Do it yourself

Thursday, July 16, 2015

How long this macro trade can drive the equity returns?

Thought for the day

"Preach the Gospel at all times and when necessary use words."

- Francis of Assisi (Italian, 1182-1226)

Word for the day

Foison (n)

Abundance, Plenty

(Source: Dictionary.com)

Malice towards none

What happens when you spit at the Sun?

How could someone defame me?

How long this macro trade can drive the equity returns?

Wednesday morning the financial markets appeared quite relieved and cheerful. Grexit concerns out of way for now and prospects of further reduction in energy cost on resumption of normal supplies from Iran charged the bulls and bears equally. Bull traders were motivated to take fresh positions as the benchmark indices crossed some key technical resistance levels and bears were pressurized to reduce short positions.

This all occurred despite consensus on poor corporate performance and worsening political landscape clouding the key legislative business like GST and Land Acquisition Bill.

An analysis of the Indian equities' performance in past one year makes it clear that the trade has so far been mostly on the macro side.

Improvement in fiscal conditions has mostly been driven by cut in government's social and administrative spending, lower energy subsidy, delay in implementation of national food security law, higher service tax and higher road cess on fuel sale, and asset sales (including spectrum and coal).

The current account looks better primarily due to lower crude bill, lower capital goods imports, lower gold demand, and higher remittances on rising rate differential.

Retail inflation appears under control - courtesy some deft market management, crash in global food prices, high base impact and to some extent due to moderation in demand. Wholesale inflation is in deflationary mode for past eight months primarily due to lower demand, lack of pricing power with manufacturers, and issues with the construction of the price index itself.

The credit demand is at multiple decade low. Consequently the rates are trending lower. After a gap of many years the real rates are now positive - a good omen for arresting the declining domestic savings.

The macro trade has also been driven to a large extent by the relative strength of Indian economy and political establishment as compared to other emerging markets. Indian currency has been rather resilient as compared to most emerging markets. The growth has collapsed in commodity driven emerging markets (e.g., Brazil, South Africa, Chile, Venezuela etc.) due to global economic slowdown. Many emerging markets (e.g., Indonesia, Thailand) have witnessed political and civil unrest. Recently, Chinese equities have corrected majorly sparking fears of collapse. This may also lead to little higher preference for relatively stable Indian markets amongst global investors.

However, the question will remain "how long this macro trade can drive the equity returns?"

At some point in time, the traders will become pious and try to invoke investment fundamentals. Then the corporate earnings and micro economic conditions would be evaluated at their face value.

This in my view is both an opportunity and threat for the Indian equities. If macro strength finally manages to permeate through the corporate performance, we may see a massive rise in the investors' interest in Indian equities leading to a bubble like condition in prices. Else, the correction is as far as the next negative headline.

Wednesday, July 15, 2015

Over to "Lift"

Thought for the day

"It is not fitting, when one is in God's service, to have a gloomy face or a chilling look."

- Francis of Assisi (Italian, 1182-1226)

Word for the day

Magniloquent (adj)

Lofty or grandiose in speech or expression; using a high-flown style of discourse; bombastic.

(Source: Dictionary.com)

Malice towards none

Do you think the Italian Marines accused of murdering an Indian will (could) ever be put to justice in India?

Should all our politicians just draw a lesson from the episode and let it go.

Over to "Lift"

As of this morning the Grexit has been replaced in cold storage and Iran seems to have got a deal. The global herd of professional traders shall be aggressively looking for the new goose to chase. The most likely candidate is the 'Lift" by the US Fed.

"Lift" is prominent in the discussions since the completion of tapering in October last year. The lines are drawn and people are well positioned on both the side. Trades could occur with ease and abundance.

It is widely accepted that this is an exceptional measure with a definite life span. Consequently, the debate over ending zero rate regime in US is mostly focused on the timing rather than rationale of it. In my view, the sooner it occurs, better it would be for US as well as global economy.

I find the Fed's contention of the decision to "Lift" being data dependent farcical. It is well accepted that the "normalized" level of economic growth, employment and prices in the current circumstances cannot be benchmarked to historical statistics.

In particular for US, it might take a decade, or even two, to normalize the employment conditions. The people, who lost employment in the aftermath of blow up of financial crisis in 2008, may not be skilled or young enough to take up jobs in new avenues. Besides, lower returns on pension funds might have forced lot of people out of retirement to take up jobs not requiring tech skills. The lower end of the job spectrum may thus be overcrowded and likely remain so for quite some time - keeping effective unemployment and wage levels low.

