It’s enough to make you succumb to the Two Minutes’ Hate.

But let’s face the truth. As egregious as salary escalation seems – coming as it does on the tail of the worst U.S. banking crisis since the Great Depression – the reality is that this is the U.S. government’s fault. After all, it was the U.S. Federal Reserve and the Obama administration that created all the bailouts and the special-loan-subsidy schemes for banks that would otherwise have been on their last legs.

In a truly free market, ex-Citibankers (NYSE: C) would be on every street corner of Manhattan – selling apples – and that would properly hold down the pay of those bankers still lucky enough to have a job.

The sudden rebound in demand for bankers is a symptom of overall market conditions right now. The U.S. stock market is way up from its lows, there are three Chinese initial public offerings (IPOs) due to come to market this week (one of them for a company with no earnings), the volume of home mortgage refinancing has been running at record levels, the FHA index of home prices has dropped only 0.3% this year and the volume of new corporate debt issuance is also high. Commodity prices are well off their lows, and oil prices are again close to $70 a barrel, which would have been considered an excessively high level only three years ago. That’s not a picture of a financial market – or a global economy – in deep recession.

Far from it.

To some extent, this is good news. A revival of the financial system and its ability to finance businesses and home purchases is exactly what the huge monetary and fiscal stimulus was meant to produce. A modest revival in world trade, as inventories cease being wound down and Chinese production ramps up again, is also a necessary precondition for economic recovery.

As the banking bonus news suggests, however, much of the activity is coming in some pretty funny places, where the excesses of the past decade were concentrated and where you wouldn’t expect to see such a quick revival.

That gives us a clear indication of just what the problem is. Because bankruptcies weren’t allowed to happen back in September and October – as they would have in a free market – there are more institutions in the market than there should be, Citigroup and Merrill Lynch most notable among them.

Moreover, in a true free market, the entire credit-default-swap (CDS) business – a product that caused $180 billion of losses to the financial system through American International Group Inc. (NYSE: AIG) – would be nothing but a smoking ruin. But in the market we are living in, those $180 billion worth of losses have been transferred to the tab of the taxpayers of America.

With Citigroup and Merrill Lynch bankers mooching around on street corners, financial sector salaries would be forced down to a more reasonable level.  As it is, the few unemployed unfortunates who worked at Lehman Brothers are not enough to depress the market. Likewise, credit default swaps have caused huge pain to the unfortunate employees of Abitibi-Bowater Inc. (NYSE: ABH), General Growth Properties (OTC: GGWPQ), and Six Flags Inc. (OTC: SIXFQ), each of which went bust partly because their creditors were playing in the CDS market and had no incentive to find an alternative to bankruptcy. Had CDS caused the pain they should have to financiers, the product would no longer exist, to the considerable benefit of the rest of us.

Inevitably, we are going to have to pay the price for all the bailouts. The financial sector will eventually shrink to its proper size, as will its members’ earnings. CDS will eventually be sharply restricted, to prevent their holders from forcing random companies into Chapter 11. Interest rates will have to rise, to accommodate the huge debt-funding needs the government has incurred. Money will have to be kept tight, to pay for the indulgences that Fed Chairman Ben S. Bernanke granted during the bubble, as well as for the even greater-indulgences of the bust.

Which is probably why you don’t want to hold U.S. stocks right now.

[Click here to check out a related Money Morning story on the salary increases some banks are offering in order to retain key employees.]

Source: Who’s Really to Blame for the Crooked Financial System

I visited the musical town of Salzburg, Austria in 1988. That was 20 years ago. The memory I have of Salzburg is one of music. I recall seeing a lot of young people walking around with musical instruments in black cases.

Salzburg is where the famous Wolfgang Amadeus Mozart was born in 1756. This quaint city is also the home of the Universitat Mozarteum Salzburg set up in 1841 which trains musicians, amongst other things.

But, 20 years later, I walked the cobble-stone streets and – there are no musicians. Maybe they are on holiday. Maybe, over the 20 year period, they all became bankers with CFAs and MBAs. Maybe some of them set up hedge funds. Maybe they all started buying Indian stocks and became rich and bought villas on the lakes in Austria.

Investing in India: ending on a bad note

But wait a minute that cannot be possible. If all the musicians in Salzburg had become investment managers with investments in India, I don’t see them on the streets of Bombay either!

And, more importantly, I don’t see their money sloshing around the Indian stock markets anymore. Alas, what is true of the musicians turned investment managers from Salzburg is true of many of the foreign investors.

Since CY 2003 (see Table 1), they have been buying approximately USD 10 billion worth of shares in the Indian stock markets. And their buying drove the markets wild. And more wild.

Then in a mad frenzy between mid-September 2007 and mid-October 2007, the foreign investors pumped in USD 6 billion. Pause and review that number.

From an average of USD 0.8 billion of buying every month (a 5 year average), they bought USD 6 billion in one month. That is 8x the normal monthly inflow.

But the music stopped – it must have been the cold winter and the desire to stay home huddled up in blankets. Heating oil is expensive these days.

