Mythology of bubbles

Thought for the day

”I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do."

-          Leonardo da Vinci (Italian, 1452-1519)

Word for the day

Geep (n)

The hybrid offspring of a goat and a sheep

(Source: Dictionary.com)

Teaser for the day

If BJP makes a government in Delhi and works for common good, in 2018 no one will remember how the government was formed.

For all you know AAP may not even be there to remind people! 

Mythology of bubbles

In Hindu mythology, once the forces of good (Sura) and evil (Asura) had a protracted battle. The battle lasted so long that both the groups exhausted all their resources and valor. Completely tired, wounded, frustrated and exhausted, they approached the savior Lord Vishnu. The Savior advised them to go and explore the great ocean to find new resources and vigor to make a fresh beginning.

Following the advice, both the groups went to the great ocean and explored it extensively. During their exploration they discovered huge amount of wealth and resources that included the nectar that would immortalize the consumer and venom that would destroy whoever consumes it.

Realizing that if the evil forces get the access to nectar and other resources found during the exploration it would seriously jeopardize the interest of the forces of good, Lord Vishnu tricked the forces of evil and appropriated the entire nectar for consumption by the forces of good.

Lord Vishnu also requested the almighty Lord Shiva to absorb the venom so that it does not harm anyone and the balance of the universe is maintained. Obliging, Lord Shiva drank the entire venom and preserved it in his throat.

Post this the forces of good became more powerful. But whenever they deviated from the path of common good, they were overpowered by the evil forces and dethroned. Each time only after a great deal of repentance they would be rehabilitated with the help of Lord Vishnu, Lord Shiva or the Mother Supreme.

Over the years I have realized that it is not just a mythological story to be heard during religious ceremonies and forgotten immediately thereafter. It is also not a usual morality emphasizing victory of good over evil. It is much beyond. This applies to all aspects of life, even economics.

In modern economic parlance, the ocean exploration is akin to the period of irrational exuberance that eventually lead to building of a 'bubble' in the economic sphere.

Bubbles are initiated when all the participants get tired, frustrated and exhausted from prolonged economic weakness. At that point in time, all the stakeholders muster the courage and supported by the 'authority' do things they would never do in normal times. They do excessive and seemingly irrational borrowing, investing and spending. Capacities are built to the scale unfathomable during normal times.

The nectar or the good that emerges from these bubbles is shared by all. However the venom is consumed only by the financial investors who invariably end up poorer after every bubble is burst.

If you are not able to correlate to what I am saying - imagine would India be a ITeS superpower without Y2K or technology bubble during late 1990s! Had we built so many houses, roads, malls, power plants, cement plants etc. during last decade but for a credit bubble! Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the west! ...to continue tomorrow

Yet another midway diversion proposed

Thought for the day

”If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me."

-          William Shakespeare (English, 1564-1616)

Word for the day

Maudlin (adj)

Tearfully or excessively sentimental.

(Source: Dictionary.com)

Teaser for the day

Does Arvind Kejriwal know that you could only buy the things which are put on sale by the present owners!

Yet another midway diversion proposed

A recent Deutsch Bank research report highlighted that India is witnessing emergence of a "clear and internally coherent economic model" that includes "export oriented manufacturing, heavy infrastructure building and urbanization". in a material shift away from "India’s current services-driven growth trajectory" This emerging model is found akin to "an East Asian growth model based on the mass deployment of labour and capital".

The DB analysts believe that "The new strategy will require keeping the Rupee weak and dramatically expanding the financial system. International experience shows that the model can generate growth and jobs, but sustaining such rapid financial expansion is not without risks."

The report highlights that while India's export growth so far has been driven by services, auto sector has demonstrated that with right kind of policy support Indian enterprise could do well in global manufactured product market also.

The key to shift would be our ability to substantially augment energy supply to the industry and "ability of the domestic financial sector to sustain rapid expansion".

The Prime Minister Narendra Modi in his public discourse has strongly emphasized on the need for expansion of manufacturing sector to create jobs for millions of youth joining the work force every year. In fact during his election campaign Congress leader Rahul Gandhi had also echoed the same sentiments.

In April 2013 in a series of five articles (see side bar) I had expressed my concerns over frequent midway diversions on core issues taken by Indian policy makers.

