income tax cuts would boost auto sales
4. Demographic - long term growth potential

 

Industry Structure

1. Two wheelers is highly consolidated industry with top 3 players (Hero Honda, Bajaj, and TVS) accounting for 80% market share.

2. Cars are also very much a consolidated markets, but there is a threat of increased competition going forward.

Banking Sector Basics

Overall Picture
Banks have very high linkage to the overall macroeconomic environment, and have very standard practices across the globe (can be compared with global peers on different ratios). This being a very important sector, is very tightly controlled and highly regulated.
One key unique feature of the industry is that here equal emphasis is given to the balance sheet (along with Income statements).
 
Asset Liability Mix
The asset side of the balance sheet mainly consists of Loans and Advances (~60%) and Investments (~27%). Most of these investments are into G-Secs (meeting the SLR requirements), and very little investments in other assets.
On the liabilities front, bulk of it is from the customer deposits (~75%).
 
Competition
More than 75% of the loans are from Public sector banks, with SBI group alone having a 25% share. Private banks have only 25% of the market now, but are growing rapidly.
 
Market
India has amongst the lowest Loan/Deposit ratio in the world. And total loans are still ~50% of the GDP. Also, consumer loans are just 10% of the GDP, so there is a tremendous opportunity for growth.
A large chunk of household savings flow to Bank Deposits - more than 50%. Good opportunities in Wealth Management, and Insurance - private banks are well positioned to capitalize on these.
Historical growth rate has been high at 12-20%, and this seems sustainable for another decade. Penetration level has improved considerably, though still much below global standards. NPLs have continued to drift down.
 
Financial Services Opportunities
1. Brokerages
2. Wealth Management
3. Life Insurance
 
Key factors affecting Stocks

• Loan Growth: Slowing down recently, from 30%+ levels in 2007 to ~17-18% now.
• Earnings: Major contributors are Growth and Portfolio Gains (in falling rates scenario)
• Interest Rates: Meaningful -ve correlation between stock prices and interest rates. However, key is the distinguish whether low rates are due to liquidity (positive for economy) or lack of loan demand (negative).
• Asset Quality: This factor is quite passive, and is talked about only in cases of sharp asset deterioration

Market View: October 23

Nifty Movements: Nifty lost some of its gains this week, and ended the week a shade below the mark of 5000. However, the market was quite strong, and despite the bad news from the RIL front, managed to close flat on today. Think the market would continue to hold over the short term, and may end the year at a high. Usually, markets do have a tendency of rallying close to the year ends, and if that happens, we may be in for another 10-15% up move from here.
 
Stocks: Telecom stocks have been very weak recently, and they continued to be under-performers. Real Estate also faced sell-off for a couple of days. However, the big under-performer has been RIL – marred in controversy and court battle, and then the Hardy pullout. IT companies surprisingly have held out well in spite of a stronger outlook on INR, though going forward we may see some weakness there. Another sector to watch out for could be the metals, with bad news expected from China.
 

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Next Week Views: The main risk remains the Chinese markets, and if the news coming out of there about the overheated economy and inflation concerns indeed is true, then we may see weak markets. However, there is not much bad news coming out of West at the moment, and if the results continue to surprise, the markets may even accommodate modest bad news from China.
I think we are standing at some sort of an inflection point – there are people who believe markets would reach new highs, and there are people who believe we are in the middle of a ‘W’. And the rational from both the sides seems to make sense. May be, this is the way markets are designed to be – capturing all the present information, and standing well in balance. I haven’t seen a bull-run from a trading floor before, so am not sure how they appear. Were there equal number of skeptics way back in the bull markets of 2003-2007 as well?

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Food for Thought: How do you think the consumption patterns would change in the next 10 years? What would be the next generation consume more, and what they would consume less? I think all the things traditional would be consumed less and less (in value terms adjusted for inflation). And people would consume more and more technology. Just like there has been a great shift in ‘Telecom’ consumption over the last decade, I think people would consume some technology a lot more than what they are consuming now. If I have to put a bet on different industries, this is how I would think:

1. IT wouldn’t remain an industry servicing large brick-mortar corporation. As more and more things start happening online, more and more IT services would be consumed by all organizations. And I would think there would be a drastic shift in the IT-related expenditure for all firms.
2. Telecom would continue its march, and might develop into the biggest industry. Most of the telecom companies would offer all sort of communication services – Television, Media, Broadband, and Telecommunications (they have already started). I think the opportunity here is huge, and we have just hit the tip of the ice-berg. The usage for the communications would increase greatly, and if somehow they manage to replace the credit cards as payment options, then it would be unprecedented. And I see nothing that a credit card offers which a mobile phone can’t do better.
3. Media/Entertainment: This is another industry which I would think would grow. Currently media is not being priced correctly, and most of time people make bundled payments (when paying for all the channels). With selective view-based pricing, and more and more cities coming under the multiplex chain, media revenues make take a quantum leap sometime in the next few years (with multiplexes opening just in the metros, the revenues from movies leapt from 10-20 Cr average to 50-60 Cr average).

Rally Monkey: Still Playing At a Market Near You

Nothing describes the current markets better than the Rally Monkey music. This one has to be played out loud in the office during the market hours (you will need to turn ON the sound on this page).

Disclaimer: The webpage actually has nothing to do with the markets, but all the investors indeed dance to similar tunes :)

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The markets have been correcting for the past few sessions, and daggers are out on the sustainability of the rally. A growing number of people believe that the markets have run up too high, and are long overdue for a correction. Well, I’m not completely bearish even now, and think there are still a couple of legs to the rally. I might be wrong here, and might have to eat my words pretty soon (for October isn’t over yet), but I would still stick to the long view.

Oil is back at $80 levels, Gold is trading at record highs, EUR has gone back to 1.50 levels and Equities are almost at their early or mid-2007 valuations. But China is still 50% down from its peak. The country best placed to avert the crisis, inspite of all the steroid-led growth stories, hasn’t seen too much of a recovery. And even though it makes sense (as China’s growth is led by export to US), I don’t think US would remain with 10% unemployment numbers for a long time. And hence, there is a strong case of rise in Chinese stocks, adding another leg to the global rally.

The underlying rational for all my bullish thoughts is the assumption that US isn’t going to have a lost decade. Japan’s case was different – Yen wasn’t the world’s reserve currency. Here, US is the master of the world – and any holes in its economy would be plugged by Qatar or Singapore or anyone else. There is a strong queue waiting to bailout US, for its the safest asset in the world. And as US comes out of the crisis, the whole world would follow, sooner or later.

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Food for thought: I got an answer to my long puzzling puzzle of why markets tend to go up more often that not. Money Supply growth is quite large compared with the World population growth, and hence, with each passing day, world is getting richer and richer. And there are only two avenues to use this money – consumption or investment. Inflation measures the rise in consumption demand, and rising markets measure the rise in investment demand. And since the marginal propensity to consume goes down as income increases, the rise in investment demand increases more than the inflation. And hence, the world markets are in perpetual bull runs.

Have we entered the Bull Market?

It initially started with disbelief, and people were laughing at any levels above 3000 for Nifty. Everyone though there was free money to be made by writing Calls, and people wrote OTM and even ATM calls in size. People blindly sold 3000C and 3100C, in the belief that we wouldn’t be seeing these levels in the whole of 2009. Once that was crossed, 3500-3600 become the TOP for the market, and people continued to write calls to cover for the losses they made on 3000-3100 Calls. Had it not been for the Knock-Out punch delivered by the election results, people might have foolishly continued to write calls even up to 4500 levels.

Now markets are flirting with 4500-4600 upper limits, and have been trading into a range between 4100 and 4500 for some time. I’m slowly turning quite bullish on the markets. While I will agree that valuations have turned quite costly, and rationally one should be selling the stocks at these levels. However, markets tend to move with a ‘herd mentality’, and there are legs to every rally/correction. This is due to the fact there are different classes of investors who invest at different points of a move. And where we are standing today, we still haven’t seen too much participation from ‘Long Only’ and ‘Private Equity’ guys. These guys are sitting with huge chunk of cash, and even though some of it has been deployed, the majority is still ‘all cash’. And the longer the market sustains at these levels, the more probable is this money flowing into the equities.

My overall sense of the market is that we won’t be seeing any more ‘crash’ in the market going forward. There would be issues on the loan books of the commercial banks, as well as concerns over the credit card defaults. However, I think these won’t escalate into very big problems, and would result into a couple of billions of charges and write-downs. Other potential triggers could be some Sovereign defaults, but again I think we won’t be seeing any major nations defaulting. Overall, I think we don’t have too many downside triggers for now (I repeat FOR NOW).

