Vijay Kumar Gaba

Monday, August 11, 2014

Tighten your belts

Thought for the day

” Any idiot can face a crisis - it's day to day living that wears you out.”

- Anton Chekhov (Russian, 1860-1904)

Word for the day

Celerity (n)

Rapidity of motion or action; quickness; swiftness

(Source: Dictionary.com)

Teaser for the day

The next global liquidity shot is now due.

German yields at all time low. Peripheral Europe Stuttering again. Japan and China not going anywhere. Commodity world jittery. US bomber jets ready to raid Iraq.

If you enjoy roller-coaster ride, get set to go. If you do not - take a good seat in the arena and cheer the braves.

Tighten your belts

The commentary on global financial markets has conspicuously turned cautious to negative in past couple of weeks. Many seasoned investors and analysts have warned about an imminent correction in prices.

Recently, Marc Faber was widely quoted as saying "By printing money, [The Fed] has delayed the cleaning process," as mal-invested capital (and self-referential buybacks) have sustained (and even encouraged) the worst quality companies. As corporate defaults pick up (and The Fed's free money dries up), perhaps that cleaning process will be allowed into the free-market producing 'the big sell-off'."

A large part of this caution could be emanating from the confounding behavior of bond markets in past few months. The consensus in the bond market over the last several years has been that yields will inevitably rise. However, the realty has been quite opposite.

The 10-year Treasury note fell as low as 2.35 percent, its nadir since June 20, 2013. As per a Bloomberg report "Yields have been falling with embarrassing consistency in 2014 despite forecasts to the contrary from most Wall Street analysts at the beginning of the year."

The global economy remains sluggish; central banks continue to push down interest rates in hopes of stimulating their countries’ economies; and, perhaps most important, geopolitical tensions have been rising. President Obama’s decision to resume bombing in Iraq, the violence in Gaza and the threat of a wider war in Ukraine are the start of a long and worrisome list.

In response, investors worldwide have been curbing the risk in their portfolios and moving money into safer holdings. United States Treasuries remain high on the list of global safe havens. Demand for Treasuries has driven prices higher and pushed down yields.

The yields on a range of other bonds have been extraordinarily low, too. For example, the yield on 10-year German sovereign debt has fallen to 1.05 percent. And Japanese interest rates have gone even lower, with the yield on 10-year sovereign debt hovering at 0.495 percent.

What does it all imply for our economy and markets?

I feel it is a good and a bad news. Good in the sense that it provides a much needed respite window to the new government. May be 4-8 quarters.

With yields staying at lower level, the global investors are more likely to continue chasing higher yielding making it easier for Indian companies to raise capital at favorable terms. This also keep global inflation in check and USD relatively cheaper.

However, the uncertainty and fear of yet another still fresh in memory 2008 like collapse keeps the investors in edge, prompting frequent panic reactions. The volatility may therefore rise materially, inhibiting any material improvement in domestic investor's participation in the market.

Insofar as recent geopolitical events are concerned, I find no chance of it escalating into any full-fledged war. I therefore do not see any need to change my investment strategy as yet.

Friday, August 8, 2014

If you are scared, say so

Thought for the day

”Imperfection clings to a person, and if they wait till they are brushed off entirely, they would spin for ever on their axis, advancing nowhere.”

- Thomas Carlyle (Scottish, 1795-1881)

Word for the day

Taradiddle (n)

A small lie.

(Source: Dictionary.com)

Teaser for the day

Could Congnizant's loss be gain of other Indian IT companies?

Cognizant's poor guidance is sacrosanct for the entire sector?

If you are scared, say so

A couple of days back I expressed some doubt about the RBI governor's comfort level in the current states of financial markets in particular and state of global economy in general. This I thought was not explicitly stated in the the periodic policy statement made on Tuesday.

A day later, on Wednesday, the governor not only confirmed my doubts, but went much further in expressing his discomfort, in an interview to the London based Central Banking Journal.

