Don't waste your last bullet

Some food for thought

You have reached the pinnacle of success as soon as you become uninterested in money, compliments, or publicity.

—Thomas Wolfe (American novelist, 1900-1938)

Word for the day

Notionate (adj)

Strong-willed or stubborn.

Having foolish and fanciful notions.

 

First random thought this morning

In past 3 decades the global geopolitics has been dominated by the fear of weapons of mass destruction (WMD) falling in rogue hands. Wars in Iraq, Libya, Syria, persistent tensions with North Korea and Iran and indecision over Pakistan have all been influenced by this fear.

Every instance of escalation in this fear has impacted the global markets significantly, especially the volatility in energy prices and trade disruptions.

While the attention of the global leadership has been focused on this potential, perceived or in some cases illusionary threat, a whole new class of WMD has been developed (mostly by US) and used extensively all over the world.

This class of WMD popularly known as Social Media (SM) has very potent weapons like WhatsApp, Facebook, Instagram, Tumbler, Twitter etc. In past one decade in particular, these weapons have acquired significantly more potency than the conventional WMD.

These weapons have been effectively deployed to destabilize governments, provoke civil unrest, ruin families and relationships, destroy productivity, espionage, etc.

While a section of US society is contesting the Second Amendment and the verdict in District of Columbia vs. Heller (2008), no one seems to be contesting the easy affording of this new class of WMD to most people in the world.

In India, TRAI has fixed minimum age of obtaining a mobile connection as 18yr. Age conditions (minimum 13yrs of age) are in place for using popular social media apps like Whatsapp and Facebook also. Regardless, a number of TV commercials show school going minor children owning and using mobile phones. These days, it is also a common practice amongst school teachers to form a WhatsApp group of their students, even if the students are of less than 13yrs of age and hence not legally permitted to use mobile phone and social media apps.

Are we missing the Gorilla in the room?

Chart of the Day

 

Don't waste your last bullet

Many readers have asked about my views on what the Monetary Policy Committee (MPC) of RBI should be doing today. I must admit that I am the most wrong person to ask this question, for two simple reasons — (i) I am neither a banker nor economist; and (ii) I accord very low priority to RBI monetary policy stance in my investment strategy.

Nonetheless, I believe that MPC should steadfastly honest to its mandate of price stability and do whatever it takes to honor its duty of maintaining a stable price environment in the country. It should leave the job of protecting the economic growth and INR entirely to the government. Because, if it does try to transgress into this territory, it will lose both the ends, and add significantly to the chaos and panic.

I also believe that an aggressive hike of 50bps would not help the cause of INR much. Because, at this point in time the exchange rate of INR has become a complex function of many domestic and global factors. For example, (i) Confidence of foreign investors and businesses; (ii) persistently poor GST collection clouding Fiscal roadmap; (iii) surging energy prices; (iv) potentially disorderly unwinding of USD carry trade prompted by surge in US yield; (v) better opportunities emerging elsewhere for foreign investors; (vi) rising risk of full scale trade disruptions due to escalating US-China conflicts; (vii) concerns over political instability emerging post 2019 elections; etc.

A benign 25bps hike would be a total waste. It will be like shooting the last bullet left in your gun at your feet, when the enemy is staring directly in to your eyes.

In this context, it is pertinent to look at the following chart. This indicates two important things:

(1)   The market may have already priced in a 50bps hike in repo rate. So do not expect any major reaction in bond or currency market, if this happens today.

(2)   The 10yr yield and Repo Rate spread is above 150bps. In past 14yrs we have seen this happening only in the crisis years of 2009 and 2013. Both years needed a significant effort from the government to bring the situation under control. Monetary policy may not be enough this time too.

Cut losses, ruthlessly

Some food for thought

The secret of life is honesty and fair dealing. If you can fake that, you've got it made.

—Groucho Marx (American Comedian, 1895-1977)

Word for the day

Rewild (v)

To introduce (animals or plants) to their original habitat or to a habitat similar to their natural one.

 

First random thought this morning

Yesterday, I met an old acquaintance after almost 20years. The man heads a key project in India for a global engineering corporation. An alumnus of IIT Delhi, he did his masters from US in early 1990s. His wife, an LSR alumna, quit her teaching job to pursue her passion in baking. I vaguely remembered that being Jain, this man was very particular about his food. He would always avoid eating out.