On the upside, the buying pressure from local Mutual Funds could pick up in the coming days. I think they would soon be launching new schemes, and public would come back to the markets after staying away for some time. Equity allocation has been close to a low in recent times, and I expect more and more people moving their debt funds into equities. Another upside shock could be the results – the results would surprise on the upside for most of the corporates.

On the volatility front, I have now changed my view. I now believe that we will have a low volatility period from July to September. Markets would trade in the range, and might slowly move up from here. Volatility might continue to drift down, and we may enter the sub-30 phase soon. That would also mean VIX entering a sub-20 phase, and when that happens, the funds would start flowing back into the markets.

On currencies, I think INR would appreciate from these levels, and we may touch 45 levels by the end of this year. I would be a seller of USD at any level close to 49 (currently).

Recession Over?

I am completely clueless about the markets right now. However, am not sure which is better – being completely clueless about the market, or being totally wrong about it. I guess in most scenarios, the former follows the latter.

All over the world, the markets are rallying, and the bears can no longer the dismiss it as just another bear-market rally. Somewhere down the line, the bears became too bearish about their predictions, and people lost it in their gloomier and gloomier forecasts. I’m not saying that the current rally is indeed THE RALLY, and we are out of recession. Personally, I have a feeling that the worst is yet to come, though am too scared to put the view into positions.

In my personal opinion, what caused this rally is the fact that globally the central banks infused massive dollops of cash into the system. The printing press all over the world went into the over-time mode, and printed millions of green and blue backs. The cash was supposed to be used to plug the holes into the balance sheets of the banks (and other corporations essential for free money supply into the economy). However, all the cash went into investment assets, and led to the massive short squeeze. People jumped to buy everything available - junkier-the-bond, longer to queue of potential buyers. Risk became history, and all the high beta names sky-rocketed. This is where we find ourselves as of now.

There are two possible paths which the markets could take from here. If the central banks indeed didn’t screw-up big-time, then we may well have seen the bottom, and are unlikely to go there again. The markets would then become a buy-on-dips market, and we would see the mother of all rallies in the emerging nations. Considering the massive amounts of cash sitting with the domestic as well as global asset managers, the BRIC and other developing nations could well go past their past highs. And the buzzword succeeding ‘recession’ would be ‘de-coupling’ for the next few years.

The second scenario, which I think has slightly a lower probability at the moment (but higher payoff if it materializes), is that the central banks erred in their bailouts and packages. And instead of reaching the ones who needed it the most, it ended up just creating a mild bubble in the asset classes. When the tides goes down again, the quarterly results would come back to haunt everyone, and the governments world-wide would by then have run out of ammunitions. Given the high deficits being run by all the governments, we are close to using the full quota of bailout funds. And for some reason, this bubble dies, then we would be in a free-fall again.

Lets see how things pan-out in the coming weeks. I think the picture would become clearer by the end of July as most of the corporates would announce their Q1 results. I’m expecting another quarter of record profits by the US banks, and if it happens, we could see the markets going into the stage 2 of this rally.

The Inflection Point?

The economists and traders around the world are engaged in the debate whether its a bear market rally, or the markets have actually turned around. The doom sayers are leaving no-stone to make everyone believe that their time under the sun hasn't finished. Whereas, the investors and money managers around are world are jumping to buy at every opportunity.

Its very difficult to say as of now which way the markets are headed. The short term momentum is certainly on the long side, but the valuations are getting costlier by the day. And unless the economy and earnings show a quick turnaround, we may see an over-heated stock market.

S&P has stayed close to 900 range for a few weeks now, and it has failed to break on the either side. There is good consolidation happening around this range, we may see a decisive move in either side very soon. If one is long vol, it may be a better idea to hedge less frequently as markets may be trending in one direction from here. I would expect S&P to be either below 800 levels or over 1000 levels by the end of June.

VIX also has been staying close to its 30 support levels, and even though it the breached it for a couple of days, it has failed to remain below the range for a longer period. We may see a gradual move up in volatility in the coming days, and I would rather be long vols at these levels.