In January 2008, the foreigners sold USD 3 billion. They bought small amounts since then.

But now in May they are out of the door again – the foreign investors probably sold USD 800 million worth of stock. And the Indian markets are not in the best of health.

Investing in India: tired of waiting

So I asked a few foreign investors: don’t you like India any more? “How can we like it”, exclaimed one investor, “the Indian market has done nothing.” “It is the worst performing country in my portfolio”, yelled another, “I am tired of waiting.” And we are not even in a bear market.

It seems like it has been many years since foreign investors could not get enough of India. But – as Table 1 indicates – it was only a few months ago when the foreign buying of Indian stocks was 5x the buying by local mutual funds.

For every one rupee the local Indian put in the market via the mutual funds, the foreign investor pumped in five rupees. The poor Indian investor is still putting his money in but the foreign investor is tired of waiting and is heading home with the cash.

The price of a share is determined by many factors, some of which are:

1. The business prospect of the company – how profitable is it likely to be?
2. Does a company borrow from banks or issues more shares to fund its growth?
3. Will the managements of these companies share the wealth they create fairly with the non-family members (what we call “minorities” – the people like you and me who don’t run the companies but are shareholders)?
4. Are there many IPO’s about to hit the market – will the supply of shares increase?
5. Is there anyone willing to buy the shares – is there a demand for shares?

Well, by the sounds of the noises made by some foreign investors I spoke to, the demand for Indian shares seems to have dried up.

That is not to say that India is bad; or that the Indian businesses will do badly; or that Indian managements are not worthy of investing in (some definitely are to be avoided – but that is a global phenomena!).

All that it means is that the foreign investor is not buying because he or she is not buying. Like the spouse who says: “abhi mood nahin hai”. That is also – by the way – a global phenomenon.

Investing in India: keep at it

No one has a clue when the foreign investors will come in. Or what will make them jump back into India.

Just like no one has any idea why they pumped in USD 6 billion into the Indian stock markets in September/October 2007. Or sold USD 3 billion in January 2008.

And no one has any idea when India will no longer be the worst performing market in someone’s global stock portfolio. You should not worry about it. Don’t brood on it.

Keep on buying into shares you like or mutual funds you like (have you made an investment in Quantum Long Term Equity Fund? You should consider it!).

Don’t borrow money to invest. Don’t try to hit “sixers” – or you will be bowled out. Just go for the steady batting. A regular rhythm of strokes, taking every ball as it comes. Seek professional help to confirm what you are investing in matches with what you should be investing in. India is on sale. And it may be for some more time, who knows.

CASH: Don’t sound too surprised now. Yep, IPO activity is at a good level. But we’re starting to see the quality deteriorate just a bit. Nothing too serious — but it’s something to keep an eye on.

JL: Can you explain the “quality” issue a little more? Does that mean we’re seeing more duds come to market?

CASH: Right, that’s part of it. When companies see that optimism is up and liquidity is flowing, it makes sense for them to try and raise capital while that window is open. Keep in mind that few people really expect this firm market to continue. So folks are trying to grab what they can, while they can.

JL: Makes sense. Anything else?

CASH: In addition to lower-quality companies, you’re also starting to see smaller companies tagging along. An example of this is Real Goods Solar (RSOL), a company that’s supposed to price its IPO this week. Because RSOL is so small — less than $20 million in revenues — they’re unable to attract the all-star underwriters. They have to use second-tier partners instead.

JL: So what effect will that have on the stock? If they’re small and putting fewer shares out there, it seems that might benefit the price, right? Keeping supply low to help the ‘ole S-and-D curve?

CASH: Don’t forget the other input for that curve…

JL: Never. Supply and demand is about the only useful thing I got out of college economics. So what do you see on the demand side?

CASH: Nothing.

JL: Nothing?

CASH: Nada. Zip. Zilch. Goose egg. Bagel. The big donut…

JL: I got it, I got it. But what does that mean exactly?

CASH: It’s means there’s just no demand — period. These underwriters (think names you’ve never heard of, like Equity, Canaccord Adams, & Broadpoint) don’t have anywhere near the footprint or the clout that, say, a Goldman Sachs, a Merrill Lynch, or a Morgan Stanley would bring. And so, while this might be a reasonably strong company with limited supply of stock, the underwriting machine is weak. They won’t be able to gin up enough interest for a good price pop.

JL: So do you short a name like this right out of the box?

CASH: Quite possibly. Although I’m a little uncomfortable being short a thin name in a hopeful market, even if the hope is fleeting. But it’s a possibility, and that brings us around to our topic for the day.

JL: Which is?

CASH: Shorting! Last week I said I’d bring a little balance to our banter. Today I wanted to give a little clearer picture as to how Cash McDash makes money on the “dark side.”

JL: Sweet, the dark side! Insert Darth Vader joke here. Can we talk about Jedi mind tricks, too?

CASH: Let’s not and say we did.

JL: Fair enough. Where should we begin?

CASH: Well, there are basically two different categories of short trades that I use. We can skim over the first and dig a little deeper into the second.

