Vijay Kumar Gaba: June 2016

Thursday, June 30, 2016

Blind Men and the Elephant-3

Thought for the day

"Tall men come down to my height when I hit 'em in the body."

— Jack Dempsey (American, 1895-1983)

Word for the day

Rib-tickling (adj)

Very amusing; funny or hilarious

Malice towards none

Pope says Sorry to LGBTs for all the discrimination faced by them in the past.

Pakistan clerics declare transgender marriages acceptable.

Indian Supreme Court agrees to hear petition challenging Sec377.

The change is in the air. And it's not a small one.

First random thought this morning

The recent spike in mindless killings by certain terrorist groups is an indication of the success of global war on terror. The desperation amongst radicals is conspicuous.

It is high time that the united offensive is intensified to fully neutralize these elements.

But in the interim, it is critical that various local administrations and people cooperate closely to step the vigil and help the armed forces in minimizing the civilian damage.

Blind Men and the Elephant-3

I believe, viewing UK's decision to terminate its present arrangement with EU as a problem may not be appropriate.

This view might be appropriate for a handful of bankers located in London, and even smaller number of investors who have invested in London real estate.

In larger picture, this referendum should be viewed as an attempt to find solution to some of the key problems that Europe currently faces, viz.,

(1) Lack of a clear leadership. Britain had lost its place at the top with end of cold war. In three decades since then it has mostly failed in taking lead in any issue of global importance and played just a second fiddle to USA. Rise in strategic and economic powers of countries like China and India, emergence of ECB as a key pillar of global financial stability, and consistent decline in its economy led to the diminishing of its historical stature.

Unwillingness (or unacceptability?) of Germany to don the mantle has left Europe behind in global strategic order.

(2) Poor economic conditions. Despite all the efforts and non-conventional policies, the economic growth in Europe has failed to show any improvement. Employment conditions remain poor and economic and regional disparities are rising faster than ever leading to serious discontentment amongst people, including in larger jurisdictions like France, Spain, Italy and UK.

(3) Worsening demographics. A large number of European countries have witnessed declining population growth rate in past two decades. Rise in the proportion of old and dependent population has been a cause of worry for most governments, as fiscal pressure are rising.

This juxtaposed with negative return on savings is becoming an epic disaster for old savers and pensioners.

Moreover, radical change in the ethnic and religious mix of conservative European jurisdictions due to free movement and large influx of refugees from troubled Syria etc. had been a cause of worry.

(4) Relatively stronger EUR hurting the periphery. A relatively stronger EUR may have helped German exports, but most of peripheral countries, like Greece, are claiming huge losses in market share to Asian competitors.

(5) Threat perception of rise in fascism. In recent years, due to poor economic conditions, rising disparities, and imbalances in socio-religious demographic mix, politicians subscribing to the extreme left and extreme right political ideologies have risen in importance.

This brings back the memories of WWII and the consequently threat perception of rise in fascism across the continent.

I view UK referendum as just another endeavor to solve some of these problems. It is certainly not done yet. It is not irreversible, should the outcome be different than as desired...........to continue

Wednesday, June 29, 2016

Blind Men and the Elephant - 2

Thought for the day

"Tell him he can have my title, but I want it back in the morning."

— Jack Dempsey (American, 1895-1983)

Word for the day

Endsville (adj)

Most wonderful or exciting, e.g., a rock band that was regarded as Endsville in the late fifties.

Malice towards none

Subramanian Swamy shall be there in Rajya Sabha till 2022 - whether you like it or not, hardly matters.

First random thought this morning

In a first, the sitting prime minister gave interview to a private Indian TV channel. The interview adequately touched upon most current issues, some controversial and some not that controversial. This interview shall settle many public debates, besides starting a couple of fresh ones.

Now since the government has decided to raise the bar, it would only be appropriate that PM Modi sets a traditions of making of a quarterly official "State of the Union" address to the nation, that may cover important current issues. That should save the nation lot of time and energy that we waste on inconsequential debates.

Blind Men and the Elephant - 2

In the late summer of 1998, I was sitting with a group of business managers in a cafeteria of Berkeley University, California. We all were attending a short duration program in marketing. The topic of the discussion was Y2K. A majority of group members portended disaster for the global economy. They were confident that a majority of the global businesses and financial institutions will not be able to "transit" their systems in time to avoid the crash as the new millennium rings in.

