Wednesday, March 21, 2018

Interesting Readings 20 March 2018

Lemon Tree is ranked 4th Best Company to Work for but attrition rate is 43%. Readers know that I have my gripes about the practice of HR management. I think most of it is glorified payroll processing. Real talent management has not developed at all. HR can be quite strategic asset if used properly.

Actually some of the ideas Jio is using came for Reliance Communications. RCom, before the split, was going along the exact same way only they were going to use fibre-to-home rather than mobile. Also the choice of CDMA was because it was data efficient. This is back in 2002 when iPhone had not changed the world. Mukesh Ambani is a tech geek and understand new tech very well.

Andy Mukherjee is at it! Well written. Kumar Mangalam Birla just treated India’s new bankruptcy law with utter disdain. But before you dismiss the behaviour, think of the huge favour he’s doing the legal system.

This crisis is entirely Modi's making. Modi, when he was campaigning, seemed like Narsimha Rao 2.0 - take political risks but fix the economy. Vajpayee's NDA was not ready to take political risks because of their marginal majority. However, Modi's policies are more in line with Gandhi's (Rajiv and Indira) and Manmohan Singh than either Vajpayee or Narsimha Rao. The sooner he aligns himself with the correct economic model the better.
Barry Ritholtz finds we haven't learnt much.

Look at the LBO-based financialization of the firm. This shows the difference between investors such as Warren Buffet and these vulture funds. In one of the meeting with investee, I happened to join with analyst from a co-investor firm. First thing this guys says to the entrepreneur "we own you guys".
They blame her but she is getting off the hook. Apparently after being charged with defrauding investors out of more than $700 million, Theranos founder and CEO agreed to a $500,000 fine, gave up her voting control of the company, reduced her equity stake significantly, and will not be able to serve as an officer or director of a public company for 10 years. 

The main culprit here is the silicon valley culture. One fellow suggested to me that entrepreneur should get financed by VCs because "they will open the doors" for him. So if his idea was important and he did not need funding no one will open the door? The once you get first round, you have to get second round at 10X the valuation and third round at 10X till you go for IPO exit where everyone gets off and common investors are left holding the bag. Read some issues raised by this episode at Worden Report.

Excellent pointer thanks to Barry Ritholtz. Look at this chart, India should focus on improving patenting of innovations already being used. Indians are quite lax about patenting.

Trade war with China was always on the cards. In fact tariffs and trade blockade is the way to keep China from damaging US interests. China was becoming increasingly aggressive with US and its allies. A US trade blockade will put the wages and employment of large population at risk. So will China suffer? I think not. Chinese leaders have shown great strategic depth. I believe they are already working on shifting their economy towards a consumption-oriented economy. However, as I said before, I think consumption driven economy is fundamentally incompatible with restrictive political system.

Indian Bank Scams
Debasis Basu asks the right questions whether RBI is powerless or not. And rightly highlights that there is finger of responsibility points to babus from Finance Ministry too. Must read.

Ajay Shah weighs in on how to manage the bank reform. I agree with him in some aspects. Here is the quote:
A comparison with the experiences of 2008 and 2013 is instructive. India was one of the worst-hit emerging markets immediately after the Lehman failure. Each crisis is different, and this one had a combination of stress in mutual funds, real estate companies, Indian borrowers in the overseas money market, ICICI Bank, etc. The key factor that led to good outcomes was the capabilities and teamwork between the Ministry of Finance, RBI and SEBI. The day to day actions mattered, but even more, the market was reassured that there was genuine capability and teamwork.

Objectively speaking, the difficulties faced in India in 2013 were smaller than the storm of 2008. The difference lay in the capabilities and teamwork. In 2013, we came across there as a jittery government coming out with one new action every day, and lacking an understanding of what we are up against. This converted a small shock into an outsized problem.
This evokes mixed feelings for me. First, Government is coordinating the various banks and their ensuring that at least there is some coordination between smaller-bank-group vs large-banks-group. It is good for efficiency. But retail credit need not be good credit. It has to be good credit first and retail credit is secondary.  

 Tyler Cowen highlights an interesting paper. This applies to "sons" not daughters. It is triggering many thoughts as to why it should be so. Read the comments too. Not much discussion can be carried out without sounding racist so be careful.

