Vijay Kumar Gaba

Tuesday, July 25, 2017

In search of ideas

"It may be true that you can't fool all the people all the time, but you can fool enough of them to rule a large country."

—Will Durant (American, 1885-1981)

Word for the day

Polemic (n)

A controversial argument, as one against some opinion, doctrine, etc

Malice towards none

Could you also hear a clear, shrill and unpleasant sound of sexism and machoism, in all this extraordinary praise for women cricket team?

Somehow I did!

First random thought this morning

His Excellency Pranab Mukherjee has completed one of the most non-controversial stints at Raisina Hills. I have not heard anyone complaining about his conduct as President of the Republic of India. To the contrary, most people are appreciative of the fact that he restored the dignity of the post, that was arguably damaged by his predecessor to some extent.

Now, if I juxtapose this status with all controversies, conspiracies and allegation that have surrounded His Excellency in past four decades, I get a conviction - "everyone deserves a second chance".

In search of ideas

Artificial intelligence (AI), automation, robotics, digitalization, et. al. are amongst the most popular buzzwords these days. In fact this jargon started gaining currency immediately after the global financial crisis started in 2008.

To me, the primary idea behind all this is threefold—

(a) To manage the worsening demography in developed economies, by delegating the mundane functions of life to machines.

I see this as an extension of the trend seen post two great wars. In those two wars millions of young men died, and it was felt necessary that women of the house should join the work force to rebuild the shattered economies. Washing machines, dish washers, microwave ovens, contraceptive pills (to avoid frequent pregnancies) ready to eat packaged food, equal rights to women, diversity, inclusiveness, etc. were amongst the scores of ideas that were conceived, innovated and implemented to successfully increase the size of the work force.

Today, many European countries, Japan and even USA to some extent, are struggling with rising population of old and infirm. China shall also join them in a decade. This trend (i) is constricting consumption, savings & investment; and (ii) creating need for human substitutes to perform the commercial and personal functions, like nursing and driving etc.

(b) To enhance productivity. While we have achieved superior speed and efficiency, in the post war period the basic innovations have taken a back seat. Improvement is the key word rather than innovation. So much so that we have no hesitation in calling an appliance which is primarily a combination of a communication device, a camera, a music player and a personal diary, the most brilliant innovation of the millennium so far.

Enhancing the speed and accuracy of the work done is the focus so as to make the processes more productive, essentially meaning deriving more output per unit of capital and labor input.

(c) Cost efficiency. The elementary reason for the latest global financial crisis, in my view, was that a whole lot of people and governments had got used to spending more than what they were earning. Piles of debt with low capacity to service it resulted in a breakdown of the system.

In the interim, central bankers have taken care of the situation by printing more money and making it available at lower or negative interest rate. But a sustainable solution can be achieved only in two ways - (i) earn more; or (b) spend less.

Earning more may not be an option for many due to adverse demography, poor investment (hence job) climate and low inflation. Spending less is therefore naturally the preferred choice. Cost reduction (cheaper food, medicine, housing, travel, wages) is therefore more acceptable. Hence these buzzwords....to continue tomorrow

Friday, July 21, 2017

Beyond Sensex

Thought for the day

"We are punished by our sins, not for them."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Ovine (adj)

Pertaining to, of the nature of, or like sheep.

Malice towards none

If things go as per plan, it will likely be NaMo vs NiKu contest in 2019, and a long European vacation for RaGa.

First random thought this morning

Government wants to sell Air India. Good intention.

Government wants to consolidate PSU upstream and downstream petroleum companies. Good idea.

Government wants to consolidate PSBs. Good strategy.

Government will continue to exercise control over management of these enterprise. Poor idea.

Why not make a super holding company. Transfer all government holdings to that company, and let individual companies be managed professionally, without any interference from the government.

Beyond Sensex

"Though stock markets in general are meaningless and indicate nothing in terms of the health of the economy they still function as a form of hypnosis, or a kind of Pavlovian mechanism; a tool that central bankers can use to keep a population servile and salivating at the ring of a bell. As I have mentioned in the past, the only two elements of the economy that the average person pays attention to in the slightest are the unemployment rate and the Dow. As long as the first is down and the second is up, they aren't going to take a second look at the health of our financial system.

Historians and economists often wonder after the fact how it was possible for so many "experts" and others to miss the flashing red lights leading into market implosions like that which occurred in 2008. Well, this is exactly how; within any casino there is an inherent bias towards false hope. Meaning, many people will invariably ignore all negative factors and past experience because positivism is more pleasant." —Brandon Smith (click here to read more)

If I close my eyes to the Sensex graph which is touching new highs every day, believing in the great Indian turnaround story is not that simple. One will have to make tremendous effort to sift out the absolute positives that will make an investor euphoric about Indian economy.