The streets of the California were filled with Indian IT workers, many of them with just three month certificate in C, C++, Java coding or something like that. They all were brought in to work on Y2K projects. The panic was palpable.

However, high on the GreenSpan steroids, the global markets were not looking worried. Even the impending impeachment of the president Clinton over Monica Lewinski issue did not bother markets.

Eventually, Y2K event passed off peacefully. No satellite crashed. No ATM refused to tend cash. No lift in the building stalled. No power cuts. No plane crashes. No payment delays. No nuclear accidents. Nothing.

The current debate over Brexit reminded me of that 1998 summer. I find that the debate, both political and economic, suffers from multiple limitations.

It is a common knowledge that the global economy is critically ill and put on the life support system (read trillions of dollar worth of free or negative rate debt supported by the liquidity created by the central bankers). Psychologically, under these circumstances usually no one would be inclined to try a new line of treatment, even if the patient is not responding to the current line of treatment. Brexit is just another line of treatment, that people are scared to try out. It's suitability or otherwise is not tested yet.

Secondly, we need to consistently remind ourselves that a positive vote in UK referendum is a consequence of poor economic conditions and rising inequalities in Europe. It is not a pre-curser to the decline of UK or EU economy. As of today there is nothing to suggest that conditions post Brexit would be better or worse, as compared to what these conditions would have been, had UK remained within EU.

The argument that UK exiting EU will terminate the process of globalization and push Britain back into 19th century also sounds rhetorical exaggeration. This view clearly ignores the fact that British traders and government were globalized much before anybody dreamt of a unified Europe. It would be reasonable to assume, with the benefit of hindsight, that UK, perhaps along with or without many other European countries, may perhaps lead a larger union of business partners that may include some larger economies outside Europe.

Weakness of GBP may also be hypothetical at this point in time. How could one completely rule out GBP emerging as a safe haven just like CHF or JPY a few years down the line....to continue

Tuesday, June 28, 2016

Blind Men and the Elephant

Thought for the day

"A good fighter usually knows, within a very few seconds, when a three-minute round is going to end."

— Jack Dempsey (American, 1895-1983)

Word for the day

Sniglet (n)

Any word coined for something that has no specific name.

Malice towards none

What's bigger loss for Tata Motors - Brexit or retirement of Messi?

First random thought this morning

Through drama of merger with and de-merger from Mukhtar Ansari's QED, SP has successfully established Akhilesh with clean image as undisputed and autonomous party leader in State. The uncles will drive from the back seat till election at least.

SP has apparently also beguiled Swami Prasad Maurya to materially weaken BSP.

BJP, still without a defined leader and confused agenda, needs to worry.

Blind Men and the Elephant

Referendums are usually conducted to find a definite binary answer, yes or no, without any conditionality attached, to a lingering debate.

A referendum aims to solve a problem through democratic process. The answer provided by it may not be to the liking of all, but mostly it does settle the long drawn dispute.

To the contrary, UK referendum on membership of EU (popularly referred as Brexit) has raised many more questions, and answered none. It takes us nowhere.

Since the results of the Brexit referendum became clear last Friday morning, almost everyone is seen raising a variety of questions, for example—

· Will other jurisdictions in EU choose to follow UK out of the Union, thus resulting in premature termination of the Project Europe?

· Will UK itself break-up post this referendum, given a completely fragmented verdict by English and Scot & Irish people?

· Will Germany emerge weaker or stronger post this referendum, given that ex-UK, it will have overwhelming dominance over the EU policy making?

· Will GBP emerge stronger as safe haven, like CHF and JPY, at the expense of EUR, or it will lose its place in the global trade?

· Will London continue to remain the global financial capital?

· Will we see a civil war like condition in UK, as immigrants (mostly youth); non-whites and non-Christians may not have voted for the Exit; but they stand to suffer most from the economic mess that may pursue the Brexit?

· Will Brexit vote bring back the specter of fascism in Europe?

· Will Brexit vote impact the politics in USA, giving an edge to the presumptive GoP presidential candidate Donald Trump?

· Will Brexit push Europe, including UK, deeper into recession?

· Will this lead to the abortion of globalization process that started with the fall of the Berlin Wall in late 1980s?