Yesterday was however different. He took me out for lunch to a nearby restaurant. When I wondered why this change! The answer was rather unexpected. He said, his wife does not enter kitchen during her periods. Being an expert cook, she does not like to hire a cook at home. So the options are either he cooks himself, or eat out. Most of the time, they end up calling food from outside 3-4 days every month.

Within a minute, I realized how irrelevant the recent SC judgment in Sabrimala case could eventually prove to be. I realized that the issue of entry of women in Lord Ayyappa Swamy is very different from the issue of SC/ST entry in temples. The former is a matter of deep rooted faith and practice, whereas the latter is a matter of oppression and deep rooted social prejudice.

In a flash I understood the perspective of Justice Indu Malhotra, the lone woman judge on the bench. I am convinced that this verdict will be forgotten in few months. Many women who worship Lord Ayyappa Swamy may voluntarily choose not to violate the religious sanctity of the shrine.

This instance also raised the level of my concern over the state of judiciary in the country. Even the higher judiciary deciding the matters based on morality, humanity and TRP of an issue, rather than the pure legality and constitutionality of the issue, is a dangerous precedence. This threatens to pollute the jurisprudence with a grave element of subjectivity. The consequence would be that no matter would ever be closed. We shall see frequent revisions of key decisions, leaving the society in a permanent state of uncertainty and imbalance.

Chart of the Day

 

Cut losses, ruthlessly

At the risk of sounding preposterous, I must say that one thing most of my fellow citizens seem to love is "chaos". I say this based on my numerous observations made during my extensive travels across the country.

The concepts like planning, processes, patience, compliance etc. are yet not integral to day to day life of a common man; at least not to the extent required to catapult our economy to middle income orbit.

Overreliance on Jugaad capabilities often motivates us to procrastinate on important decisions. Moreover, sustainability is something that is usually not a high priority for even top decision makers. The frequent crisis seen in our financial markets are only a reflection of this mindset.

For example, investors suffered hugely as the commodity bubble of early 1990s, dotcom bubble of late 1990s and credit bubble of mid 2000s ruptured.

Without bothering about the sustainability of business models, analysts wrote exuberant reports. Fund managers extrapolated monthly random numbers (footfalls, eyeballs, units sold, orders booked, land bank acquired, etc.) to long term profitability and justified the bizarre valuations. Managements made promises like politicians in opposition. Those in government claimed rise in stock prices as their key achievement.

The first bubble wiped off many prime institutions from the Indian financial markets, most notable being ICICI, IDBI and UTI. These institutions in a sense were key to the industrial development of post independence India. The second bubble took the sacrifice of few banks and many large brokerages. The third one has put the entire public sector banking space in deep distress, and promises to eliminate many large promoter families completely from business.

Did we learn anything from so much wealth destruction and business displacement? Well, not much. Analysts have again extrapolated unsustainable credit growth and net interest margins (NIMs) of non bank financial companies to long term profitability and affording them astronomical valuations. IL&FS and DHFL could just be harbingers of a systemic malignancy.

Higher NIMs have been managed by many NBFCs through availing cheaper short term credit and lending to long gestation period projects, borrowers with lower credit rating, and household borrowers with little credit history at relatively higher rates. This is obviously not sustainable.

Similarly, totally regarding the basic economic concepts of equilibrium, the valuations of most consumer stocks have been driven higher. Some consumer analysts, I spoke to, have been working with assumptions of sustained growth in consumer demand as more and more Indian break the poverty barriers. The constant argument has been the relatively poor per capita consumption of Indians as compared to the global averages. Most of them appear working with the linearity in the middle class household income growth, in line with the trend seen post 6th pay commission award in FY2009. The tangible risks like new domestic competition, more imports, erratic rural demands, falling real wages, etc have mostly been relegated o foot notes.

The valuations of many such NBFCs and consumer companies have transgressed the bubble line long time back. In past few days we have seen that market has now taken cognizance of this fact and is willing to correct the anomaly. The corrections could be quick and painful, like it has been every time before. Besides, many investors losing money, collateral damage in business space is also inevitable. I am reviewing my portfolio to assess if any of my holding transgressed to the bubble territory. I guess, it's high time everyone should be doing that, objectively and ruthlessly.