Nifty has been playing around in the 4200-4500 range now, and contrary to all the initial expectations, markets haven't yet broken below the levels reached after the 'Super Monday'. Shorts have been cleared in the system, and the futures premium has jumped to high levels. Might seem silly to say, but I don't think markets are going to cross 4600-4700 range in the near term. With budget around the corner, long term investors would shy away from committing large funds.

EUR and GBP have been gaining against the USD, and last I saw, EUR was trading at 1.41 levels. Somehow, I am not very bullish on the Eurozone, and think the currency would depreciate. US economy in the shambles, and with General Motors filing for bankruptcy, another chapter in the US economic history comes to an end. However, I don't think EUR or GBP are the alternatives for the future.

Gold has been climbing for over a month now, and is trading close to 950 levels (mostly on the back of USD weakness). Oil has also been moving up, and is currently at 65. If the Oil keeps climbing, and moves into the 80+ zone, we may all be back to square one.

US Dollar: Inevitable Fall?

In their latest policy action, Fed has started buying US Treasury Bills from the market. Finally, they have realized to the reality that they are running out of ammunitions. And this is the first indicator that US economy may be in much deeper sh*t than everyone thinks it is.

The Fed ran out of ammunition as the rates were already hovering around zero. And to provide more incentives to the market, they were left with one last option - printing money. So, on one hand, the government is running huge deficits, and is issuing bonds to finance them. On the other hand, it is printing more $ to repay the same. This is as blatant a misuse of their stock currency status as is possible.

The world markets have reacted sharply to the news, and USD is down against all the major currencies. GBP and EUR are currently trading at YTD highs of 1.44 and 1.36. Initially, I had a view that economies of UK and Europe are in shambles, and we may see massive devaluation of their currencies. Now it seems that USD has also joined the club.

I think we may see USD weakening a lot from here. China, the world's largest investor in the US treasury has openly expressed their concerns over their holding, and going forward I see more of their investments going into EUR, GBP, JPY, and Gold. In addition, they might prefer investing in commodities rather than US T-bonds. And once this process starts, USD may fall off a cliff, literally.

I would be short USDINR at levels of 51-52, with a year-end target of 47. We may see INR weakening to 53-54 levels in the short term (on the back of fiscal concerns, and election uncertainty), but I think the issues with USD are much serious and long term in nature.

UK and its much talked about downgrade

After Ireland and Spain, it might be UK's turn to be downgraded. A lot of speculation has been going on on whether UK would be able to maintain its AAA rating.

The most recent quarterly numbers shook everybody up, and GDP has contracted by 1.5% in a quarter. To get an idea of how bad this number is, none of the G-7 countries have contracted by more than 3% annualized in the last 50 years. In addition, there are talks doing round that GBP as such is an inflated currency, with nothing in real economy to justify its levels. UK as an economy is ruled by a few sectors: Energy, Financials and Tourism. And in the current year, all 3 have been badly affected.

While its much outside my knowledge to comment on whether GBP is inflated or not, I certainly feel that the path going ahead is not very rosy for the country. US is a much better placed than UK to contain its crisis. 2009 might see a massive devaluation of EUR as well as GBP. GBP has already fallen from its >2.0 levels to 1.40 levels, and there are reports doing rounds which predicts a rate of parity pretty soon. Same goes for EUR as well, which after trading above 1.60 earlier last year, is now down below 1.30 levels.

We might end up the year with EUR at 1.0, GBP at 1.20 and Yen close to 100 levels.

Short-selling and Efficient markets

I have pondered over this question for some time now - 'Does short-selling make a market more efficient?' Or, to put it differently, 'Is short-selling a pre-requisite for efficient markets?' Here are my views on the same.

To answer the above question, we must first define 'market efficiency'. In my opinion, an efficient market is one where price discovery is solely based on the intersection of demand and supply functions. And any new information or event affects either or both of these functions, and hence results in the change in price. But as a whole, price is always arrived at by the demand function of the consumers and the supply function of producers.

In stock markets, the demand and supply functions are slightly complicated. The supply function is simpler to understand. During an IPO, its the standard supply function as in case of a manufacturing firm - higher the price, more the supply. As the valuations become richer, promoters supply more and more shares in the market. And as time passes, in a secondary market, the supply comes from prior period consumers (which were the demand function earlier). However, the supply side is still limited by the total amount of stock outstanding, and hence, has its upper-bound. It can always be estimated as coming from a single large firm with limited production - higher the price offered, more the supply.