This trend will have a direct bearing on the economic growth in terms of lower private consumption. However, going by the current trend, the government's fiscal conditions may improve materially in next 5yrs and government spending may pick up thereafter.

Lower energy prices are increasingly becoming tricky for US. The opinion is divided as to the cost and benefit of lower energy prices on overall US economy, considering the huge investment made in shale business over past one decade and given that it accounts for a major part of incremental employment.

The incremental strength of USD, consequent to "Lift" and persistent weakness in EUR and JPY, could be yet another cause of concern for US exporters.

I am not taking any side in this "Lift" trade. I believe that like Greece, there are no black swans hiding behind this cloud also. So no major surprises. I am personally expecting an accelerated "lift' initially (may be to 1.5%) followed by a rather longer pause.

I do not see it causing much disruptions in the global markets, except for a last bout of USD carry trade unwinding causing some volatility in high yield markets. Indian bonds could be at the receiving end this time.

The financials will give a last opportunity to buy cheap. Highly indebted infra players would continue to remain in "no-go" zone.

Tuesday, July 14, 2015

About feudal lords and a monkey

Thought for the day

"If a superior give any order to one who is under him which is against that man's conscience, although he do not obey it yet he shall not be dismissed "

- Francis of Assisi (Italian, 1182-1226)

Word for the day

Mimesis (n)

Imitation or reproduction of the supposed words of another, as in order to represent his or her character.

(Source: Dictionary.com)

Malice towards none

May I seek a Fatwa from Ulema that only Rozadaar people have a right to Iftar. To everyone else Iftar is Haram!

About feudal lords and a monkey

This week the legendary artist and my all time favorite Guru Dutt would have turned 90. His classic movie Sahib Biwi Aur Ghulam vividly depicted the decline of a feudal family, which could not manage its affairs in accordance with the evolving realities in post independence era.

The feudal lords continued with their extravagant lifestyle when their primary source of income was drying up. Pain, misery, anguish and vanity was all that got left.

To me the story is resonating in the present day Europe. The European power began to decline sharply in post war era. The huge income drawn from erstwhile colonies in Asia, Africa and Latin America dried up fast. The huge loss of youth life in the war could never be replenished. Socialism replaced monarchies. The genius, research and innovation that heralded the era of renaissance and of industrial revolution since 18th century started dispersing across Atlantic to US. The Asian enterprise (primarily Japan, Korea and China) snatched a lot of initiative and the market.

The consequence was crippling labor unions, consistently rising wages and state welfare spending, diminishing tax revenues and ever rising public debt.

The common market and common currency was to my mind an experiment to collectively protect the slithering market share and geo-political importance of individual countries. The idea might have worked partially. However, presently, the vast socio-economic imbalances within member states more and more appear accentuating the problem rather resolving it.

I am inclined to join the school which believes that European Union is inherently unviable and mostly a failed experiment.

Greece to me is the monkey chosen for clinical trials to test the eventual disintegration of EU. A successful Grexit followed by internal normalcy in Greece over next 5-7yrs, would provide a platform for exit to other countries suffering due to a relatively stronger common currency. On the other hand the failure of this clinical trial would not cause much disruption and Greece will be kept within the Union with even larger support. The round one of trial has of course failed.

The long term sustainable solution to the problem would only come through extensive structural reforms, which includes immigration reforms, labor reforms and subsidy reforms.

In simple terms, the salvation lies in cutting expenses and raising income to reduce indebtedness. Raising income may not be an option in the short to medium term, given the higher dependence ratio in demography, and falling employment opportunities due to technological obsolescence and highly subsidized farm sector. So we come to cutting expenses. That essentially means cheaper drugs, cheaper clothes, cheaper travel, and cheaper workers etc. or in other words India, Bangladesh, Sri Lanka, Philippines, Indonesia, et. al. I would say more of India, because we share the same education, legal, and political system.

In the meanwhile I am not bothering about the monkey on the experiment table. Those in position of power palpably not interested in the success of this clinical trial as yet.

Monday, July 13, 2015

Domestic investors hold the fort amidst global rout

Thought for the day

"Start by doing what's necessary; then do what's possible; and suddenly you are doing the impossible."

- Francis of Assisi (Italian, 1182-1226)

Word for the day

Quixotic(adj)

Extravagantly chivalrous or romantic; visionary ,impractical, or impracticable.

(Source: Dictionary.com)

Malice towards none

What the options with Pakistan are but to keep the dialogue open!

Domestic investors hold the fort amidst global rout

The month of June witnessed about 1% fall in benchmark indices. In July YTM benchmark indices are almost unchanged. However, a further analysis of market internals would highlight that midcap and small cap have continued to outperform the benchmark indices even when institutions have withdrawn to fringes.

June'15 witnessed the lowest turnover in a year in the cash segment. The average trade size also was the lowest, indicating that it is mostly smaller investors who are holding the fort in the market.

The greed obviously is still dominating sentiment. The persistently lower volatility suggest that the global events have not deterred the domestic investors as yet.

It is clear that the Indian markets are in no hurry to follow China.

Friday, July 10, 2015

The perfect storm

Thought for the day

"Our insignificance is often the cause of our safety."

- Aesop (Greek, 620-560BC))

Word for the day

Peacock (v)

To make a vainglorious display; strut like a peacock.

(Source: Dictionary.com)

Malice towards none

Congress lost a lot of regional Satraps between 1991-2014 due to death, dissent or dominance.

Do we see the same path for BJP in 2014-2024?

The perfect storm

Many global wealth reports written over past six months may have already become irrelevant. The staggering statistics of wealth creation in China that overwhelmed the global financial community stand completely destroyed.

Stand destroyed simultaneously is the facade of "all is well" in the global financial system that was meticulously built by the powerful central bankers through adoption of "non-conventional" policy measures post Lehman collapse in the summer of 2008.

As of this morning, the global financial markets are standing at crossroad.

It is highly probable that European community finds a way to live with Greece for some more year, Chinese authorities are able to stem the panic that has set in deep into investors psyche, and Iran deal is finalized to enhance the chances of peace in middle east and stability in global energy prices.

However, no one would like to rule out the probability of market getting caught in perfect storm caused, inter alia, by the following.

(a) Political turmoil that would erupt in Europe if the Greece has to be finally ejected out of the Union. The socialist forces within Europe may see this as existential threat and endeavor hard to strengthen their grip on administration as well as businesses.

(b) Financial turmoil that a Grexit would cause in Euro area bonds (especially Spain, Italy and French bonds). The bonds of these large economies with unsustainably high indebtedness have seen stupendous rally in past few years. A risk-off scuffle could make these market illiquid, in spite of "whatever it takes" resolve of ECB.

(c) Economic turmoil that a hard landing in Chinese economy would cause in global commodities and financial markets. Complete collapse in commodity demand, higher inventory carrying cost and lower import demand from China would disrupt a large number of economies.

(d) Emerging market turmoil caused by a unduly stronger USD, sharply lower global trade led by collapsing demand and poor liquidity. Weaker currencies may rake specter of hyper inflation in many import dependent economies.

It would be totally naive to suggest that India will remain insulated from all this turmoil.

1. Our already struggling export sector will face serious demand contraction if Chinese and European demand contracts.

2. Our commodity producer will find it difficult to survive in an environment where industrial demand is contracting (due to poor export demand) and imports are becoming materially cheaper.

3. The manufacturing sector may benefit to some extent from lower commodity prices. But most of the benefits would be offset by lower demand and underutilization of capacities.

I am happy to let go the trade in large commodity consumers like tyres and paints.

Thursday, July 9, 2015

Focus on your strength

Thought for the day

"The little reed, bending to the force of the wind, soon stood upright again when the storm had passed over."

- Aesop (Greek, 620-560BC))

Word for the day

Fisc (n)

A royal or state treasury; exchequer.

(Source: Dictionary.com)

Malice towards none

PM Modi would certainly be nominated for Noble Peace Prize.

Wonder, is that the goal or the fringe!

Focus on your strength

The recently released Socio-economic Caste Census (SECC) data has opened many eyes. It not only demolishes many myths about the Indian growth model, but also highlights the adhoc and unsustainable character of the economic development. The outcome of the exercise taken for the first time also severely dents the argument in favor of famous "Make in India" plan.

I am not startled by the data thrown by the mammoth exercise, since I have personally witnessed the ground reality during my numerous excursions into the hinterlands of the country. The readers are well aware, I have been highlighting these facts repeatedly through my blog.

As per the census data, in India agriculture is the primary source of income for only 30% of the 179 million rural households. While 51% depend on manual or casual labor for a living, 56% rural households do not own any land.

Even in the state of Punjab, considered predominantly an agriculture dependent state, farming is the main source of income for less than 30% of rural households, while 48% depend on manual labor as the primary source of income. Staggering 65% of rural households in Punjab do not own land.

