Do it yourself

Monday, April 20, 2015

Shenanigans of a redeemer

Thought for the day

"I'd like to live as a poor man with lots of money."

- Pablo Picasso (Spanish, 1881-1973)

Word for the day

Grubstake (n)

Money or other assistance furnished at a time of need or of starting an enterprise.

(Source: Dictionary.com)

Malice towards none

You would not know if you were dead. Only others would know.

It's same for stupidity.

Shenanigans of a redeemer

The recent prints on trade data read with domestic core inflation, indirect tax collection numbers, employment data and result expectations for the quarter ending March 2015 present a clear picture of the state of affairs at this given point in time.

· The external demand environment is tough and not likely to improve in near term.

· The domestic manufacturing may have bottomed, but the pickup is still a few miles away.

· One certain factor in lower core inflation is lack of pricing power.

· Execution delays continue to reflect poorly on the employment growth.

The incumbent government shall complete its first year in office in four weeks. The report cards presented by various ministers, especially by the Finance Minister in recent speech at Peterson Institute for International Economics, claims to have achieve wonders. I would like to leave the assessment on this to discerning readers.

In past few days, five events have particularly dominated media headlines.

· PM Modi's yet another "successful" foreign visit. The longest one this time.

· Congress VP Rahul Gandhi's return from 57day introspection sabbatical.

· Sania Mirza and Saina Nehwal achieving which no other Indian woman has done so far, viz., No. 1 global ranking in their respective sports.

· TCS deciding to distribute some of its cash pile to its employees and RIL regaining India's top profit maker position.

· J&K plunging back into unrest after relatively peaceful decade.

Making PM part of the problem

PM Modi has made friends with many important global leaders like Japanese PM, Australian PM, British PM, Canadian PM and American President.

One wonders whether it is a reflection of the charisma and congenial personality of the prime minister or something else.

The trivia is that if PM were so charismatic, congenial and friendly, why would he fail in making friends with opposition leaders like Rahul Gandhi, Mulayam Singh, Lalu Yadav, Mamta Baneerjee, Naveen Patnaik, Nitish Kumar etc.

The argument of untouchability of BJP is weak. Bharat Ratan Atal Bihari Vajpayee was also a BJP Prime Minister and he was admired and befriended by all opposition leaders.

We need to examine whether these global leaders are smitten by the persona of PM Modi or merely by the irresistible lure of Indian markets in a time when recession is knocking furiously on their respective doors.

In the case of latter, the bonhomie displayed by these leaders calls for greater caution rather than celebration.

It's not the opposition, but the friends on his side of the divide

I have been highlighting since past many months that the incumbent government suffers from all the limitations which constrained the preceding regimes. The majority in Lok Sabha is just an illusory comfort.

If only number of Lok Sabha MPs could bring about the socio-economic metamorphosis we all are longing for (at least in our public discourse), Rajiv Gandhi could have done it long ago.

The only differentiating factor is that the government is led by an experienced politician who is committed, has shown understanding of the problems, has some vision of the solutions and track record of delivery.

Unfortunately, in the course of his election campaign he has raised expectations of the people beyond manageable levels and frequent state elections are not letting him moderate these expectations.

The critics of the prime ministers nonetheless need to appreciate that he is a Valuable Resource of this country. It is for us to decide how best we want to make use of him. We could pull his legs and laugh. Or we could suggest him solutions for the myriad of problems faced by this country and cooperate in implementation these solutions.

This does not require giving a missed call at 1800 266 2020 or attending RSS shakha or subscribing to the frivolity of VHP etc.

The prime minister himself is making all the right noises. He wants people to walk with him on the path to progress. Unfortunately, even his horsemen would not let him do this.

To appreciate what am I saying, just read 100 latest tweets of various minister in his government. They just eulogize the PM, putting on the highest pedestal far away from the people and thus make him the part of the problem rather than becoming themselves part of a solution.

