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Wednesday, June 13, 2012

DJIA 1920-1940

A lot of people are drawing parallels between 1930-31 and today. I thought let me post a chart of  DJIA over that period to understand what it means for us.

Courtesy: Stockcharts

Tuesday, June 12, 2012

Elinor Ostrom

Elinor Ostrom is no more and economics is poorer today. Her work on management of commons and economics in general was path-breaking. She was the only woman Nobel Laureate in Economics. RIP Ms. Ostrom we will never find someone as capable to carry forward your work.


Monday, June 11, 2012

Parallels and differences Germany vs. EU and US vs. China

I would like to draw attention of policy watchers to this interesting parallel - What Germany is to EU, China is to US. I have raised this point earlier as well.

  1. Germany is the manufacturing powerhouse primed by debt-accumulation across EU just like China is manufacturing powerhouse primed by US debt. 
  2. Both Germany and China hold government bonds in quantities that may break the bond markets and trigger concurrent run on currencies and banks. 
  3. Both want others to follow austerity while trying to keep interest rates low and economy primed at low unemployment.
  4. In effect, both will have to be architects of bailouts at substantial costs to their respective tax payers. It seems unfair but it is only reasonable way out of the current problem. 
Let us watch what experts recommend to both economies in these scenarios.

Thursday, June 07, 2012

George Soros - remarks on the Euro

Rocking Jude pointed towards a recent George Soros Speech about EU crisis (among other things) via Business Insider, which I believe is a must read. Here are some diverse but important issues:

  1. Soros highlights "you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it." which I agree with. However, those forcing the governments to austerity may do well to remember that in the end, government enjoy a kind of legitimacy that they don't. So if push comes to shove, the politicians will roast them alive and announce a victory parade while they are at it. One of the  solution to a debt crisis is to eliminate the creditor. History bears witness to many such "eliminations" (a few of them quite physical).
  2. The objective of the economic studies should not be search for Newtonian-like laws but rather seeking engineering objectives of "fail safe" and "factor of safety" into regulation, policy and economic system as a whole. The current risk management system is falling woefully short.
  3. Two-level currency system: An ideal currency system, I think, may be a two level currency system. A currency at the national level should signal the relative prices of goods and services in the economy. An international currency should signal the confidence in the judgement exercised in national currency. The international currency therefore decides the relative prices of currencies and thus of everything.
  4. The problem of EU is that at current position it is unsustainable. It has either to go forth (towards complete integration) or go back (break-up). Mustering the political will to forth in such climate is challenging as Soros highlights.

Wednesday, June 06, 2012

Importance of Emerging markets in portfolio

Here are my comments:
  1. Growth is in EMs: If you use GDP growth in addition to GDP, emerging markets will come out still higher.
  2. Currency story: The undervalued currencies of EM economies make it good opportunity from currency gains aspect as well.
  3. Known trajectory: EM economies require product and services, regulations, infrastructure along well established and well understood lines. We have done such things in developed markets before and thus it is less risky.
  4. Less consumer leverage: One significant difference between other economies and EMs is consumer is not leveraged. In fact there is substantial class of people with good amount of savings and latent demand. Thus, once government policies are on track, you can have growth and not face deleveraging.
  5. Political risks: Government or political risks, to my mind are same as developed countries. All politicians are jack-asses and we have seen how politicians from any country, developed or emerging, can turn it into a banana republic. Further, some entrenched vested interest may work against developed economies in this case.

Explaining Indian Policy Paralysis

A lot of recent comments, including mine, have pointed out the lack of policy commitment from the government. I believe there is a reason to this policy logjam and it may reverse quite quickly, to surprise of many, making the current time most critical time to invest in the country. To warn this is a conjecture.