The worst, the referendum does not appear to have fully settled the issues at hand.

The overwhelming response (highest ever) to the online petition for a re-referendum suggests that the last word on the Brexit might have not been said as yet.

Many economics and market experts have expressed fear of apocalypse in the global economy as a consequence of UK exiting EU.

I find the commentary suffering from Blind Men and the Elephant syndrome. In some cases people are uttering some non-sense, so that they could someday tell the world - "See, I told ya'."....to continue tomorrow

Monday, June 27, 2016

Nifty to remain directionless for now

Thought for the day

"Nobody owes anybody a living, but everybody is entitled to a chance."

— Jack Dempsey (American, 1895-1983)

Word for the day

Tohubohu (n)

Chaos; disorder; confusion.

Malice towards none

It's a season of "Exits" everywhere.

Someone please show the "EXIT" door to those Indians who are celebrating the "No Entry" for India in NSG.

First random thought this morning

Referendums are usually conducted to find a definite binary answer, yes or no without any conditionality attached, to lingering debate.

A referendum aims to solve a problem through democratic process. The answer provided by it may not be to the liking of all, but it does settle the long drawn dispute.

UK referendum on membership of EU (popularly referred as Brexit) has raised many more questions, and answered none. It takes us nowhere.

Nifty to remain directionless for now

In line with the global markets, Indian markets also witnessed rise in volatility last week. Volumes are rose towards the end of the week.

The momentum that is necessary for the market to make a decisive directional move has certainly started to build in the market. However, as yet it is not strong enough to actually lead the market in any direction.

Last week, two events, RBI governor's decision to not to seek a second term and UK referendum results, caused huge intraday volatility and massive rise in volumes, correcting the short term indicators from extreme overbought conditions. The indicators are however still not close to "fearless buy" levels.

It is therefore likely that we may continue to see higher intraday volatility and exit of weaker hands this week also. The derivative expiry this Thursday shall also add to the tentativeness of the trade.

Nifty may continue to oscillate in larger 7930-8330 range for now with a strong support base in 7860-7930 range and stiff resistance in 8280-8330 range. For Bank Nifty range could be even larger at 16760-18080.

7730 for Nifty and 16300 for Bank Nifty are the level below which one could consider building leveraged positions with one year perspective.

Friday, June 24, 2016

Random thoughts on gold - 2

Thought for the day

"What gives the artist real prestige is his imitators."

—Igor Stravinsky (Russian, 1882-1971)

Word for the day

Paranymph (n)

A groomsman or a bridesmaid.

Malice towards none

Heard in Shastri Bhawan canteen in New Delhi.

"Gone are the days when EGoMs were set up to finalize the color of the uniform of Ministers' drivers, and it took years to decide.

Now the Shenshah reigns. Decision happen instantaneously."

First random thought this morning

It seems the government has surreptitiously established an Central Authority for Certification of Patriotic Credential of Citizens (CACPCC) with Mr. Subramanian Swamy as its Chairperson.

While preparing my application for certification, I wonder what would be status of the families of soldiers who fought for Mughal and British forces. There are Indians who still receive pension from the British Crown for serving the British Army in two World Wars. Some PIOs may be serving Pentagon, FBI, CIA etc. WTO may also have some Indian officials who might have to decide against Indian interests in disputes brought before them!

Random thoughts on gold - 2

Yesterday I expressed my serious doubts over the future growth in consumption demand of gold. (see here) The argument was pretty simple, in my view.

However, the demand of gold as store of value is a deeply complex matter. In past gold had been a preferred asset to store value both during economic as well as political (including geo-political) crises.

Gold has served as reserve currency whenever the paper currencies have lost faith of people due to a variety of reason, particularly high inflation and fiscal profligacy. It has also been used as such during transition periods in global strategic power equilibrium.

However since end of Breton Wood agreement in 1971, gold has not been used as reserve currency. Post fall of Berlin Wall in 1989 the strategic supremacy of USA, and consequently USD, has remained mostly unchallenged.

Post Breton Wood there have been two instances of global financial crisis.

In 1970s the world faced serious stagflation as the demand generated by post WWII reconstruction activities faded and Iranian revolution created a worldwide energy crisis. Gold jumped 10x in real terms during the decade of 1970-1980), to give back most of the gains in the following two decades.