I had emphasized this fact few months back (see here) to highlight the bizarreness of opposition parties' campaign against the proposed modified land acquisition law.

The census data also highlights that illiteracy is pervasive and persistent in most states, especially in rural areas. An overwhelming majority of rural population depends on "casual manual labor work" for survival.

India could not be fathomed as an economic story without her 1.3bn strong populace. Unless at least two third of the population actively participates in the process of "earning-consuming-saving-investing", the story is without a plot.

It is clear that the "high" industrial growth achieved during the decade of 2000s has mostly failed in creating enough sustainable employment opportunities.

Industrialization that brings riches to 5-7% elite and leaves 40% "struggling to survive" and another 30% "barely surviving", is therefore neither sustainable nor desirable.

The census data should invoke a serious rethink amongst the policymakers, planners and lawmakers about the extant socio-economic development paradigm.

I continue to believe that for our country the ideal socio-economic development model would be that focuses on the intrinsic strengths rather than weaknesses.

Wednesday, July 8, 2015

Who wants another Shakespeare

Thought for the day

"Put your shoulder to the wheel."

- Aesop (Greek, 620-560BC))

Word for the day

Telegnosis (n)

Supernatural or occult knowledge; clairvoyance.

(Source: Dictionary.com)

Malice towards none

Good to know that India's food safety standards are much higher than UK and Singapore.

Kudos FSSAI!!!

Who wants another Shakespeare

Admittedly I am just an amateur reader of history and claim no authority to comment on it.

Nonetheless, from the few pages of history of human civilization I have occasionally flipped over I could vividly make out that till a few decades ago the state played the primary role in promotion, encouragement and financing of the pursuits of excellence in the fields of art, science and technology. The development of commerce was left primarily to the private entrepreneurs with state limiting its role to providing basic logistic infrastructure.

In recent decades however the paradigm has shifted. The states have engaged themselves fully in the promotion and management of trade and commerce. The pursuit of excellence in the fields of arts, science and technology has been left to the private citizens and entrepreneurs.

Consequently, the work in the fields of art, science & technology has acquired a distinct commercial character. Mostly, these fields are now pursued for immediate economic benefits rather than for the larger benefits of humanity in the interest of posterity.

Our current days heroes are market economists, stock market investors, film stars, professional sportspersons who mainly play for money, pop singers, car & mobile phone designers and pulp fiction writers.

Few miss the likes of Shakespeare, Aristotle, Plato, Galileo, Leonardo da Vinci, Beethoven, Varāhamihir, Panini, Kautilaya, Kalidasa, Ramanujan, et. al.

Few would want another Taj Mahal to be built. Many would pray that no Picasso is ever born so that the commercial value of their art possessions does not diminishes.

Technological evolution is incremental and mostly driven by immediate economic considerations. Music, food, architecture, literature, politics, and other arts are also driven more by markets rather than purely by the pursuit of excellence.

Many may like to completely or partially disagree with me on this. I respect their stance. Nevertheless, I am convinced that under the extant political and market dynamics the global (including India) economic growth will continue to be slow, imbalanced, unsustainable and volatile.

Reading economic history in isolation will not help the cause of investors. Trust me 2015 is not 1930 and 2020s will not be 1950s.

British crown may not have enough money to fund fundamental research and a strong army that will reshape the global trade and commerce. Japan may not dominate the engineering prowess. US universities may not continue to sponsor scientists from across the world. An odd Apple and Google may continue to enrich couple of million people, but nothing beyond that. Natural calamities and water & food shortages will kill more people than the modern medicine could save.

Those claiming that India and China would do sufficient to fill the void created by diminishing spending of developed countries on pure sciences and arts, may please mind their financial security. ...more on this later

Tuesday, July 7, 2015

Consumerism, markets, aspirations and adhocism

Thought for the day

"A liar will not be believed, even when he speaks the truth."

- Aesop (Greek, 620-560BC))

Word for the day

Whodunit (n)

A narrative dealing with a murder or a series of murders and the detection of the criminal; detective story.

(Source: Dictionary.com)

Malice towards none

New Wonder of the world!

The dispensation responsible for one third of the administration of Delhi needs US$90mn to tell people what has been done to make their life better in past five months!

Would people not know by themselves if their life becomes any better?

Consumerism, markets, aspirations and adhocism

A vacation in serene hills of Garhwal Himalaya turned out to be revelation of sorts. Though I always had this slight inclination but picture was never so clear.

