People are rethinking cities

National Geographic magazine has an issue on urban development. Seems to be a collectible. Here are some important articles I liked:

To build the cities of the future, we must get out of our cars. It has fantastic pictures by Andrew Moore and Robert Kunzig has done great by summarising the developments walk-friendly cities.

It refers to the emerald city planning guide by Calthorpe Associates. You can download it here.

The cities of the future infographic is super awesome.

The related articles also features one of my favourites: Want to visualize inequality? View cities from above. It features pictures by Johnny Miller. The Johnny Miller website is treasure trove of many such pictures.

The development of Tokyo is documented quite well. 

The photos feature titled This man spends 8 hours every day commuting. He's not alone. is quite good. In my paper How cities Develop I have explored the commute as distance travelled in acceptable commute time. Those insights seem to be bearing out. 

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Socialism or capitalism - Big government is a consequence, Small government an objective

Look at what they do NOT what they say!

Socialism or Capitalism - it is one of the central discussion points these days. Socialist too form a broad spectrum - from Bernie Sanders to AOC to Elizabeth Warren. The capitalist are not yet vocal but many are simply dismissive of the left-leaning neo-politics. But are there really left-right differences? Not too much. And I say that as I look at what they do NOT what they say.

Governments get bigger

The basic aim of government at the formation of Amercian revolution was twofold - Army formed protection force protecting citizens from outsiders AND legislation, police, courts system formed Law and Order for resolving disputes among citizens.

Gradually government came to provide diverse services - education, healthcare, insurance, subsidies, legislation and regulation of various industries. Each of these activities has grown in scale over the past 100 years. 

When you want government to take up more responsibility then you will end up with a big government. 

Big government = MORE TAXES

First objective of taxes is to pay for the government. In some countries the salary expenditures of government account for more than 50% of the total expenditure of the government. This is not counting the maintenance cost and other regular expenses government has to incur just to exist. = MORE TAXES.

Then all these people employed by the government have to do something. Even if they do nothing and just make presentations they consume a lot of money. That requires even more budgets = MORE TAXES.

To make it worse usually they add to procedure and impose cost on society. They prevent innovation. They make it their responsibility to say NO. That stops entrepreneurs before they can create value. It means MORE HIDDEN TAXES.

It all eventually leads to more taxes.

 

Big Government attracts big responsibility

People have started viewing government as a provider. Governments have encouraged that view. In effect whatever we want to get done, we want government to do it. We would like universal health care, you ask government. You want insurance for all - you ask government.

When governments become bigger, governance becomes difficult. Hence laws turn into fine prints, every step of industry is managed by dozens of legal clauses. Compliance becomes a cost.

Big government is a consequence - Small government is an objective

We need to prune governments regularly. On one level that means improving productivity of government servants. But on other level we need to reinvent our systems to be designed for less government.  But remember, no matter what they say, they will increase the size of government AND they will increase taxes AND they will default towards socialism.

To prevent it we must actively reinvent the system to stay on the money. We shall discuss how in subsequent posts.

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World War 3 Watch 04: Indian Defense Equipment strategy

India needs to up its defense game. India is dealing with potential conflicts on two fronts. On both these fronts we have belligerent neighbors engaged in asymmetric multi-dimensional confrontation. Pakistan is more of warfare and China is more of competition. Yet, India must prepare for the potential conflict. And in this we need to improve our preparation substantially.

Airforce

Just cursory look at the Air force in the region will set us back. Pakistan Air Force generally known combat strength is about 500 aircraft. China is about 1600 aircraft. India is about 600. While the numbers are not exactly a way to differentiate - but considering the length of border and our defense requirement India should aim for 2000 combat plane air force.

This means HAL cannot produce 16 aircraft per year. It has to produce 16 aircraft per month. Using private participation we need to improve this number quickly. Second, it appears we need full Rafale deal AND a F16 manufacturing line at the same time.

IAF should also think of getting larger number of combat drones. These drones should be able to manage to fly with manned aircraft. This one manned aircraft (M) -coupled with around 10 drones (D) or more. Thus one mission unit with M-D combination. Then you can add mission units with xM-yD.

These mission units will need to collaborate and coordinate with share intel. That will require a robust ICT interface.

Airforce needs support from ground and space in the form of missiles and information. We should develop mechanism for coordinated launch of missiles controlled by the aircraft pilot herself. We can augment it with coordinator based ground support too.

