Thought for the day
"Appearances are often deceiving."
-
Aesop (Greek, 620-560BC)
Word for the day
Diddle (v)
To cheat; swindle;
hoax.
(Source: Dictionary.com)
Malice towards none
Snow, hail storm, rains and dust storms in April - is
Mother Nature trying to tell us something?
Figure it out yourself
There is a famous fable I like to keep reminding myself rather
frequently. It goes like this:
Once the king rodent called a general assembly of all rats to ponder
over the rising feline threat. Everybody was bothered and concerned about the
menace.
After a long deliberation, it was unanimously agreed to appoint
a strategic consultant to advise on the matter. The consultant so appointed
studied the problem in great detail and came out with this famous and
voluminous report, that primarily highlighted that cats are far more powerful,
wise and smart animal than mice. Therefore it is extremely difficult for the
mice to put up a credible defense against the menacing felines.
The only way to counter the threat, the report egregiously
suggested, is that all rats should become cats.
The rodent populace was extremely thrilled to receive the report
and instantly went jumped into a celebration.
The celebrations was however halted abruptly when a tiny mice
raised his hand and asked the king - "O' My Lord without an iota of doubt
it is a great moment in the perennially miserable life of ours and we must
celebrate it. But if you pardon my naiveté, may I ask Sir - would it not be
appropriate to first find out how do we all become cats?"
Pushed into serious contemplation, the King called the
consultant to ask the question "How"?
"Well, Sir, I am afraid that I may not be of any help in
this regard. You Lordship will have to figure it out himself", the
consultant replied promptly.
Our McKinsey consultant turned Finance Minister for State, Shri
Jayant Sinha told an august gathering at a CII function that to overcome
persistent poverty and unemployment, India needs "to accelerate growth and
sustain those high levels of growth for a long time."
May I ask my Lordship - "Sir how do we do that?"
What to do?
Mr. Sinha impressed by suggesting some noble ideas for
alleviating poverty and making India grow faster. Some notable suggestions were
as follows:
*
There is a need to develop and create a new
India growth model and grow at 7-8% in the next 10 years.
*
There is a need for increasing the tax to GDP
ratio from the current 12-13% to 20-25%.
*
There is a need to increase the size of the
banking system by 4-5 times to help boost growth.
*
There is a need to increase price to book
multiples of PSBs and bring them at par with Private sector banks, so that the
government holding in these banks could be brought o targeted 52%.
The Minister highlighted that the current valuations of PSBs are
distressed and there is no possibility of government diluting its stake in
public sector banks at current valuations. He underscored that his government
would chose to do so only once it manages to push up the price to book
multiples of these banks and bring them at par with private sector banks.
"How?"
Sustaining a 8% growth rate for a decade, doubling the tax GDP
ratio, increasing the size of financial system by 5x and managing 3-4 P/B ratio
for PSBs!
Well these are extremely noble and highly desirable thoughts.
But the moot question is how do we achieve this?
The few and scattered indications of the new model on growth
that are available in public domain suggest that the new model is definitely a
capital intensive model involving huge capital investments in long gestation
infrastructure and manufacturing projects.
With this model achieving higher growth rate (7-8%) would take
many years. The problems are that:
(a) The huge
unemployed and poor youth population needs jobs today morning;
(b) The capital
needed to implement this model is not available within the country and foreign
capital is likely to become scarce, choosy and expensive in following years;
(c) This model
adopted by China has raised serious sustainability concerns;
(d) With huge spare
capacities available cheaply across the word, the financial viability of new
general manufacturing revolution in India could be doubtful; and last but not
the least
(e) People may not be
willing to give the government those many years.
The minister also suggested that he wants pension funds to
become larger and stronger and provide long term capital to the market. He also
highlighted that tax incentives are being provided to encourage people to
invest their savings in long term instruments.
(a) The incentivized
investment in past three decades has mostly resulted in misallocation of
capital as well as inefficient use of funds.
(b) The household
savings rate has shown a consistent declining trend in recent years. So has the
real wage rate.
(c) The RBI
commentary yesterday highlighted that global deflationary and disinflationary
tendencies are providing support in maintaining an accommodative policy stance.
Under such circumstances expecting serious rise in household financial savings
would sound little unreasonable.
The most amusing part is that the government would like to
manage pushing up to book ratio of PSBs 4-5x from the current level.
Three questions instantaneously crossed my mind on hearing this:
(a) Are our capital
markets so inefficient that something worth Rs100 is being traded at Rs.20-30,
not for few weeks but for few years?
If yes, then
there is a serious rethink required in pushing household savings towards Indian
equities through tax incentives and pension funds.
If not and PSBs
are trading at large discount to their private sector peers, we need to
evaluate whether the "B" in "P/B" is truly what is
reflected in the balance sheets of PSBs.
I believe,
adjusted for restructured book, higher credit cost, lower return on assets, and
higher operating expenses PSBs may not be at a material discount to private
peers.
(b) Growth of banking
sector is a function of economic growth. I am afraid, vice versa may not be
true in the context of an emerging market like India, at the least.
Banking sector will grow 5x if our economy grows 3x.
It straight and simple. No chicken - egg issue involved here.
The impact on the
carry trade
I have been thinking and talking about eventual reversal of USD
carry trade as the US Fed begins the "lift". The following views of
Chris (Capital Exploits) make an interesting read:
"Should the Fed raise rates in June, the impact on the
carry trade will only be exacerbated.
We’ve spoken at length about the carry trade, both in our
detailed USD Bull Market report as well as my explanation of the anatomy of a carry trade bubble. It’s
important to understand how interconnected world markets are. Nothing happens
in isolation.
Consider investors, hedge fund managers, pension funds, and
other financial flotsam and jetsam will now have added incentive to pay back
borrowed dollars after their forays into emerging market debt and high yield
instruments. Not only has the yield differential moved against them as dollar
returns on a yield basis outperform. Equally importantly, this itself will
simply fuel demand for the already strengthening greenback.
A rate rise by the Fed will act as a margin call on carry trade
assets as the yield differential widens in favour, this time of the dollar.
This is why I fully expect some hair raising events in the 3rd and 4th quarters
of 2015 as levered players who are currently coughing up blood actually die. It
promises to be a good show.
I should point out that a strengthening dollar is deflationary
on a global scale. I struggle to see how this is anything but bearish for
commodities and commodity currencies.
As terribly managed as the dollar is, we believe that global
capital flows increasingly favour the USD. This will likely have the perverse
effect of sending the wrong signals to US policy makers who understand global
capital flows in the same way my young daughter understands quantum physics –
not so much.
This dollar rally and periphery debt default we’re expecting
will set the stage for the Fed to eventually attempt to reverse the strong dollar,
bringing about a rise in US bond yields and a loss of faith in the mighty
dollar. We have more of the show to enjoy though before we get there.
Trivia
In a not surprising event, most of the socialist parties appear
to have agreed to merge and present a united opposition to PM Narendra Modi led
NDA government.
The first test of the unity will occur in next few weeks as the
modalities are worked. In my view, TINA (there is no alternative) factor should
help the erstwhile Janta Dal colleagues to come together rather comfortably.
The relationship of MSY and LY should provide the cement.
The real test will however be during Bihar election. A
successful campaign there will catalyze a strong national front.
The question is whether Akhilesh Yadav will achieve in 2019 what
Rahul Gandhi could not in 2014.
Interesting reads:
