Your Bharat vs. My Bharat

Thought for the day

"The worst form of inequality is to try to make unequal things equal."

-          Aristotle (Greek, 384-322BC)

Word for the day

Baleful (adj)

Full of menacing or malign influences; pernicious.

(Source: Dictionary.com)

Malice towards none

Where would you fit Sunny Leone in the "Idea of India"?

Trivia

Two individuals - Ms. J. Jayalalithaa and Mr. K. V. Kamath - dominated the headlines yesterday.

Ms. Jayalalithaa regained her right to Tamil Nadu CMship after Karnataka High Court exonerated her all charges of holding disproportionate assets. The verdict came two days after Mumbai High Court showed exemplary promptness in admitting Salman Khan's appeal against lower court order and granted him bail pending decision on his appeal.

Because of these decisions, a large section of society is raising question on the entire justice delivery system, blaming it to be squarely pro rich & powerful.

The appointment of Mr. K. V. Kamath as first chief of US$100bn BRIC Bank has also surprised some. The outburst of Deepak Parekh and Arun Shourie against the government (both were speculated to be front runner for the post) had made it clear that they are not in the reckoning.

The question that is bothering some at Raisina Hills is what made Kamath supersede Subba Rao, Bimal Jalan and Urjit Patel. Raghuram Rajan had already denied his interest or consideration.

Some interesting reads

Growth prompts many in FMCG to bet on rural segment

Slump in infra projects belies recovery story

Car sales grow 18.14% in April, fastest in 30 months

Brazil's Only Hope Is Mr. Market

Care for the big elephant sitting right to ya

Thought for the day

"The duty of rhetoric is to deal with such matters as we deliberate upon without arts or systems to guide us, in the hearing of persons who cannot take in at a glance a complicated argument or follow a long chain of reasoning."

-          Aristotle (Greek, 384-322BC)

Word for the day

Defenestrate (v)

To throw (a person or thing) out of a window.

(Source: Dictionary.com)

Malice towards none

Why all celebrity friends of Salman Khan chose to visit him unshaven and disheveled.

Care for the big elephant sitting right to ya

The sharp corrections in equity prices accompanied with material rise in implied volatility, as seen in past few trading sessions, is definitely disconcerting for all market participants, especially short term traders.

It is easier, under the circumstances, for equity traders to get overwhelmed and focused on daily price movements. Thus increasing the chances of missing the big elephant present in the room and committing avoidable mistakes many fold.

I strongly agree with the view that the happening in stock market, domestic and global, developed and emerging, is only a side show. The primary event is taking place in the bond markets.

The global markets might have derived some comfort from the latest statement of the US Federal Reserve (Fed) in which reference to timeline for raising policy rates was omitted altogether. But the fact remains that most investors and analysts are apprehensive about imminent end to zero and sub-zero yield regime. Bond investors, after years of rising prices and big returns, are bracing for the return of 'normalcy' in debt market.

The sudden and sharp rise in commodity prices, despite continuing poor economic data across the world, and rise in US bond yields indicate that the long bond and short commodity trade has begun to unwind.

The process is slow and not unidirectional as the opinion on direction of global rates is not yet unanimous.

The more prominent view is that the US rates are inevitably headed higher. Hence, going forward the US yields and USD carry trade unwinding will accelerate, and the long bond unwinding shall gain more momentum. Given the exorbitant level of leverage in the bond markets, the unwinding will obviously be torrential and extremely painful once some clarity on timeline of the "Lift" emerges. Legendary Warren Buffet and Bill Gross subscribe to this view.

The other view, certainly not a small minority, is that US economic conditions are far from suitable for a "Lift" as yet. The bond bull markets, in their view, has many more miles to go before it ends.

Good years ahead for Indian equities

The rise in global rates and bond yield may be a terrible news for global financial markets in the near term.

A whole generation of dealers, traders and investors has now been raised on low rates. The strategies and tactics these people have so far used are completed untested for a bear market in bonds.

In an environment where half of world's outstanding bonds trade at zero or negative yield, equity analysts and traders in their twenties and early thirties are used to discounting future cash flows of companies at zero or even negative rates. Their valuation models and investment strategies may perhaps not account for 4-6-8% discounting rates.

In simpler terms, at near zero discounting rate you need low earnings growth to be bullish about a company's stock and could accord higher P/E. However, if you have to discount the future cash flows by higher discounting factor, the required earnings growth for the same P/E multiple would be much higher.

This could be good news for Indian equities in medium term.

The rising cost of capital in global market may have three impact on Indian economy and markets.

(a)   The cost of capital may rise for Indian companies. But this could be offset by higher availability as the savings rates go up in developed world with rise in yields.

(b)   The INR may weaken against USD, GBP and EUR as the higher rates push up these currencies.

(c)   Indian equities may look cheaper in relative terms, as higher discounting factors and lower earnings growth (due to stronger currencies and lower demand due to higher rates), push up valuation of equities in the developed world.

This translates into the following in investment strategy terms:

1.     The companies which are inadequately capitalized or whose business model is highly capital intensive but which have poor balance sheet/credit rating would face trouble due to rising cost of capital. These businesses should be mostly avoided.

2.     Exporters who are competitive on product and technology front shall gain further strength and remain preferred investments.

3.     The companies with strong balance sheets and higher RoEs would remain the most preferred investments. The relatively higher valuations may become more reasonable in medium term (3-5yrs).

More on this later.

Contempt of popular mandate

As expected, the finance minister seems to have virtually given in to the pressure of FPIs over issue of MAT demands for previous periods. The matter has been referred to an expert committee; which in Indian parlance is nothing but an euphemism for avoiding a stand on any controversial issue. In recent times we have seen this tactics used successfully to bury GAAR.

The moot point is what did prompt the government to kick the can in the instant case. Was it the fear of collapse in financial markets due to some mindless selling by the "concerned" FPIs? or the government is truly doubtful about the legal validity of the tax demand raised on FPIs from outside DTAA jurisdictions.

In case the former is true - it is unfortunate. The markets which cannot sustain couple of billion dollars worth of selling by investors who have pumped in US$9bn in just past four months, need some serious restructuring.

However, if the latter is true, it is much more serious matter. It raises questions over the credibility of the promises made by the government both inside and outside the Parliament.

The conduct of various political parties in the Parliament has already cast dark clouds over the entire legislative process. Given the minority status of NDA in Rajya Sabha and adversarial attitude of opposition parties over most government agenda, there is little certainty over any legislative business.

As I write this today, the critical economic legislations like GST Bill face uncertainty due to partisan brinkmanship. The prospects of laws relating to land acquisition, real estate sector regulation, and black money regulation also look poor.

While it is difficult to determine who is at fault (government or opposition) for this legislative logjam - the economy and poor shall suffer, and so would markets.

Politically speaking, both the Congress and BJP appear losing in this internecine battle and the regional parties are gaining at their expense. To me it is a contempt of the popular mandate.

Three decades of falling rates may be coming to an end

Warren Buffett is famous for his long-term bets on companies that he thinks are cheap.

Conversely, he's not known for short positions.

But in an interview with CNBC's Becky Quick, Buffett revealed one asset class he would short.

"If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," he said.

These long term bonds have effectively been a bull market for three decades as falling rates translated to higher bond prices.

Regarding interest rates, Buffett noted that if rates were to increase to more normal levels, stock prices would look expensive.

While he said he would short long-term bonds if he could, he also said that he couldn't.

"But that not my game, and it can't be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued. I'll put it that way."

Trivia

Speaking in typical desi lingo, Mr. N. R. Narayana Murthy now has high connection in British government.

Traditionally, such people are bracketed in a special category within our society, so that we could exploit their high connections for furtherance of our petty vested interests.

Remember Shahrukh Khan and Irrfan Khan starrer "Billu".

Some interesting reads

Inequality, Immigration, and Hypocrisy

The Return Of Peak Oil

Why the British election matters to the United States

April PMIs Provide More Evidence BRICs Are Buckling

 

 

Lost my Way

Thought for the day

"The secret of getting ahead is getting started."

-          Mark Twain (American, 1835-1910)

Word for the day

Aver (v)

To assert or affirm with confidence; declare in a positive or peremptory manner.

(Source: Dictionary.com)

Malice towards none

Running, running 'til the fear is gone, don't know where I'm going

Don't know if I'll make it home, tell Mama I'm sorry

I know that I've made mistakes, tell her it ain't easy

I'll see her on judgment day, I lost my way

I lost my way, yeah, I lost my way, yeah

("Lost My Way"  - Lecrae, King Mez & Daniel Daley)

 

Lost my Way

Amitabh Bachchan is inarguably a living legend today. Almost all Indian film lovers accept him as Maha Nayak (super hero). But there was a time in 1990s when his fans were deeply disappointed in him. Many were shocked to see his decline from the invincible position he commanded through the decades of 1970s and 1980s.

A brief and miserably painful excursion in politics, death of mentor Manmohan Desai and a disastrous business venture (ABCL) left the super hero broke financially, weak physically and disturbed emotionally.