I still feel that he current socio-economic mess in the country is outcome of total adhocism in policy and program formulation & implementation, non compliance with the comprehensive socio-economic structure conceived in the Constitution, and lack of committed leadership, especially in past three decades.

The political establishment has so far mostly failed in justifying the midway diversion from the prescribed socialist framework taken in mid 1980’s. The obduracy shown by successive governments in relinquishing enormous amount of discretions enjoyed by political establishment has been a consistent obstruction in the way to evolve the intended quasi capitalist or neo-socialist policy framework that would lead to sustainable and faster growth.

A brief spell of high growth, which many may find accidental in hindsight, has probably misplaced the popular aspirations and thus added to the complexity of the problem.

I feel the country needs to comprehensively review the constitutional framework for evolving a wider consensus on the policy direction for sustainable socio-economic development in the current context. Blindly following East Asia model of capital and energy intensive growth may not be ideal in our context.

I will write more on the current flavor "Make in India" next week.

Related articles

A midway diversion to nowhere

A midway diversion to nowhere - Disinvestment

A midway diversion to nowhere – Foreign capital

A midway diversion to nowhere – Energy policy

A midway diversion to nowhere – youth policy

Some books to finish and few places to visit

Thought for the day

”Maids want nothing but husbands, and when they have them, they want everything."

-          William Shakespeare (English, 1564-1616)

Word for the day

Plebeian (adj)

Vulgar; common; crude or coarse in nature or manner.

(Source: Dictionary.com)

Teaser for the day

TRS chief says "Will bury anyone who dares disrespect Telangana"!

What could be worst disrespect to the motherland than suggesting that it is capable of being disrespected by any tom dick harry?

Some books to finish and few places to visit

In past few days, I have outlined my thoughts on hurdles Indian economy faces in achieving a sustainable 8%+ growth path.

Positively, many readers have appreciated that there is little on the ground which could kick start the virtuous cycle of "higher income - saving - consumption - investment - income" in near term.

Most also agree that morning star is now visible and signs of a brilliant dawn are emerging on the horizon.

Some active participants in the equity markets have however suggested that hurdles in achieving higher savings and investment rate should not be deemed as "no profit making opportunity" in the market in near term. I could nothing but agree with them. I receive plenty of "stupendous trade" ideas every morning. Many of them actually go up 2-20% for several days.

Every day morning I find a slew of companies which traded at their all time high levels. Admittedly, I have never heard about 70% of these companies. A preliminary enquiry shows a large number of these "multi baggers" have little to show in their financial statements. Surprisingly, their profits jump with investor's sentiments and ebb accordingly. Obviously I am not at all excited about these "circuit hitters".

The tremendous response to some recent IPOs also reminds of exuberant times seen during 1989-90, 1994, 1999, 2005-07.

But what is catching my attention is small bubbles on the surface of services sector suggesting a strong undercurrent and high temperature underneath. Retailers, e-commerce platform providers, logistic services, pharma R&D, ITeS, telecom, entertainment, E&C contractors have all seen their market value burgeoning exponentially. Many players in this space have been able to raise risk capital at rather elevated valuations in recent past. Though comparatively smaller in overall macroeconomic context, this space appears to have decoupled and moving ahead alone.

I am a big fan of enterprise, innovation, large scale and ideas that directly touch of people. However, I do not like to invest in businesses (a) I fail to understand; (b) where visibility of positive cash flows is low; or (c) where valuations are high just on hopes.

I would therefore be very selective in venturing in this space. I guess I have enough time at my hand to make the selection. The nagging feeling I get from conditions in Europe provides me comfort that soon there will be an opportunity to buy at my will. I need stand in long queue at the upper circuit freeze level to buy any stock.

This soon however may not be tomorrow morning or next week. But that is fine with me. I have some books to finish and few places to visit. I can therefore wait little longer without getting bored.

For those getting itchy I would suggest studying the market behavior during July 2007 when subprime problem first hit the market and September 2008 when Lehman actually collapsed. The yield curves across Europe are also depicting a story.

Why bother about things you can't help

Thought for the day

” Let the one among you who is without sin be the first to cast a stone. "

-          Jesus Christ

Word for the day

Cavil (int. verb)

To raise trivial objections; also, a trivial objection

(Source: Dictionary.com)

Teaser for the day

If religion of Sanskrit is Hindu, what is the religion of English, Urdu, Tamil, Bangla, Malyalam, Sindhi, Gujarati, Marathi, Punjabi, French, German....?

