The dark fortnight is little longer this time

Thought for the day

"You can learn more about human nature by reading the Bible than by living in New York."

—William Lyon Phelps (American, 1865-1943)

Word for the day

Myrmidon (n)

A person who executes without question or scruple a master's commands.

Malice towards none

Trump says he has engaged the best dealmakers in the country to run the government.

Good dealmakers are always on look out for opportunities.  They never shut the door on anyone or anything.

First random thought this morning

Budget 2017: It would be a great idea to leave lot of cash in peoples' hands. Lower direct tax, direct transfer of subsidies, cash incentive for buying first house, incentive for monetizing 200gms of gold, no fee on credit card usage, interest free 10yr loan for higher education of one girl child, etc are some suggestions.

Refrain from hiking service tax pending GST implementation.

The dark fortnight is little longer this time

I have written it couple of times before. The historical correlation between inflation, interest rates, currency exchange rates, terms of trade, demand and supply of credit, risk & cost of credit, fiscal policy, trade competitiveness, economic growth, commodity prices, etc. have weakened considerably, in past one decade. Economic forecasting, and investing & trading on that basis has become all the more difficult.

During this period, some European countries audaciously threatened to default on their debt obligations; defied many conditions of the bailout agreement and brought the global financial system on the verge of collapse; on more than one occasion. Even after 5-7yrs of bailout, these economies are nowhere close to be able to move out of ICU walking on their own feet. The sovereign bonds of some of these countries lost 50-80% of their value in the aftermath of 2008-09 global financial crisis (GFC). Some of these countries have been able to sell 30yr bonds at miniscule yield.

An unprecedented amount of money has been printed in the developed world, since first round of quantitative easing (QE) in 2009. In conventional sense, with this deluge of money, we should already seen couple of episodes of hyperinflation. But, what we have seen so far is episodes of disinflation. OPEC is producing much below its potential. Chinese factories have been shut down. Australian and Latin American mines are either shut down or producing below potential. On global basis, the unemployment is higher - not what Keynes would portend.

We witnessed a colossal amount of debt trading at negative yield. But it has apparently not catalyzed any amount of economic growth. Leave aside lot of opportunistic buybacks by many global corporations (to make their RoEs look great and consequent rallies in stock markets), the cheap credit has not led to any real investment. Only bond & stock prices have rallied. The world is still awash with huge unutilized capacities.

The threat of tiny economy like Greece exiting EU; or even smaller Iceland defaulting on a few billion dollar worth of debt, shattered global markets wiping off hundreds of billion dollars from asset prices. But when a larger and relevant economy like UK has decided to exit EU, the markets are mostly sanguine (after reacting nervously for couple of days).

Conventional and non-conventional monetary policy tools used by the large global central bankers are becoming increasingly redundant. Consequently, many leading currencies are presently valued far from their economic value . For example, even with persistent deflationary pressures, negative bond yields, and almost no economic growth - BoJ has to struggle a lot to weaken JPY. Despite enjoying trade surplus with most of its trading partners, China is able to devalue its currency.

I strongly believe that the present breaking of economic correlations is transitory in nature and order will be restored in due course. However, it is difficult to see that happening in next 4-5yrs.

Remember the famous dialogue of Hindi film Aandhi - Is baar Amavasya thodi lambi ho gayee (The dark fortnight is little longer this time)

This time India is in playing 11

Thought for the day

"There is a strange reluctance on the part of most people to admit they enjoy life."

—William Lyon Phelps (American, 1865-1943)

Word for the day

Draconian (adj)

Rigorous; unusually severe or cruel

Malice towards none

UAE Army contingent in Republic Day parade, when ex Pak army chief Raheel Sharif is leading the Saudi led military alliance - interesting times.

First random thought this morning

Budget 2017: After so much threatening and posturing, it would be totally in order, if the government introduces some meaningful incentives for promoting voluntary tax compliance in the forthcoming budget. Materially lower tax rate could be ne such incentive.

This time India is in playing 11

In past one century, the global community has done many experiments to find a suitable global order. The year 2017, marks 100yrs of two very important global events.