Give him some time and support

One of the most reputable industrialists in the country, Ratan Tata recently, advised his peers not to get "disillusioned and dissatisfied with the new government so fast".

"He (PM Narendra Modi) is still in the early stages of defining what he hopes to deliver a new India. The implementation hasn't really taken form this year," Tata said recently in a program.

Coming from a seasoned persons like Ratan Tata, this exhort is significant in many ways. To me it highlights five things:

(a) The business community in the country is restless and beginning to feel disillusioned and dissatisfied by the performance of incumbent government. At an earlier instance HDFC chairman Deepak Parekh had also expressed similar sentiments.

(b) The government is still some distance away from defining the framework for delivering on the promises made during pre-elections and post election period.

(d) Notwithstanding the popular narrative and rhetoric, wise amongst the herd understand that it is not easy to realize the dream of new India, but it is within the realm of reality nonetheless.

(e) No single person, party or government could deliver the New India. It has to be a popular movement. Cynicism, opportunism, partisanship aside, the country as a whole would need to support the movement.

The best example is the effort invested by two young women Temsutula Imsong and Darshika Shah's in cleaning of famous Prabhu Ghat in Kashi. It is for us drive inspiration from these two young women and contribute to building new India or wait for the Modi government to fail just to enjoy a few moments of sadistic pleasure.

Rahul Gandhi has an opportunity

In my view, the space for a sustainable national opposition to NDA is still vacant and the Congress Party is the most preferred and natural choice to fill the void.

Rahul Gandhi has taken a good two month break from active politics. Despite his uninspiring speech at Sunday Kissan Rally, I believe he has the opportunity to make a new beginning. People will forget and forgive all his previous failing if he could reinvent himself and his party.

It will be unfortunate if he squanders this opportunity.

Inspiration vs. reverence

While helping them prepare for their GK class test, I asked my daughters (10 & 12 year old) who inspires them most. Both of them answered in a blink - "Sania and Saina". One could clearly see the twinkles in their eyes.

"What do you think of Narendra Modi?", I asked. "Ain't he also inspiring?" Son of a tea vendor becoming prime minister - "Doesn't he remind you of Cinderella story?"

Stared at my face - as if they were searching for the answer I am expecting - both paused for few minutes and softly uttered "Not really". The indifference in their response conspicuous and bit concerting.

The children who just a year ago had shouted 'Abki Baar Modi Sakar" for more than two months, debated with their friends, even requested me to vote for a Shiv Sena candidate notorious for criminal antecedents - are not inspired by his leadership.

There has to be something wrong. My pursuit to find the truth pushed me to dial a few acquaintances.

The outcome was not surprising. The truth is that people believed Modi to be a redeemer (Taranhaar). He is expected to redeem all the problems faced by the populace. That's his duty.

Prince Gautama followed the path of salvation and became Budha. But no king would wish his son to become Budha.

Corporate performance meets the muted expectations

The result picked up steam last week. TCS met the muted street expectations. Highlighted the challenges in external demand environment. Managed the currency fluctuations well and sustained the pricing. The surprise was the decision to reward employees by generous bonus. We are yet to ascertain whether TCS is finding it hard to stop talent from flowing to more lucrative e-commerce and other IT start-up businesses.

RIL became the largest profit earner in the country once again. The numbers were though not very inspiring. Petrochemical business which was expected to turn corner from the current year is still suffering from low demand and lower margins. Telecom business execution is lagging behind.

Heaven burning again

Both the Modi and Mufti governments have mishandled the situation in the Valley. The people returning after holidaying in Srinagar suggest that the situation there is likely to worsen from here.

An Army brigadier candidly told me - both the governments are not too keen to find a solution. A simpler thing could have been to construct a gated colony of 1000-1500 houses in Srinagar and allot these dwellings to Kashmiri Pundits through a draw of lots, instead of shenanigans of announcing that a "separate township" will be created (with no plan whatsoever on the board).

