Vijay Kumar Gaba

Monday, June 23, 2014

Don’t rush, stitch it tight

Thought for the day

“The promise given was a necessity of the past: the word broken is a necessity of the present.”

- Niccolo Machiavelli (Italian, 1469-1527)

Word for the day

Epithalamion (n) A song or poem in honor of a bride & bridegroom.

(Source: Dictionary.com)

Teaser for the day

Modi should address the nation and say in unambiguous terms:

(a) All citizens of India are free to use whatever Sch-VIII Language they are comfortable with. The government will accept and honor the communication.

(b) Our God, Goddess, scriptures, religion, culture, languages, Tricolor, etc. are supreme and beyond insult by ordinary mortals. Therefore ordinary people should feel free to write, draw, or narrate whatever they wish about them.

Don’t rush, stitch it tight

The conduct of new government in past couple of weeks has raked up some completely avoidable controversies. Some of these expose the dichotomy between ordination and intent of ministers, especially those influenced by cultural nationalism propagated by RSS; while the other have emanated from the exigency imposed by the leader himself.

In my view, it is imperative for the new government to take strong and effective steps to bring back the aberrant socio-economic conditions to the right path. But it certainly does not mean that everything must be set correct in conventional “100days” inaugural period itself. I believe, after suffering for so long the people of this country are resilient enough to weather another year of hardship.

The “jugaad” mindset therefore needs to be given up in favor of strong conceptual framework and highest standard of quality. The stitches at the loose ends should strong enough to last at least two generations if not more.

I would like to highlight the following instances in particular:

Firstly, the RSS grooming of our home minister has desired to make Hindi language as medium of promoting national pride. A BJP spokesperson from UP suggested that Hindi Speaking people are often subjected to derision and face discrimination at various places.

Without going into the merit of this suggestion I would like to flag to him that Narendra Modi, Shivraj Singh, Raman Singh, Nitish Kumar, Akhilesh Yadav and Arvind Kejriwal all are “Hindi Speaking” and certainly not appear to have faced any derision or discrimination for their linguistic preference.

Believing that this government really intends to be comprehensively inclusive, I suggest that it should stay out of my home, office, school bag and place of worship at the least. It has no business guiding me what and how to communicate, work, study or worship so long I am not violating the constitution or any other law of the land.

If the government is seriously interested in promoting equality, quality and therefore efficiency of Indian populace, it should encourage all citizens to communicate with the government in the language they feel most comfortable with. It should be duty of the government to equip all its offices, courts and police stations with adequate linguistic skills for this purpose.

Any visitor to Mumbai, Patna and Lucknow would know the rules relating to promotion of language have led to degeneration of local language. If you have not noticed, see the following:……………………to continue tomorrow

Friday, June 20, 2014

Bewildered markets picks up wrong threads

Thought for the day

“A return to first principles in a republic is sometimes caused by the simple virtues of one man. His good example has such an influence that the good men strive to imitate him, and the wicked are ashamed to lead a life so contrary to his example.”

- Niccolo Machiavelli (Italian, 1469-1527)

Word for the day

Scofflaw (n)

A person who flouts the law, especially one who fails to pay fines owed.

(Source: Dictionary.com)

Teaser for the day

Was US war against global terrorism just an extended exercise to enhance homeland security post 9/11?

If yes, in hindsight should Europeans regret joining the war?

Bewildered markets picks up wrong threads

She came, she spoke, and she sent stocks to a new all time high. That is perhaps the simplest summary of what Janet Yellen did yesterday when, as a result of her droning monotone, she managed to put the VIX literally to sleep, which closed at the lowest since 2007 and the resulting surge in the S&P was a fresh record high, because despite the "concerns" Fed member have about record high complacency, all they are doing is adding to it.