  1. Indian politics has undergone a change of mechanism in financing. A significant (non-trivial) percentage of money deployed in politics comes from stock markets where it remains invested in distributed accounts. 
  2. This implies that the stock markets must have a good peak about a year before the election. Year being the approximate time required to oil the election machinery of the political parties.
  3. This also implies that there should be a good opportunity to invest around 2 years before the election without which the peak referred above will have no meaning. 
  4. Political money is gained from rent-seeking and corruption and not invested in first three years as it is being collected at that time. It is usually available around 2 years after new government takes office, the bulk being available around 3 years time. (term of government = 5 years in India)
  5. Insiders inform me that Late Mr. Pramod Mahajan (parliamentarian of BJP) was amongst the pioneers of such strategy around 2002-03. Subsequently ruling party Congress, inducted relevant talent into this strategy. Some say, former finance minister P. Chidambaram, known for his investment sense, may have used this means earlier. Though I have heard conflicting reports that state branches of parties in South using similar means since 1998-99.
  6. While earlier efforts benefitted from a global bull market, current efforts require ingenuity to create returns in an adverse global macro environment. 
  7. I hear that ruling party has taken an ingenious approach to current problem. The first phase of the strategy is to create policy misdirection, increase rhetoric and in general cause panic and injure investor sentiment (only enough to create a equity market). The second phase is to establish policy direction and build credible reform base that should lead to uptick in equity markets.
  8. The magnitude of money involved is not small. Even small district magistrates have wealth in excess of INR 50 million. Politicians have access to money in excess of INR 200 million each. There are tons of them. However, substantial amount of this money is in black (cash not accounted or declared) and thus cannot be funneled into the equity markets. However, the numbers are mind-boggling.
Thus, I expect:
  1. Reform process to gather steam from current levels.
  2. Increasingly positive policy news of reform and clarity coming from governments.
  3. In general improving investment climate.
  4. Proactive and improved response from government to cushion or even counter negative news coming from global economies.
  5. Government may talk the market up.
Implication for Equities:
  1. I believe this current level is a bottom for next year or more.
  2. From this point we will move up is a sustained manner till beyond March of next year (around).
  3. At that point we may see a sharp correction as money starts being pulled out of the markets.
  4. So, this is time to be long India and get out by March next year.
  5. Risk is that if all start working on the same strategy exit needs to be critically examined.

Tuesday, June 05, 2012

Problem of Indian Economy

The problem of Indian Economy needs to be explained better.

Imagine the economy as a car (favourite of economists). The car has an engine of 4 cylinders (say). Then process of policy development adds cylinders to the engine. Thus, with prudent reform and policies the 4-cylinder engine economy can grow to become 6-cylinder engine economy. This is achieved while the 4-cylinder engine is still working and therefore is a complicated process.

First set of problems
Indian Economy is a car with 4 cylinder engine (as against US economy which could be 16 cylinder or China could be 12-cylinder etc). This engine is capable of growing at ~7% steadily. But to grow at 9-10% we need a bigger engine. Sadly, the Indian politician has no inclination to undertake these reforms.

Second set of problems
To add to our woes, the 4-cylinder engine itself is not running to its capacity. Not all cylinders are firing, brakes are engaged slowing the economy and there isn't enough lubrication to transmit all the engine power to the wheels. As a result we are finding it difficult to hold on to 6% GDP growth. Here again the problems are created by political class.

In times of global macro-economic distress, one expects politicians to at the very least avoid second set of problems. In corporate lingo, these can be solved by "de-bottlenecking". In other words just simplify the procedure and keep policy clear and simple and you will have solved second set of problems.

Tackling first set of problems is going to be difficult and will need decisive political leadership that sadly is not even available on the far horizon.

Monday, June 04, 2012

Austerity isn't a choice!

If you are already in debt, then you cannot get out of this mess (or hole) by borrowing more. Or can you?

This is oft repeated argument you will hear in current crisis. Well, here is my clarification.

Who is the "you" in that statement?
If you includes everyone then austerity won't help. If, on the other hand, "you" only refers to government then austerity may help.

What do you do when you find yourself in a deep hole?
Frankly, tell me what would you do? Would you say starve yourself that you may become lighter and thus be easy to pull out by some onlooker or, for that matter, rise to top? Or would you gain strength and carve out steps on the side of the hole and try to climb up? I would definitely do the latter. But it involves digging. But I cannot be expected to dig to make the hole deeper.

In other words, we need to dig, just not deeper. We need stimulus. But one that can create competence and help build a path out of this mess. Thus it becomes very critical for government to choose the projects rightly - something not many governments are good at. 

Big government vs small governments
Just remember, governments must get bigger when everyone else is getting smaller and vice versa.

Indian Economy: Difference between 2001 and 2012

The difference between Indian Economy of 2001 and 2012 relates to how demand and policy are inter-related.

In 2001, policy certainty (directional certainty) helped drive investments when demand was yet not established. In 2012, demand is well established but it is the lack of policy certainty (again directional) that is preventing investments.

Thus, if India can sort out its politics it can gain quite a bit in a short time. Meaningless ambivalence about policy has condemned India to low growth seen recently. Hopefully the 5.3% quarterly GDP growth may wake the government from its slumber.