Demand function, on the other hand, can come from anyone in the market place, and it has no upper-bound. However, it has a non-zero lower bound. So, there is always a positive demand, as well as a positive supply in a perfectly functioning markets. And it doesn't need 'short-selling' to function efficiently. In the worst scenario, there is no demand for the stocks, and hence, there is no trade in the market.

Now if short-selling is allowed, the supply function becomes as independent as the demand function. Everyone can become a supplier (that is, can sell the stock), and the upper bound on supply function disappears. Or, to look at it differently, now there is a possibility of a negative demand, and hence, must be matched by a positive demand. In falling markets where there is no positive demand, a negative demand if not met, can make a stock price nosedive towards zero. It will keep falling as long as it is matched by some positive demand. Hence, it can lead to quicker falls and higher volatility during the times of uncertainty.

Its a choice between a dry market with no trading (zero demand) or a highly volatile market with falling prices (negative unmet demand). And am not sure why the latter is better than the former.

Financial Crisis

The ongoing financial crisis is getting worse with each passing day. No one seems to have any clue as to when things would start improving. It has put some doubts over everyone's immediate future as well with their companies. Already, a couple of my friends have received the pink-slips, and I fear there is worse to come.

Just hoping that time would pass, and things would be normal again. These days, there is gloom all around. A lot of dreams, unfounded or grounded, have burst in recent times. And we are now in the process of realizing that Rome wasn't built in a day. Growth and development are slow process, and they happen over time. None of the economies move as fast as the stock or currency markets, and hence, there are crashes everywhere. Last few years were really a mad period in the world economic history where central banks around the world eased monetary policies, and credit was very easily available. Everything was made to appear rosy, and risk had disappeared from the world. The process of securitization had distributed to risk to everyone, and hence the crisis we find ourselves in has taken everything with itself.

There would be massive de-leveraging all around the world, and we can expect further crashes in almost all the asset classes. The emerging markets would be the worst affected, and there is a slight chance that it may pre-maturely end a lot of 'growth stories'.

End of Road for US?

This would be the year of contrasts. The two biggest events of the year symbolize the same thing - US power may be waning, and something must be done very soon to save it.
Lets start with the first event - the great credit crisis. As has been said earlier, it was a game of musical chair being played by the banks, and thankfully, they always seemed to have a seat when the music suddenly stopped. Many corporations as well as a few banks have gone bankrupt in the last 2 decades, but the big ones got bigger. They became too big to fail. But in a complete turn-around, banks now find themselves caught in their own game. All are left with huge amount of sub-standard assets on their balance sheets, and with continuous fall in their market values, its a south journey for most of them this year. Bear Sterns has already been sold-off at throw-away prices, and Lehman Brothers may no longer exist after a couple of days. Nobody wants to make a guess on who would be next, but everybody in almost convinced that this is not the end of pain.

All the great institutions of US are performing badly. The big three of the automobile would may be struggling, and may meet the same fate as their banking counter-parts. The US is losing its hold over all the manufacturing sectors, and now with financial services, this may be the beginning of the service sectors as well. Already a large chunk of the these companies is being owned by Asian funds.

A marked phenomenon has been the interference by the US government and treasury in dealing with this crisis. The treasury tried its might to lend support to the sector, and extended a number of facilities earlier undreamt of. It was a great irony that the greatest proponent of Capitalism and free-market needed government intervention at the time when Socialist countries are turning towards Capitalism.

The second event that would define the year would certainly be the Beijing Olympics. From being described in superlatives all over the world, it was undoubtedly, the best ever sports event hosted on such a large scale. China showed its might to the world, and in the year where US and Europe are struggling with their economies and budget deficits, China spent more than USD 70 billion in preparation of the games. The move has paid-off handsomely, at least in an absolute sense. The world which was already witnessing an ailing giant saw a rising star as well in the same year. China brought an end to the US domination of the games, and in its typical manner. There was no star like Michael Phelps, or Usain Bolt. It was an effort by little known athletes, who together brought a giant to its knees. It was just another example of how socialism conquered the year.

What are the implications of these events for the future? They clearly shows us the divergence between the two big powers today. Whereas much of the money and energy in US has gone into preserving its institutions and survival, China has grown by leaps and bounds. For all the talks about recession and its severity, a country which spends all its year in fighting for survival and arranging bail-outs must surely be in a deep recession.