Former Additional Solicitor General of India Biswajit Bhattacharya has written a good piece. But like a good lawyer fails to explain the other side. Supreme Court, despite being cognizant of this, has granted custody for many politicians. Mind you this is mostly in case of politicians accused of scams. Others like Salman Khan tended to get off easily. The CBI, government officers and corrupt politicians have extremely tight nexus. It is being sought to be broken and it is not going away without a fight.

World War Watch
Mint believes in pragmatism. But two-front war is something we need to prepare for. General Bipin Rawat is right. The points made by Mint are right too.

Excellent article by C Raja Mohan. I think, India must consider the possibility that China is playing the same game US played with Soviets and the game is economic and not related to armed intervention. Luckily, India has US on its side in this game. The Quad is necessary reality. Shinzo Abe was right and timely (probably late). India must accept this reality.

Monday, March 19, 2018

Interesting Readings 19 March 2018

V Ananthanageswaran points to interview of former election commissioner. It highlights how the proposal for electoral bonds (a salutary proposal at the time) has morphed into something of a joke against corruption. The mechanism for political party finance remains elusive.

India is considering creating a regulatory Sandbox for fintech. I think Singapore provides a good model, proactive and with feedback loops.

David Henderson writes about his experience of Uber Driver cancelling and ponders over the economic motivations.

World War Watch

Interesting development. Was the need of the hour.

Lockheed Martin is trying to sell F16s to India. Offering is unique. But F16 still has higher operational cost than Gripen and likes. I would rather have a Gripen aircraft with same deal as F16. Modern air warfare will most likely involve big-team strategies beyond visual range. Gripen can also be modified to carry Indian missile systems.

Friday, March 16, 2018

Interesting Readings 16 March 2018

BJP is becoming arrogant. The problem is people realise what reforms are critical. Unfortunately Modi has gone silent on reform and development. He needs to communicate and guide the national sentiment. Further, 80% of BJP is like all other political parties - goons, thugs and fringe elements. They need to be disciplined. 
BJP is also suffering from prolonged and relentless campaign by the media. Media is wearing BJP down. In the time when prime minister (the main icon of BJP) is not speaking on reform and process government is using, it has become one sided. 
The institutions too are waging a war against reforms - banks and telcos are relentless in their Aadhar marketing. To make it worse they are threatening with dire consequences causing pain - locking of bank accounts, mobile phones etc. Can the BJP not reign them in?

Suresh Prabhu's efforts are paying dividends. This is the beginning of improvement in Railways. 

A day after Patel’s plaint, finmin points to power regulator enjoys
I don't understand why they have to fight in public. Why can't the RBI and Finmin sit and do a dialogue. I mean even Kim and Trump are talking. This public spats are unwarranted. I was not sure about Jaitley as Finance Minister.

Also Mohammad Shami and his wife should shut up and the press should just ignore them. 

Trade Wars
There I have come to first use of Wakanda as an example in Economics.

World War Watch
HAL production capacity is 6 aircraft per year. The aim is to get 16 aircraft per year production rate. If this is what is priority then I believe we need super duper priority. The aim should be to create about 30 aircraft per year. For next 3 years. 
As a comparison Lockheed Martin F35 production rate is 17 aircraft per month. It is not totally comparable as there are orders of 3500 F35 pending with Lockheed. But once the Indian capacity is used up for Tejas there will be upgrading and new aircraft etc. HAL's IPO should help proceedings.

Mark GB presents a case that Putin is being wrongly demonized. Russian version of Syrian conflict was more accurate than US/Western version. I am also not a fan of US interfering in elections, parties, coups and political assassinations in guise of bringing democracy. 

US has done a great service to the world in second world war. I think the post-war freedom movement was partly result of negotiation by Franklin Roosevelt with the Europeans. That was good. After the World war US entered into a cold-war era which had its issues. Part of US interference in other countries was in light of cold war Soviet financing of the political establishment in other countries. [One can see the parallels with China in this case]. But after the fall of Soviet Russia, US has interfered without reason and merely to further interest of those who lobbied for it. The first war on Iraq was justified but not the second. The mess in Afghanistan was more created by US. 

Thursday, March 15, 2018

Interesting Readings 15 March 2018

No Banking Regulator Can Prevent All Frauds, Says RBI Governor
Urjit Patel, full speech is here. Before reading you might be tempted to count this as a cop out by RBI. However, Urjit Patel raises important issues which merit consideration in overall scheme of Banking Regulation. It is not to blame present government but to highlight the important issues. Most of the points he highlights need careful deliberations which frankly I think are beyond Arun Jaitley. (He may be a good man but mostly misled by his bureaucrats and same goes for Hasmukh Adhia).
All commercial banks in India are regulated by the RBI under the Banking Regulation (BR) Act of 1949. Additionally, all public sector banks are regulated by the Government of India (GoI) under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; the Bank Nationalisation Act, 1980; and the State Bank of India Act, 1955. Section 51 of the amended BR Act explicitly states which portions of the BR Act apply to the PSBs, most common thread across the omissions being complete removal or emaciation of RBI powers on corporate governance at PSBs:
  • RBI cannot remove directors and management at PSBs as Section 36AA(1) of the BR Act is not applicable to the PSBs.
  • Section 36ACA(1) of the BR Act that provides for supersession of a Bank Board is also not applicable in the case of PSBs (and regional rural banks or RRBs) as they are not banking companies registered under the Companies Act.
  • Section 10B(6) of the BR Act that provides for removal of the Chairman and Managing Director (MD) of a banking company is also not applicable in the case of PSBs.2
  • RBI cannot force a merger in the case of PSBs as per Section 45 of the BR Act.
  • PSB’s banking activity does not require license from RBI under Section 21 of the BR Act; hence, RBI cannot revoke a license under Section 22(4) of the BR Act as it can in the case of private sector banks.
  • RBI cannot trigger liquidation of PSBs as per Section 39 of the BR Act.
  • Furthermore, in a remarkable exception of sorts, in some cases there is duality of Managing Director and the Chairman – they are the same – implying the MD is primarily answerable only to himself or herself.
This legislative reality has in effect led to a deep fissure in the landscape of banking regulatory terrain: a system of dual regulation, by the Finance Ministry in addition to RBI.3 I will now take a few minutes to explain why this fissure or the fault line is bound to lead to tremors such as the most recent fraud.
In contrast, the market discipline mechanism for public sector banks is appreciably weakercompared to that at private banks. There is implicitly a stronger perceived sovereign guarantee for all creditors of PSBs, and the principal shareholder – the government – has not so far been interested in fundamentally modifying the ownership structure. From an economic standpoint, this weakened market discipline should imply that the government would prefer strongerregulatory discipline of these banks, not weaker. However, as I explained above at length, and perhaps since the original idea behind bank nationalisation was complete government control over credit allocation to the economy, the situation in India is exactly the reverse: RBI’s regulatory powers over PSBs are weakerthan those over the private sector banks.
The owner of our public sector banks – the government –which has provided the IBC, the related ordinances and the bank recapitalisation package to get the churn going, might consider making further, equally important contributions by:
  • Making banking regulatory powers neutral to bank ownership and leveling the playing field between public sector and private sector banks; and,
  • Informing itself about what do with the public sector banking system going forward as part of optimising over the best use of scarce national fiscal resources.
It is an open issue whether centralised government control alone can be effective enough at designing and implementing governance of banking franchise comprising over 2/3rds of the sector’s deposits and assets. It would be better instead to restore regulatory and market discipline.
Read this in context of article below which suggests some ways how to operate publicly owned companies.

Scott Sumner talks about past article How capitalist is Singapore? (we linked to this in previous post). Read the article with an eye to Air India and Indian Government owned companies. The first line is : 
Singapore Airlines is majority owned by the Singapore government. Alitalia is privately owned. So which country's airline industry is better described as "capitalist", Singapore or Italy?
India's Clouseau Bankers Deserve a Bigger Stick
Andy Mukherjee says it well suggesting Arun Jaitley should accept Urjit Patel's suggestions. Though I do not agree with the privatisation part. They could well set out a road map saying Banks will be privatised in 8 years or so and then working them towards profitability.