And now that apparently the Fed has a market "valuation" department, and Yellen can issue fairness opinions on whether the S&P is overvalued, the only question is whether today, as a follow through to yesterday's "buy everything, preferably on leverage, sincerely - the Fed" ramp, the VIX will drop further. (Zero Hedge)

Yellen brushed aside concerns about quickening inflation, diminishing labor-market slack and asset-price bubbles in a prepared statement and press conference, emphasizing the Federal Open Market Committee’s view that rates are likely to stay low “for a considerable time.” (Bloomberg)

The Federal Reserve continued to reduce its monthly bond-buying program and held interest rates near zero even as it debated persistent conflicting signals in the economy. In addition to continuing the scaleback of its monthly money-printing efforts, the Fed slashed its outlook for full-year economic growth, cutting gross domestic product growth forecast to 2.1 percent to 2.3 percent. (CNBC)

On sidelines:

Argentina threatened to default on its debt on Wednesday when the government called it "impossible" to pay bond service due on June 30, citing a U.S. court decision earlier in the day increased pressure on economically-ailing country.

Remember, Buenos Aires is locked in a 12-year legal fight with creditors who refused to participate in two restructurings that followed Argentina's 2002 default on $100 billion in bonds.

The long impasse in the U.S. courts has kept the country from accessing international capital markets as its economy stagnates, inflation soars and central bank reserves fall. (Reuters)

Ukrainian troops and pro-Russian separatists were locked in fierce fighting in the east of Ukraine on Thursday after rebels rejected a call to lay down their arms in line with a peace plan proposed by President Petro Poroshenko, government forces said. (Reuters)

Iraqi government forces battled Sunni rebels for control of the country's biggest refinery on Thursday as Prime Minister Nuri al-Maliki waited for a U.S. response to an appeal for air strikes to beat back the threat to Baghdad.

If you are wondering why I have chosen to reproduce miscellaneous global reports instead of analyzing the events back home; my clarification is that is what our market is more concerned about with PM Modi preferring to maintain silence and his minister dressed in combat gears, searching for the threads where they can begin their “jobs”.

Thursday, June 19, 2014

Blame it on Rio

Thought for the day

“Today was good. Today was fun. Tomorrow is another one.”

- Dr. Seuss (American, 1904-1991)

Word for the day

Transfigure (v)

To change in outward form or appearance; transform.

(Source: Dictionary.com)

Teaser for the day

Will FIFA cup 2014 travel to Europe this summer?

Blame it on Rio

I had a chance meeting with a small group of Rio bound Delhi realtors yesterday. The discussion expectedly was not quite enlightening or intellectually stimulating. Nonetheless, I found a few points worth chronicling.

Firstly, none of the group members had any interest in the game of football. They are visiting Brazil for indulging in cheap booze, legal betting and abundant sex!

Secondly, they are disappointed in Modi Sarkar. In past three weeks since the new government took over, they have not seen any improvement in business. Buyer enquiries continue to be scant and often just exploratory in nature. On the other hand potential sellers have decided to wait for markets to improve. The inventory in market has reduced. Therefore now they have much less scope to keep themselves engaged.

Thirdly, the liquidity condition in the informal market has tightened further in past few weeks for some inexplicable reasons. This group suspects that perhaps fearing stricter surveillance many “cash lenders” have slowed down their activities. Other doubts were that (a) there are huge defaults in election betting and (b) the losing non-BJP candidates are refusing to pay up the money borrowed for election related expenses. Usually, as per one inebriated group member, they would have paid up by way of an administrative favor.

The revelation to me in this whole one hour conversation was as follows:

(a) There may be many participants in the equity markets who have entered post election just for making few fast bucks. These are not serious investors or even traders. Historically, these lottery seekers have exited market with material losses and disappointment. A deeper correction might be needed to drive these non-serious players out.

(b) The business recovery might take little longer than presently anticipated. The “bitter pill” that Narendra Modi is frequently alluding to may actually cause lot of pain and dismay in certain segments of business community.