Army

The future soldier will be an augmented information soldier. 

We need to up our game in terms of equipping the soldier with top-class equipment. AK-203 is a step in the right direction. But we need to lighten the soldier and get every soldier a robo-buddy. The buddies could be in multiple form - carrier mules, terrain mapping drones, communication bots and combat drones (sniper buddy). For this we need very intense development in robotics and again the ICT component will also play a role.

We should experiment with augmenting the soldiers with exoskeletons and other techniques to improve battleground performance.

Air-cover has been neglected part of the army. Apache helicopters in air support is essential. 

Navy

Future of navy is stealth platforms. As the US stealth ship Zumwalt goes for a maiden mission, China is developing aircraft carrier buster missiles. The Chinese missiles are hyper-sonic and thus almost impossible to intercept. In this context any above surface ship will find it difficult to beat the defenses. Hence reliance of submarine platforms should be increased.

Sub-marine drone tech is actually quite interesting. It can be used on sink-and-forget  wait mode. Thus we should be able to plant and move around many depth assets on wait and watch basis. Without humans on board this is (a) easier and (b) safer. It also improves the counter-strike and defense capability. These drones should be easy to manufacture in large numbers and low cost. These drones need not be large they can simply be attachments to ammunition that can help the ammunition to navigate and activate.

Deep sea surveillance and AGAIN ICT is also going to be critical.

So Navy must develop platforms but also develop choking -technologies for anti-ship systems.

Space wars

Space is important front for information wars. The satellites form critical part of the ICT infrastructure we need to deploy across the forces.

Satellites should be able to perform twin functions - jamming enemy satellites and keeping ICT infrastructure working for our forces.

The ability to quickly and rapidly restore downed satellites is very important. We should also explore possibility of smaller satellites that can last only for 5/6 months and then disintegrate. The smaller the satellite the costlier it is to destroy. Also because of size, you can build for redundancy. It is also possible to launch 100 satellites in one launch. These satellites are more relevant for theater coverage rather than country coverage.

Cyber war

Most of modern warfare is quite destructive and hence preventive techniques are more important than remedial measures.Cyber war allows for information and processing delays in enemy retaliation and gives us additional time and information to respond better.

Many times it is better for cyber initiatives to operate in bleeding mode than in crippling mode. Thus, it is better for cyber initiatives to delay the enemy communication rather than cripple it. Thus introducing delays and errors is better than crippling the infrastructure for short time. These cyber initiatives can also provide advanced information about enemy maneuvers. The aim is to destroy combat assets of the enemy.

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Indian Foreign Policy

Since last month's attack on Indian Security forces in Pulwama by the Jaish-e-Mohammad terrorist group, I have been thinking about the changes required in the national policy. Today we get the news that China once again blocked the proposal to declare Masood Azhar, the leader of JeM as a terrorist. In light of these developments here are some thoughts about Indian policy. 

Note: Many sound quite conflicting but that is the reality. I miss Narasimha Rao.

With Israel

India MUST announce a proper strategic deal with Israel including multi-faceted cooperation including defense, technology, agriculture, business, banking etc. 

We must improve integration with its defense network. A Multi-track developments must take precedence -

1. Designed in Israel, made in India, (avionics and defense info-tech subsystems)
2. Jointly designed and made by Israel and India,  (missile, interception & drone tech)
3. Designed in India and made for Israel - (aircraft and other equipment)
4. Joint Cyber warfare development cell.
5. We should have joint training - allowing Israeli forces to train in various conditions and set up training with them in Israel too.

We should aim for Agriculture and water management technology collaboration. We should explore policies that should allow Israel-India manufacturing companies to go global - compete across the world. We need to have 3 such companies be global brands like say ikea.


With Russia

India MUST announce a proper strategic defense deal with Russia as well. Russia is a long-term partner and we must improve the interaction with Russia. We must engage with Russians for heavy equipment - fighter aircraft, ships and submarine.  We should further the missile development cooperation and aim for joint technology development in defense space.

Economically, we have to help Russia ween itself from Chinese dependence. Russia should be able to stall and deny China without a huge economic cost.


With United States

That India and US are not friends is first the fault of India and then the fault of US. Unfortunately, today there a little bit of mistrust still left. 

India MUST have strategic partnership with US and must join the Quad.

