Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts

18 Jan 2015

Financial Market Iceberg ahead

I have immense respect for Sanjeev's articles. They are well researched and give you a lot to think about. This one is definitely worth reading.

Source: https://www.valueresearchonline.com/story/h2_storyview.asp?str=26870

The Titanic, accelerated to 22 knots, full speed ahead, just before it hit the iceberg. Besides all the other factors, the speed at which it was going, gave it little chance of avoiding disaster, and of surviving the damage after it was hit.

This is a very appropriate metaphor for the dilemmas facing India just now. We have a 'Titanic' mentality, a flawed belief in our own invincibility. One part of this Modi Mania says, 'we have Modi', implying he will get us out of any hole, even change the Laws of Physics/ Economics.

To change the metaphor I have used above to describe macro-economic management just now, 'steering the economy' is very similar to driving a car. You don't accelerate a car as you drive through a crowded village, you slow down till you reach an empty stretch again. Or better still, you don't accelerate on a flat tyre, you wait for 'stability' before you try accelerating again.

The world economy is seeing great uncertainty and increased volatility in many markets. Some of the areas are as follows:
  • Deflation/ depression possibilities in Europe, as the region nears its third recession in 6 years.
  • Falling oil prices, which will seriously affect major oil producers, including major emerging markets. These economies will see sharp spending cuts, or huge Budget Deficits and hence, falling currencies.
  • A general commodity bust, consequent to a slowdown in China, which could tip into a serious crisis.
  • A rickety Japan, which has a number of problems, and has still to see the after-effects of an unprecedented last ditch attempt at speeding up a sputtering economy. This could end in a Greek-style blowout.
  • A potential currency war, which could be triggered by any of Japan, China or Germany devaluing suddenly and trying to garner export competitiveness. This triggers an upward Dollar spiral, with disastrous consequences for everyone.
Hardly a time for a still-stable Indian economy to try and wring out additional decimal points in growth, by shifting Monetary Policy from its focus on stability. Which makes me want to wade into this 'debate' between Mr. Jaitley and the RBI on Interest Rates.

This chorus for an Interest Rate drop is rather like a bunch of kids sitting in the backseat of a car, screaming 'faster!!! Faster!!!', with no idea of what the driver is dealing with. I don't understand this obsession with growth, in an economy that is one of the fastest growing in the world anyway.....it certainly has the highest growth momentum in the world. It's not like we are teetering on the verge of recession, like Europe, or trying to fight chronic deflation like Japan. I can understand an obsession with growth in those economies.
India is the only major economy still battling inflation. And we are just coming back from a near Currency Crisis.....shouldn't we be focused on stability, especially given the rocky seas clearly visible ahead. How have we quickly created a consensus that all is well and we are ready to jump off a cliff with an umbrella?
Most of the underlying factors are still in the red zone. The fiscal deficit, for one: we are going to overshoot yet again, a modest target that still brackets us with France, that basket case of a no-hope economy that sits at the heart of the Eurozone crisis. The CAD is back above the 2% red line, in an era when the falling Euro and JPY is going to increase your trade deficit. If you look at the trade-weighted REER in nominal terms, you will find the Rupee has got overvalued, which is not going to be good news for your CAD.
If the CAD also represents your savings deficit, then any further uptick in the Investment Cycle will only bring more bad news on that front. So why not keep high real interest rates to push up domestic savings? A drop in the credit offtake could mean a cyclical deleveraging effect. This can be made up with other reforms that improve corporate profitability, like labour and land (acquisition) reforms, which bring down the cost of other inputs. Tinkering with Monetary Policy to bring down the cost of capital, is just lazy government, taking the easy way out.

The steep drop in oil prices has been a good stimulus for the economy, but this decline could have been used to bring down the fiscal deficit with some temporary taxes. Such initiatives could also cross-subsidise energy efficiency programmes and VGF funding for Solar.

With all this talk about the Modi Wave, real change of macro-fundamentals has been zero, and we are already talking about going to 'loose money' again, even as liquidity is already flooding in. This will only feed inflationary pressures, leading to a two-steps-forward-and-one-step- back policy that will only promote volatility in monetary policy.

I mean, why do we always to look to Monetary Policy to bail us out of a slowdown? Is it because everything else is more difficult, or is it because Markets are most sensitive to money flows, and they have a disproportionate voice in the mainstream media? Are the profit priorities of just a few rich and influential individuals, going to be allowed to destabilise the country's most important economic objective.....to provide stability first, and then create the right environment for growth to find its natural level.

Shouldn't the Govt's targets be first an inflation target, a fiscal deficit target, a Public Debt target, a Primary Surplus target.....and then a growth target, which follows as a result of the enabling environment that is so created. A driver is first meant to ensure that a car is stable, there are no accidents and the wheels are not flying off, before he listens to the kids screaming in the backseat. In India, you find very little debate on the rest of the variables that drive stable growth, and all the conversation is just about growth at all costs. This only promotes cyclicality and volatility, with its own economic costs.....most important, these costs (i.e. inflation, debt defaults, spikes in unemployment etc) are borne by the poor and the middle class, while the short-term benefits of incremental growth are eaten away by the elite.

A Modi government that is looking at the long-term is better served by a sharper focus on stability, and creating the right environment for sustainable growth, rather than a blind rush for growth. I sincerely hope that a Raghuram Rajan who has set himself the target for a 'bullet-proof' Balance Sheet, will not be swayed by this cacophony of voices that are looking for growth on steroids.