(c) Electoral reforms as envisaged in various speeches of BJP leaders, even if partially implemented, may dynamically alter the contours of business-politician relationship. Businesses surviving and thriving purely on the basis of administrative and political patronage could face serious existential threat under that circumstance.

(d) Tourism is a “big” development idea in the Modi government scheme of things. We have heard about promotion of thematic tourism, pilgrimage and cultural tourism.

I am not sure how BJP’s conventional ethos would be able to co-opt the Rio, Macau, Vegas and Bangkok type tourism their public promotion schemes.

Education tourism (parents visiting their wards studying abroad) and immigrant tourism (family members visiting the people living and working abroad) is a big drain on RBI’s dollar chest. The government may need to work on (a) how to bring student back for internship during their vacations and (b) how to bring young Indian living abroad to spend their vacations in India with their family members.

Wednesday, June 18, 2014

A crash not expected till it actually happens

Thought for the day

“Truth is so obscure in these times, and falsehood so established, that, unless we love the truth, we cannot know it.”

- Blaise Pascal (French, 1623-1662)

Word for the day

Cathexis (n)

The investment of emotional significance in an activity, object, or idea.

(Source: Dictionary.com)

Teaser for the day

“Compulsory Tweet and FB in Hindi” is not exactly language of compliance, inclusiveness and development.

I feel it’s my constitutional right to communicate in a language me and my audience are most comfortable with.

A crash not expected till it actually happens

The sharp market correction last week was as much a reminder to the unmindful bulls, as it was an opportunity for the investors sitting on fringes waiting for a correction to occur. Besides, invoking an element of fear, it certainly did revoke memories of 2008 market fall.

Greece, Syria, Iceland, Libya, Crude Oil, have all caused serious corrections in global markets in past six years. The latest instance of unrest in Iraq is therefore nothing new or unpredictable.

Perhaps, with US petroleum production at 44yrs high and crude exports at 15yr high, consumption growing at slowest pace in decades, the crude shock appears less likely. Moderate growth in China and other emerging markets may also be providing some comfort.

The world markets, under deluge of liquidity pumped in by major central banks therefore presently do not appear too concerned about the consequences at this point in time. This also is not completely unpredictable, given that most markets, including India, were scaling new highs every day when Sr. Bush invaded Iraq for the first time in summer of 1990 to protect its interest in Kuwait and gulf of Persia.

I am bringing this subject as many readers have raised doubts on the ability (or otherwise) of economists and market analysts to predict market crashes. Though many celebrated economists (including our own RBI governor Raghuram Rajan) are credited with foreseeing market crash at various times, no one has presented a definitive model that can forecast a crash. It had been more about epiphany rather than economic or technical forecasting.

In my view, the conventional method of trusting and respecting the collective wisdom of market to predict future course of asset prices is the only sound method available to us.

It is true “that financial markets process new information faster than any one individual, government or institution could, and so for most people they may seem to behave unpredictably”. The economists cannot be expected to understand these sudden movements better than anyone else, so expecting them to foresee market crashes is absurd.”

Remember, the information that would cause excessive market volatility and eventually lead to crash is usually not new. For example, information about sub-prime loans was available with all market participants, investors, regulators and government authorities much before 2007. In fact many bankers and investors had gained tremendously from such instruments. Many had also taken contrarian bets on these instruments well before July 2007, when it started dominating the headlines. These investors and bankers also gained from these hugely post crash. What happened in 2008 was perhaps everyone suddenly wanting to exit these instruments for one reason or the other.

Similarly, the precariousness of the geo-political situation in Middle East Asia, and North Africa is well documented and known to all. Recent escalation is also not a surprise occurrence. Therefore, the battle in Iraq on its own cannot cause crash. For that a majority of market participant need to simultaneously believe that it can cause markets to crash.

Tuesday, June 17, 2014

Means are equally important

Thought for the day

“Men should be either treated generously or destroyed, because they take revenge for slight injuries - for heavy ones they cannot.”