1. This will include setting up bases
2. We must join the information sharing treaty with US
3. We must have/develop defense ICT that is interoperable one with US. 
4. We need cyber defense cooperation with Quad.
5. We need to step-up and take our responsibility in Indo-Pacific. 
6. We also need deeper collaboration and joint exercises between US and Indian defense forces.

With Japan

India must enhance partnership with Japan on following fronts:

1. Fighter aircraft development
2. Ship-building tech.
3. New Drone tech

 With Japan, India must set up ventures to develop infrastructure in the Indo-Pacific region. Japan has the capital and technology and India will need to give its man-power.


France
In general, it is not well-understood that France has been a long-standing defense ally of India since independence. More than Britain which somehow finds more sympathy than France. India and France need to improve the cooperation on defense as well as non-defense sectors.  We need to improve the status of France in the Indian economic and defense scheme.


South East Asia/ Asean / Asutralia New Zealand
We have to play very pro-active role in this region. We can work on the food side trying to reduce the cost of food and other goods in this part of the world.


About Pakistan
Pakistan will continue to remain an irritant unless we take proactive effort to eliminate the terrorist setup. It can be eliminated by imposing very high economic costs on the Pakistani Army. To this end, India needs to be part of Afghanistan solution. If US cedes Afghanistan to Taliban or to Pakistani Army backed group, we will soon have trouble on Indian soil.


Working in Middle East

India must UNDERSTAND and ACT on the fact that we are Hindu majority country AND we are the largest democracy of Muslim at once. India must use this to influence a lot of things in the Islamic sphere and give it a better direction. We must champion the reforms taken up by other middle eastern countries and overcome the regressive developments taking place. 

Africa

India should be able to collaborate with Africa much better than any other country. We should provide the institutional support and help African companies develop as suppliers to India. Japan and other countries will surely help us in this process. We have to showcase a credible alternative to Belt and Road but with good clean reformist credentials.

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Time Travel effect of Debt

Generally in Time Travel movies the actors go back in time to change some minor thing to alter the future dramatically. Debt does this in reverse.

Debt pulls value from future and alters the present in such a manner that more value is created in the future than estimated.

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One problem with Indian capital risk return matrix

One problem with Indian corporate and their regulation can be summed up in the chart below.

Ideally a simplistic capital risk return matrix looks like this (click picture for larger version). In the best of places it comes close to this. Note that this is a simplistic depiction.

Ideal Capital Risk-return matrix

In India, it looks like this:

Indian Capital Risk return matrix

This is law enforcement issue as well as information issue. There is lack of regulation on conflict of interest between promoters and investors (small and big), there are many issues related to corporate governance. There is paucity of information to ratings agencies and these days the rating rigour is under a cloud with intense competition.

The chart also tells us why India does not have a deep bond market. Since my days in CRISIL, we have been harping on the improving the depth of bond markets. But so long as the risk-return profile continues there are no incentives for it.

The dispute resolution mechanism is abysmal. It is particularly unwieldy, long winding, costly and infructuous in the end. This has hurt investment in the country. Once this is fixed India will have unprecedented growth in equity and bond investments.

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How Low interest rate can be bad for small business - 2

In a 2012 post with same title, How Low interest rate can be bad for small business, I had explained mechanics of how small businesses are denied capital BECAUSE of lower interest rates. This was summarized from my book Subverting Capitalism and Democracy. Over the years few readers have asked for further explanation. So here goes.

Demand for projects

Let us look at the following schematic.

Capital Quantum and return

The diagram shows the amount of capital demanded and its possible rate of return. The distribution is made from capital requirements of various businesses of various sizes. The financed part is the blue rectangle. The width of this rectangle and its location is determined by various factors.

Now our experience tells us following details - (1) smaller businesses have higher risk profile whereas larger businesses have lower risk profiles; (2) smaller businesses have smaller quantum requirement whereas larger businesses have diverse capital needs; (3) as a corollary projects with large quantum of capital requirement and low return are dominated by large corporations.

Therefore, let me quote what I said earlier:

How low interest rate leads to mal-investment
A bank takes risk by investing in a venture. Interest rate is also a reward bankers get, for taking the risk. Ideally, even in lower interest rate scenario, those projects with best risk-return trade-off should get financed.

However, in reality, lower yielding large borrowings backed by reputed corporates get access to financing more easily than new ventures. This means, irrational mega-projects or mal-investments of large corporates get financed at the cost of genuine investments of new ventures.

