7th January 2012 Dear Friends, Wishing you and your loved ones a Very Happy New Year

2012. Hows 2011 been for you? Personally for me its been most eventful, with lots of ups and downs(quite like the markets!!!) I apologize for not being able to mail in more often because of various projects and other commitments that took up a whole lot of my time in 2011.[A lot of friends and family have been asking me when I will resume the newsletters and in spite of wanting to life usually gets in the way!!!].Will try my best to mail in once a month. Been doing a lot of traveling and taking in a whole lot of new, different experiences. Thats what the Magic of Life is all about, isnt it??? As for the Sensex,it fell by over 20% in Rupee terms but by over 35% in US Dollar terms and 30% in both Pound and Euro terms. I honestly can't imagine what it must be like to be an India Focused Fund manager sitting in New York, London or Paris and seeing your assets perform so disastrously that they are awarded the Title of the Worst Performing Asset class for 2011. If you sit down and listen to any of these Guys,they are all now super-bearish on Indian Stocks(so very typical of them!!!). The reasons are the same-Policy Inaction from the Indian Government (on Corruption,Subsidies,Reforms,Inflation,Infrastructure),China slowdown and Euro Debt troubles. I on the other hand am Cautiously optimistic on Indian stocks.After all its very rare that an asset class takes the title of Worst performing class for Two Years in a row!!! But above all its the amazing ingenuity,flexibility and ability of the common man in India to adapt& perform in the most difficult conditions that makes me most positive on the Indian Stock market story going ahead in 2012. Looking ahead to December 2012.I am cautiously optimistic that Indian Stocks will be range-bound for 2012[My preferred Scenario 1(below)]. I see BSE ending the year anywhere between 14500 and 17500. Which I think has a very high probability of playing out-close to 50%. Sure there are still lot of negatives on the external front(especially in Europe),but all those FIIs(Hot Money) who had to sell are more or less completely out (or severely underweight )on India.They are instead overweight on China,Korea&Taiwan(China in particular is a big,big mistake!!!)

If we get even slight policy action from the Central Govt. especially regarding key reforms,coupled with a little bit of easing by the RBI on the Interest Rate front(upto 50basis points) the BSE could very easily reach the Upper end of my estimates for Scenario 1. Majority of the Big Investors in Indian stocks today are of the long-term Variety who will not look to exit unless the BSE gets around 19000+ levels or we get a super-bearish spike on the Global Financial Markets caused primarily by Greece or one of the other PIIGS exiting the Eurozone decisively by defaulting on their enormous debt burdens.In that case,All bets are off on how low the BSE could go12000 ??? Even the 2008 lows of 8000 are possible. That is my scenario 3(and has a probability of 40% for 2012).The US Dollar Index could very easily hit 100 ,with the Euro falling below parity vs the USD and The Rupee could very well hit 70 to the US Dollar.Please note if Scenario 3 does not play out in 2012,the probability of it playing out in 2013 is even higher-more than 50%(as there is only so long you can keep kicking the can forwards). I think that Global Central Banks and Policy makers will manage to put off the eventual (almost certain) defaults(thanks to their unique brand of can-kicking for one more year). As for Scenario 2-The Super-Bullish Scenario which Go-Go Fund managers in India were touting at the beginning of 2011 and don't quite have the courage to push to clients today.For that to happen we need a super-strong QE3 from the US Federal Reserve, as well as sizeable cuts in Interest Rates at the RBI(more than 50 basis points for 2012) and strong action from the Central Govt on the Reforms front.

THREE SCENARIOS WHERE SENSEX WILL BE IN DECEMBER 2012 Scenario 1:Sensex moves within a narrow band- +/- 10% of where it is today-Basically range-bound between 14500 and 17500. Probability -50% Scenario 2:Sensex rises much above 17500 levels,possibly even as High as 2010 Highs of 21000. Probability -10% Scenario 3:Sensex falls much below 14500 as low as 12000 or even lower. Probability - 40%

Personally, My recommendations haven't changed at all since December 2009.You should not hold any stocks apart from the Dividend High Yielders. My portfolio has done reasonably well (with more reliable returns)since it was entirely structured along those lines all the way back then .And all the Dividend Income is re-invested back into more Dividend High-Yielders.