Again in the decade of 2000s, as the dotocom bubble hit the global economy, interest rates crashed leading to sub-prime crisis that culminated in a major global financial crisis. The gold jumped 5x in real terms during this decade (2001-2011).

Gold is down about 33% from its 2011 high. But given the negative rates in large economies like EU & Japan; persistent deflationary pressures despite unprecedented and obscene amount of money printed by Central Bankers; poor economic growth outlook; and war like situation in global currency markets - the gold is reemerging as a favorite asset to store value.

At present the interest in gold appears to be more intuitive rather than analytical. It is being presumed that the end game of the non-conventional monetary policies currently in practice will be prolonged stagflation, complete disintegration (or euphemistically restructuring) of the present monetary systems where USD may longer be the sole reserve currency, massive debt write off resulting in near complete erosion of savers' financial wealth.

The popular commentary and trends in places like UK and US suggest that it is generally believed that gold held in paper form may face huge value erosion just like bonds and currencies, at the same time when physical gold value soars.

I intuitively find that most of the current analysis suffers from some degree of cognitive dissonance. It is trying to dress a trading opportunity into a secular trend. I do not see any reason why gold should ever touch its 1980 high in real terms and why not go below its 1971 lows (in real terms)....to continue next week

Thursday, June 23, 2016

Random thoughts on Gold

Thought for the day

"To listen is an effort, and just to hear is no merit. A duck hears also."

—Igor Stravinsky (Russian, 1882-1971)

Word for the day

Quaff (v)

To drink (a beverage) copiously and heartily, e.g., We spent the whole evening quaffing ale.

Malice towards none

Excess of everything is bad - even if it is Yoga!

First random thought this morning

Ever wondered what's the life expectancy rate in India!

The way people in their late forties and fifties are branded as kids and youth, it feels close to 120yrs!

But my insurance premium calculations are based on a life expectancy of around 70years.

What's amiss here? Is LIC cheating on me or the politicians & Bollywood fraternity?

Random thoughts on Gold

Not long back in the global history, aluminum was thought to be more precious than gold. Most powerful kings were served food in aluminum utensils while the lesser knights had to do with gold flatware. The sudden change in the value of aluminum took place when much cheaper means of refining the ore became available. Suddenly, it was disposable - as in aluminum foil or cola cans. In no time it transformed from most expensive thing in the world to garbage. Similarly, in African continent for long common salt remained a more prominent store of value and medium of exchange than gold.

I have always been crystal clear in my opinion that gold is not an investment product. But unarguably it has had its utility as the store of value for its limited supply and physical traits that make it indestructible.

In past five years, though, I have been expressing rather confusing views about the future of gold. On introspection, I discovered the following reasons for the incoherence in my views about gold.

First and foremost, I strongly believe that when economics fails in providing solution to the problem of livelihood and sustainability, philosophy provides the answer. It is a natural instinct of human being to look up to the skies for guidance when all our efforts fail. (Some even do so without making any effort at all!) Religion has therefore been an inextricable part of human life since beginning of the civilization and has grown with the growth and expansion of the global trade and commerce.

Most ancient cultures, China, Egypt, Mesopotamia, Indus Valley etc. have believed in continuation of life after death. Gold being an indestructible (and therefore sacred) object had always been an important part of their religion, culture, traditions and beliefs.

I therefore feel that a view on gold is not relevant without a view on the socio-religious trends.

In my view, the factors like popularity and spread of technology in common man's life; rising fascist and communist tendencies due to worsening socio-economic disparities; rise in electronic transactions (personal, social and commercial) thus lower risk (less travel, less physical transactions & deliveries); emergence of new articles of luxury to serve the vanity needs of the affluent; stronger and deeper social security programs; demise of monarchy; spread of spiritualism; dissipation of church & temples, etc., all indicates towards potential decline in traditional demand and pre-eminence of gold.

In the modern context, technologically challenging things, e.g., Bitcoins, have more potential to attract peoples' fancy as compared to gold, I feel.

The spread of radical Islamic forces is the only factor that somewhat weakens my conviction in decline of gold. But the way, the global war on radicals is progressing, I am sure that in next decade or so we shall see this concern easing materially and then gold may decline rather precipitously in value.....to continue tomorrow

Wednesday, June 22, 2016

Playing Ostrich

Thought for the day

"Harpists spend 90 percent of their lives tuning their harps and 10 percent playing out of tune."