If at all interest costs need to be lowered, the Govt can give an Interest Subvention of, say, 4% for Solar investments. This will have the effect of reducing the cost of capital for solar investments, helping promote investments. Except that the cost wuld show up in the government's fiscal deficit, even if it is as a capital subsidy. But at least it will discipline the government, which will have to find other spending cuts. The net effect of a further solar subsidy (over and above the VGF of `1 cr per MW), will be to reduce imports (of coking coal and oil) and the cost of energy. Energy independence will give a fillip to agriculture and water management, which is just where growth momentum should be promoted.

To summarise, the government should focus on promoting asset profitability, rather than reduce the cost of liabilities. With rose-tinted profit outlook being posted by every analyst worth his salt, why should we resort to rate cuts: instead, keep real interest rates high, even as you reduce the cost of other inputs, especially land, raw materials and management value-add. This will bring in foreign investment, which will help kick off your Investment Cycle with equity rather than debt. That will kick off a virtuous cycle, bringing in FDI, besides promoting domestic savings. It will also silence industry lobbies that are behind this cacophony for lowering interest rates.

Lowering the cost of capital often results in misallocation of investments, even as we are suffering the after-effects of the rate-lowering spree and spraying of cash, after 2008. The chorus for a rate cut could hardly be wanting to go into another cycle of misallocation (of investments), even as we have still to write of the NPAs of the last cycle.
The author teaches, trades and writes at spandiya.blogspot.com.

21 Sept 2014

Jack Ma on ambition

People will always have their opinions on what is right and what is wrong. But this one coming from the major headliner of the day will carry some weight. Jack Ma is all about the news given the IPO of his firm Ali Baba that seems to set to break the record books.

http://vulcanpost.com/7702/jack-ma-youre-still-poor-35-deserve/

Reading it reminds me of this speech (Not Safe for Work) http://www.youtube.com/watch?v=y-AXTx4PcKI from Alec Baldwin in Glengarry Glen Ross.

Or if you want a more recent example the wolf of wall street (Again, Not Safe for Work) http://www.youtube.com/watch?v=8snbL_kVmXw

16 Jun 2014

19 Apr 2014

The Great Indian Robbery

An interesting thing in the national elections this year is that no one has talked about tax and the common man. A very interesting statistic that the 1 lakh exemption limit is now worth only 47,000 in inflation adjusted terms.

www.valueresearchonline.com/story/h2_storyview.asp?str=25012

20 Sept 2013

Investing in art as an asset? - Article for the day 20 Sept

In the last few years there have been a lot of people talking about "diversifying" by "investing" in art. Well how does one find out the fair price of art? Well, you turn to the "experts". Experts who can't seem to distinguish between an original and a fake it seems. Add to that

That art market pretends that great artists are inimitable, and that this inimitability justifies the often absurd prices their work commands. Most famous artists are good: that is not in question. But as forgers like van Meegeren and Pei-Shen Qian, the painter who turned out Ms Rosales’s Rothkos and Pollocks, show, they are very imitable indeed. If they were not, the distinction between original and knock-off would always be obvious. As Ms Rosales’s customers have found, no doubt to their chagrin, it isn’t.

http://www.economist.com/news/leaders/21586580-fakes-say-some-interesting-things-about-economics-art-emperors-new-pictures



P.S. The logic behind these posts can be found in this post

16 Sept 2013

Designing your goals - Article for the day 16 Sept

While working in Incentive Compensation design (How to measure people's performance and pay them for it) we always faced the dilemma of relative pay or open ended pay. In relative pay people needed to be ranked and paid according to their ranking. Open ended pay was based on how you performed against your baseline performance. Most companies I know force rank people into a "Bell Curve" for grading so that they can control how much profit goes out in bonuses. But as this article describes, if you want amazing performance from your people with lower anxiety; make it about challenging themselves, rather than comparing them against others.

The way we design our working and learning environments can change people's motivation for achieving important tasks.

http://news.stanford.edu/news/2012/may/shape-achievement-goals-051012.html



P.S. The logic behind these posts can be found in this post

11 Sept 2013

Cyclical Nature of business - Article of the day 11 Sept

"A housing slump in India" Sounds impossible? Not really. In fact I have been amazed at how everyone I talked to about real estate in the last two years believed in the never ending rise of housing prices. Even after pointing out to them that this was exactly what happened prior to the US housing bubble, they had enough reasons to believe that India was different. They talked about how India was different from the US in x,y,z ways. Pointing out that they were using the "decoupled" logic which the stock markets used but failed miserably, couldn't move them.

http://www.nytimes.com/2013/09/11/business/global/a-housing-slump-in-india.html?_r=0

This is the cyclical nature of business. What goes up, needs to come down. There will always be boom and bust cycles.



P.S. The logic behind these posts can be found in this post

9 Sept 2013

The Hidden Hand - Article for the day 9 September

So I had internet issues again (thanks for nothing Reliance). So missed a few days. But coming back to the point at hand. Conspiracy Theories.

I heard quite a few people in my friend circle spout the "India's foreign exchange crisis has been deliberately caused by political parties in preparation of bringing in foreign slush funds in order to fund the elections."

While I didn't take the time to do the research, Value Research has done it. I particularly like the way he explains that we always look for supporting evidence rather than evidence to disprove it. Read and enjoy

http://www.valueresearchonline.com/story/h2_storyView.asp?str=23506



P.S. The logic behind these posts can be found in this post

4 Sept 2013

There is a storm coming - Article for the day 4th Sept

600 point swings on the market. SEBI asking banks to relook at how they calculate circuit filters. It looks like there are a lot of things for the 24x7 news channels to talk about these days. A few people started comparing the crisis with respect to 1991 when our current PM was the Finance Minister. However, I think this post is a little more balanced. How does this affect us? Well if you don't have a Batmobile, at least get an umbrella.

http://blogs.timesofindia.indiatimes.com/Swaminomics/entry/get-ready-for-another-asian-financial-crisis



P.S. The logic behind these posts can be found in this post