Typically, such irrational mega-projects consume a lot of credit requiring load syndication. This has twin benefits for bankers. First, there is a higher degree of comfort in being with the herd. Secondly, bankers do not have to go through credit appraisal of many small entities of questionable risk profile. This makes them assign a lower risk to these projects than appropriate. Intelligent investors will find that this contradicts with the "diversification as risk management" strategy. But being with herd has a stronger lure and is treated as risk mitigation (though wrongly).

Further, at lower interest rates, debt starts being used as an instrument to amplify equity returns. 

Thus the second blow to new ventures comes from crowding out. It implies that even in a low interest rate environment, small businesses and entrepreneurs may not have access to lower cost capital. Therefore this impacts the long-term strength of the economy.

The Mechanics

When interest rates are low this rectangle starts more towards the left. This is space where there are weak business models, those that are viable only in low return scenario. This space has irrational mega-projects of large businesses like debt financed share-buybacks etc. With the superior credit rating of large businesses these projects crowd out the smaller businesses.

As the interest rates rise the rectangle is pushed rightwards. In high interest rate scenario, the irrational mega-projects seem less promising. Hence, contrary to popular belief, it may be easier for smaller businesses to compete in high interest rate scenarios. 

Are few projects with consortium lending more risky?

The answer to this question is easy if you understand it from banks perspective and not from bank manager's perspective. From bank's perspective more the number of projects it finances the more the diversification possibility and thus lesser the risks.

But this has higher risks for bank manager who has to stick out her neck for each of these projects. From bank manager's perspective fewer the projects and more the number of borrowers approving the project as credit-worthy lesser the risk for bank managers. But this means more the risk for the bank (concentration risks).

In sum

The cumulative effect of all these is that at low interest rate the credit is denied to small borrowers at the expense of irrational mega-projects of large businesses. When the interest rates rise, as they always do, these projects turn bad and become a drag on the economy.

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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.

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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.

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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 Moneylife.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.

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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.

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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.

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Interesting Readings 11 June 2018 = Is Debt Jubilee lurking?

I came across an article titled Some ways to introduce a modern debt Jubilee at Vox. The article is in line with the recent discussion about debt. John Mauldin has highlighted this problem generally and more specifically in the last Thoughts from Frontlines. A few months back Christopher DeMaria had written about debt jubilee on Seeking Alpha article titled The American (Debt) Jubilee, And The Current Correction.

Debt Jubilee may be lurking in our future. It is not as bad as it sounds. For some kinds of debt, when prevalent in excess, needs to be written down. I have highlighted the difference between good debt and bad debt earlier - i.e. productive debt and unproductive debt.

Productive debt creates an asset of higher value than the debt itself.

A large part debt currently outstanding is unproductive debt. All consumer credit is unproductive, except educational loans or student loans. It does not create a means to pay the debt back. Thus, debt jubilee may be a proper solution to problem of unproductive debt. Productive debt in trouble can be repaid by extending more productive debt.

The alternative could be to extend and inflate it away. But will there by appetite for that?

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Interesting Readings 01-June-2018

Macro Issues 

This graphic summarizes most of the macro issues going on by Mark Rzepczynski: courtesy Barry Ritholtz  

[Twitter @ritholtz] 

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Interesting Readings May 14 2018 - Development Finance Institutions.

Financing reindustrialization: bring back development banks

Deepak Nayyer talks about capabilities created in Development Financial institutions (DFIs) for longterm lending. 

These DFIs are very important in creating a capability for lending to special investments. India, till 2000, had developed the capabilities to lend to infrastructure, sector-wise capacity creation etc. We need the concentration of skills in one place. This way, special knowledge reduced the risk for lending.

The commercial banks decided to reduce the lending risks by consortium lending. That is a statistical approach to risk mitigation.

Now Deepak Nayyar wants to create a National Development Bank. That I think is a bad idea. Though there may be some merit in creating a network of professionals who can lend to industry and towards infrastructure. These professionals can be monitored using DIN-like number (Director identification number) and their investments performance tracked. These people may be employed with commercial banks but without sign-off from these persons, such loans will not be approved.

Note:

What we are creating is attribution chain. I have discussed the importance of attribution in both of my books - Subverting Capitalism and Democracy and Understanding Firms. Please use the links below to check out the books. 

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My two favourite HR people!