Some interesting charts

US disinflation may be real

US groceries prices fell 0.5% last month, the largest decline in nearly six years.

Demography explains EU low growth more than anything else

Figures released by the European Union’s statistics agency Thursday show the 28-member bloc is running low on children, a trend that is set to continue. People aged less than 15 years accounted for 18.6% of the population in 1994, but just 15.6% in 2014. Eurostat estimates the rate of decline will slow in the coming decades, but just 15% of the population will be children in 2050.

Friday, April 17, 2015

Time to serve the food

Thought for the day

"If it looks like a duck, and quacks like a duck, we have at least to consider the possibility that we have a small aquatic bird of the family anatidae on our hands."

- Douglas Adam (English, 1952-2001)

Word for the day

Schlemiel (n)

An awkward and unlucky person for whom things never turn out right.

(Source: Dictionary.com)

Malice towards none

PM Modi began his term with a visit to Bhutan. He will complete first year with a visit to China.

In the mean time he has travelled across seven seas and five continents.

Time to serve the food

As per current estimates, the urban population of India is set to rise by more than 400 million people to 814 million by 2050. The country is likely to witness mass urbanization only seen before in China. Most Indian cities today face extreme infrastructure constraints.

In past seven decades we have perhaps developed 25 odd new cities. Besides Chandigarh, almost all new cities like Gurgaon, Gandhi Nagar, Navi Mumbai, Dispur, Secundrabad, New Raipur etc. have evolved as satellite town of a large congested city without much long term planning. Many of these cities are suffering from inadequate civic amenities like water, electricity, parking space, security, etc. Lack of employment opportunities makes people travel long distances and hence problems of pollution and poor quality of life.

Under these circumstances, there are three options to improve life of the people. (a) Provide modern amenities and employment in the 6,50,000 villages of the countries and thus reverse the flow of immigration from villages to cities; (b) create new urban infrastructure and let the manage mass migration of people from villages to these cities; and (c) use a judicious mix of first two options, i.e., improve quality of life in some villages and build new urban infrastructure.

The government of India seems to have opted for the third alternatives. It plans to build 100 smart cities to decongest exiting cities and provide necessary social and physical infrastructure in villages through schemes like PURA (Providing Urban amenities to Rural Areas).

Building smart cities is a good idea. Making 100 of them is even great idea. But we need to understand and accept that smart cities are not merely about technology and infrastructure. It is indeed more about smart people who are dedicated to quality in life and are fully compliant.

I have so far not seen much effort on the part of government or civil society to promote such dedication and enforce compliance. The cleanliness initiative of PM Narendra Modi has the potential to drive an effective mass civic compliance movement, but so far the commitment to this program has been sketchy.

It's already 11PM, serve the food

PM Narendra Modi and his government have invited the entire world to come to India and experience the red carpet welcome. A grand banquet has been organized. Many guests have arrived well in time. The evening started with pleasantries and then began the session of speeches. Many leaders have spoken eloquently. Their views, vision and promises have been received well.

But it is 11PM now. The guests are hungry. They need food. But there is no sign of even appetizers.

...set your house in order

It is widely known that many strategists and fund managers are seriously looking for long term investment themes in programs like Make in India, Development of Smart Cities, Clean India, Digital India, Inland Waterways etc.

To assess the validity of these themes and identify some micro level investment ideas, I decided to gather some information.

After trying with many ministries and departments, I discovered that though the government is already 11month old, its bureaucratic structure is far from established. The churn is still continuing. The roles and accountabilities are not yet finally assigned. In short, the execution team has not yet taken position on the starting blocks.

The pursuit of information took me to the BJP headquarters in New Delhi. Unfortunately, I could not get any bit of the desired information or even any clue as to this information could be obtained.