The relative argument — "We are doing better than most others" or "we are the fastest growing economy" — make one comfortable. But when put to litmus test, many of these argument sound academic. For example, Indian economy growing over 7%, the fastest in the world, may be matter of pride. But is the real per capita income of the bottom 50% of the population is also growing meaningfully, leave alone the fastest.

The changes in indirect tax structure and greater transparency in the administration (especially in relation to real estate sector and bankruptcy proceedings) are two major positives, which I could sift out. Most other measures, claimed to be landmark reforms, may not actually qualify to be so.

For example, the scheme to provide LPG connection to BPL families, could easily degenerate into kerosene subsidy type situation, with even larger burden on the exchequer. Similarly, the UDAY scheme to restructure state electricity boards could also degenerate like all other previous restructuring episodes.

The lending rates are falling because of poor credit demand and wide spread with global markets. This is a cyclical phenomenon and would get obliterated by play of market forces. Some businesses will gain and some will lose in the routine process. There is nothing to be structurally positive about this.

The socio-economic divide is widening at much faster rate than ever in past seven decades. That is a structural negative to be worried about. I say it structural because it's a trend in most developed democracies, and none has been able to solve the conundrum.

Unemployment, underemployment and disguised unemployment are all rising at an accelerated pace. This could be cyclical phenomenon, but may create some structural issues like rise in crime rate, cases of depression and other mental disorders, widening regional disparities, etc.

Coming back to stock markets, the following Sensex EPS forecast chart from a research report of BofAML, tells you the whole story.

What it shows is that the analysts have always been projecting a rosy picture of the corporate health. The projections though believed by the market have been seldom realized.

Thursday, July 20, 2017

Who needs more investment?

Thought for the day

"Genius may have its limitations, but stupidity is not thus handicapped."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Etymology (n)

A chronological account of the birth and development of a particular word or element of a word.

Malice towards none

Why this pretense that President, Governor and Vice President are nonpartisan?

First random thought this morning

I met a midsized chemical company's management last week. The people were generally very bullish on the prospects of their business in near to midterm.

When asked about "what could be the key risk to their business outlook"; the instant reply was 'Modi not winning election in 2019".

When I asked them what specifically the incumbent government has done to promote their business and that could change if Modi is not re-elected in 2019, I got no reply.

Who needs more investment?

Relative to equities, commodities are trading cheapest in many decades. This divergence is there despite the fact that a large proportion of traders are betting on a global reflation trade since past six months at least.

The primary premise underlying the so called reflation is that the money sloshing around the world will begin to find its way in the capacity building and inflation will eventually rise. The rise in inflation shall lead to lower bond prices and higher equity and commodity prices. This also implies that the commodity producing currencies shall gain and the commodity consumers should lose. The economic cycle thus turn from buyers' dominance to sellers' dominance; and from borrowers' dominance to lenders' dominance.

In past six months—

· Equity prices have risen considerably in most markets. Emerging markets equities, where growth is visibly higher, have done better than developed market equities which are still struggling with growth.

· Emerging currencies have done better than developed currencies.

· Bonds in emerging markets have also outperformed the developed markets.

But there is nothing to suggest that growth is accelerating to a level where inflationary pressures will kick in.

This raises doubt on the very premise of the reflation trade. Especially when the central bankers across developed market are talking about raising rates and shrinking balance sheets.

The capacity utilization across geographies and sectors is much below optimum. And fiscally most governments are still challenged. The specter of sub-prime loans and froth in asset prices has also started to raise its head again.

Under these circumstances a trade based on presumption of higher investment looks slightly questionable. ....to continue

Wednesday, July 19, 2017

Literature over history

Thought for the day

"To avoid criticism, do nothing, say nothing, and be nothing."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Harrumph(v)

1. To clear the throat audibly in a self-important manner.

2. To express oneself gruffly.

Malice towards none

Digvijay Singh is doing 3300km Narmada Parikarma and Lalu Yadav's family is performing a variety of religious rituals.

It is comforting to note that in India, still "Secular" does not mean "Non-believer".

First random thought this morning

A number of opposition parties in India facing existential threat. They can clearly see that another term for the incumbent government will materially erode their base. They are therefore naturally in a hurry to unite so that they could at least present a realistic challenge to PM Modi.