How is it that I knew all the way back in December 2009 that Stocks as an asset class will disappoint going forward(and specifically the Buy and Hold crowd in so-called "Growth" stocks is going to get clobbered)??? Simple, read your History on The Great Depression as well as Japan's stock market performance since the Credit bubble there burst in the late 80s. There is only so much Credit that can be pumped to generate incremental Growth and we are now reaching the point of (heavily)diminishing returns for the Global Financial Industry(of which India is very much a part).Its all a question of Excessive Debt and leverage that needs to be worked off. We are not entirely through yet. And until we are through, we should only expect more volatility rather than steady returns. In fact for a High Net worth Investor or for that matter an NRI; there are so many opportunities outside the Stock market to gain much more reliable income without touching the stock market at all. Take the Indian Govts 10 year bonds-Yielding over 8% today. Take the NHAI Bonds-Again Yielding over 8%(tax-free) today. Put your money in a 1 year FD in an NRE account-Yielding over 9%(tax-free) today. Put your money in Gold or unbuilt land-Again decent high single digit Yields.

Even for a Resident Indian all these very same options are open today (obviously Tax considerations change)why should you put your money in a High-risk avenue like Indian Stocks???

Why would you want to take the risk of putting your money in Stocks which are in a confirmed downtrend & basically going nowhere like the Ambani Group of stocks,Real Estate and Infrastructure and paying absolutely nothing in Dividends as well???Most of these stocks have HALVED IN VALUE Since the beginning of 2011!!! My Dividend-High Yielders list today has over 40 stocks which are yielding over 3% today and 18 stocks which are yielding over 5%!!! In my opinion, your stock portfolio(and especially any new purchases you make) today should be restricted to these stocks only. You can very easily construct a very nicely diversified stock portfolio(divided amongst different sectors like Pharma,Power,Finance,Banks,Autos,IT,FMCG,Metals,Oil& Gas,Agri,Paper,Media) and at the same time gain reliable Dividend Income.

Even in the worst case Scenario 3-Most of these companies are extremely well-capitalized(and/or have the implicit backing of the Indian Govt behind them) so Dividend Payouts for 2012 should not be an issue. As for Investing in My Dividend High-Yielders,I have attached the list with this email.Coupled with color coding in order of how they will do in the event of QE3[Quantitative Easing Part 3 ,after Part 1 was conducted in 2009 and Part 2 was conducted in 2010] conducted by US Federal Reserve in 2012. Please note once again,there is no certainty that QE3 will happen for sure.So do not take it as a certainty. For QE3 to happen for sure,Crude Oil Prices have to fall decisively below USD 70/Barrel and/or the Euro has to fall below 1.10 vs the US Dollar. Even here,there is another wildcard in the mix-The Republican Presidential Nominations and whether my preferred candidate-The only man with real quality and integrity -Ron Paul is still in the race come July-August.If Ron Paul is still very much in the race around this time,then there is NO WAY that the US Federal Reserve will be able to launch QE3 in 2012. For the uninitiated,its simply because the very sight of Ron Paul in the White House is enough to have Ben Bernanke and his assorted Banking cabal quaking in their boots.And they are doing everything they can to stop it from happening.Please see my writeup below.But funny thing is that Ron Paul doesn't even need to win-All he has to do is finish in the Top 3 in the Republican Nomination process come August-And The Federal Reserve will be very,very cautious of any more Easing actions they perform in 2012. If on the other hand,you are a short-term trader then the Volatility which was part of 2011 will be back in 2012 and should be very welcome to you.In that case,considerations change for you are just looking to buy and flip to the next buyer out there.Then,you want to look out for over-sold and over-bought stocks(throughout the year) and act accordingly. Regards Ashish.Mehta

P.S Read Hyman Minsky's Book-Stabilising an Unstable Economy. Great thoughts there-A lengthy period of tranquility will raise fragility ;people will underestimate dangers and overestimate oppurtunities.The Great moderation contained the seeds of its own destruction. ------------------------------------------------------------------------------------------------------------------------------------------

The following stocks all Yield in excess of 5% today. RURAL ELEC CO HCL INFOSYSTEMS HEXAWARE TECHNOLOGIES SUN TV HERO MOTOCORP ASHOK LEYLAND PHILLIPS CARBON BLACK GIC HOUSING FINANCE BAJAJ HOLDINGS&INVESTMENTS INDIA INFOLINE INDIAN OVERSEAS BANK SHIPPING CORP HPCL CHENNAI PETROLEUM ALKALI METALS Gujarat Gas Company TAMIL NADU NEWSPRINT&PAPER RIDDHISIDDHI GLUCO BIOLS ------------------------------------------------------------------------------------------------------------------------------------------

What's The Deal with The Ron Paul Media Blackout???