But what I observed there, made me little skeptical about the dedication and commitment of BJP workers and leaders to the cleanliness and civic compliance. The toilet meant for the use of visitor was dirty and stinking like a typical municipality managed public toilet. Pan Masala sachets, empty cigarette boxes and plastic cups were strewn around garbage bins. The canteen was dirty and filled by house flies. There was a lot of temporary looking permanent structures, which I suppose is to dodge the stringent Lutyens Zone building rules. Most structures were highly energy inefficient and lack proper ventilation.

The Union Minister for Urban Development, who should logically be responsible for delivering smart cities, also happens to be the Minister for Parliamentary affairs. Given the persistent logjam in Rajya Sabha, he naturally spends more time in managing the relations with opposition parties and the unhappy media personnel, as compared to issues like urban development.

For now I have given up on the this theme. Perhaps I will revisit a year later.

In the context it is pertinent to note the following excerpts from the interview of Ramakant Jha, CEO of GIFT city, Ahmedabad published by Reuters India and an interview of Rajeev Malik, a senior economists at CLSA, Singapore.

India: A Truck With A Broken Gear Box

"The delay in passing the land acquisition legislation is disappointing, as is the compromised design of the GST—a well-designed GST has the potential of doing for India something similar to what the entry into the WTO (World Trade Organization) did for China. Despite repeated assurances by the government, there are still doubts about the consistency and clarity on India’s tax policies. Worries over retrospective taxation haven’t gone away fully, and the latest issue of tax demands for prior years on international funds investing in India leaves a lot to be desired. The approach towards a critical area like education remains an enigma wrapped around a question mark."

"The Modi government has some meaningful achievements but still appears to be under-performing a key test—the pick-up in economic growth. Further, there is a feeling among investors that the government could have moved faster. The fact of the matter is that either the government overestimated its ability to jump-start growth or underestimated the time needed to fix the multiple factors which had crippled growth. In any case, it is difficult not to be constructive on a secular story like India. However, it is important to reiterate that the much-awaited acceleration in economic growth will be slow and uneven initially. The government is partly a victim of high expectations, unrealistic in some cases. It also comes across as being somewhat defensive for its pro-business approach and is caught in this unnecessary political web of being branded anti-poor. Spreading the fruits of faster growth is the best economic medicine for dealing with poverty. The government should emphasize the benefits of reforms more assertively rather than being defensive about them.

"The Indian economy is a like truck with a messed-up gearbox. More petrol or fresh paint or new tyres or a new driver-cum-mechanic won’t be successful in making it to move faster until the gearbox is fully fixed. Fixing the gearbox will take time. Investment recovery continues to be held back by structural factors, institutional issues, supply-side constraints and policy uncertainty. The banking system is burdened with asset quality issues, while corporate debt overhang constrains a quick turnaround in taking on risk. Corporate balance sheet stress is particularly high in infrastructure and natural resources. Higher private capex will need improved profitability; this again will be slow in playing out. The domestic headwinds are complemented with subdued global demand. The above is not to say that a new investment cycle won’t take shape. To be sure, some of the pieces are already falling into place. But the turnaround will be gradual and uneven. Investors shouldn’t let impatience cloud their judgement."

"The Reserve Bank offered an inconsistent contributing factor of poor monetary transmission of its earlier interest rate cuts for not cutting the repo rate earlier this month. I say inconsistent because poor monetary transmission is hardly a new problem in India. RBI did not raise it as an issue when it was raising interest rates in late 2013.

Governor (Raghuram) Rajan had raised rates by a total of 75 bps (basis points) after coming to RBI but there was hardly any transmission of those into banks’ lending rates.

Does anyone recall the Reserve Bank signalling that it will wait for banks to pass on, say, the first two rate increases before taking a call on further tightening?"

"One critical challenge is that most high-frequency data don’t echo the more favourable signals in the annual GDP data, which also seem to be out of sync with the bottom-up evidence and feedback from corporates. The forecasting challenge is compounded by limited history of the revised data—growth rates for only three years are available. There is some improvement in clearing the backlog of stuck investment projects but the delay in passing the land acquisition legislation is disappointing."