In that phase of adversity, he made many attempts to recover. But each attempt would push him further down, like he was stuck in quick sand. Each failed film was followed by even a worst one. He did projects like Toofan, Ajooba, Jadugar abd Lal Badshah, which were thoroughly unworthy of a super star.

Friends deserted him and government authorities persecuted him. In that hour of frustration and dismay he got the company which he might have avoided usually. Fortunately, he soon found his way out of the black hole and was finally rid of the avoidable company.

I find Rahul Gandhi in somewhat similar situation as the Big B found himself in 1990s. He is defeated, doing one bad project after another and is keeping avoidable company.

Consequent to BJPs overwhelming victory in the general elections of 2014, the Indian political spectrum has lost its equilibrium. The traditional Right has intruded into the central territory. The traditional Left has been squeezed out to fringes. And the traditional Center has become too crowded with less space and larger number of claimants.

Rahul Gandhi does not seem to be clear which part of the spectrum he wants to start his comeback trail with. One day he is seen exploring the extreme right with trek to Kedarnath. The other day he is seen at the left corner talking about landless labors. And then suddenly he crops up at the middle discussing the plight of middle class home buyers!

Poorly mixed concoction of Gandhi and Marx

A study of the history of Indian politics would suggest that unlike western democracies only an abysmal minority of Indian voters are strongly committed to a political or socio-economic ideology.

The political discourse in India is usually dominated by contemporary issues and personalities. The economic issues raised during elections are mostly confined to the slogan of poverty alleviation. In recent times corruption has also become a popular electioneering slogan.

Perhaps, no political party seems to have taken issues of poverty alleviation or corruption seriously. Therefore no one has bothered even to outline a conceptual or ideological framework for solving these problems.

Ideologically, the Congress Party abandoned the most acceptable and perhaps most suitable Gandhian Socialism in favor of Nehruvian Socialism that was a poorly mixed concoction of Leninist central planning (central ownership and management of resources and businesses) and British colonial legacy (discretionary patronage to the faithful and loyal).

The model was certainly at cross-purpose with the constitutional federal structure. Poverty, poor governance and corruption were natural off-springs of this system.

BJP started with Deen Dayal Updhaya's Integral Humanism. However, in 1990s it adopted Gandhian Socialism (which is not too far moved from the Integral Humanism) as the principal doctrine. The present leadership has however presented again a poorly mixed concoction of Integral Humanism and Laissez-faire model used by some developed economies principally USA.

Politically leadership preaches "Human Being" as the fulcrum of policy making. Whereas the executive is more focused on "Business" and "Macroeconomics" as the central theme. The conflict is for everyone to see. The consequence is that we seem to be moving in no direction.

The people at the left end of the spectrum exercised significant sway on the bottom of the pyramid in Indian society since independence. They controlled most of labor unions. Though divided between Marx, Lenin and Mao they still were the preferred choice of landless, oppressed and intelligentsia. There was a time when being poor, intelligent (economist, thinker, poet) or rebellious meant being communist.

The things however began to change in late 1980s post dismantling of USSR and the German wall. The Lenin and Marx were relegated to the history lessons. The economic reforms initiated in China under Deng Xiaoping's supremacy, further pushed back the traditional Marxists.

Insofar as the Lohiaites (socialist parties occupying the left of the center space in Indian politics) are concerned, they deserted both Lohia and his ideologue Gandhi as soon as they came into power. Degenerated into motley feudals they mostly have no commitment to any economic idea and mostly follow Congress agenda.

In next couple of days I shall discuss what Rahul Gandhi is doing wrong and how he could redeem Congress out of current mess.

Trivia

By out rightly rejecting the points made by Arun Shourie, and even disparage him, BJP has proved his point.

The people who have observed L. K. Advani closely, would confirm that he is not the one who could be silenced easily. Be sure, that we would hear the echo of Mr. Shourie's views in LKA's memoires which would be published within few months of PM Modi relinquishing PMO.

On the smaller screen, Arvind Kejriwal has made a full proof plan to hold central government responsible for all his failings.

He is instigating BSES to disrupt the electricity supply to Delhi when temperature would be running at 45C and blame central government for the misery of people.

Similarly, Manish Sisodia, is planning to disrupt the student's life by proposing a separate education board for Delhi.

 

 

What is it we really want?

Thought for the day

"Tact is the art of making a point without making an enemy."

-          Isaac Newton(English, 1642-1727)

Word for the day

Veridical (adj)

Truthful; veracious; corresponding to facts; not illusory; real; actual; genuine.

(Source: Dictionary.com)

Malice towards none

Indians have this natural tendency to support the underdog and humble.

BJP knows it well. They have seen this in 2009 MMS vs. LKA contest.

