Market Outlook

Paul Kedrosky has a wonderful link to interview of Michael Steinhardt and others. There are a lot of quotation gems in there. I paraphrase a few ideas with my take on it:

• No one is bullish over long-term: The problems we are in, in US and globally, are too big to be wiped out by a ill-directed few trillion dollar stimulus. Government does not have information to go for precision-bombing stimulus. So for carpet bombing, that we are aiming for, we need a hell lot more bombs.
• What has changed? - Nothing: Other than extra few trillion sloshing around nothing has changed. We still seem to be playing out the same moves from great depression times. Our two most likely outcomes are a bloody great depression or a prolonged stagnation - both are grim. Markets are enforcing themselves - I mean real economy markets. Consumers are de-leveraging and increasing savings.
• We cannot estimate valuation because future is uncertain: The future is uncertain. We are not confidently able to foresee how future corporate world will look like. What will be the revenue levels? What will be the growth levels? Who will survive the crisis? In such a scenario, putting numbers to revenue projection and looking at valuation is dangerous game.
• A forecast tells more about the forecaster than the future: This is a gem. I think that is true. At the moment all analysts will be better off understanding potentially likely scenarios and potential outcomes.

Future Without Poverty

World without poverty is one of my dreams! And I fuss over it in lot of ways. My readings of current writers on Poverty suggest that we need a view on life of the poor. This ebook is an attempt to express the same. It is my contribution to understanding and eradication of poverty in the world. Download the ebook here.

Briefly it covers three main aspects:

How poor get poor?


I look at three phases over which a household gets into a poverty trap. This, I believe, is critical to understand as it harbours solutions to the poverty problems. Further, it also leads us to a basic framework for solving the poverty crisis everywhere.

Snakes and Ladders Approach


Getting a community out of poverty needs a customized solution. Each community faces its challenges (snakes) but has opportunities (ladders) hidden within its structure. This framework may be used to build a customized approach for the community.

Structural v/s transient poverty 


One of the central idea I want to highlight is the difference between temporary poverty - one that household can get out of versus structural poverty - one that seduces the household into believing that they can get out of poverty.

I would love to hear your feedback on the ebook. Please email me at rahuldeodhar [at] gmail [dot] com.

A Clear Policy on future bailouts

Senator Ron Paul is keen to get the Fed audited and closed. I don't know how that will pan out but I would seek clarity in one aspect of Fed's functioning. The bailout criteria needs to be defined and communicated.

We need a decision tree to understand how Fed will hereafter decide who gets bailed out. The current "case-to-case basis" and "threat to financial system" arguments are too esoteric. We need clear principles and guides to understand how such decision will be made in the future. There are four critical element of "Guidelines of future bailouts" plan:

1. We need clear understand of who can seek a bailout. Is it banks? Are insurance companies allowed? Who is allowed? Who is not? Why?
2. The next part is within this set, who are eligible for bailout, how will you choose? What self-help measures the company has to go through first before coming to Fed for the bailout? What if someone exceeds Fed's / other regulators benchmarks for leverage? Or pays excessive bonus? Will those companies get bailed out too?
3. How will the bailout amount be decided? Will it come entirely out of Fed gurantees? How about untouched bonus pools? How about unwinding risky position in hard-to-sell paper?
4. What happens after companies are bailed out? How will they be restructured? How will Fed ensure that those funding the bailout (US citizens) get control over the company?

It is right time to initiate the plan. We have Ben Bernanke at the end of his term. We have some green shoots so markets are reasonably calm to absorb and accomodate the rules of the game. I believe this will reduce uncertainty in the markets. I think it is a moral duty to explain to tax-payers how future bailouts, if any, will be decided. Moreover, I believe tough times lie ahead. It is better to be prepared with a plan - at least for things that we know we might need.

Exchange Rate appreciation

The Reserve Bank of India (RBI) announced the monetary policy on tuesday 28th. In one of the innocuous statements RBI mentioned it will allow appreciation of Rupee if there is higher capital inflow than can be managed through intervention. Not many commentators weighed in on this at the time. But that represents the most important signal.

Felix Salmon explains the dilemma of the asian central bankers in more details. RBI has sensibly tackled the financial crisis as of now and this indicates RBI is one of the intelligent central banks around. China faces this dilemma more critically as it wants an undervalued Yuan. To top its list of worries the GDP is rising really fast. If there is one way to attract big money then this is it.

There is a good chance central bankers will soon resort to good old capital restriction. This will be the first blow in the test of globalisation. This threatens to raise the friction between countries. We are witnessing increase in friction over anti-dumpting duty imposed by EU on Chinese.

Such regulatory threats have the potential to create more cycles in markets. So this is definitely going to be painful - we will have to hold our nerves. Fortunately or otherwise, we cannot, will not be able to reverse the globalisation.

Why no one saw the crisis coming?- An explaination for Queen Elizabeth II

The question reminds me of King Charles II who invited members of the Royal Society to explain why a dead fish weighs more than same fish alive. After the Royal society provided various explanations it was brought to everyone’s notice that they actually weigh the same! It is the same with current economic crisis.

The group of eminent economists could not foresee the current crisis due to “failure of collective imagination of many bright people”. In my humble view, your highness, this is incorrect. Nobody actually bothered to make the real‑world observations. How could one not notice unemployed people buying multiple homes? Or, how could they not notice people with mortgage repayments more than their incomes?

Such ignorance on the part of trusted few will cost the world dearly. The developed world, including Great Britain, is on throes of worst economic decline spurred by international debt. We are facing a decline in standard of living that will undo decades of development. In such times of calamity, the elites are busy retrofitting explanations to history. The “group of eminent economists” has been deeply inbred and so have all other eminent groups who run the financial system. These are groups formed between likeminded fellows, those conforming to specified views. These groups have shown clan-like behaviour ridiculing alternate points of view. One only needs to look at ridicule heaped on likes of Peter Schiff, Nicholas Nassim Taleb, Nouriel Roubini and others. These groups lack diversity of opinion to understand multiple facets of financial, economic innovation.

I further disagree with the economists’ gracious claim that everyone was doing their job to the best of their abilities. If guarding the door “to the best of our abilities” when thieves attack through the window, you are not much of a guard, are you? Sadly, even the press has abandoned its duties of fourth estate. Our journalists no longer reflect on social implications and problems but often report from their own ivory towers. We haven't seen any pointed intelligent debate between press and policy makers even as policy response aggravates the crisis further.

To ensure such crises never occur again, we need more respectful cross-disciplinary debates involving social understanding and moral values. We need philosophers and cross disciplinary thinkers more than ever. Usually, such is the responsibility of the House of Lords. Are there, if I may humbly ask, real knights amongst your ranks, your majesty?

Note: This is a response to Guardian Story about Economists explaining how the crisis happened to the Queen.