I was listening to Masters in Business and discovered Patty McCord. Patty is former HR head of Netflix. She doesn't speak HR she speaks innovation. Listen to the MiB episode with Patty Mccord here. It is worth it. THIS is what HR should be.

My suggestion:

1. Ask your HR manager if he/she knows what is your job like day-to-day. ( analyse financial statement, work on new toothpaste launch, etc.) it has to be specific.
2. Does he/she know who are your clients? 
3. How do you make money for the firm? How much?

And the next one is of course EvilHRLady.

Interesting Readings 20 April 2018

India
India needs to fundamentally alter its export strategy
Ajit Ranade spells out the answer briefly. The article however highlights important gaps in Indian exports.

World

What 1985 tells us about a US China trade war
Mint searches for lesson in Regan's Japan strategy for Trump's China strategy. Interesting.

Jeff Bezos letter to shareholders, 2018 and 1997

Worth reading.

Why shorting stocks is not for me - in the words of Charlie Munger.

Sort of explains my feeling. Long ago we shorted a group of Australian media stocks. We took positions when they were trading in $38-42 range (yeah all of them) and then they went up over next 3 months. I being a junior was a bit scared though we had doubled down of these bets. Ultimately Lehman struck and these stocks went down right to $4 approx. Yet, I still remember feeling a bit jittery during those times.

Masters in Business Podcast: Annie Duke on Avoiding "Resulting"

One of the most important podcast you will listen. Annie is a poker player and her views on decisions in uncertainty will definitely be helpful. I want to read her book "Thinking in bets". Poker is much like financial markets - decision making under uncertainty. You can also read For Richer, For Poorer: Confessions of a Player by Victoria Coren Mitchell for general view of Poker.

Blockchain Is About to Revolutionise the Shipping Industry

Many people seem to throw blockchain and Distributed Ledger technologies as useful in many domains. For example, in the above one, shipping is considering. While blockchain can solve their problem, that is not the most apt solution. What they need seems to be a centralised processing system with view access to all channel partners.

How China’s Top Leaders Came Into Power

This is an old one but it gives sort of the evolution of Chinese leaders. 

World War Watch

F-35 the myths. This four part series answers some of the questions related to F-35. Part 1; Part 2; Part 3; Part 4. I am beginning to believe it will be better for India to rely on 5 aircraft configuration for Indian Airforce. Gripen, F-35, Tejas, Su-30, Rafale. If US can offer a manufacturing line for F-35 we should take it. But a manufacturing line for F-16 block 70 does not seem to make sense. Particularly I find F-16 short on avionics and a fuel guzzler of sorts. The main part will be to ensure all aircrafts talk to each other. That will be the biggest problem. Further, the deployment should be multi-aircraft types rather than single types. It means more collaborative training between all pilots.

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Jobs/Employment and Growth

Why are incomes not picking up even when the unemployment rate is at its lowest and profits are rising?

The first phase of automation focussed on improving productivity. So skill requirement of workers goes up and hence their pay goes up.

In present phase of automation, the skill requirement of worker operating the equipment is going down and hence their pay is going down.

Thus, if you replace the spade with earth moving equipment, you need to pay the worker more for the higher skill requirement. But when you replace an expert barista with a coffee-maker machine then you need to pay less to the operator of that machine. 

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Interesting Readings 11-Apr-2018

When the supervisor slept

Ila Patnaik believes bank fraud at PNB and ICICI Bank (possibly) are result of lack of proper supervision. I agree that supervision is inadequate. However putting the blame on RBI alone is not proper. Rightly, Ila points at all supervisors. In addition, I think one perspective is missing - that PNB and ICICI Bank (alleged) fraud are two different animals. PNB is systemic loopholes being exposed something regulator, management should have caught and has far reaching implication wrt Business process design within banks. ICICI Bank (alleged) is pure corruption. Even if it is conclusively proved that there was no fraud, the optics on this are bad. It is more responsibility of shareholders than the other. 

Shikha Sharma At Axis Bank: A Stormy Entry And A Stormy Exit

Shikha Sharma followed K V Kamath's model of growth without regard to Asset quality. Even Rana Kapoor belongs to this group. On the liability side their strategy is to get corporate deposits. Aggressive lending - generally large corporate (longer tenure) and consumer lending (higher risks) on asset side and corporate deposits (more fickle, higher costs) on liability side accentuates Asset Liability mismatch for these banks. Chanda Kochhar managed to set ICICI house in order after Kamath's high-paced up-scaling. But the problem persists in many new private banks. As corporate lending portfolio looks more risky the banks become more shaky.