The below are the key concerns and doubts raised by the governor, as reported by Wall Street Journal.

(a) The global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense. The difference: competitive monetary policy easing has now taken the place of competitive currency devaluations as the favored tool for playing a zero-sum game that is bound to end in disaster. Now, as then, “demand shifting” has taken the place of “demand creation”.

(b) As was the case in the 1930s, the lack of coordination between policymakers is producing spillovers that may be difficult to control, and the world’s financial system may soon face fresh turbulence at a time when central banks have yet to repair the damage that the 2008 financial crisis caused to developed economies. “We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” said Mr. Rajan.

(c) A sudden shift in asset prices could happen in a variety of ways. The most obvious route would be as a result of investors chasing higher yields at a time when they believe central bank policies will protect them against a fall in prices. “They put the trades on even though they know what will happen as everyone attempt to exit positions at the same time – there will be major market volatility,” said Mr. Rajan.

(d) A clear symptom of the major imbalances crippling the world’s financial market is the over valuation of the euro, Mr. Rajan said. The euro-zone economy faces problems similar to those faced by developing economies, with the European Central Bank’s “very, very accommodative stance” having a reduced impact due to the ultra-loose monetary policies being pursued by other central banks, including the Federal Reserve, the Bank of Japan and the Bank of England. “The exchange rate is too strong given the euro area’s economic standing,” said Mr. Rajan.

(e) Mr. Rajan said economists still disregard the central role of financial systems in the economy and believe they can predict upcoming disruptions. “They still do not pay enough attention–en passant–to the financial sector,” Mr. Rajan said. “Financial sector crises are not as predictable. The risks build up until, wham, it hits you.”

Well this adequately explains the hawkish stance of the governor. Though I still believe that his official policy statement need not be guarded if he is scared.

Thursday, August 7, 2014

Three short stories

Thought for the day

”The world is a republic of mediocrities, and always was.”

- Thomas Carlyle (Scottish, 1795-1881)

Word for the day

Bugbear (n)

Any source, real or imaginary, of needless fright or fear.

A persistent problem or source of annoyance.

(Source: Dictionary.com)

Teaser for the day

A 129 year old organization, which in past had been led by great leaders like Mahatma Gandhi and Subhash Chandra Bose, is genuflecting before a reluctant novice to assume its leadership.

It reflects on whom - the party; the country; our political system; our understanding of democracy or just Gandhi family?

Three short stories

A dilapidated building needing urgent reconstruction

Three years ago I had chance to visit a dilapidated residential building in Mumbai. The palatial building which once housed officers of the crown, was abode of mostly lower middle class families engaged in sundry professions. The civic authorities had declared the building dangerous both for its occupants as well as the neighborhood. It therefore needed to be urgently demolished and reconstructed.

Many occupants had already made the alternative arrangements and moved on. But a few were still clinging on. When enquired, I was told that these are either retired/unemployed people who cannot afford an alternative accommodation, or the brave ones who do not mind risking their life for a few extra bucks in compensation. I am sure there would be a few who would be staying on for emotional reasons.

The current state of the Congress Party reminds me of that building.

No one seeking freedom

Once the home minister of a state visited the Jail on the Independence Day. After finishing his speech, he asked the inmates about their problems and what he could do for them. Most complained about mosquitoes and quality of food. Few wanted new blankets. Some daring one asked for a TV in the library. No convict asked for freedom. No under-trial requested that his/her trial may be speeded up, or he/she be released on bail as the trail proceedings had procrastinated beyond the maximum sentence they would face if convicted. The minister granted their wishes and won their adulation.

The latest controversy over UPSC civil services exams is a similar instance.

Is India already corruption free?

The politicians who campaigned aggressively for a corruption free India, especially Rahul Gandhi and Arvind Kejriwal, during last general election have not uttered a word on corruption in past three months.