- Niccolo Machiavelli (Italian, 1429-1527)

Word for the day

Beget (v)

(especially of a male parent) to procreate or generate (offspring).

(Source: Dictionary.com)

Teaser for the day

If someone can be insulted by ordinary people like me, let me assure you such person was never reputable.

Means are equally important

Swami Jagadatmananda in his famous work “Learn to Live” extolled the readers - the sincerity and honesty of the means to achieve a goal is equally important as the goal itself.

More popularly, in blockbuster Hindi movie DDLJ the hero Shahrukh Khan articulated this thought in a conversation with the mother of his beloved. When for the fear of her husband’s retribution, the mother advises the two lovers to elope – the hero tells her that the path suggested by her appears easy but it would lead to nowhere. He would rather prefer the path of courage, honesty and integrity which though arduous definitely leads to the desired goal.

I am reminded of these instances by the latest discussion regarding likely economic and fiscal policy stance of the new government.

Both PM and FM have indicated, on more than one occasion, that some tough measures would be needed to bring the economy back on the sustainable growth path. The media speculations suggest that the government might consider tighter fiscal discipline by way lower non-plan expenditure, lesser subsidies, and somewhat higher taxes.

However, I am yet to hear from any non-government stakeholder that they are willing to cooperate and cooperate. To the contrary almost all stakeholders have presented their lists of SoS concessions.

This presents the government with classic dilemma – whether to expediently yield to popular pressure for ad hoc relief or institute structural reforms that would afford the economy fiscal & financial stability and capability to grow sustainably faster.

In my view, two tasks need to be accomplish expeditiously –

(a) Bridging the multitude of deficits prevalent in the country, especially trust deficit, governance deficit, compliance deficit, skill deficit, social and physical infrastructure deficit, and capital deficit.

(b) Bringing India into a state of equilibrium by removing social, and regional, economic imbalances.

To this end, it is imperative that all of us contribute to the endeavors of the government. In particular, industries and businesses who have thrived historical on government largesse and not necessarily on the enterprising abilities of promoters would be willing to give back to society by way higher taxes, higher voluntary CSR spending, technology upgrade for better resource utilization, etc.

On household citizens’ part the minimum we could do is to commit ourselves to (a) most efficient use of energy; (b) totally avoiding food wastage, and (c) high standard of quality & conduct in our respective professions, social and civil life.

Saturday, June 14, 2014

Bulls’ resolve tested

Thought for the day

“You have to take risks. We will only understand the miracle of life fully when we allow the unexpected to happen.”

- Paulo Coelho (Brazilian, 1947 - )

Word for the day

Ambulant (adj)

Moving from place to place. Itinerant.

(Source: Dictionary.com)

Teaser for the day

With US assiduously avoiding any direct intervention in international conflicts in past couple of years, and Russia gaining tremendously from spike in energy prices – who will lead the joint action in Iraq, should a need arise?

Bulls’ resolve tested

The raging bulls in Indian equity and currency markets faced their first serious test last week. Various local and global events tested the resolve of bulls who are having a free run for past one month.

Globally, strife in Iraq sent energy prices soaring, as global leadership continued to dither over a clear stance on military intervention. The situation in Ukraine remained fragile.

Back home, IMD forecasted a 7% deficient monsoon. Heat wave across north and northwest India led to serious power crisis. Reports suggest that the crisis may worsen as coal inventory at many plants is below critical level. Unusual rains and hailstorm damaged the onion crop in Maharashtra again, threatening the consumer price inflation. Mumbai coast was deluged by a high tide making people nostalgic about July 2005 flash floods.

On supporting side, IIP data for April brought some cheers to the market. Morale of the bulls was also supported by the government’s effort to accelerate the decision making process by removing many redundancies. The vision statement of the government as articulated in the President’s address to the joint session of the Parliament and subsequent very assuring reply of the Prime Minister to the debate on that address were largely accepted as harbingers of the good times.