—Igor Stravinsky (Russian, 1882-1971)

Word for the day

Embonpoint (n)

Excessive plumpness; stoutness.

Malice towards none

The politics over Yoga is unfortunate.

No surprises if it becomes a domain of foreigners, while our politicians bicker over it and Yog Gurus sell cosmetics.

First random thought this morning

I believed in the stories about how investment bankers manipulated markets, States, Central Bankers, Investors and politicians to rake in billions of dollars in trading gains during the global financial crisis 2008-09, but with a pinch of doubt.

I had been at a loss in understanding how come all these could be fooled so easily by a bunch of scrupulous bankers. This all sounded like commonplace stories of crooks looting jewellery from gullible women on the pretext doubling it.

But the clamoring of many "reputable" bankers and investment managers in the matter of Rexit and Brexit, which is clearly aimed at manipulating markets, makes things much more clear.

Playing Ostrich

"Ostrich" appears to be most popular global game at this point in time. Everyone appears to be closing their eyes or burying their heads in sand to obviate the need to address the real issues; some of which could be listed as follows:

· Trillions of dollars of debt is yielding negative returns, thus jeopardizing decades of future growth and exacerbating socio-economic disparities.

· Regional, economic, and social inequalities are rising at unsustainable pace -bringing back the specter of extreme nationalism (fascism) and communism, not seen since fall of the Berlin Wall.

· Rising demographic imbalances are challenging the current global strategic equilibrium. The resistance to the process of repositioning of the strategic equilibrium is igniting conflicts that may have lasting impact on global economic sphere.

· Ecological degradation is accelerating as many developing nations are beginning to industrialize at a meaningful rate.

· Conventional and non-conventional monetary policy tools used by the large global central bankers are becoming increasingly redundant. Consequently, many leading currencies are presently valued far from their economic value - a state of affair that may not sustain for long.

Brexit in global context is a fistful of sand; Trump is another. The global financial and political communities are burying their head in them just to avoid the real problems facing the global economy.

Gold has traditionally been a large bowl of sand, often used by investors and traders to stick their neck in, during the period of crisis. The current situation is no different.

In USD terms, the prices of yellow metal is up over 21% YTD. The consensus suggests that a "leave" vote in tomorrows' referendum may send it much higher.

My readers are well aware that I have never considered gold as an investment worthy product. Still many of my readers have been asking about my views on the trajectory of Gold prices in future.

Well I can only reiterate my consistent position. Gold as a commodity has very limited application. At household level, It is owned mostly for the reason of vanity and religious sentiments. However, as a medium of storing and exchanging economic value, gold has been in currency since time immemorial. Before demise of Breton Wood in 1970s', on many occasions it has served as the reserve currency for global trade & commerce; and unlike other reserve currencies it has stood the test of time.

But as all good things have to end someday, the importance of gold will inevitably recede too. In my view the process had started with the end of Breton Wood and might get completed in next couple of decade.........to continue

Tuesday, June 21, 2016

Who is Rajan? What does he do?

Thought for the day

"My music is best understood by children and animals."

—Igor Stravinsky (Russian, 1882-1971)

Word for the day

Cater-Cousin (n)

An intimate friend.

Malice towards none

Mr. Market is perhaps the most cruel person around - He just destroyed the halo around Gov. Rajan within 20minutes of the opening trade on Monday(:-

First random thought this morning

Heard from an executive of European engineering company - (a) Investment in railways core infrastructure has not picked up despite lot of noise; (b) Smart city development is still on drawing boards, though the government officials are meeting the developers and solution providers. Hopefully execution will begin this Diwali; (c) The power equipment sector has material unutilized capacity and may not need capex in next couple of years.

Who is Rajan? What does he do?

In past 15years, my wife (a post graduate in Hindustani classical music and English literature) has been my barometer for judging the popular public opinion on any issue. I am usually able to assess the gap between "reality" and the "media presentation" of an issue by 7.30AM when she finishes reading newspaper with her morning cup of tea and throws a barrage of questions on me.