Do we believe what we know?

What is it we really want?

To accelerate the economic growth in order to generate more employment and improve the quality of life of Indian populace, the country needs huge amount of capital.

Various economists, government agencies and expert committees have suggested that to attain optimum level of employment Indian economy would need to grow 8-10% CAGR for next decade or so.

The capital investment required by private sector to create critical infrastructure to support 8-10% GDP growth is pegged in the range of US$10-12trn over next 10yrs. Energy sector alone may need investment of more than US$1trn over next one decade.

It is well recognized fact that such kind of long term risk capital may not be available internally.

Foreign investment is therefore a pre-requisite for the process of economic planning, development, and growth.

Any debate on path, trajectory and sustainability of growth should therefore begin with this assumption that adequate foreign capital would be available.

A pragmatic economic development and growth plan under the current circumstances should acknowledge the following in the preamble itself:

(a)   India needs huge amount of long term risk capital to achieve the goal of fast, equitable and sustainable economic growth and development.

(b)   Meeting of this goal is materially contingent upon flow of foreign capital.

(c)   Despite unprecedented liquidity sloshing the global financial system, the risk capital that could be for long term to emerging markets like India is scarce and may become expensive as US Fed begins the "Lift".

(d)   The long term risk taking foreign capital will come to India at its own terms and not at the whims and fancy of the politicians and myopic bureaucracy.

...do we want to follow the herd?

However, what is true for long term risk capital (commonly known as FDI) may not be true for the short term arbitrage money (commonly known as Foreign Portfolio Investment or FPI).

This is the money that usually is not invested by the owner of the money. Instead professional investors who are paid to maximize the returns for owners of the money, exercise the control over such money.

Their interest in the investment is limited to the remuneration they would get. The remuneration is usually based on the relative performance of the money invested over a small period of time (usually 12 to 36months).

In order to maximize their remuneration, these fund managers would chase the relative outperforming assets in a most secular fashion - with no regional, racial or systemic bias. They would go to communist China, chaotic Russia, democratic India, war torn Africa, vulnerable Chile & Columbia, struggling Dubai, or bankrupt Greece.

As most of them move in a herd, they cheer the market by driving up the asset prices with huge collective inflows in a short span of time.

They inflict severe pain and cause huge volatility by their ruthless collective exit.

There is little evidence to establish their long term positive impact on the investee market or economy. However, there is enough anecdotal evidence to show the damaging impact of the excessive volatility caused by their collective actions.

The south east Asian economies suffered tremendously at their hands during 1990's.

We did also have few instances of irrational boom and bust cycle driven by collective withdrawal of FPI money. 1998 post nuclear blast exodus, 1999-2001 dotcom bubble and bust, 2006-2009 easy credit driven boom and bust are some major incidences.

Besides, we have seen frequent collective actions to pressurize the government and regulators over issues such as taxation (MAT, DTAA) and transparency (P. Note disclosures), etc.

On most occasions the government and the regulators have given in to the pressure, deciding to maintain the status quo. Consequently, (a) many nagging issues have accumulated that would keep the FPIs and agencies at confrontational path for many years; (b) the message to FPI is that Indian government and agencies accord significant importance to the stock market indices and are willing to walk extra mile for a few billion USD of FPI flows.

Currently Indian markets are witnessing yet another instance pressure tactics. The indications are that the government will give in yet again.

Tomorrow I shall examine the trend and role of FPI investments in India.

 

Interesting reads:

Why Markets Are Manic—-The Fed Is Addicted To The ‘Easy Button’

How Iran Is Winning

Greece €400 Million Short For Wage And Pension Payments, Rushes To Pass Troika-Friendly Laws

Sun Pharma may spend up to $7 billion on M&A

 

Trivia

Three questions that bothered me yesterday:

1.     Why should people be critical of Rahul Gandhi deciding to undertake a journey across India? The country only stand to gain if he gains a better understanding of the country, her people and their problems. No one will miss him in New Delhi. No one would lose anything.

2.     Why is it necessary that the home minister gets to know about a natural calamity in the country before anyone else does?

3.     Hand on our hearts - How many of us 125cr Indians believe that politicians in general would place the country and humanity before their families and business?

       I sincerely believe that not more than a million people will raise their hands to this call.

       Then why this hypocrisy? Why we want the same politicians to maintain a facade in public and say things they do not mean? SP leaders were honest and not naive in expressing their concern for their family members!

 

Thought for the day

"Tact is the art of making a point without making an enemy."

-          Isaac Newton(English, 1642-1727)

Word for the day

Veridical (adj)

Truthful; veracious; corresponding to facts; not illusory; real; actual; genuine.