In 1917, Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of USSR. In the following decades, many smaller independent European states would become subservient to a mighty Russian socialist army, and together become one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, USA decided to join the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, USA would evolve into a formidable military and economic power, that would lead the democratic allies to become the second pole in the emerging bi-polar world.

The imperialist global order that existed since past couple of centuries, began to dismantle. Many colonies of European empires would get freedom. The British empire that was built in three centuries and covered almost one fourth of the world population and area before the War, would completely dismantle in the following three decades.

It took three decades for the new order to consolidate. The new order was characterized by UN, NATO, WARSAW, Mao, Israel, NAM, Bretton Woods, World Bank, Cold War, energy cartel (OPEC), et. al. The globalization that was a norm prior to the first War, was completely overpowered by the forces of nationalism and protectionism.

The new order lasted till the German Wall fell and USSR disintegrated. This unleashed a new wave of globalization. Global Trade (WTO), Internet, dematerialization of assets, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control and global financial crisis, dominated this phase.

The recent events, especially in the past one year, give an impression that the extant global order may be crumbling under pressure, as the forces of nationalism and protectionism are rearing their head again.

There are two prominent debates that are currently going on.

The first debate seeks to challenge the very premise - "whether the current state of globalization is reversible at all?"

The second debate accepts the inevitability of the de-globalization, and is therefore focusing on the shape of the new order that would be emerging in next few years.

On previous occasion, when India was mostly a controlled and closed economy, we just suffered some collateral damage. This time our exposure to the global economy and geo-politics is little higher and deeper; and so would be the impact. I would like to share my views on this in a later post

Expect occasional "Attaboy" and few cookies

Thought for the day

"If I were running the world I would have it rain only between 2 and 5 a.m. Anyone who was out then ought to get wet."

—William Lyon Phelps (American, 1865-1943)

Word for the day

Etiolate (v)

To cause to become weakened or sickly; drain of color or vigor.

Malice towards none

RTI for BJP: How many BJP members have questioned the #Demonetization move?

If none, then the party is in serious need of introspection, as the very core of democracy may be weakening.

If there are voices of dissent, why don't people hear it?

First random thought this morning

Budget 2017: To promote investment and entrepreneurship, the government must introduce greater deal of predictability in policy and tax regime. It should definitely lay to the rest all scope for speculation about the policy matters.

One good beginning would be to irrevocably specify the treatment of capital gains on transfer of securities for next 10years, whatever it may be.

Expect occasional "Attaboy" and few cookies

The next two month are likely to be one of the most interesting phases in the global financial markets. The markets participants shall be keenly observing what the US president elect Donald Trump would say (won't say) or do (won't do) after his inauguration on the coming 19th January.

The participants shall also be keeping a close watch on the US Federal Reserve Chairperson Janet Yellen and Chinese leadership, especially the premier Li Keqiang.

It is widely expected that we may almost immediately see a trade war between US and China; build up of tension between White House and FOMC; rise in protectionism leading to disruption in global corporations; and realignment of US strategic partnerships. Drastic changes in policy towards foreign workers and capital flows are also feared.

The unusual personal bonhomie between President Trump and President Putin is also keeping the analysts busy.

A number of reputable experts have warned that a trade war with China could drag the world into 1930s' like severe recession.

FOMC meets on 31 January and 1st February and then again on 14-15 March. So far, the Chairperson Yellen has not been supportive of the fiscal profligacy proposed by the President Trump. A higher than warranted rate hike by Fed, could actually damage the fragile recovery US economy has witnessed in past 6 quarters. The bond market appears to be already factoring higher deficit, and hence higher yields in midterm.

A dramatic tightening of VISA rules and immigration policy, could hugely disrupt the businesses, especially the technology business that depends hugely on low cost skilled foreign workers and construction business that is supported by low cost foreign labor (including illegal immigrants). A temporary demand-supply mismatch in labor market, at a time when businesses will have incentive to relocate manufacturing to US, may lead to materially higher wages.

Intuitively, I am not losing my sleep over it, as of now.

In my view, a lot of Trump rhetoric may remain just that, rhetoric. Like Arvind Kejriwal, he will spend a better part of his 4yr term in managing the numerous conflicts of interests and personalities.