The first round has apparently gone to the bulls, as the sharp falls in prices has largely been lapped as opportunity. So far there are no signs of panic in bull camps. Over weekend, the Finance Secretary Arvind Mayaram has also attempted to reassure markets that as yet there is no need to panic over Iraq. The markets ended the week with about half a percent loss over past week; though the losses were about 2percent from intraweek highs.

I also believe that Iraq situation has the potential to evolve into a larger conflict in the region, if the militant forces are not curbed immediately. The success of Islamic militia in Iraq could encourage the defeated militant groups in the Middle East Asia, South Asia and North Africa region.

The attitude of US administration and many western European nations towards the events in Syria, Ukraine and Iraq, in my view, has exposed the weakest part of the global economy, viz., lack of credible strategic leadership that has been the hallmark of global economy in past 150years. Britain and US have invariably taken lead in resolution of most global conflicts since later half of the 19^th century. This assumption of strategic leadership has made their economic and financial acceptable to the other relevant forces in the world.

Britain has been losing their leadership status since Tony Blair era. The economic decline of UK has coincided with it. London has lost substantial share in global financial business to new centers like Dubai and Singapore. The argument that only favorable taxation regime is responsible for this shift is not acceptable to me. I would give first priority to the perceived safety when it comes to my wealth.

I would watch keenly for next decade how US losses or retains its strategic leadership over the world. For now, Barack Obama is not making much effort.

Thursday, June 12, 2014

Morning dream

Thought for the day

“Reality is wrong. Dreams are for real.”

- Tupac Shakur (American, 1971-1996)

Word for the day

Schmaltz (n)

Informal, exaggerated sentimentalism, as in music or soap operas.

(Source: Dictionary.com)

Teaser for the day

Pride of triumphant is fine, but it should not cross the line of hauteur.

Morning dream

In order to diminish deflationary pressures and weaken the common currency Euro and thereby stimulate economic growth, ECB announced some measures a few days ago. The most discussed of these was reducing the interest on ECB deposit facility to below zero percent.

Though at face value 1/10^th of a percent is not much below zero percent and should not be a matter of additional concern for savers who are now used to earning negative return on their savings, the signals are worth taking note of.

It is conspicuous that like Fed, ECB is also past the trauma of financial crisis that repeatedly threatened the global financial system since 2008. The regulators now want participants to take risk. They want banks to lend more, businesses and household to borrow & spend more and save less.

The sharp decline in long term yields, despite US Fed tightening the policy stance, across Europe, USA and Japan is contrary to popular expectations. It could be a matter of concern for markets.

Conventionally, compression in yields is a negative growth signal. However, there is little evidence to suggest that economy is the USA, Japanese or European economies are likely to fare poorly in next couple of years at the least.

The lower yields therefore could be logically defined by shift in demand-supply curve of government bonds. With many governments simultaneously endeavoring to put their fiscal conditions in order, the supply of bonds is falling at a time when crisis struck households’ propensity to save is rising at fastest pace in recent decades. Consequently, the demand is outstripping the supply at much faster clip.

ECB might therefore be right in signaling its support for risk taking, lest the economy slips again into recession, this time led by higher savings and risk averseness, unlike 2008-10 a period which saw unsustainably high leverage and excessive risk taking materially damaging the financial markets.

There are many who believe that it is not long when Fed may also follow ECB below the ground Zero on deposit rates, despite continuing with moderation in bond buying program. This may be necessary to keep US exporters competitive against sharp decline in Euro.

Back home, we have heard some voices pleading the regulators and government to stimulate risk appetite of investors through a series of measure, including tax concessions, lower interest rates etc.

It would be interesting to see how RBI reacts to likely deluge of FII flows due to higher risk appetite fueled by fall in global yields and weaker USD and EUR.

In my view, a dramatic cut in rates to keep INR around 60/USD level would be in order. It is with this premonition I suggest a duration play on long bonds, after spending almost 4years exclusively in accrual products.

Gold may also warrant a re-look if my suspicion comes true.