Haim Bodek is a whistle-blower who exposed Direct Edge a stock exchange help High Frequency Traders. He is back with another expose of NYSE now. Both have resulted in fines of $14m. Also worth reading are articled linked in this one.

Chinese credit risks are quite severe. It is good that India is reforming its banking system. This will allow for next decade or two of growth. 

A counter-view about China. He points out that China's overall debt is not too high. He makes certain other points in favour of China too.

But the debt is not too high when using normal methods. The Chinese use outside-mechanism to create debt. It's institutions carry too much debt burden backed by the government. This debt has financed investment in factories capacity equal to global demand for many products. When trade policy turns adverse and every country protects its own manufacturing, this capacity will be a huge liability. US is rightly changing the policy and in fact is playing the conflict strategically in the economic theater. US did the same with Soviet Russia - played them economically with Star Wars program.

What should be the international reaction to Chinese debt problem?
Global central bankers should increase the risk weightage for firms dealing with Chinese financial institutions. This is the time to increase capital backing these transactions.  That is what I suggested in Subverting Capitalism & Democracy:
In  an  economic  growth  cycle,  it  seems  advisable  to  have  increasing  deposit  reserves.  As  the  pace  of  the  economy  grows, banking system should become taunt and solid. This  moves the banking system from a fractional reserve system  towards  100%  reserve  system.  Of  course,  it  would  never  reach  100%  reserve.  At  the  extreme,  reserves  may  reach  say  40%.

Wednesday, March 14, 2018

Interesting Reading 14 March 2018

Bank Scam
RBI bans letters of undertaking for seeking overseas loans
Too little too late?

China’s Own Goal: An Unnecessary and Counterproductive (on-budget) Fiscal Consolidation
Brad Setser talks about how Chinese demand and savings affect global demand and savings. Interesting read as usual. He has clarified this issue many times before but read this article as it gives details on Chinese central government debt and savings.

B.R. Ambedkar in the time of farmer protests

China’s US Treasury holdings in focus amid trade tensions
This seems like a fallacy. China would rather use the forex reserves to buy assets globally or in US than just dump them. With countries restricting acquisitions by China [Recently US government vetoed Singapore based Broadcom's bid for Qualcom] things could get nasty but dumping treasuries may not be part of the deal. In case situation worsens however China may use it as an offensive tool. From China's point of view those dollars should be written off already.

Other Interesting
The Economist has a story on how taxi data was mined around Fed meetings to study what is the potential impact of the policy being announced. The Economist raises some questions about information leakage between policy announcement and release of minutes of meeting where there is no blackout.

My suggestion is that every politician or bureaucrat when he meets with outsiders the meeting should be live streamed with audio on their website. And no meetings should be allowed on outside. Thus when an official meets outsider in a coffee shop or so, a presumption of law may be attributed to that being "illegal" meeting.

Blockchain Revolution Without the Blockchain 
A sensible article about what the block-chain is  and what to expect. This comes from Bank of Canada courtsey Amol Agarwal.

Addressing the Dark Side of the Crypto World
Christine Lagard weighs in on risk of Crypto World. Gives you flavour of what international policy is heading for.

Something Mysterious Is Killing Captive Gorillas
Gut bacteria is very important. Some principles of Ayurveda are coming back to mainstream.

World War Watch
A challenging time for the Indo-Pacific
Brahma Chellaney does a superb post. Must read.
Remember Indian ocean is strategic - it has access to two choke points on trade routes - The gulf of Aden (towards suez canal) and Strait of Malacca (Singapore strait towards pacific). China is trying to get its feet into areas where it feels it can be choked -oil transport routes.

Forget Trade Wars. Trump's ‘Taiwan Card’ Is China's Real Worry

Game Theory Scowls at Trump-North Korea Talks
Tyler Cowen explains the North Korea-US talk in game theory perspective. North Korea is in position of significant advantage. The question is there are some options that are not known to us lay people but known to US security experts.  That is the hope.

Most of China experts believe that North Korea is headache for China. However, I don't think so. There is/must be some tacit understanding between China and North Korea. I feel China is playing US through North Korea. This game is not being played by Kim alone. The behaviour of China & North Korea just don't add up.