Happy to be fearful and paranoid

Some food for thought

"It's a new game now, you know, you have to bring some fresh stuff."

—Scotty McCreery (American Musician, Born 1993)

Word for the day

Ineluctable (adj)

Incapable of being evaded; inescapable:

 

First random thought this morning

I have written it before. But this morning I find it germane to reiterate this story. As per the Hindu lunar calendar the ancestors' fortnight (पितृपक्ष), ended couple of days back. As per the ancient Hindu traditions, all Hindus are obligated to serve Brahmins (Scholars) and feed crows during this fortnight that usually comes in the month of September every year. It is widely believed that serving Brahmins and feeding crows in this fortnight pleases souls of the ancestors and thus redeems the person performing this ritual from the debt of ancestors.

Besides, a grand feast has to be organized by all Hindu males within 3weeks of the death of their parents, wives and children in which Brahmins, Dogs and Crows are fed.

I know from my interactions with numerous villagers and urban poor, this feast (श्राद्ध) could be one of the top 10 reasons behind perpetual indebtedness of rural Indian household, bonded labor and distress.

The moral of the story is that the feast will be held regardless of you. In case you want to enjoy the feast, you need to survive till good times (अच्छे दिन) arrive; lest Brahmins and crow shall enjoy the feast.

Relating this analogy to the politics and economics—

• It must be understood that to benefit from whatever good a government does, the political parties running that government will benefit from that good only if they survive to see the result of their good deeds. Otherwise, the party that will form the successive government will enjoy the benefit.

I am sure PM Modi is fully aware of this and he would make sure that he survives long enough to enjoy the feast of all reforms he is trying to implement.

• In past two decades corporate India has invested huge amount of money in creating capacities. Many of these capacities, especially in infrastructure and real estate sector, have been created without bothering about the prevailing demand conditions. Consequently, a significant amount of these capacities became economically unviable. Promoters who created these capacities, bank managers who funded these capacities, and investors who provided equity to these promoters and lenders - are all in distress.

There is no argument against the need for these capacities. The demand will also come in next few years. But the question is who will enjoy the feast. The bank managers would have retired, sacked or shunted out for his poor performance. The promoters would have diluted his equity substantially at distress price or forced out by IBC. The equity investors would have booked the loss.

The Brahmins and Crows - the new bank manager in whose tenure these capacities will become viable adding to bank's profitability, investors who will buy equity at distress prices and acquirers who would then be managing the show - will feast on the misery of others.

The conclusion is simple - You must survive to enjoy the fruits of you labor!

 

Happy to be fearful and paranoid

There is an old saying — "D'nile is not just a river in Egypt."

Denial is actually a strong force in our life. It makes our life easier by constricting our vision to the capabilities of our mind. Our eyes can see only as far and wide as our mind can process.

The problem however occurs when we make "denial" our habit or worse a tool to disregard the obvious.

In the current market context, in my view, ascribing the current turmoil in the market place to mostly localized factors, e.g., temporary liquidity crisis in certain NBFCs, political uncertainty, USD carry trade unwinding leading to FPI selling, CAD touching 2% of GDP and consequent INR weakness, etc., may just be another instance of denial overwhelming the reason.

I feel the investors, especially my peers, who are very small and vulnerable, must be fearful, paranoid and aware.

I feel comfortable by just not denying or brushing aside the following ten signs, which in my view are indicating that the current market turmoil is consequence of some plates drifting underneath global markets. It is entirely possible that the drift gets completed without causing any major tremor on the surface; for which I am actually praying every day. Nonetheless, as yet the probability of "no tremor" is nowhere close to zero.

(1)   As Goldman Sachs has highlighted in one of its recent report, "...interest-rate-sensitive areas of the US economy have already stumbled. Auto sales have been weak this year. Signs are also increasing that US housing is sluggish as 30yr fixed mortgage rate has risen to nearly 5%.

(2)   The default fears in Italy, along with Greece and Portugal, caused a freeze in global markets in 2008. Italy is again becoming a threat to global markets, as Quitaly replaces Grexit in market jargon. (See here and here)

(3)   The fear of Greece exiting the common market kept markets awake through many nights. Much bigger partner UK is all set to exit the common area and many other are threatening some others seriously than before. No one seems to have any clue how bad Brexit could be world economy.

(4)   The US Fed is unwinding QE at a pace of US$50bn/month. The economy is running at almost full employment. Inflation is now above Fed target of 2%. The growth from here is forecast to be flat to lower in next couple of years. A US recession towards end of 2019 is a real possibility.

(5)   China had been the engine of global growth during most part of past 15years. The growth in China is now slowing at much faster pace than previously anticipated. In 2008 China was forecast to be growing in double digits and India was not lagging behind with ~9%. No longer is the case. Even though Chinese economy may not stage a hard landing, but still there is nothing to suggest that the growth rate decline would be arrested in neat term.

(6)   Crude oil prices are threatening to rise to a level where these seriously start hurting global growth. GCC countries are positioned much worse than 2008. Sanctions are beginning on Iran Oil next month.

(7)   Unlike 2008, the world leaders are not cooperating with other. The response to GFC was a united and forceful one. No longer is the case. The obduracy of powerful leaders and disregard for the wider common interests may actually be the cause of the next crisis. Trade war has taken place of global cooperation.

(8)   Emerging market currencies have been dumped, causing widespread stress in global economy. IMF has in fact just downgraded its earlier global growth estimates.