Rahul Gandhi who made a passionate pitch for the famous "SIX" anti corruption legislations to be passed by the Parliament chose not to use the opportunity of bargaining with the government on any of the legislations proposed by his party in last six months of UPA-II regime. Narendra Modi would have been happy to support some of these legislations in lieu of Congress' support on Insurance (Amendment) Bill.

Arvind Kejriwal, or for that matter any AAP leader, has not publically mentioned the phrase "Jan Lokpal" in past three months.

P. Chidambaram and Manmohan Singh, who had passionately advocated higher FDI limits in insurance sector, have not uttered a word on Congress' opposition to the Bill.

What the action of these people and parties imply?

To me it implies nothing. I always believed that these are normal politicians who are selfish and care about common man issues only and to the extent it serves their vested interests.

Wednesday, August 6, 2014

Between lines

Thought for the day

” Reform is not pleasant, but grievous; no person can reform themselves without suffering and hard work, how much less a nation.”

- Thomas Carlyle (Scottish, 1795-1881)

Word for the day

Lambent (adj)

Dealing lightly and gracefully with a subject; brilliantly playful:

(Source: Dictionary.com)

Teaser for the day

Why should there be an age limit for joining civil services?

Would it not be useful if people with 10-15years of work experience join civil services?

Between lines

The RBI governor obliged the consensus on Tuesday by keeping the policy stance on expected lines. From that viewpoint there is little to comment on the policy stance. In fact in the press briefing post policy announcement, the governor sought to impress the media that it is his conscious effort to make the policy path as predictable as possible.

However, refusing to be drawn into the intended boredom over this periodic ritual, I read a lot in between the lines in the four page policy statement.

First of all, a between the lines reading gives me an impression that the governor is not quite comfortable with the movement in the financial markets in past few months.

He attributed a large part of the buoyancy in financial markets to a global trend with its root in the "assurances of continuing monetary policy support in industrial countries". The emphasis on the vulnerability of financial markets to "changes in investor risk appetite driven by any reassessment of the future path of US monetary policy or possible escalation of geopolitical tensions" and the consequent discomfort is rather conspicuous to me.

Secondly, the governor sought to convey the thought that while the inflation has shown some moderation since June policy statement, the monetary policy would have played little role in this moderation. Most of this could be due higher base effect and lower global commodity prices.

He also highlighted that the government, through reform in administrative price mechanism (APM), could be a significant contributor to inflation in coming quarters. Therefore, "the upside risks to the target of ensuring CPI inflation at or below 8 per cent by January 2015 remain". Accordingly, the statement reads, "The balance of risks around the medium-term inflation path, and especially the target of 6 per cent by January 2016, are still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialise".

Thirdly, and most importantly, RBI's assessment about growth pick up sounds circumspect. The policy statement implies that better export demand is supporting manufacturing and service sector activity. The current easy liquidity conditions and slack credit demand implies that the current estimate of 5.5% growth (5-6% range) could be sustained only if (a) external demand picks up; (b) the environment becomes and remains conducive to the revival of investment and unlocking of stalled projects (c) fiscal consolidation releases resources for private enterprise.

RBI thus appears captive at the hands of central bankers in the developing economies, especially US Federal Reserve, the political establishment's commitment to fiscal consolidation and private sector's ability to effect necessary improvements in their balance sheets to become creditworthy again.

With so many constraints and dependencies, no wonder the only thing RBI has to sell is predictability of policy direction (boring!) and thus taking the attention away from it!

Tuesday, August 5, 2014

To cut or not to cut is not the only question!

Thought for the day

”There are good and bad times, but our mood changes more often than our fortune.”

- Thomas Carlyle (Scottish, 1795-1881)

Word for the day

Rimple (v)

To wrinkle; crumple; crease.

(Source: Dictionary.com)

Teaser for the day

President's daughter tells the world that she possesses the personal diary of her father, containing his account of political events in past four decades.

Why does she say this? Is she "assuring", or "threatening", or "warning" someone?

To cut or not to cut is not the only question!