"Government officials badmouth negative actions of rating agencies but become their cheerleaders when an action is favourable. A more balanced approach might help to improve their credibility. Different asset classes— equities, fixed income and currencies— had already priced in improving macro dynamics. Moody’s move—although not without caveats—essentially formalizes that improvement."

100 ‘smart cities’? Getting just one done will be a challenge

Prime Minister Narendra Modi’s plan to build 100 “smart cities” by 2022 to decongest existing urban centres probably will take longer to achieve. Reuters visited the foundations of one of these cities in Gujarat, a finance centre called Gujarat International Finance Tec-City (GIFT).

Situated between the cities of Gandhinagar and Ahmedabad, the government wants the city to double as an international finance centre to rival crowded Mumbai and business hubs such as Singapore and Dubai. It plans to offer drinking water from the tap, automated waste collection and dedicated power supply. [Full Story]

Read the full interview at Reuters India

Wednesday, April 15, 2015

Making my life simple

Thought for the day

"I think fish is nice, but then I think that rain is wet, so who am I to judge?"

- Douglas Adam (English, 1952-2001)

Word for the day

Argot (n)

The special vocabulary and idiom of a particular profession or social group.

(Source: Dictionary.com)

Malice towards none

MSY is groom's grandfather. LPY is bride's father. Their bonhomie and alliance is understandable.

What this guy Nitish is doing in the family affairs?

Making my life simple

The unconventional methods used by the global central bankers in their endeavor to stabilize global financial system since 2008, have definitely complicated the context of financial markets.

To a simpleton like me who:

(a) does not understand the economics beyond its first lesson which says all economic decisions involve a trade off and price of things having economic value is determined by their demand and supply at that given point in time;

(b) does not know how to play with data on Microsoft Excel Sheet;

(d) seriously believes that numbers invariably follow the good story

I find it tedious to comprehend how the movement in global currencies and bond yields could have material impact on my investment portfolio which is largely India centric.

But unfortunately, the current state of affair is that movements in global currencies and bond yields have become an important factor to analyze in construction and maintenance of an investment portfolio - regardless of country you live in and asset class you invest in. From precious metals to agro commodities, from real estate to bank deposits and from equities to bonds the prices and return on all asset classes across world is being impacted.

It is frustrating to note that the money in my savings bank account is also not spared. The commodity price disinflation caused by a fluctuating USD could impact the domestic inflation rate and thus the value of my savings also.

In order to simplify my life and avoid complications in investment process, I have made couple of assumptions, which incidentally are in agreement with the popular view.

With these assumption, I believe, I could live for another five years without attending economics or MS Excel classes.

1. USD shall continue to gain strength for next five years

I believe the demand of USD shall materially outstrip its supply in next five year, thus raising the price equilibrium of USD vs. most global currencies.

Simply put, the major source of supply of USD to the global economy are trade and investment.

Negative current account balance of US: when US economy imports more goods than it exports to the outside world, it bridges the gap by paying the difference in USD thus supplying USD to the world.

Negative budget balance of US government which is monetize by printing more USD. The USD so printed could be borrowed by the domestic investors and invested outside US to take advantage of the yield differential.

Quantitative easing (QE) program of US Federal Reserve: To provide monetary stimulus to the US economy US Federal Reserve may print USD and buy the outstanding debt of the government or private borrowers using newly minted USD. The USD so printed could be borrowed by the domestic investors and invested outside US to take advantage of the yield differential.

Similarly, in simpler terms, the major source of demand for USD could be listed as follows:

· Governments: Since the USD is reserve currency for the world, a large number of governments/central bankers maintain a part of their reserves in USD to ensure adequate supply of currency to pay for imports and repayment of external debt.

· Corporate borrowers: Corporates across the world borrow in USD given the wider acceptance and greater liquidity.

· Global Investors: The global investors who invest in cross border assets need the common currency to make their investments.