Why bother about things you can't help

I am fortunate to have critics who are most charitable in their criticism. For past two weeks especially they are leaving nothing to imagination., Some of them have even picked up selective Punjabi expletives to express their frustration with me.

Their main objection is to my nonchalance to seemingly exciting events and data, e.g., Ukraine, Pakistan, Gaza, ECB stimulus, Fed tightening, etc. My point is that anything which can be clearly seen by the last person standing on the street (that is me) is not worth bothering about. So is not which even the likes of Yellen and Draghi cannot see.

I like to factor in my strategy all that is known and/or expected, whether quantifiable or not, and keep enough flexibility to accommodate any black swan that may chose to visit unannounced. This saves me from reacting to every news headline or getting excited over every hint of trouble.

I understand it is unfair to use this column to take on my critics, but who said life is fair!

Now coming back to normal business, I have been emphasizing that the Indian economy may not sustainably return to the path of high growth (8%+), in next 5years unless the virtuous cycle of "higher income - saving - consumption - investment - income" gets kick started. So far we have not seen any evidence of this happening.

The upward revision in growth estimates so far is coming from expectation of faster execution and administrative efficiencies. New investments are not on the horizon of analysts and economists so far.

The corporate profit growth in past couple of quarters is also mostly driven by cost efficiencies and better export demand. There is no evidence of pricing power returning to producers or material rise in consumer demand.

In my (over) simplistic assessment the following pieces need to fall in place before the virtuous growth cycle led by investment and credit is kicked in.

(a)   More money needs to flow in the hands of consumers so that consumption demand and household savings could grow at faster rate.

(b)   Credit worthiness of enterprise engaged in high gestation capital intensive infrastructure  projects needs to improve.

(c)   Lending capability of financial institutions needs to improve materially both in quantitative and qualitative terms.

(d)   Enabling industrial, fiscal and sustainability policy environment needs to be firmly put in place.

(e)   Monetary policy needs to ensure that the foreign flows are not used to feed asset price bubble like during 1991-1995 and 2003-2007 but are strictly channelized to built productive assets and social & physical infrastructure.

In next few days, I shall discuss these points in some more detail. All suggestions, comments and views (even with expletives) are welcome at vijaygaba.investrekk@gmail.com

Solve the puzzle

Thought for the day

”For if you love those who love you, what reward have you? Do not even the tax collectors do the same?"

-          Jesus Christ

 

Word for the day

Bletting (n)

The ripening of fruit, especially of fruit stored until the desired degree of softness is attained.

(Source: Dictionary.com)

 

Teaser for the day

Pakistan gets its own AAP moment.

There are lesson for all - Anna, Quadri, Kejriwal, Imran, Manmohan, Sharif and Modi!

 

Solve the puzzle

In past couple days some market commentators and analysts have made seriously buoyant forecasts about Indian equity markets, almost disregarding the global unease about the bond and equity rallies in developed markets. It certainly feels good to hear calls for 10000 Nifty level in next 6-7months translating into 25% return from the current levels.

The latest trigger for the bulls is the GDP data for 1QFY15, which came at 5.7%, though not unexpectedly. As I suggested yesterday, the stream of latest data, including GDP data for 1QFY15 and PMI numbers for past 6months, support optimism about "worst is over". There is however little to suggest that the virtuous cycle of higher savings, investments, credit and consumption is likely to get kick started tomorrow morning.

I feel the latest GDP data needs to be seen in this context. Even a prima facie look at the CSO press release of 1QFY15 GDP data raises some questions. For example, consider the following:

(a)   Good rabi crop is reflected in strong Agriculture growth. But this number is corroborated by private consumption which fell, continuing the trend of past many quarters.

(b)   Strong growth in construction sector growth did not reflect in banking and real estate sector growth. From other data we know that infrastructure construction, especially roads, has not done well in that period.

(c)   Government consumption expenditure rose, perhaps due to election related spending. However, considering that over 60% government spending is done on social sector, the decline in social sector growth is difficult to explain.

(d)   Rise in investment also is not corroborated by decline in financing, banking and insurance sectors. The credit growth number for the corresponding period also do not confirm this.

(e)   Gold might have contributed much to lower imports number. Oil import is also lower. Both these are not sustainable.