Leaving a trail of simmering issues and ashes

Some food for thought

"If I take death into my life, acknowledge it, and face it squarely, I will free myself from the anxiety of death and the pettiness of life - and only then will I be free to become myself."

—Martin Heidegger (German Philosopher, 1889-1976)

Word for the day

Habiliment (n)

Characteristic trappings or dress

 

First random thought this morning

The Supreme Court of India is in overdrive these days. Destroying many archaic structures and creating new pathways. After reading down section 377 of IPC (decriminalizing same sex relationships), it has struck down Section 497 of IPC (decriminalizing adultery) completely. In the interim, SC upheld that the Right to Privacy is integral to the Right to Life, and hence effectively scuttled the State's attempts to invasion in our private lives. Aadhar Act verdict is a landmark in that sense. Allowing live streaming of SC proceedings in select cases is also a major milestone. Hopefully we shall see another remarkable judgment on Ayodhya dispute.

The government did a Shah Bano with the verdict on SC/ST Act. It is reportedly considering a legislation to undermine the Aadhar Act judgment also. It is inappropriate and unacceptable.

To the contrary, it's high time that the government takes a cue from the SC's line of thinking and initiates a comprehensive review of IPC and synchronizes it with the modern times.

Various laws should be suitably amended to provide for a "Dignified Life" to all citizens of the country. Do whatever it may take to ensure that.

 

Chart of the Day

 

Leaving a trail of simmering issues and ashes

Adhocism is the key word in policy making these days. Without a robust conceptual framework, the governance and administration has been reduced to mere fire fighting. Short of resources and constricted by poor vision, they are leaving a long trail of simmering issues and ashes, as they set out to fight a new fire every morning.

With most couples needing to work and many singles forced to stay alone for work, refrigerator and washing machine are commonly acknowledged as nothing but essential accessories, just like mobile phone.

It's not even two months when the government cut GST on air conditioners and washing machines materially. I took this as an recognition by the government of ground realities.

Suddenly comes a rude shock. Custom duties are hiked, inter alia, on air conditioners, and domestic washing machines.

Worst, it's not only the import of white goods, the government might have hit the investments made in "Make in India", by hiking the duty on AC compressors.

Given the insignificant amount of potential revenue and forex savings through this hike, the only inference I could draw is that somewhere it is a mindset problem. Apparently, the bureaucrats sitting in North Block at Raisina Hills are still not able to reconcile with the ground realities.

The political establishment is torn between the necessity to keep the middle class in good humor, while addressing the concerns of the people at bottom of the pyramid and protecting the interest of India Inc. Obviously they are not successful in pleasing anyone.

By committing to complete normalization of the policy by 2019, US Federal Reserve has further queered the pitch for our policy makers. A stronger USD consequent to higher US rates, will certainly impact capital flows to emerging markets, including India. Higher crude prices shall also keep the current account position persistently under pressure.

The imported inflation, at a time the domestic prices are also looking to rise due to rain caused supply disruptions and rise in logistics cost, shall add to the complexities being faced by the Monetary Policy Committee of RBI.

Conceptually, if MPC adheres to its mandate of price stability, it shall be looking at raising rates rather aggressively at its review meeting early next week, to stem INR depreciation, augment foreign flows and curtail domestic consumption demand.

This may result in collateral damage in the form of growth slowdown, renewed cycle of financial slippages, and increasing fiscal pressure as cost of government borrowing rises. This all is happening when the incumbent government is going to face the toughest test of its popularity in BJP's home turfs (MP, Rajasthan, Chhattisgarh) in next couple of months.

The question is what the government should be doing under the circumstances! The answer in opinion lies in politics and not in economics. For example, if I were PM today, I would not be scared to go to my people today. I would admit shortcomings in the DeMo exercise and thank them for bearing the pain. I would strongly commend their contribution in terms of voluntarily surrendering LPG subsidy, and committing to better tax compliance. I will seek their cooperation in managing the current account by minimizing the fuel consumption for 3months. Request them to travel only if necessary, use car pool & public transport and deferring their foreign travel programs to next summer. Most important, for once I will focus on delivery and refrain from making tall promises that cannot be delivered in next 6months.