I have been reading/watching every mainstream News/Economic publication(Time,NYT,Washington Post,Economist,Business week, FT,MSNBC,Fox ) in the last few weeks and they all have Ron Paul penciled in as unelectable for the Republican Presidential Nomination. Why is that so? Is anything that he says wrong/incorrect? Has not America over-extended itself sharply(military as well as Debt levels)?? Has the frequency of boom-bust cycles driven totally by cheap credit doled out by US Federal Reserve not made normal economic cycles worse??? Has The American State now ,not gotten over-arching powers over Citizens private lives(especially after the Bill on Defense and now SOPA)??? http://globaleconomicanalysis.blogspot.com/2012/01/obama-signs-legislation-killing-bill-of.html What happened to totally American notions of Individual freedom and Liberty??? Is it not true that far-far too many people are dependent on the state for their livelihood and sustenance today??? Atleast he's not a totally corrupt hypocrite like Romney ,Santorum or Gingrich http://news.nationalpost.com/2011/12/06/romney-paying-100000-to-hide-records-wipe-computerdata-unprecedented/ Suddenly this makes total sense http://charleshughsmith.blogspot.com/2012/01/ministry-of-propaganda-declares-ron.html Its true,people need to wake up and start critically questioning every single thing mainstream media pushes our way today. The so called Independent media is nothing but a cruel joke today. Regards Ashish. ------------------------------------------------------------------------------------------------------------------------------------------

Some great articles to read http://www.rediff.com/business/slide-show/slide-show-1-when-ambani-lost-his-cool-and-tata-wasembarrassed/20110711.htm http://www.rediff.com/business/slide-show/slide-show-1-special-telecom-how-ambani-brothers-canrule-the-roost/20111229.htm http://www.rediff.com/business/slide-show/slide-show-1-column-why-our-rulers-want-people-toremain-poor/20111229.htm http://www.rediff.com/business/slide-show/slide-show-1-india-twiddles-its-thumbs-as-foreign-airlinesgrab-traffic/20111229.htm http://www.rediff.com/business/slide-show/slide-show-1-worlds-30-countries-and-personalfreedom/20111228.htm http://www.rediff.com/business/slide-show/slide-show-1-the-top-5-stock-picks-for-the-year2012/20120103.htm http://www.rediff.com/business/slide-show/slide-show-1-tech-embattled-indian-it-firms-adopt-newgrowth-strategies/20120103.htm http://www.economist.com/node/21542412 http://www.economist.com/node/21542446 http://www.economist.com/node/21542424 http://www.economist.com/node/21542452 Awesome quotations from article above. Deep down, nobody wants the aam admi to get out of his rut. Oppositionists don't, because they'll lose a convenient stick to beat the government with. The government doesn't, because poverty offers a spending opportunity too lucrative to give up. One feels bemused. What constitutes public interest? Letting a marginal farmer be a marginal farmer all his life? Leaving the poor at the eternal mercy of governments and politicians, to languish and live their lives only on guarantee of employment and subsidised food? Or creating opportunities that will help them improve their lot, acquire economic power, develop new hopes and aspirations and become positive contributors to economic growth? ------------------------------------------------------------------------------------------------------------------------------------------

Submitted by Keith Weiner

Inflation: An Expansion of Counterfeit Credit

The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand whats happening in the monetary system.

Anyone who has ever been at a magic act performance is familiar with how sleight of hand often works. With a huge flourish of the cape, often accompanied by a loud sound, the right hand attracts all eyes in the audience. The left hand of the illusionist then quickly and subtly takes a rabbit out of a hat, or a dove out of someones pocket.

Watching a performer is just harmless entertainment, and everyone knows that its just a series of clever tricks. In contrast, the monetary illusions created by central banks, and the evil acts they conceal, can cause serious pain and suffering. This is a topic that needs more exposure.

The commonly accepted definition of inflation is an increase in consumer prices, and deflation is a decrease in consumer prices. A corollary is a myth that stubbornly persists: today, a fine suit costs the same in gold terms as it did in 1911, about one ounce. Why should that be? Surely it takes less land today to raise enough sheep to produce the wool for a suit, due to improvements in agricultural efficiency. I assume that sheep farmers have been breeding sheep to maximize wool production too. And doesnt it take less labor to shear a sheep, not to mention card the wool, clean it, bleach it, spin it into yarn, weave the yarn into fabric, and cut and stitch the fabric into a suit?

Consumer prices are affected by a myriad of factors. Increasing efficiency in production is a force for lower prices. Changing consumer demand is another force. In 1911, any man who had any money wore a suit. Today, fewer and fewer professions require one to be dressed in a suit, and so the suit has transitioned from being a mainstream product to more of a specialty market. This would tend to be a force for higher prices.