From India viewpoint, I feel - a US-China trade war could possibly benefit India, as Trump cannot expect to win this war without help from India, Russia, Japan, UK and many others.

A stronger USD, consequent to higher rates would eventually be deflationary, helping India on current account.

In his acceptance speech Trump, said if you are not with us, you are against us. We Indians are more than eager to be him. Expecting occasional "Attaboy", and few cookies would not be unreasonable.

In between, we have union budget for FY18 on February 01 and MPC, makes a monetary policy statement on February 08.

May also read:

"What Trump can do or cannot do"

"Why INR may remian resilient to the Trump Trade"

"US bonds: Possible long -term trend change"

Can't stop an idea whose time has come

Thought for the day

"Then not only an old man, but also a drunkard, becomes a second time a child."

—Plato (Greek, 427-347BC)

Word for the day

Genuflect (v)

To express a servile attitude.

Malice towards none

Hurricane RaGa has now been downgraded from level 5 to level 0.

First random thought this morning

We have adopted a lot many things from the Europe and US in past one century - ranging from constitution, administration practices, language, food, fashion, TV shows, technology, education system, legal system, architecture, system of medicine, accounting practices, taxation practices, profligacy, violence, and intolerance to music, art, movie plots etc.

Many of these imports violate the conventional concept of Indianness, and many have since been abandoned by the originators themselves.

Our exports to the western cultures include yoga, spirituality, classical dance & music, food, tolerance, non violence, frugality, and altruism.

This trade deficit is blunderous, just like the proverbial gorilla in the room that no one is talking about.

Can't stop an idea whose time has come

Pursuant to my request yesterday, I have received a number of suggestions as to the topics I should be delving upon while formulating my investment strategy for next year or so.

Not surprisingly, most of the people want to know my views on the likely impact of 'Demonetization', 'GST', and 'Trumponomics' on the investment strategy of an Indian investor. Some have asked for stocks ideas to implement the changes in the strategy.

I would like to make it very clear, that in my firm opinion, all these ideas are popular today just because their time has come and not for any other reason. These are culmination of a long drawn process involving a number of socio-economic and political changes. Most investment strategies in fact are already oriented to assume the full implementation of these events.

Any businessman in India would tell you that ever since global financial crisis of 2008-09 (GFC) there has been a concerted effort on part of the government, enforcement agencies and regulators to check money laundering and accumulation of black money. Holding large sum of cash had become seriously difficult for past many years.

In last 3-4years particularly, a number of steps have been taken to curb generation of black money. Fraudulent agriculture income (e.g., Himachal CM Birbhadra Singh); fraudulent real estate deals (e.g., Robert Vadra deals) and regulation of real estate sector; Hawala deals (HSBC Swiss account disclosures, taxation of Vodafone deal, revision of Mauritius and Cyprus treaties; transparency in Defense and Railway purchases; regulation of bullion transactions through TDS and excise duty; AIR for transactions exceeding Rs10lacs; information sharing deals with foreign regulators; curbing of money laundering through fraudulent long term capital gain in penny stocks; FATCA disclosures; etc. are just a few of the steps taken to achieve the objective.

Abolition of high denomination currency notes is certainly a step with widest possible repercussions. But it is in no way the first or the last step in the process. It is a step whose time has just come.

After living with a fractured political mandate for most part of last three decades, we had been consistently witnessing clear and full mandates for past few years. BJP as a political party is ruling in over half the country, and this is what makes it the most appropriate time to implement GST.

The economy is definitely headed towards a more organized and structured business environment in the coming decade or so. The businesses mostly based on tax arbitrage (or evasion) opportunities and non-compliance are going to get extinct in next one decade. That has been my strategy for past couple of years and would continue to be so.

Insofar as Trumponomics is concerned, I believe people are bored from eight of status quo and want a change. They have got the change and are obviously excited. I am too naive to judge the impact on global economics and politics just as now. But the itch to make a guess is certainly there....more next week.

Driven by hope, lacking in optimism

Thought for the day

" Honesty is for the most part less profitable than dishonesty"

—Plato (Greek, 427-347BC)

Word for the day

Humbuggery (n)

Pretense; sham

Malice towards none

I am no big fan of either Saif or Kareena.