(9)   US stock valuations are already flirting with bubble territory.

(10) The USD supply in the global market is shrinking at faster speed than previously anticipated.

When I juxtapose these signs to the high probability of earnings downgrade, high probability of rise in cases of fresh slippages as rate rise, significant rise in market volatility, and a violent and acrimonious election season ahead, I find it even more prudent to be fearful and paranoid in my investment strategy.

If in the end all comes out well and I find myself left out of a wonderful money making opportunity, I would not feel bad. Because, if We the 1.3bn people of India have to eat two square meals, wear a pair of clean cloths and get an all weather shelter, the opportunities to make money will remain abundant for at least 20years.

 

 

Be truly desperate

Some food for thought

"Even if a snake is not poisonous, it should pretend to be venomous."

—Chanakya (Indian Political philosopher, 350BC-275BC)

Word for the day

Librate (v)

To remain poised or balanced.

 

First random thought this morning

The popular narrative in past 2-3years has been revolving against the persons accused of financial impropriety in India, who have taken shelter in the foreign jurisdictions. Recently, the Vijay Mallya, Nirav Modi, and Mehul Choksi have been at the center of political slugfest as well as the joke factories of social media.

Now look at the irony.

The government agencies and BJP supporters are trying to build a perception that the incumbent government has tightened the compliance regime to the extent that the non-compliant are either falling in line or running away to safer jurisdictions.

The opposition parties are however pressing that the government is helping BJP cronies to escape the rule of law and take shelter in safer jurisdictions.

But the truth may be lying miles away from this popular perception. The truth is that the number of Indian rich seeking to settle in foreign jurisdiction is increasing exponentially. They are not necessarily seeking settlements in "easy" jurisdictions, but adopting strictly regulated jurisdictions like USA, Singapore, Australia, and UK. They are paying/investing millions of dollars to get permits to settle overseas. It is pertinent to note in this context that this year Indians have exhausted the quota permits granted under EB-5 program of USA, within no time.

Most of these aspiring immigrants are not necessarily non-compliant or violators of law. These may include honest and sincere businessmen and professionals disenchanted with the under delivery of government on various promises; or concerned about the safety of their daughters; and those refuse to buy certificate of patriotism religious faithfulness from ultra constitutional authorities.

Playing ostrich to this trend and drumming up the position on a questionable "Ease of Doing Business" index may not be much helpful, after all.

Chart of the Day

 

Be truly desperate

The conventional wisdom is that the "desperate time needs desperate measure!" With the general election 7months away, and still short on delivery, the government does look desperate in its disposition. Following the conventional wisdom, it is also taking some desperate measures. Abandoning the discipline on fuel pricing again (first it was done just ahead of Karnataka elections) and brazenly introducing direct subsidy burden of Rs1/ltr on oil marketing companies is one such measure. By this step, the government has—

(a)   Effectively killed the chances of any further private investment in fuel retailing;

(b)   shown total disregard for the interest of minority shareholders once again, and thus severely impeded the prospects of future private investment in public oil marketing companies; or any other public sector company. The disinvestment program may thus be reduced to a mere book entry business whereby cash rich PSUs are forced to buy the government's stake in other PSUs.

Moreover, the measure per se is too little and too late. A mere 2.5% rise in global crude prices could totally annul the relief in few days.

In the blockbuster Hindi movie DDLJ, the heroine is deeply in love with a guy against the wishes of her father. Her mother is afraid of her husband’s retribution and advises the two lovers to elope. But the hero, who is equanimous and noble, tells her that the path suggested by her appears easy but it would lead nowhere. He would rather prefer the path of courage, honesty and integrity which though arduous definitely leads to the desired goal.

Unlike our hero, our governments have historically preferred to take the easy road, even if it leads to destruction. First the transportation fuel was allowed to become an essential commodity for a large part of the population. Then it was taxed heavily. This is the easiest way to generate bulk revenue that could be used to sustain the social profligacy of the politician and maintain an inefficient and oversized government.

Unfortunately, the incumbent government that had assumed power on basis of the promise to implement a differentiated policy, also chose to tread the path to destruction followed by previous government, instead of staging a quick retreat to the starting point to the right path.

The right path, for example, in case of the fuel pricing would be as follows, in my view.

(a)   Accept that the Mother Nature has not given us enough hydrocarbon reserves, but she has given us plenty of sunshine and water. She obviously wanted us to use more of solar and hydel energy and minimal hydrocarbon fuels. Post independence following the Gandhian theory of self reliant village as the key economic unit, the government should have focused more on developing a large renewal energy base, world class public transport system and less water (and therefore less diesel) intensive crops, among other things.

(b)   The government must have treated hydrocarbons as a "luxury" and "sin consumption", just like tobacco and alcohol and taxed it more heavily; but earmarking the tax revenue for development of world class public transport infrastructure, mainly railways and trams, that could be run on very economical fares. This would have also saved lot of money that is spent on combating side effects of carbon pollution, e.g., spending on health etc.

The desperate measures, I would take today shall include (a) raising the price of petrol and diesel for personal vehicles to Rs200/ltr, raise public parking charges by 500% and make public bus service free and cut metro fare by 50%; (b) let fiscal deficit rise by Rs1trn, and add immediately to public transport system (AC buses, Metros, Trams etc.) and distribution of roof top solar panels free to farmers and households using DG for electricity.