I dont know if a decent suit cost $20 (i.e. one ounce of gold) in 1911. Today, one can certainly get a decent suit for far less than $1600 (i.e. one ounce), and one could pay 3 or 4 ounces too for a high-end suit.

My point is that consumer prices are a red herring. Increased production efficiency tends to push prices down, and monetary debasement tends to push prices up. If those forces balance in any given year, the monetary authorities claim that there is no inflation.

This is a lie.

Inflation is not rising consumer prices. One cant understand much about the monetary system from inside this box. I offer a different definition.

Inflation is an expansion of counterfeit credit.

Most Austrian School economists realize that inflation is a monetary phenomenon. But simply plotting the money supply is not sufficient. In a gold standard, does gold mining create inflation? How about private lending? Bank lending? What about Real Bills of Exchange?

As I will show, these processes do not create inflation under a gold standard. Thus I contend the focus should be on counterfeit credit. By definition and by nature, gold production is never counterfeit. Gold is gold, it is divisible and every piece is equivalent to any other piece of the same weight.

Gold mining is arbitrage: when the cost of mining an ounce of gold is less than one ounce of gold, miners will act to profit from this opportunity. This is how the market signals that it needs more money. Gold, of course, has non-declining marginal utility, which is what makes it money in the first place, so incremental changes in its supply cause no harm to anyone.

Similarly, if Joe works hard, saves his money, and gives a loan of 100 ounces to John, this is an expansion of credit. But it is not counterfeit or illegitimate or inflation by any useable definition of the term.

By extension, it does not matter whether there are market makers or other intermediaries in between the saver and the borrower. This is because such middlemen have no power to expand credit beyond what the sourcethe saverwillingly provides. And thus bank lending is not inflation.

Below, I will discuss various kinds of credit in light of my definition of inflation.

In all legitimate credit, at least two factors distinguish it from counterfeit credit. First, someone has produced more than he has consumed. Second, this producer knowingly and willingly extends credit. He understands exactly when, and on what terms, with what risks he will be paid in full. He realizes that in the meantime he does not have the use of his money.

Lets look at the case of fractional reserve banking. I have written on this topic before. To summarize: if a bank takes in a deposit and lends for a longer duration than the deposit, that is duration mismatch. This is fraud and the source of banking system instability and crashes. If a bank lends deposits only for the same or shorter duration, then the bank is perfectly stable and perfectly honest with its depositors. Such banks can expand credit by lending, (though they cannot expand money, i.e. gold), but it is real credit. It is not counterfeit.

Legitimate lending begins with someone who has worked to save money. That person goes to a bank, and based on the banks offer of different interest rates for different durations, chooses how long he is willing to lock up his money. He lends to the bank under a contract of that duration. The bank then lends it out for that same duration (or less).

The saver knows he must do without his money for the duration. And the borrower has the use of the money. The borrower typically spends it on a capital purchase of some sort. The seller of that good receives the money free and clear. The seller is not aware of, nor concerned with, the duration of the original savers deposit. He may deposit the money on demand, or on a time deposit of whatever duration.

There is no counterfeiting here; this process is perfectly honest and fair to all parties. This is not inflation!

Now lets look at Real Bills of Exchange, a controversial topic among members of the Austrian School. In brief, here is how Real Bills worked under the gold standard of the 19th century. A business buys merchandise from its supplier and agrees to pay on Net 90 terms. If this merchandise is in urgent consumer demand, then the signed invoice, or Bill of Exchange, can circulate as a kind of money. It is accepted by most people, at a discount from the face value based on the time to maturity and the prevailing discount rate.

This is a kind of credit that is not debt. The Real Bill and its market act as a clearing mechanism. The end consumer will buy the final goods with his gold coin. In the meantime, every business in the entire supply chain does not necessarily have the cash gold to pay at time of delivery.

This problem of having gold to pay at time of delivery would become worse as business and technology improved to allow additional specialization and thus extend the supply chain with additional valueadded businesses. And it would become worse as certain goods went into high demand seasonally (e.g. at Christmas).

The Real Bill does not come about via saving and lending. It is commercial credit that is extended based on expectations of the consumers purchases. It is credit that arises from consumption, and it is selfliquidating. It is another kind of legitimate credit.

For more discussion of Real Bills, see the series of pieces by Professor Antal Fekete (starting with Lecture 4).

Now lets look at counterfeit credit. By the criteria I offered above, it is counterfeit because there is no one who has produced more than he has consumed, or he does not knowingly or willing forego the use of his savings to extend credit.