I often doubted the projections of India's growth potential by economists and government authorities. The potential that has been seldom accomplished in past seven decades needs to be judged with a great deal of suspicion.

To make the matter even more complex, the evaluators comprising of economists, retired bureaucrats, market analysts and investment strategists etc., have often held the government responsible for the this consistent "below par" performance of the economy.

During the 900km drive and four days in a camp in secluded forest area I got convinced that the "economic growth potential" as projected using mechanical economic models is mostly illusionary. The growth and development projected through these models cannot be accomplished without pre-existence of certain civic and social conditions.

I am confident that it is the people of India who are constricting the economic growth and development. The government and administration are only some of the people who usually after making some small effort decide to join the people in their civil non-compliance. Being in a position of trust, they usually are successful in taking pecuniary advantage of the disparateness and pervasive non-compliance in the society.

Consider the following examples to understand the point I am trying to make.

(A) Driving on NH-58 (Delhi-Badrinath) at night, I observed that (i) most state transport busses plying on the road did not have a working tail light or break light; (ii) cyclists were carelessly cycling on the main road without any protective headgear, reflector or light; (iii) trucks were commonly carrying iron rods hanging well outside their vehicles and no caution sign/light or reflector; (iv) pedestrian were crossing the highway carelessly; and (v) bikes and tractors were freely driving against the traffic to avoid a long U turn.

Discussing the phenomenon with many drivers on the food outlets all along the highway, I found that the immediate outcome of all this is that this slows down the traffic and keeps the drivers in constant fear of accident often resulting in high stress, drunk driving and violent outbursts.

However, the more serious consequences are that (a) after a while everybody stops following the traffic rules and general non-compliance & tendency to cut corners permeates deep into the behavior; (b) the value of human life diminishes and social violence gains acceptance; (c) the disregard for "right of way", translates into the disregard for "right to life".

(B) The staff of civic authorities is perhaps never trained to value human life and time. They bother least about the inconvenience caused to fellow citizens by the carelessness and apathy.

After a repair job, they often leave the debris on road or do not patch the hole dug on the road for carrying repairs, causing traffic snarls, endangering life of travelers at night. They take weeks to do a job that could be done in hours.

The consequences is frustration, stress, and anguish. The outcome is violence, deep disregard for civic courtesies and compliance norms and tendency to cut corners at the expense of fellow citizens.

(D) A hike to the famous Surkanda Devi temple, near Mussoorie was frustrating. The entire path was littered with plastic wrappers and bottles. Considering that this temple is mostly visited by the local people, it was really saddening.

The people of the region are known for their struggle to save environment. Famous Sunderlal Bahuguna carried out his movement to save trees and Ganga (from Tehri dam) here. Now these very people threatening the environment and embracing mindless consumerism would certainly constrict the growth and development.

(C) The ‘jugaad’ mindset has tenaciously constricted the vision of an average Indian entrepreneur. Except for a handful of Indians, most of whom have the benefit of studying and/or working overseas, not many have thought about scalable business models.

‘Jugaad’ in economic field is proving to be as dangerous as in personal (like self medication) and political (caste and religion based politics, adhocism in key socio-economic policies etc.)

The ‘jugaad’ mindset reflects poorly on almost every aspect of the socio-economic life in India. This has severely impacted the pursuit of excellence, a hall mark of Indian art, culture, engineering, architecture, industry till 19^thcentury, at least. Today, “Quality” is something India and Indians are not particularly known for globally.

As said on many occasions earlier, for my investment strategy, I presume a slower ~5-6% (old series) average growth for next decade with rise in mindless consumerism, policy adhocism, dominance of markets and unleashed aspirations.

I would not bother too much about struggle for survival of the bottom half of the pyramid, insofar as the construction of my portfolio is concerned. And I do not expect any major civil unrest, presuming that all Indians will continue to work for furtherance of their personal agenda only. About National Interest - that bird perhaps got extinct on 15 August 1947.

On Greece, I find it sufficient to quote a dear friend:

"Personally I think Germany will buckle under pressure from IMF and US. Between worries of a contagion and the impracticality of kicking Greece out of Eurozone and US worries of a left wing socialist fire in Europe fed by Russia they will arm twist Merkel and Troika to take a big haircut.

But that emboldens the anti austerity wing in Europe even more. All the left wing anti austerity chaps in Europe will have their tails up, especially in countries with high youth unemployment, viz., Italy, Spain, Portugal and France.

We have just seen Season 1 of a six part House of Cards. It's going to be a long and messy."