The unfortunate part is that in their desperation, they seem to have forgotten that they would need an aggressive development agenda to beat PM Modi. Mere "Modi hatao" slogan may not be sufficient.

Literature over history

The latest OECD Economic Outlook forecast (see here) succinctly summarizes the "New Normal" in just one paragraph, as follows:

"The mood in the global economy has brightened during the last year. Confidence indicators, industrial production, headline measures of employment, and cross-border trade flows have improved in most economies. However, this still-modest cyclical expansion is not yet robust enough to yield a durable improvement in potential output or to reduce persistent inequalities. Financial vulnerabilities could be realised by policy and geopolitical shocks. Compared to the 20-year pre-crisis average against which expectations have been set, OECD per capita GDP growth remains over ½ percentage point weaker and global growth overall, projected to rise to just above 3½ per cent by 2018, also lags. In sum, the global economic outlook is better, but not good enough to sustainably improve citizens’ well-being."

The economic growth for OECD countries is expected to stagnate around 2% level, at least till 2018. Whereas, for non-OECD nations, it's expected to rise to 4.8% in 2018. Overall world growth is not expected to remain stagnant around ~3.5% during 2017 and 2018. Most of the non-OECD growth is coming from just three G-20 members, viz., India, China and Indonesia; though China is likely to continue decelerating from 6.9% in 2015 to 6.4% in 2018. India is also projected to grow at lower pace from 7.9% in 2015 to 7.7% in 2018.

The OECD outlook report shows that economic inequities in developed countries have risen sharply post global financial crisis in 2008.

...as the real wage growth remains much below the pre-crisis averag

Wide acceptance of lower growth and higher concentration of economic power may not be a simple economic phenomenon, in my view. This may likely have far serious repercussions.

For one, it threatens the very core of the developed world, i.e., democracy and free markets.

Two, the New Normal, seeks to accept the dominance of Economic Elite over condescending administration.

Three, it strengthens the social dissent, that is presently manifesting in seemingly irrational socio-political decisions like Brexit & election of Donald Trump and stray incidents of violent strikes. This dissent may at some point explode to take form of a more violent, more popular and much larger movement. I am reading literature written during 1890-1930 to find clues. For history books look inadequate in presenting the true picture....to continue

Tuesday, July 18, 2017

Maintain proportion

Thought for the day

"Do not take life too seriously. You will never get out of it alive."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Uptalk (n)

A rise in pitch at the end, usually of a declarative sentence, especially if habitual.

Malice towards none

Have seen or heard of Digvijay Singh lately?

First random thought this morning

"Good is a noun. That was it....Good as a noun rather than an adjective is all the Metaphysics of Quality is about. Of course, the ultimate Quality isn't a noun or an adjective, but if you had to reduce the Metaphysics of Quality to one sentence, that would be it." — Robery Pirsig in LILA

I feel that this book should be made mandatory for all politicians, media persons and civil society members. "You have done much worse than me" should not be tolerated in defence of any action or argument.

Friday, July 14, 2017

A decade and counting

Thought for the day

"There is not in the universe a more ridiculous, nor a more contemptible animal, than a proud clergyman."

—Henry Fielding (English, 1707-1754)

Word for the day

Glocal (adj)

Of or relating to the interconnection of global and local issues, factors, etc, e.g., a glocal conference on community development.

Malice towards none

Waiting for some sermon on Gita and Unpnishada from Rahul Gandhi!

First random thought this morning

If data is a weapon, than H. D. Deve Gowda and Dr. Manmohan Singh could be in possession of the most potent ones of all.

While HD presided over the "Dream Budget" that let the animal spirit of Indian entrepreneurs loose, something that the watershed 1991 budget could not do. The two terms of MMS (2004-2014) saw India's growth galloping from sub 5% in 2004 to over 9% in 2008. The data also shows that he steered the economy remarkably well through the global financial crisis.

But this, as I said, might just be that Data. Nothing more. Those who love to use data to show the unprecedented performance of the incumbent government are advised to read the time series from 1991 at least.

And guess what, P. Chidambaram may emerge as unlikely champion of growth, and Yashwant Sinha a close second.

A decade and counting

Exactly a decade ago, during the second week of July 2007, S&P downgraded US$7.3 billion of securities sold in 2005 and 2006. A few weeks later, Moody’s Investor Service slashes ratings on 691 securities from 2006, originally worth US$19.4 billion. Some 78 of the bonds had Moody’s top rating of Aaa. The securities were backed by second lien mortgages that included piggyback mortgages. Moody’s stated that the cause for the downgrades was the dramatically poor overall performance of such loans and rising default rates. Fitch also downgraded subprime bonds sold by Barclays, Merrill Lynch and Credit Suisse.

