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Friday, February 08, 2019

About Australian banks and Australian property

John Hempton highlights something interesting today about resignation of top Australian Bankers.

Back in 2016 John Hempton and Jonathan Tepper of Variant Perception conducted research by personally meeting with the real estate brokers and seeking apartments to buy. In a sort of reply of scenes from the Big Short, they found banks wanting on the paperwork, mortgages being sold to those with questionable ability to repay. You can read some media reports about this here, here or here.

Today John Hempton wrote about recent firing in light of the final report of the Royal commission into banking and detailed allegation therein. John Hempton says:
Anyway come the Royal Commission Dr Henry talked to the Commission in a frank and open way about the problems. It was Dr Henry being Dr Henry: honest, competent, and realistic.

It came off badly. I remember the grilling he got from the Royal Commission and understood what was happening. It was clear that what was required from the Royal Commission was kowtow, rather than honest frank discussion. Dr Henry looked bad even though he was probably the single most reliable and honest witness the banks put up.

The Royal Commissioner made specific findings against Dr Henry and Andrew Thornburn. This surprised me because on my research National Australia Bank was the best of a bad lot, both in absolute level of moral decay and in direction.

The report quotes Dr. Henry and Thorburn in many places. The transcripts do not show Dr. Henry in good light. The transcript indicates that possibly Dr. Henry took this too lightly. He did not do any homework. A deposition once you are sworn in is a serious business. I do not sympathize with Dr. Henry.

The transcript of some others reveal that they kept repeating from jargon books and PR manuals. To that extent whatever their deep rooted ills did not come out. 

Implication for property market
There are two fundamental issues with the housing and mortgage markets. 

First the search for yields and the quantum of capital available makes real estate the best asset class to absorb the QE effects. It is doing precisely that. So some of the price appreciation is attributable to this. The macro policies have created this asset builders boom - create an asset and sell it to REIT type holders at ludicrous cap rates without any regard to final consumer.

Second, the problems in mortgages are of banks creation. As banks search for return in a tight market they have crossed the limits. The crisis in Australian banks is part of continuum that includes Wells Fargo opening accounts for customers to US sub-prime crisis. It may not be as acute but it is part of the same class.

Learnings for Commissions in India
The commission for banking has its website and documentation spot on. I urge Indian commissions to maintain such kind of records open for public scrutiny.

Thursday, February 07, 2019

Questionable Promoters' action

Deepak Shenoy from CapitalMind has an excellent blog and website. His post today titled Jubilant Backtracks From Paying Promoters For Brand They Don’t Really Use deals with some questionable actions by the Bhartias. Below are edited quotes from that article.

Jubilant Foodworks and Jubilant Life Sciences in a board meeting, they proposed a 0.25% royalty on consolidated sales for using the “Jubilant” name , to each of the companies.
To give you a perspective Jubilant Foodworks is franchisee operator for Dominos and Dunkin Donuts both well known US brands. Jubilant Life Sciences is a pharma company in generics and contract manufacturing.

The article further details various business groups doing this activity in some form or other. The two prominent ones that are missed in that discussion are the Aditya Birla Group and Kingfisher. Here are some from the article:
  • Royalty from listed companies - 
    • Colgate from Colgate India (4.8% of turnover) 
    • Unilever from HUL (3.15%), 
    • Dominoes from Jubilant Foodworks (~3%), 
    • JSW Steel to Wife of Promoter (INR 1.25 billion)
    • Tata from Tata companies using Tata name (0.25%) 
    • Tata from Tata companies not using Tata names (0.15%)
    • Muthoot group
    • Shriram group
    • Wadias (intending) from Britannia Industries
  • Loans to promoters later written off
    • Network 18
    • DHFL (Alleged)
  • Merging promoter companies with listed ones at unclear valuations
    • Satyam
    • JPAssociates
    • LEEL
    • Eon electric (attempted)
    • Vedanta
  • Financing Promoter lifestyle
    • Raymond - maintaining Raymond House

I do not like these kinds of "promoter earnings". You are either a promoter or an employee - don't be both. These should come within the purview of related party transactions irrespective of their materiality.

Thursday, January 24, 2019

Urban Development problem in India - the lack of proper Development Plan

Recently, I had the opportunity to examine the Draft Development Plan released by Maharashtra State Road Development Corporation (MSRDC). The plan is quite badly designed. Yet, what hurt me more was the fact that this plan was developed for Special Planning Area (SPA) which is not developed as much so the development is almost green-field urbanization. And yet, even when we are given a clean slate we make such primary mistakes in planning. I wrote about the shortcomings in an Article in titled "How can smart cities be built on dumb development plans?"

I have looked at the population, water demand estimation, power demand estimation, waste estimation, transportation planning etc. On every parameter this plan falls short. Have a read and leave comments.

Thursday, September 13, 2018

Oil trade routes and India's geo-political advantage

Here is a picture about oil trade routesfrom Geopolitical futures:

You can see the Geo-political importance of India. India has access choke-points carrying about 40 million barrels per day - 4X flow at all other choke points put together. Guarded by a decent navy that can go against the best.

You will realise why China is interested in this area and interested in encircling India with string of pearls. More so if you have read Daniel Yergins The Prize. (If not read it now for understanding of oil industry).

For more details of balance of naval presence in the Indo-Pacific region look at the map below:
Naval Bases in Indo-Pacific - Rahul Deodhar (data from public sources)

These maps are important tools to understand Geo-politics and George Friedman of Geopolitical Futures has a great compilation. Head over there to check it out.

Wednesday, September 12, 2018

Can only US markets go higher in the face of tariffs and other trade headwinds?

In one word - NO!

One the trade front, the US needs other countries (suppliers) as much  as other countries need US as a consumer No. 1. Yet, the consumption burden falls excessively on the US. That too is not sustainable. In the natural course of things this burden should gradually pare down. This natural process was impeded by interventions in currency and trade policy by (a) East Asian economies following 1997 crises and (b) Japan first then China. 

In the first case, the impact is benign as the comparative sizes of the economies in South East Asia and US/UK etc is too big. 

The second case turned out to be problematic, though bit less, in case of Japan. Absent the computer and technology revolution, US would be in same position as today as in post-Japanese growth phase. At the time when the US jobs were diminishing in the face of Japanese competition and trade, Tech was already cooking in the oven. The massive productivity boom unleashed by tech was supported by job growth in new sectors. These sectors pulled decent quantum of current workforce and modified the training profile of upcoming workforce.

Today, there seems to be no new sector that is vigorously attracting the current workforce into itself. There are two reasons for this. First, the speed of Chinese growth is dramatically higher than Japanese growth. What Japan achieved between 1945-1980, China achieved between 1980-2000. Second, Japan started at the time of man-power constraint. China started gaining traction when manpower was becoming surplus. Therefore, job "protection" in developed world has become important.

The trade fears can be allayed / calmed if there is another sector that can create as many jobs for the profile of workforce that exists today and about 20 years from now. Absent that, growth will require  fighting for a larger share in a diminishing pie - a potent trigger for conflict.  The war can be won by biggest bully if he is alone. But when there are a few contenders it takes time to settle the pecking order. Many skirmishes (I mean trade & currency conflicts) need to happen to settle that order. For strategy suggestions we can look at how pecking order is established in prisons. The strategies will be same the tools will be sophisticated. 

Thus, US cannot do trade wars alone. US needs its own "gang". That gang was NATO, NAFTA and these days the "Quad".  The Stock markets of one gang may rise if the gangs are tighter) and they may decouple from other gang. But only US markets rallying is not possible.