The young Taimur has so far done nothing to draw my notice.

First random thought this morning

All of you must have seen students who are not confident of what they have learned in the past many months, and want to revise the entire syllabus just minutes before entering the examination hall. I have even heard some parents complaining that their ward could not do well in exams because he/she woke up late on the exam day and could not revise the notes just before the exams.

The CMs and other senior government functionaries of the five states where polls are likely to be held in next few months these states are behaving just like these students. In just two months, they want to make their respective states look developed, people friendly, business friendly, safe, best place to live for minority communities & the backwards, and much more.

Driven by hope, lacking in optimism

As the 2016th year of Christ draws to a close, it's again time for reflection, reassessment, and restrategizing for investors.

Despite a setback in 4Q2016, the year has been largely satisfactory for Indian investors.

While the benchmark indices are almost unchanged for the year, diversified equity portfolios have yielded 6 to 10% return for the calendar year. The return in hybrid funds has been better in 9-11% range as the fall in bond yields led to outperformance of bond funds which yielded 12-15%.

In other asset classes, global commodities have done really well with crude gaining over 50%, and industrial metals and coal gaining from 15-70% during the year. Despite sharp fall in last couple of months, precious metals are also higher by 7-11% yoy.

Real estate has seen a mixed trend this year. While the housing prices have remain mostly subdued, the commercial and retail assets have seen a revival in many markets.

Standing at the doorsteps of the new year 2017, however, the investors are a worried lot. The optimism seen since March of 2016 is nowhere to be seen.

The fear of unknown is inarguably the dominant sentiment. The impact if changes in US and European politics on global economics and markets is not known yet. But most forecasts are hinting at acceleration in popularity of nationalist agenda against the globalization.

A careful reading of the past few statements of many large central bankers highlights their frustration with the current "new normal" and "whatever it takes" stance, that has been the hallmark of their policy since 2009. US federal reserve has made a beginning to normalize the unconventional zero rate policy. ECB and BoJ too seem to be willing, circumstances permitting. 2017 will be keenly watched for any "disorderly normalization" of the extant policy stance of many central bankers.

So far, most positive statements from market experts, appear based more on hope rather than optimism. The slight tremor in the voice and worries hidden between forehead wrinkles though evidently belies the conviction.

I do unconditionally believe in what Andy said to Red in Shawshank Redemption (1994) "Remember, Red, hope is a good thing, maybe the best of things. And no good thing ever dies". I personally therefore do not mind driving into 2017 with a tank-full of hope. Though I would keep the seatbelt tightly fastened, speed well within limits, and be mostly driving in slow lane.

Next week, I will be sharing my views on investment strategy for 2017 and beyond with the readers.

Would be glad to receive suggestions as to what specific points I should be dealing in my strategy write up. Thanks!

In support of "The Radicals"

Thought for the day

"Some people mistakenly think nature is very nice and benevolent and never betrays"

—Margaret Atwood (Canadian, 1939)

Word for the day

Toggery (n)

Clothes; garments; togs.

A clothing shop.

Malice towards none

BJP and SAD should contest forthcoming Punjab elections separately.

If need be, they could come together post election, like BJP and SS did in Maharashtra.

First random thought this morning

I am unable to find an appropriate expression to describe the present state of affair of the Congress Party.

It's got to be more than a tragicomedy, when the usually sober people like Dr. Manmohan Singh and P. Chidambaram start talking like the usually indecorous people like Digvijay Singh and Rahul Gandhi.

In support of "The Radicals"

Try and imagine a situation where a post graduate class of literature is given a question paper of quantum physics to solve within stipulated three hours with no outside help.

It would be fair to assume that most students will leave the answer sheets blank leave the examination hall, distraught.

Some may try to test their ingenuity and offer literary solutions to the complicated problems, still hoping to score zilch.

A few would however contend that being students of literature, they are naturally the only genius around. These few would offer detailed literary explanations which may not make any sense to the conventional students of physics or literature; and still insist that the solutions offered by them are the best. Hoping to pass with distinction, they might also take this opportunity to ridicule the students of physics and celebrate their superiority. This small group is popularly referred to as "The Radicals".