JL: Hold on! We’re just getting into the good stuff and you’re already skimming? Why don’t we take ‘em one at a time and get some more detail.

CASH: Because the first category of shorting doesn’t quite fit for this type of conversation. The trades are too specialized… Oftentimes they have to be executed very quickly, with very little notice, in order to lock in solid profits. I can tell you “how” that’s done, but if I tried throwing out picks in that area to a broad audience, it would be more trouble than it’s worth. I’m more interested in sharing that type of info with a small, select group of readers who are dead serious about their trading gains.

JL: Fair enough. So give us the Cliffs Notes then.

CASH: Well, the first way I make money on the short side is by selling underwriting dogs right from the beginning — “out of the box,” as you say. Because I’m so plugged in to that whole hidden process of taking companies public, I see what most others don’t. I know whether or not the demand is there, and I can get a very clear read on whether or not the underwriters have buyers for the stock.

JL: Hey, so you’re kind of like that guy Simon Cowell on American Idol or something. Except you, uh, judge new issues instead of wannabe pop stars.

CASH: Ugh. I’d rather be Darth Vader. But, yes, from time to time there are deals that are just destined to fail. And even although the public can sometimes get excited over these deals, my behind-the-scenes view makes it exceedingly clear that money is to be made on the short side.

JL: How about an example folks might recognize.

And today, China announced that its white-hot economy beat analysts’ predictions, growing 10.6% in the same period.

Let me put that in perspective for you…

China’s been growing so rapidly that it may overtake Germany as the world’s third biggest economy this year.

Since the country kicked-off its free-markets reform programme in 1978, the economy has grown in size by a mind-boggling 68 times.

What’s all the more staggering is it achieved that growth DESPITE seeing the first fall in its trade surplus since 2004.

In other words, even while China’s export growth is slowing as a result of the economic slowdown in the West, its economy is continuing to hold up remarkably well as domestic and regional demand picks up – and the country’s appetite for imports is helping the emerging markets to withstand the U.S. slump.

But I think it’ll do much better than simply ‘withstand’ the slump.

And it’ll drive money into other emerging economies at a rate of knots…

Vietnam and Africa: Two likely winners of China’s $1.5bn windfall

China now holds $1.68 trillion in foreign reserves and it is looking for profitable opportunities to pump the cash.

According to China consultants, Z-Ben Advisors, part of that plan could see China’s three sovereign wealth funds outsourcing a combined $320 billion to foreign asset managers.

These investments could be huge – Z-Ben expects the size of the individual investments to range between $750 million and $1.5 billion.

And where do you think the bulk of that money is going to end up?

Emerging Asia.

My favourite Asian market, Vietnam, is right on China’s doorstep. I believe they’re likely to be one of the big winners from China’s investment drive.

And, of course, the Chinese are investing massively in Africa as well. They’ve just offered $50 billion in development finance to Nigeria. Frankly, you’ll bump into them everywhere on the continent today.

China isn’t just a source of investment capital for the emerging markets – the country remains one of the greatest investment stories of all time and there is a lot of money waiting to get in.

Now, the Dubai government controlled investment house, Dubai International Capital, is teaming-up with Hong Kong’s First Eastern Investment to launch a $1 billion private equity fund that will connect Middle Eastern cash with China deals.

That’s another leg in the Gulf’s attempts to shift its investment focus away from the slowing Western economies and towards the faster-growing emerging markets.

‘The mother of all investment booms’

My point is that despite the economic gloom and doom that we keep reading about in the press, the growth story across huge swathes of the world remains intact.

The idea of a “credit crunch” in places like the Gulf or China or Russia right now is laughable.

The problem in these places isn’t a lack of cash – it’s that they have far too much of it.

And as they begin investing that cash in the emerging markets, I expect that we will see the mother of all booms.

Regards,

Manraaj Singh Editor Profit Hunter

P.S. The great shift in the economic balance of power from the West to the emerging economies underlies our investment strategy here at Profit Hunter. And as the current financial crisis deepens, it will only accelerate the gains to be made in the East. Click here to learn more.

Turns out March will be the slowest month for IPOs since August 2003, with a measly three IPOs.

Like the broader market, which experienced wild mood swings during the month, IPOs suffered from investor panic in March as the credit crisis enveloped more firms and economists began to speak more assuredly of a recession ahead.

Bankers say that issuers and investors alike are hanging back from taking the plunge into IPOs until there is more clarity and stability in the stock market.

Read the full story here.

The financing spigot for private-equity funds has also been largely turned off by the credit crisis, says Jason Simpkins in the Takeover Trader.

“Recent data from Thomson Financial suggests that worldwide M&A deals slumped by nearly one third in the first quarter of 2008. But that doesn’t mean the M&A market is dead in the water. Instead, it means that cash-laden corporations will be taking the baton from the private-equity firms and will re-ignite the buyout binge.

“The one caveat: Companies, buyout firms and banks are being more selective about picking partners, and are looking for comprehensive, ‘perfect-fit’ deals.”