(f)    Mining growth is purely due to lower base, as the coal and iron ore production data does not confirm this sharp rise.

(g)   The shortages in power supply belie the spectacular rise in electricity and gas production.

(h)   Rise in manufacturing and exports could be due to other economies doing well rather than Indian economy doing well. Lower consumption number confirms this.

I would like this puzzle to get resolved before changing my investment strategy from overweight consumption and exports to overweight investment and credit. For now I am sitting tight. I shall though look at rebalancing my portfolio this month to take care material outperformance in certain stocks.

No free rides

Thought for the day

” When you have got an elephant by the hind legs and he is trying to run away, it's best to let him run. "

-          Abraham Lincoln (American, 1809-1865)

Word for the day

Rusticate (v)

To go to the country

(Source: Dictionary.com)

Teaser for the day

Is Modi relying too much on Japan? or Vice versa is also true?

 

No free rides

Yesterday I called 50people randomly selected from my phone book to ask "what if Google, Facebook, Wikipedia, WhatsApp, and Yahoo are not available from tomorrow morning?". The reactions were unusually but expectedly uniform. I could imagine that all of them had expression "are you mad?" and "Do ya even realize what're you talkin' 'bout?"

Not surprised, I followed this up with a supplementary "what is all these service providers start charging for their services?" Now the silence was deafening. The unease was palpable.

No one could deny the critical role these services play in our day to day life. The utility is unquestionable. But we are accustomed to enjoy these services for free. We have never planned paying for these.

I am sure that if I have to directly pay for these services, I will cut down the usage by at least 75%. The sense I got from the people I called, most of them will be very discrete in using these services.

I believe that this "for free" attitude of ours has introduced serious problems in Indian economy. Not only consumers, but investors and industrialist are also often seen on the lookout for freebies.

We all appreciate that serious economic inefficiencies have crept in the system due to schemes like tax Free zones, free food, free electricity, free water, free air, free mines, free tickets/passes, interest free, etc. These schemes invariably lead to misallocation of capital, regional imbalances, lower productivity, misuse, wastage, leakages and various forms of corruption.

The classic example is sudden rise in markets value of a company which announces a bonus issue of shares. Theoretically, a bonus issue causes no change in the intrinsic value of a company. In fact post bonus issue the company has enlarged equity base to service, which in some cases could be disadvantageous to shareholders.

The PPP model of infrastructure development in India also appears to be an outcome of this "For Free" seeking mindset. The projects are often undertaken under the model with 5:95 equity to debt ratio. It is popularly believed that some promoters even avoid putting 5% equity using scrupulous methods. In case project is successful, they make lot of money. However, if the project fails, the loss is absorbed by the lenders (mostly public sector banks) and tax payers.

I understand the Prime Minister call for reform of this "For Free" mindset, has disrupted peace in many corporate board rooms.

The independence day exhort of PM to shed "what's for me in this?", "cleanup the filth around you", "focus on quality and sustainability of your business", "make positive contribution to society" clearly shows the intent.

But "Good Days" will come only when and if we are ready for that.

Let the patient be cured first

Thought for the day

”We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time."

-          T. S. Elliot (American 1888-1965)

Word for the day

Fink (v)

To inform to the police; squeal.;

(Source: Dictionary.com)

Teaser for the day

You cannot take away my right to preach morality, even if I am stuck in 300BC.

You are free to disagree, ignore, ridicule,  or contradict me.

But for God sake do not gag me or paint me a criminal.

Let the patient be cured first

Once a patient was admitted to an upscale private hospital with a serious heart condition.

The cardiology team at the hospital was headed by an experienced old surgeon, who was lately rendered incapable of performing complicated surgeries due to his blurred vision and trembling hands.

The team he headed was not harmonious. Many doctors were either incompetent or had allegiance to their vested pecuniary interests. They would often indulge in unethical practices and conduct unbecoming of a reputable medical practitioner.

The management of the hospital was fully aware of the state of affairs at the hospital, but did little to put the house in order. The popular belief is that the management itself encouraged the disharmony amongst the team members and incongruence of the objectives to stay in control of the institution and maximize the profitability.