First, is the example where no one has produced a surplus. A good example of this is when the Federal Reserve creates currency to buy a Treasury bond. On their books, they create a liability for the currency issued and an asset for the corresponding bond purchase. Fed monetization of bonds is counterfeit credit, by its very nature. Every time the Fed expands its balance sheet, it is inflation.

It is no exaggeration to say that the very purpose of the Fed is to create inflation. When real capital becomes more scarce, and thus its owners become more reluctant to lend it (especially at low interest rates), the Feds official role is to be the lender of last resort. Their goal is to continue to expand credit against the ever-increasing market forces that demand credit contraction.

And of course, all counterfeit credit would go to default, unless the creditor has strong collateral or another lever to force the debtor to repay. Thus the Fed must act to continue to extend and pretend. Counterfeit credit must never end up where its pay or else. It must be rolled. Debtors must be able to borrow anew to repay the old debtsforever. The job of the Fed is to make this possible (for as long as possible).

Next, lets look at duration mismatch in the financial system. It begins in the same way as the previous example of non-counterfeit creditwith a saver who has produced more than he has consumed. So far, so good. He deposits money in a bank, and this is where the counterfeiting occurs. Perhaps he deposits money on demand and the bank lends it out. Or perhaps he deposits money in a 1-year time account and the bank lends it for 5 years. Both cases are the same. The saver is not knowingly foregoing the use of his money, nor lending it out on such terms and length.

This, in a nutshell, is the common complaint that is erroneously levied against all fractionally reserved banks. The saver thinks he has his money, but yet there is another party who actually has it. The saver holds a paper credit instrument, which is redeemable on demand. The bank relies on the fact that on most days, they will not face too many withdrawal demands. However, it is a mathematical certainty that eventually the bank will default in the face a large crowd all trying to withdraw their money at once. And other banks will be in a similar position. And the collapsing banking system causes a plunge into a depression.

There are also instances where the saver is not willingly extending credit. The worker who foregoes 16% of his wage to Social Security definitely knows that he is not getting the use of his money. He is extending credit, by forcei.e. unwillingly. The government promises him that in exchange, they will pay him a monthly stipend after he reaches the age of retirement, plus most of his medical expenses. Anyone who does the math will see that this is a bad deal. The amount the government promises to pay is less than one would expect for lending money for so long, especially considering that the money is forfeit when you die.

But its worse than it first seems, because the amount of the monthly stipend, the age of retirement, and the amount they pay towards medical expenses are unknown and unknowable in advance, when the person is working. They are subject to a political process. Politics can shift suddenly with each new election.

Social Security is counterfeit credit.

With legitimate credit, there is a risk of not being repaid. However, one has a rational expectation of being repaid, and typically one is repaid. On the contrary, counterfeit credit is mathematically certain not to be repaid in the ordinary course. This is because the borrower is without the intent or means of ever repaying the loan. Then it is a matter of time before it defaults, or in some circumstances forces the borrower to repay under duress.

Above, I offered two factors distinguishing legitimate credit:

1. The creditor has produced more than he has consumed

2. He knowingly and willingly extends credit

Now, lets complete this definition with the third factor:

3. The borrower has the means and the intent to repay

Every instance of counterfeit credit also fails on the third factor. If the borrower had both the means and the intent to repay, he could obtain legitimate credit in the market.

A corollary to this is that the dealers in counterfeit credit, by nature and design, must work constantly to extend it, postpone it, roll it, and generally maintain the confidence game. Counterfeit credit cannot be liquidated the way legitimate credit can be: by paying it back normally. Sooner, or later, it inevitably

becomes a crisis that either hurts the creditor by default or the debtor by threatening or seizing his collateral.

I repeat my definition of inflation and add my definition of deflation:

Inflation is an expansion of counterfeit credit.

Deflation is a forcible contraction of counterfeit credit.

Inflation is only possible by the initiation of the use of physical force or fraud by the government, the central bank, and the privileged banks they enfranchise. Deflation is only possible from, and is indeed the inevitable outcome of, inflation. Whenever credit is extended with no means or ability to repay, that credit is certain to eventually become a crisis that threatens to harm the creditor. That the creditor may have collateral or other means to force the debtor to take the pain and hold the creditor harmless does not change the nature of deflation.

Heres to hoping that in 2012, the discussion of a more sound monetary and banking system begins in earnest. DISCLAIMER: I do not work for any of the following organizations A Mutual Fund, Investment Bank, Bank, Analyst Firm,Brokerage House,Any Government or any other related firm with links to the Financial Services Industry. I am a retail investor and I write because I Love writing about Finance and Economics. Please do your own due-diligence before investing anywhere