This was beginning of, what would become a global financial crisis in no time. The crisis which would annihilate some of the leading financial institutions like Lehman Brothers and Merrill Lynch, threaten the solvency of some of the most powerful empires in history, namely Portugal, Italy, Greece and Spain (Inappropriately clubbed under acronym PIGS), lead to erosion of trillions of dollars from global wealth, cause millions of job losses, imperil the unity of European Union, and push the world into a prolonged period of low growth.

Surprisingly, the stock markets did not react to the crisis immediately. After a small jerk in July 2007, stock markets across the world rose dramatically. Except for Chinese equities that corrected in October 2007, most markets rose sharply till January 2008. This was perhaps the sharpest bear market rally, in my view. And then came the inevitable crash. From last week of January to March 2009 was one of the worst periods in decades in terms of stock returns.

The challenging times call for tough measures. But that was not to happen in this case. The central bankers across the world got united to bail the world out of this crisis through an "unconventional method" - quantitative easing, an euphemism for printing more money.

"Whatever it takes" was the new paradigm. The mints across the world ran overtime. Centrals banks printed enough money to buy all the junk available on street, bail out profligate governments & errant banks, and splurge concessions on consumers to boost consumption.

To their credit, the gigantic effort did help in unfreezing the global markets, stabilizing the global financial system, forced a certain degree of fiscal discipline amongst the profligate government, pull out the global economy from recession (that was widely feared to snowball into a worldwide depression, worst that the 1930 episode)

The strategy however created a New Normal in the global economics. Something that was not there in the economic text so books.

The unprecedented monetary and economic stimulus failed to bring the inflation back. The commodity producers continue to struggle. The economic growth potential for most developed economies scaled down materially. The investment demand therefore seems unlikely in foreseeable future. The bond yields remain close to their lows, despite talks of imminent talk of policy reversal. Reflation and bond correction are two trades that have deceived millions of traders following old text books....to continue

Thursday, July 13, 2017

Set the priorities right - 2

Thought for the day

"Guilt has very quick ears to an accusation."

—Henry Fielding (English, 1707-1754)

Word for the day

Cannikin (n)

A small can or drinking cup or a small wooden bucket.

Malice towards none

Why did Tubelight flopped on box office?

(a) It's a bad film

(b) People had already spent all their movie budget for the quarter on Bahubali - 2.

(c) Spiderman

(d) Salman Khan's statement on talks with Pakistan

(e) Any other, pl specify.

First random thought this morning

Some recent reports have suggested that public sector behemoth and world's largest miner of dirty fuel, Coal India is betting big on renewable energy (see here).

The minister was quoted as having said that "This is a contribution towards a better planet, towards greening the country and greening the world."

What would you call it - Paradox. Irony. Sham. Bizarre. Incongruous. Droll.

Or something else!

Set the priorities right - 2

My colleagues recently visited the flood affected areas of Assam. The misery of people there can't be described in words. Especially when it is a predictable and recurrent phenomenon. The apathy of administration and policy makers is astonishing.

Spending couple of days there and interacting with some other NGOs working in the area, we could figure out very effective solutions (that would cost almost nothing and are very easy to implement) to minimize the misery of people.

The objective of writing this is to highlight two things:

(a) The political (and therefore administrative) priorities in the country may be seriously misplaced.

(b) The administration lacks both innovation and initiative, insofar as dealings with people's common problems are concerned. Some of this banality might be due to recurrent political snubs. But that is a weak defense, in my view.

Imagine if this happens to you every year.

We suggest the least the administration could do is to provide a durable survival kit to the people in the areas frequently affected by floods.

The kit may contain small, convenient, and efficient self-help tools to improve the sustaining power of poor and underprivileged people who totally rely on the government's help for survival.

The kit may for example contain:

A water proof all weather roof for temporary, kutcha and semi-pucca dwelling units.
Durable, water proof, inflatable containers to preserve Ration, Medicine and Valuables during the flood period. The container may also be used to safeguard Infants under extreme conditions.
A foldable 10x10 tent to be used as temporary accommodation during the floods.
A solar charged LED lantern for emergency lightening

Our market survey suggests that this entire kit would cost less than Rs7500 per household. It would last for 7-10years. It can save many precious lives; reduce hardship to millions of people, and materially enhance people's sustenance power.