I am inclined to view the present day global economy as the examination hall described above. Almost none of the participants (economists, bankers, administrators, politicians, regulators, traders, borrowers, lenders, consumers, producers, et. al.) seems to have any clue.

Absolutely clueless most may be about solutions, they can apparently read the problems. And that is precisely what they are doing day and night - reading the problem; sometime in hush-hush sounds; sometimes raising the decibel to the maximum; sometimes in the secret chambers and sometimes in front of the mammoth crowds; sometimes with audacity and sometimes with jitters in their spine.

The Radicals are the one who are offering solutions. Totally unassimilated, these solutions naturally do not appeal to the conventional mindset.

These solutions are therefore mostly liable to be rejected as hazardous, for these seek to rattle the status quo.

These are also condemned to the derision of the conformist and purist, as they approach the problem from a completely unexpected tangent.

Admittedly, these solutions may very well fail to solve any of the problems, global economy is facing today; or even exacerbate the problems. Although this cannot be known today. As Shakespeare would tell us “There are many events in the womb of time which will be delivered.”

What matters today is to make an effort, howsoever radical or unassimilated it may seem. That is what is needed to administer a sense of calm on the stressed nerves of the common people, who are finding the current conditions unfairly severe to them.

On my part, therefore, I fully appreciate what the Radicals like Trump and Modi are doing or may try to do. I would like to wait what the time delivers.

In next few days, I would like to share my thoughts on the problems India is facing and today, and what could be the solutions to these problems.

I am done and over with

Thought for the day

" For years I wanted to be older, and now I am."

—Margaret Atwood (Canadian, 1939)

Word for the day

Soliloquize (v)

talk to oneself.

Malice towards none

Attended a marriage last night.

I am sure a lot of cash is being hoarded by the families who have marriage in family.

All this money will flock the markets as marriage season ends in December.

First random thought this morning

BJP, RSS et. al. want to impose their idea of good governance on the country, considering it to be inarguably the best alternative. Some may find it against the basic tenets of parliamentary democracy. But I have no problem with this. If it is good for the country, it is good. Regardless of everything and anything.

My problem is that they want to experiment with their ideas at my expense.

BJP & RSS canteens are neither Swach (clean) nor cashless. BJP and RSS have not issued any whip or request to its members and elected representatives to not to deal in cash any further; donate 2hrs a week for cleaning of public places; not to attend or arrange lavish marriages or birthday parties; I visited 7 Patanjli stores in Delhi yesterday. None accepts payment otherwise than cash.

I am done and over with

In past three weeks millions of reams of papers; millions of terabytes of data space; over a billions man-hours of productive time; about 100hrs of parliament time; and thousands of hours of administrative & banking time has been spent (some may want to call it "wasted") discussing, debating, protesting, managing and suffering the government's move to abolish old high denomination currency notes and replace these with new currency.

I have also spent at least 70hours, studying, analyzing, explaining, arguing, criticizing, defending and writing about the measure in past three weeks. I feel it's high time that I get past this whole issue and focus on the road ahead. I would therefore like to close the discussion with the following summary of my final understanding, view and opinion on the issue. I totally concede that there is huge scope for disagreement. But I am in no mood to take this discussion any further. All comments are totally unwelcome.

·         I firmly believe that the latest exercise of the government and RBI does not qualify to be demonetization in any measure. It's simply replacement of currency notes. I am reasonably confident that by the times cows come home, Banks and RBI would have received more old currency notes than the RBI balance sheet showed as outstanding at 8:30PM on 8 November 2016. Other things remaining the same, the note printing press can rest for next 2-3yrs, after working overtime for two months.

·         The exercise may lead to direct transfer of some INR50-70K crore to the lower strata in the socio-economic pyramid of the country. This combined with the additional cash flows to the middle of pyramid through 7th Pay commission and OROP payouts, and better Kharif realizations for farmers, there are sufficient reason to believe that the consumption slowdown due to disruptions since 9 November, may get fully neutralized by 1QFY18. No surprises if the consumption surprises on higher side as the propensity to consume is much higher in the "receiver" lower half of the pyramid as compared to the "transferor" upper half of the socio-economic pyramid. The positive sentiment amongst the common public shall also aid consumption. The GDP of FY17 may be lower by 30-40bps but with upside risk. FY18 likely +8%.