The complete unanimity amongst forecasters over the likely decision of RBI on policy rates is rather unusual. Overwhelming consensus on any issue involving human intervention always bewilders my strategist mind. Consensus on economic issues is even more perturbing as it is against the basic concept of market. Imagine a market place where only buyers or only sellers are present.

To me this consensus could be outcome of any one or more of the following factors:

(a) The economic situation in India is too volatile. All forecasters are therefore equally confused about the likely direction in near term.

(b) RBI is presently faced with unprecedented complexities in policy making.

In a decoupling world, the largest economy USA is doing relatively better and Federal Reserve is moving steadily on the path of tightening the monetary policy and debating the timing of reversing the declining trend in policy rate; whereas other big economies like Japan, China and EU are struggling with growth and are more likely to ease the policy. The currency movements are accordingly also volatile and divergent.

RBI therefore has the unenviable task of maintaining the competitiveness of INR to protect exports; to augment USD reserves to protect the economy against a possible BoP crisis, protecting the interests of importers and borrowers in foreign currency, and at the same time keeping real rates positive to encourage domestic savings which have been on the decline since past few years.

(c) RBI has mostly failed in ensuring adequate transmission of policy easing in past few years. During past four rate cuts private banks have not transmitted any concession to borrowers, while PSU banks did full transmission only once.

Under these circumstances, from industry stand point policy rate cut becomes more of political decision rather than a monetary one.

Moreover, rate cuts are not necessarily positive for the economy and markets. In a recent report India rating (Ind-Ra), highlighted "...policy-driven change in interest rates has in the past impacted the domestic currency rate. In certain instances, an interest rate cut by the Reserve Bank of India (RBI) was followed by a 1.1%-5.8% depreciation in the Indian rupee one month post the effective date of cut. Around 53% of BSE500 corporates, which account for 70% of the balance sheet debt, have historically suffered a 1.3% EBITDA (by value) erosion for a 1% rupee depreciation, according to Ind-Ra‟s estimates. The benefit of a lower interest rate is thus often muted, and in some cases the impact on credit metrics such as coverage ratio is actually negative.

Under the scenario of a 25bp interest rate cut followed by a 2% depreciation in the currency, the amount of stressed debt within BSE 500 corporates is estimated to increase to 14% from the current amount of 10%. While a 50bp rate cut followed by a 5% rupee depreciation could cause the stressed debt to increase to 21%."

Sunday, August 3, 2014

Trade, trust, nationalism and overtime

Thought for the day

”The merit of originality is not novelty; it is sincerity.”

- Thomas Carlyle (Scottish, 1795-1881)

Word for the day

Gloaming (n)

Twilight; dusk.

(Source: Dictionary.com)

Teaser for the day

Name 3 Congress leaders who can successfully succeed Gandhi family?

Trade, trust, nationalism and overtime

Yesterday, a simple query to St. Google for the meaning of term Trade led me to St. Wikipedia, which said " Trade exists for man due to specialization and division of labor, in which most people concentrate on a small aspect of production, trading for other products. Trade exists between regions because different regions have a comparative advantage in the production of some tradable commodity, or because different regions size allows for the benefits of mass production. As such, trade at market prices between locations benefits both locations."

This left no doubt in my mind that countries trade with India because she has few things (labor, raw material, skills, etc.) which others lack. GAAT, WTO, FTA etc. may be merely negotiating platforms to extract best deal out of each other. Countries will trade with India if it benefits their populace and politicians. They would not if it does not help.

Anyways WTO is an institution on decline since past decade or so. Numerous FTAs and bilateral treaties and frequent disputes and rising number of pendency of disputes at WTO only emphasize this.

Judging the attitude of Indian Government by its stand on WTO negotiation is inappropriate. Suggesting that a rigid stand at WTO will prejudice India's advantages in international trade is preposterous.

Those who believe that global investor's will rethink their India strategy post failure of current WTO talks, may like to study the history of Indian markets and FII flows post nuclear tests in 1998 to get a sense that investor's look for a country and company that negotiates hard and knows to protect its interest rather than those who surrender to counterparty pressures easily.