International

Odds of market melt-up still at 40% but lower than earlier- Jeremy Grantham

Grantham is one astute market observer. Earlier this year he mentioned the likelihood of a melt-up (markets going up). The Trump histrionics have dented the probabilities but it still is at 40%. Cool!

Pitch Deck Alternatives

Interesting ideas from Fred Wilson. Short video, short podcast, IPO intro-letter. 

After a String of Corporate Scandals, “Big Four” Accounting Giants Face Breakup in the UK

Frauds are eating up the moral character these days.

Europe’s Great Housing Division 

Interesting

Will China Really Supplant US Economic Hegemony?

Ken Rogoff thinks it is not easy.

On a different note

The True Story behind Meghna Gulzar’s Upcoming Movie Raazi! 

The story of the spy. Looks like a must watch movie from Meghana Gulzar. Talvar was well made movie. I liked it.

Dwayne Johnson: The Pain and the Passion That Fuel the Rock

I like Dwayne Johnson.

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 Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Interesting Readings 09 April 2018

BANK SCAM WATCH

PNB scam: ED unearths Rs5,000 crore money trail
This will test the skill-set of ED team. Lets hope they get it done properly.

INTERNATIONAL

John Hempton, the Aussie fraud-hunting short seller taunting billionaire investor Bill Ackman

Also subscribe to Bronte Capital blog. The article is thanks to Barry Ritholtz.

Trade wars are good and easy to win

This post was courtsey Barry Ritholtz. The author is worried about US stock markets and believes that central banks will back the markets again. I find that difficult to believe but the past decade has been unbelievable to say the least. But the post triggered some thoughts. Refer to this comment:

This massive growth has had tremendous implications for the global financial system. As the Chinese government sold more Yuan and bought U.S. dollars, they reinvested the USD back into US Treasuries and other relatively safe fixed-income vehicles. This had the effect of pushing interest rates lower, which when combined with the falling rate of inflation from the cheap Chinese goods that were entering America, sent bond prices rocketing higher. As interest rates fell, many consumers were able to refinance their mortgages (or take out equity home lines of credit), which allowed them to buy even more Chinese goods. This, in turn, caused the Chinese government to have to sell even more Yuan and again buy USD, thus creating a self-reinforcing feed back loop. To some extent, the credit excesses that led to the 2008 Great Financial Crisis were the direct result of the Chinese economic reform. China’s transformation had the effect of creating lower inflation and lower interest rates in the rest of the developed world.

Most commentators praise China for "allowing" US to consume more. I think that is wrong way to think about it. It is because of this cheap credit that we had the bubbles and problems of the past decade. Had China been gradual in its development, it would have given about 400 million developed world workers to make the adjustment. The world went along with China in that game to its own detriment. Further, it would have been worthwhile if Chinese workers would be irrevocably moved out of poverty. But that is not so. The upcoming trade wars and squeezing of Chinese supply will put many out of work and push them into poverty. China will have to make a decision to chose who to let go into poverty. To prevent this, China wants to invest in the world through BRI which they will use Chinese capacity and Chinese employment to create assets overseas. It is all fantastic.

Edward Harrison explains this in his post titled China cannot use its Treasury holdings as leverage. Here’s why.  Edward links to work by Micheal Pettis and explains some of the nuances of the present Chinese predicament. Similarly Marshall Auerback highlights some risks to China here.

But here is a cartoon from Tom Toles

OTHERS

Seinfeld has movie coming up!

Puffin beaks are fluorescent and we had no idea
Thanks to Tyler Cowen. Puffins are birds with colorful beaks. The beak apparently lights up under UV light. What I learnt is that birds perceive colors differently. Humans see colors that are a mix of red, blue and green light, while birds have a fourth color in the mix — a property called tetrachromatic vision. Tetrachromacy is quite common among birds reptiles etc. It provides larger visual spectrum (different types of light) though spectral resolution (clarity) is similar to humans.

Not Enough Women at Wikipedia?
There are not enough women editing the stuff on wikipedia. I don't know how to think about this. Wikipedia is a free resource, created by free contribution by everyone. I hope Wikipedia is not stopping women from contributing. That would be stupid. Is it that men contribute overwhelmingly more than women? Why so? Does it say something about pay-gap and gender equality? I wonder.

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 Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".