Yesterday morning was no exception. The first question she fired was sufficient to explain the frivolity of whole controversy over the Governor Rajan. "Who is this Rajan fellow dominating the headlines this morning (she does not watch news on TV)? Looks very handsome!", she enquired at 7AM, her tea still unfinished.

It took me precisely 30seconds to find answers for all the queries I had been struggling with since Saturday evening. I knew instantly that Rajan is a superstar of Mint Street, darling of the media and ping ball of politicians, having little connection with the common man.

The following five questions fired by my wife in quick succession, without waiting for my answer, destroyed the whole fracas build over his decision to not to seek a second term.

(a) If Rajan successfully reigned inflation why tomatoes are selling at Rs60/kg and people are blaming Modi for this and not the governor?

(b) Why my NRI brother still gets 9.5% interest on his fixed deposit with SBI, while my small deposit is getting renewed at 7%?

(c) Accounting I do not understand. But tell me how much money banks have recovered from defaulters in past three years? My poor niece who works so hard for a bank, 13hrs a day and often on weekends also, did not get any bonus this year, because her bank passed some accounting entries!

(d) If Rajan's departure will severely dent India's credibility in the international markets, what is the role of the government? Was RBI really not a respectable institution before Rajan?

(e) Who is this El-Erian fellow? What business he has telling our sovereign government that failure to retain Rajan for another term will have serious consequences for India? Is he some terrorist or what?

I am actually thoroughly incompetent to answer these innocent questions. But after spending many hours in trying to answer the queries and worries of my readers since Saturday evening, I am sure that departure of Rajan may be a Good thing for Indian economy.

Insofar as the policies and programs are concerned, we have faced BoP crisis on many occasions in past. Every time we have modified our policies and introduced new schemes/programs to tide over the crisis. On all occasions we have been successful - 1991 being one case in point. S Venkitaraman, C. Rangarajan and then Bimal Jalan saw us through that crisis. Inflation and rates fell materially over that period. We sustained Asian crisis, global sanctions, and dotcom crash successfully and emerged stronger.

But none of these governors sought to undermine the stature of RBI as an premier and respectable institution. No one spoke out of turn. No one sought a super star status for himself.

Apparently both C. Rangarajan and Bimal Jalan harbored political ambitions, but not at the expense of the institution. They did not charm the media personnel or global investors to canvass support for them.

Insofar as the commentary of opposition leaders, Bollywood sundries, et. al. is concerned. I truly find it frustrating.

P. Chidambaram and Rahul Gandhi clamoring for Rajan is the most ridiculous sight I have seen in years. These are the people who denied second term to APJ Abdul Kalam and preferred a totally uninspiring Ms. Pratibha Patil over him. He was one man who was unarguably admired by 125cr Indians (except perhaps the Gandhi family) and all world leaders. If that was not wrong how this is wrong?

Please note that I have nothing against Dr. Rajan. I totally disagree with Mr. Swamy in casting doubts over his competence, integrity and patriotism.

But I feel, the way he has conducted himself in undermining the superiority of the RBI as an institution leaves much to desire. If PM and FM were wrong in not supporting him openly when Dr. Swamy attacked him, he is also wrong in not telling El-Erians of the world that RBI is a strong autonomous institution with a robust policy framework, and one person matters nothing to this. (Though he said something to this effect on Sunday, it was too feeble and insufficient, in my view.)

People who doubt RBI autonomy may explore the archives and read what the analysts said after each policy statement of Y. V. Reddy and D. Subbarao. These two governors were reportedly consistently at war with the respective finance ministers on rates, but did never succumb.

Last but not the least, if the monetary efforts of the RBI under governor Rajan were not duly complemented by the fiscal efforts of the government (risking its political career and perhaps some elections) the results might not have been as good as they look today.

Restrictions on gold imports and gold monetization scheme (annoying their core constituency of traders), not passing over the full advantage of the fall in crude oil prices to consumers by hiking duties (bearing the wrath of opposition in and outside the parliament), saving subsidies on LPG etc., attacking wholeheartedly on generation and deployment of black money through administrative and legislative measures etc. (annoying businesses and traders and even compromising on growth), taking government patronage off the willful defaulters, liberalizing FDI rules (to the annoyance of RSS and other affiliates) etc. are just some of the efforts that have strengthened the Indian macro position.