· Money launderers: Given the widest acceptance and easier access, USD is the preferred currency for illicit cross border trades & money laundering.

Considering that the traditional sources of USD supply are drying and demand for USD is likely to remain strong, it is a valid assumption that USD continue to gain strength in next few years, till the time the global market paradigm changes and an alternative reserve currency emerges.

(a) The US current account deficit is shrinking and may even become positive in the following years given the lesser energy import and rising household savings rate.

(b) US government budget is slated to attain equilibrium by 2018.

(d) The USD reserves of foreign governments have bottomed out and beginning to rise.

(e) The repayment cycle for USD borrowing made by global corporates and governments during easy money days of 2003-2012 will start in next few years - leading to higher demand for USD.

(f) The US Federal Reserve may hike the policy rates from the current near Zero level in the near future. This shall definitely lead to higher demand for USD, as (a) the investors and arbitrageurs who have borrowed in USD to invest in higher yielding currencies may scramble to reverse the trade, and (b) USD assets may become relatively more attractive with higher yield.

(g) The pressure on money launderers is rising across the world. Liquidation of physical assets to return the money to the country of origin may cause higher demand for USD.

To make my simple, therefore, I would factor in a strengthening USD over next five years in my investment assumptions for all constituents of my investment portfolio.

2. The cost of capital could only rise from here

As per various estimates, approximately one sixth of government bonds across the globe are yielding negative return to investors. Yer, investors are paying fees to own these bonds.

This sounds unsustainable to me. The condition therefore should normalize in next few years. Nonetheless, assumption that the cost of capital could fall further from the current level does not hold good to me.

Regardless of "abundance of liquidity" globally, the "risk capital" is shrinking fast. The liquidity created through numerous QE programs chases few basis point arbitrage opportunity through carry traders. It is seldom deployed in long gestation projects, especially in emerging markets.

I would therefore like to build in a rising cost of capital for domestic borrowers, notwithstanding the degree of slope seen on the domestic yield curves.

A large number of corporates have borrowed in USD in past five years. Presuming they have fully hedged their currency risk, the cost differential in INR and USD debt is close to 250bps.

Even if the domestic rates fall by 150-200bps over next three years, the cost of capital for these borrower will only rise if they are not able to roll over their current USD debt at current rates.

On the sidelines, cash hordes and dividend yields is more likely to comeback as an investment theme as compared to Cyclicals who are undercapitalized as present.

China’s First-Quarter GDP in Four Charts

China on Wednesday recorded its slowest growth rate since 2009, a time when the global economy was staggering beneath the effects of the financial crisis. First-quarter growth slowed to 7% on-year from 7.3% last quarter, a signal that the world’s second-biggest economy has little wiggle room to meet its annual growth target of about 7%.

Here’s a breakdown of China’s GDP in four charts:

China’s factories are hurting. Value-added industrial output, a measure of manufacturing production, has hit financial-crisis levels. Industrial production grew by 5.6% on-year in March, far short of economists’ expectations of 6.9%, amid weak global and domestic demand–a dynamic that has pressured prices.

Chinese shoppers aren’t buying. Retail-sales rose 10.2% in March. That’s slower than during the financial crisis.

Big spending is shrinking. First-quarter fixed-asset investment, which measures money put to big projects and factories, rose 13.5% on year, below economists’ expectations of 13.9%.

Trivia

In the post independence history of India there are many things that have been persistently gnawing the conscience of citizens and are in desperate need of closure.

The deaths of leaders like Netaji Subhash Chandra Bose, Lal Bahadur Shastri, Shyam Prasad Mukherjee, etc., transactions like Bofors, and events like partition, accession of Kashmir, emergency are few such things.

The points worth pondering are (a) how much disruption in normal life can we afford to attain this closure; and (b) whether the political establishment indeed intend to close these issues once for all and lose traditionally useful armory to fight the opposition!

Even more critical is to assess the cost and benefits of indicting Nehru for snooping on Netaji!