Pic source: Twitter #JugaadNation

Monday, July 6, 2015

Greeks vote for struggle and self respect

Greek people have voted for struggle and what the ruling party likes to say "self-respect", rejecting the bailout conditions by a 2 to 1.

PM Tspiras must be feeling encouraged by the overwhelming mandate for defiance. Welcoming the result Greek Prime Minister Alexis Tsipras said that Greeks had voted for a "Europe of solidarity and democracy".

"As of tomorrow, Greece will go back to the negotiating table and our primary priority is to reinstate the financial stability of the country," he said in a televised address.

Now it is for the European Union and primarily Germany to decide whether to work with the Greek government or eject the Greece out.

In case they decide to work with Greek government, the other countries on the brink of default might take a cue and try to put their agenda on the negotiating table.

However, if they decide to eject Greece out of EU, it will entail a human crisis of serious proportion.

A summit of Eurozone heads of state has now been called for Tuesday.

In our view, the "NO" vote has in fact put the European authorities and IMF in a quandary. It is now more of a human rights issue than an economic one. The decision may therefore not be simple and quick. It will be sometime before a amicable solution is proposed.

In the meantime, global markets do not appear too perturbed, though down 1 to 1.5%. China is trading up 3.5% propped by the series of policy measures announced over weekend.

Euro and oil are trading down and US and German bonds are trading higher.

Our market may open with ~1% gap down, but may see no further weakness due to Greece factor. We shall be guided more by the 1QFY16 results going forward.

Nifty faces resistance at 8470 level. A decisive breakout shall establish Nifty in 8470-8750 range for next couple of months. However a sustainable close below 8324 shall push it back to 7860-8350 range.

For those interested in rhetoric the following is an indicative list of companies deriving substantial revenue from Europe (not necessarily from Greece directly).

Tuesday, June 30, 2015

The road less traveled has its own perils

Thought for the day

In struggling against anguish one never produces serenity; the struggle against anguish only produces new forms of anguish."

- Simone Weil (French, 1909-1943)

Word for the day

Stinkaroo (n)

Something markedly inferior in quality

(Source: Dictionary.com)

Malice towards none

Is there any study to assess what is the role of incest in worsening sex ratio in India?

The road less traveled has its own perils

The week expectedly started with Greece. Monday morning was overwhelmingly dominated by Greek talk. By the time markets opened, I had already participated in many discussions.

"What is happening in Greece?" Why people are discussing it 5am in the morning! my wife a student of Music and blissfully oblivious about finance, wondered.

"I am praying for Gexit. A vacation in Santorin at cost of Bangkok would then be possible!", a dear friend exclaimed.

"Should I sell everything at the market opening? Will the fall of Greece be as bad as the fall of Lehman Bros?" worried a traders.

"Tell me what to buy this morning, should market open materially lower", an investor who had been looking to increase his equity allocation, inquisitioned.

Unfortunately, I could offer no intelligent input to none of them.

All I could think was that "in 2008 the world reached a point where two roads diverged into the woods; and the world took the one less traveled. Seven years and few trillion dollars down the road, we find ourselves standing at the same fork we left in 2008, only more wearied and less sure about ourselves."

I feel taking the path less traveled was the right strategy back in 2008, as the conventional path was severely damaged and blocked. But the world outside US should have returned to the conventional path the moment US chose to ditch the global cooperation forged in 2008. Following the US was another option available.

If it appears Greek to you, let me get back to simple English.

To understand the problem of Greece and many other countries in Europe and find a sustainable solution, it is essential to understand the root cause.

The core of the European problem lies in the blatant fiscal profligacy in post War era. Both European governments and people have spent way too much more than they have earned in past few decades. Large socialist governments, high wages, inflexible labor markets, huge subsidies ensured that the fortunes collected through industrial evolution and colonial expansion were squandered. The industry thus moved to Asia, constricting the new avenues of employment.

To make things worse, the human lives lost in the two wars were never adequately replenished, making the demography old and dependent on pension. The virtuous cycle of economic development has been replaced by the vicious cycle of adverse demography. Most European nations have more people to provide for than the tax payers.

In post war era, despite all the mistrust, US kept its door open to the talent and capital from across the world. The mass emigration of talented people and real capital to US from Europe has left Europe way behind in technological evolution.

Following the unconventional monetary policy like US is no solution for Europe for the simple reason - US could grow at 3-4% and repay its debt and Europe cannot grow and cannot service its debt.

NEXT POST WILL BE PUBLISHED ON 7-JUL-15