(Source: Dictionary.com)

Malice towards none

Indians have this natural tendency to support the underdog and humble.

BJP knows it well. They have seen this in 2009 MMS vs. LKA contest.

Do we believe what we know?

What is it we really want?

To accelerate the economic growth in order to generate more employment and improve the quality of life of Indian populace, the country needs huge amount of capital.

Various economists, government agencies and expert committees have suggested that to attain optimum level of employment Indian economy would need to grow 8-10% CAGR for next decade or so.

The capital investment required by private sector to create critical infrastructure to support 8-10% GDP growth is pegged in the range of US$10-12trn over next 10yrs. Energy sector alone may need investment of more than US$1trn over next one decade.

It is well recognized fact that such kind of long term risk capital may not be available internally.

Foreign investment is therefore a pre-requisite for the process of economic planning, development, and growth.

Any debate on path, trajectory and sustainability of growth should therefore begin with this assumption that adequate foreign capital would be available.

A pragmatic economic development and growth plan under the current circumstances should acknowledge the following in the preamble itself:

(a)   India needs huge amount of long term risk capital to achieve the goal of fast, equitable and sustainable economic growth and development.

(b)   Meeting of this goal is materially contingent upon flow of foreign capital.

(c)   Despite unprecedented liquidity sloshing the global financial system, the risk capital that could be for long term to emerging markets like India is scarce and may become expensive as US Fed begins the "Lift".

(d)   The long term risk taking foreign capital will come to India at its own terms and not at the whims and fancy of the politicians and myopic bureaucracy.

...do we want to follow the herd?

However, what is true for long term risk capital (commonly known as FDI) may not be true for the short term arbitrage money (commonly known as Foreign Portfolio Investment or FPI).

This is the money that usually is not invested by the owner of the money. Instead professional investors who are paid to maximize the returns for owners of the money, exercise the control over such money.

Their interest in the investment is limited to the remuneration they would get. The remuneration is usually based on the relative performance of the money invested over a small period of time (usually 12 to 36months).

In order to maximize their remuneration, these fund managers would chase the relative outperforming assets in a most secular fashion - with no regional, racial or systemic bias. They would go to communist China, chaotic Russia, democratic India, war torn Africa, vulnerable Chile & Columbia, struggling Dubai, or bankrupt Greece.

As most of them move in a herd, they cheer the market by driving up the asset prices with huge collective inflows in a short span of time.

They inflict severe pain and cause huge volatility by their ruthless collective exit.

There is little evidence to establish their long term positive impact on the investee market or economy. However, there is enough anecdotal evidence to show the damaging impact of the excessive volatility caused by their collective actions.

The south east Asian economies suffered tremendously at their hands during 1990's.

We did also have few instances of irrational boom and bust cycle driven by collective withdrawal of FPI money. 1998 post nuclear blast exodus, 1999-2001 dotcom bubble and bust, 2006-2009 easy credit driven boom and bust are some major incidences.

Besides, we have seen frequent collective actions to pressurize the government and regulators over issues such as taxation (MAT, DTAA) and transparency (P. Note disclosures), etc.

On most occasions the government and the regulators have given in to the pressure, deciding to maintain the status quo. Consequently, (a) many nagging issues have accumulated that would keep the FPIs and agencies at confrontational path for many years; (b) the message to FPI is that Indian government and agencies accord significant importance to the stock market indices and are willing to walk extra mile for a few billion USD of FPI flows.

Currently Indian markets are witnessing yet another instance pressure tactics. The indications are that the government will give in yet again.

Tomorrow I shall examine the trend and role of FPI investments in India.

 

Interesting reads:

Why Markets Are Manic—-The Fed Is Addicted To The ‘Easy Button’

How Iran Is Winning

Greece €400 Million Short For Wage And Pension Payments, Rushes To Pass Troika-Friendly Laws

Sun Pharma may spend up to $7 billion on M&A

Trivia

Three questions that bothered me yesterday:

1.     Why should people be critical of Rahul Gandhi deciding to undertake a journey across India? The country only stand to gain if he gains a better understanding of the country, her people and their problems. No one will miss him in New Delhi. No one would lose anything.

2.     Why is it necessary that the home minister gets to know about a natural calamity in the country before anyone else does?

3.     Hand on our hearts - How many of us 125cr Indians believe that politicians in general would place the country and humanity before their families and business?

       I sincerely believe that not more than a million people will raise their hands to this call.

       Then why this hypocrisy? Why we want the same politicians to maintain a facade in public and say things they do not mean? SP leaders were honest and not naive in expressing their concern for their family members!