·         Political rhetoric apart, the time spent in ATM/Bank Qs does not matter much in terms of productivity loss. Most people standing there are either employed in disguise or underemployed.

·         This exercise will prepare a solid ground for smooth implementation of GST in FY18 or FY19. Most small businesses will get tech savvy and less resistant to "white" payments.

·         The plastic money may grow at least by 50% in next 2-3 years, leading to higher velocity of money (sustainable higher liquidity) and lower cost for banks. Lending rates could fall on sustainable basis, adding materially to economic growth.

·         This exercise and reactions thereafter have introduced significant unpredictability in the system. This shall logically lead to break in status quo and coax higher compliance. Property and gold businesses will change structurally and for the good.

Good times for realty market around the corner

Thought for the day

"Gardening is not a rational act."

—Margaret Atwood (Canadian, 1939)

Word for the day

Savoir-faire (n)

Knowledge of just what to do in any situation; tact.

Malice towards none

PM Modi has played the trump card, which AK played in last Delhi election - "Anyone who does not support me is corrupt!"

If this card works - expect 280-290 seats for BJP in forthcoming UP elections, and a majority in Goa and Uttrakhand.

Punjab is tough and Manipur unpredictable.

 

First random thought this morning

The move to abolish the extant currency notes has seemingly brought the opposition parties together for the time being. However, it appears more as a floor management strategy than a political game plan.

Imputing any larger motive to this or expecting any substantial outcome from this may be political naiveté.

Except for few jokers, most of the opposition leaders have seen the Emergency in 1975 and the subsequent events. They know very well that two and a half year period (to the 2019 elections) is too long a period in politics. A majority of the voters would not remember the hardship they suffered due to this move.

Good times for realty market around the corner

Commenting on my yesterday's post. Many readers have highlighted that one major source of land for real estate development is the surplus land with the civic administration. The civic agencies sell these land parcels to users or developers at a relatively lower rate, who in turn are able to sell these at the market determined rates, accepting the "gain" part of the compensation in cash. This cash adds to the stock of black money in the system and perpetuates the cash element in the real estate dealings.

In my view, this was true till a few years ago. Now a days, most of the sale by civic authorities, except housing for economically weaker section, is at near market price; and the sale is also through a mostly transparent process of computerized draw or auction. In Delhi, for example, many flats offered by DDA have remained unsold vs. 100x demand two decade back. Many commercial sites sold by DDA in past decade have also remained unviable for the buyers.

Now coming back to the main topic - I firmly believe that the expectations of a major correction in real estate prices in short term may not come true. To the contrary, after a short period of subdued activity, we may actually see prices firming up.

Top five reasons for my positive view on real estate are as follows:

(a)   The real estate prices have been correcting in most micro markets since past 5years. In many markets, like NCR, Punjab, Haryana, UP, Gujarat, Rajasthan, West Bengal, MP, Punjab, etc. the prices have seen material correction. In many other markets, we have witnessed time correction. The commercial real estate prices have reacted fast to the interest rate cycle and have already started to firm up in past few quarters. The housing demand may have bottomed out. With rise in affordability, lower rates, and better tax incentives, this segment may also see better days soon.

(b)   In many micro markets, the current market prices are not very far away from the cost of construction and government prescribed floor rates (circle rate or stamp duty rates). The scope for prices to fall further therefore is limited. The cost may actually rise in the short term.

(c)    The stress in real estate market in past few years, new regulatory regime, new land acquisition laws and now currency abolition has ensured that the smaller, unorganized, inefficient developers go out of the market and the markets get consolidated with 4-5 large player in each micro market. This consolidation will bring the pricing power back to developers.

(d)   More money in bank accounts, and better tax compliance will enable lot many more people for bank credit and demand for residential and commercial estate shall begin to firm up.

(e)    There could be supply constraints in short term as the holders may be reluctant to sell for various reasons.