In a substantive administrative reform the Modi government has asked its offices to trust Indian Citizens by their words and not subject them to seek certification and attestation for most trivial of the issues. This to mind will go much further in increasing productivity than many of the economic reforms markets participants clamor about.

In a first, the government through public sector oil marketing companies, has sought support of citizens on a specific issue. The LPG users have been urged to voluntarily give up their claim on annual quota of subsidized cooking gas cylinders. If propagated properly the results of this campaign could potentially equal the Shastri's call for fasting once a week or Gandhi's call to adopt Swadeshi. I hope this just a tiny beginning on the path to progressive nationalism. A steady progress would solve much of the economic problems without any governmental intervention.

Reports suggest that the new government has made the Parliamentarians work overtime in the very first session itself. "After a deadlock of nearly three years, there is a flurry of activity on the floor of the House. In the last three weeks, the 16th Lok Sabha recorded a productivity of 103%, in sharp contrast to the 15th Lok Sabha that worked for only 61% of the scheduled time."

Is it correct to say. "the Prime Minister is not communicating enough"? I guess if results are showing I would rather not care about the speech. However, it would be a healthy practice if Modi holds a "State of the Union" address to nation once every quarter, to outline his government's views over important matters before the nation.

Friday, August 1, 2014

Is it the fat lady singing?

Thought for the day

”I never see what has been done; I only see what remains to be done.”

- Buddha (563-483BC)

Word for the day

Disambiguate (v)

To remove the ambiguity from; make unambiguous

(Source: Dictionary.com)

Teaser for the day

Mr. Natwar Lal!

Is it the fat lady singing?

The readers may recall, late last summer the most hotly debated topic in financial markets and related media was unmistakably the "tapering" - euphemism for moderation in bond buying by the US Federal Reserve. This was the single most important consideration in many investment strategies. A sizable majority of analysts believed that "tapering" will push global markets back several miles.

A hard landing in China was often termed a certainty. Disintegration of common currency area in Europe was spoken about by every tom, dick and harry. The commentary for foreign flow dependent emerging markets like India was even more scary. Added to the scare of tapering was fear of a full blown balance of payment (BoP) crisis in India.

Three quarters later, here we stand - US Federal Reserve has already moderated its bond buying program by 75%. US unemployment rate has almost fallen to desired 6% level from over 9% a year ago. US economy has grown 4% in 2Q2014. China's has managed to slow down her economy in a controlled fashion. India has mostly corrected its fiscal and current account deficit problems; even managing to grow its Fx kitty. Global equity markets are back to "exuberance" territory where the word "bubble" is used more than recession or depression. The German bund yields are lower than 2007 level. PIGS (Potugal, Ireland, Greece and Spain) are able to raise money at easy terms. London house prices are well past their 2007 peak.

The Fed's decision to reduce the bond buying by a further US$10bn on Wednesday did not make to headlines.

What has changed in these 9months that the whole paradigm of global financial markets has changed?

One thing, as Gavekal's Anatole Kaletsky puts it, "the US economy now seems to have reached ‘escape velocity’. From this point it can continue expanding and creating jobs even in the face of exogenous shocks such as cold winter weather, geopolitical turmoil and the chaotic introduction of Obamacare."

Though, the situations in Europe and Japan are still fragile, and the risk of financial defaults in Chinese banking system appear real, the investors appear confident that if the latest policy experiments have worked in US, then Europe, Japan and other countries would also see success, may be with a lag of a year or two.

In Indian context particularly, the leadership seems to be making some difference. First, the former Finance Minister P. Chidambaram and RBI governor Raghuram Rajan took the lead and took some seemingly harsh steps to put the fiscal and trade account in order, and now PM himself is assuring the investors and businessmen alike. However, the real support so far has come from US investors and consumers only.

It is interesting to flip the pages of Diary back and see what I wrote on 1st April 2013.