The head of the team diagnosed the patient's condition accurately and proposed a line of treatment, which would treat the patient promptly with minimum pain and cost. The team members however disagreed. They wanted the patient to spend more time in hospital and undertake a variety of experimental tests and procedures. This would cost the patient much more and cause more pain. The management concurred with the unethical lot of doctors.

After spending some time in the hospital, paying huge costs, and suffering tremendous pain, when the relatives of the patient saw condition of the patient worsening, they moved him to another hospital.

The doctors there studied the case history and discovered that the patient's condition was accurately diagnosed by the previous hospital and correct line of treatment was proposed by the head of the department. The doctors there decided that once the condition of the patient is stabilized they would follow the same line of treatment as suggested by the old surgeon at first hospital.

The doctors and management of the first hospital accused the second hospital of unethical practice and incompetence, charging them with appropriating their diagnosis and following the same line of treatment as they had suggested.

Somewhat similar is the situation of UPA (the first hospital), NDA (the second hospital) and the Indian economy (the patient).

In the meanwhile some vital signs of the patient have shown improvement, since moving to the NDA hospital. I'm not sure whether it is effect of the treatment afforded at the UPA hospital or at the latest hospital. Nevertheless, as one close relative of the patient, I hope NDA doctors and management would take care of the patient well and follow the correct line of treatment that would cause least pain and cost us minimum.

In next few days, I shall discuss what's ailing the economy and what should be the ideal line of treatment in my view.

The Big Bang Theory

A quick post PM's independence speech telephonic survey of some market participants finds a large majority confused.

All of them are deeply impressed by the high emotional quotient, commitment and nationalistic fervor of the speech. However, many of them sounded disappointed by lack of specific project and scheme announcements that can boost the market Monday morning.

We, for the record, are deeply impressed by the tone, tenor and contents of the PM's speech. The speech encourages us to increase our bets on Indian economy.

We heard many Big Bang announcements in the speech, which many market participants perhaps would notice in the months to come. Specifically, we would like to highlights the following:

(a) For the first time since Lal Bahadur Shastri, a PM has underplayed the role of the government and highlighted the role and responsibilities of citizens in building a progressive society. PM rightly pointed out that all 1.25bn Indians need to contribute in nation building and the government will only play the role of a constructive facilitator and coordinator with compassion.

(b) The PM emphasized the importance of quality and sustainability in the process of growth and development.

(c) Emphasis on building strong national character through commitment to cleanliness, social harmony, peace, socio-economic equality is also first.

(d) Commitment to restoration of true federal structure of government, that got lost in the personal ambition and insecurities of Mrs. Indira Gandhi, may pave way for the balanced, equitable and sustainable growth of the country.

(e) Emphasis on protection of personal dignity of all citizens as guaranteed by the constitution may help restoring the faith in Nation State and thus enhance the compliance level.

(f) Engaging all elected representatives in the nation building process will help ease the power struggle, corruption, and encourage healthy competition amongst legislatures and local communities. Through model village schemes (Smart villages with urban civic amenities) all elected representatives will have an opportunity to demonstrate their organizing, project management and development capabilities and will be able to rise in national hierarchy. Each of them will have a project named after them as legacy to show case (so far domain of a few families).

Insofar as financial markets are concerned, we believe that the PM has just announced seriously big bang structural changes in the whole economic paradigm. For example,

(1) In our view, the new manufacturing policy is on the anvil that would enable India become an important international manufacturing hub. "Make in India" mission shall see far reaching changes in SEZ policy, FDI rules, taxation policy, land acquisition policy, and sustainability rules.

(2) The disbanding of central planning commission shall strengthen the federal structure. Deeper center-state cooperation will improve execution and bridge the trust deficit. Estimates suggest huge savings could be achieved by removing redundancies through combining state and center welfare schemes.

(3) A common SAARC trade area could bring serious benefits to many industries.

(4) Development of MSMEs with focus on quality, sustainability and import substitution is a noble thought.

(5) Massive financial inclusion scheme is aimed at eliminating exploitation of poor and leakages in delivery of government assistance.

 The last but not the least, by not referring to the menace of corruption even once in his 64min speech, PM has highlighted total confidence in his team and his ability in making it a non-issue sooner than later.

It is also a matter of comfort and delight for us that many of our suggestions have found place in PM's speech. In particular the following:

8 things I wish to hear from PM tomorrow

Raise the Bar

Regards a very Happy Independence Day to all our readers.