Vijay Kumar Gaba

Wednesday, November 15, 2017

Strategy Review - 2

Thought for the day

"If you can do it then why do it?"

—Gertrude Stein (American, 1874-1946)

Word for the day

Wastrel (n)

A wasteful person; spendthrift.

An idler or good-for-nothing person

Malice towards none

When all the TV channels in the country unashamedly air private moments of an aspiring politician, why don't I hear a word from the crusaders of the Right to Privacy?

SC has upheld the right to privacy as a fundamental right.

Why should the police not take a suo moto action against people violating this right of Hardik Patel?

First random thought this morning

Any regular visitor to Mata Vaishno Devi Shrine would know that VIP culture has not spared this temple, like any other. It is common to see sundry government servants and their families being escorted by the soldiers in uniform. A number of people carry VIP slips for a privileged tryst with the Divine, while the common people, old and young, man and women, feeble and strong, all struggle in long queues.

The recent NGT order to limit the number of visitors to the holy Shrine will only exacerbate the VIP influence at the expense of the unprivileged devotees. But that is the story of all temples.

I find this appropriation of Deities by VIPs blasphemous, only when I fail to get a VIP ticket. What about you?

Strategy Review - 2

Considering the recent global and domestic developments (some of which I discussed in past couple of posts) I would like to factor in the following assumptions in my investment strategy for next few years.

It is important to note that these are strategic considerations in Indian context, and may or may not reflect on the short term investment strategy for 2018, that I will be sharing with the readers in 4-5weeks.

Factors be incorporated in strategy

(1) Higher inflation.

(2) Higher cost of capital.

(3) Technological disruptions in the areas of mobility and financial services. Going by the current views, the pace of obsolescence and redundancy could surprise the markets.

(4) Prospects of an intense cold war and a bi-polar world. India most likely ends up in the grouping led by US and including Japan. However, any ambivalence on part of India, might prove to be massive disaster in terms of foreign policy and trade.

(5) Greater emphasis on import substitution.

(6) Higher volatility

(7) Lower growth in real income

(8) Rise in risk premium

(9) Stronger INR

(10) Climate change

Strategy implications

· Higher weight for commodity producers and resource owners and lower weight for resource consumers.

· Higher premium to free cash flows and operating leverage.

· Lower weight to passenger mobility and conventional fuel.

· Higher weight to domestic consumption, especially upper middle class.

· Higher weight for sectors with large negative trade balance.

· Lower leverage.

· Higher allocation for expenditure necessary for more household members to go out for work.

· PE De-rating.

· Business automation; lower job-investment ratio; economies of scale.

· Lower dependence on conventional fuel.

· Also see

· In search of black swans

· Assimilating the change

Strategy Review

Tuesday, November 14, 2017

Strategy Review - 1

Thought for the day

"Everybody gets so much information all day long that they lose their common sense."

—Gertrude Stein (American, 1874-1946)

Word for the day

Eurhythmic (adj)

Characterized by a pleasing rhythm; harmoniously ordered or proportioned

Malice towards none

Besides Rakhi Sawant, Rahul Gandhi is the only person seems to be thoroughly enjoying his stint in politics, regardless of election results.

First random thought this morning

Imagine, schools shut in Cherrapunji due to rain, in Leh due to low air pressure, in Helsinki due to snowfall, or Congo due to heat wave. Obviously, children in these places will seldom get to go to school.

Why is that Children in Delhi are made to feel so weak and insecure that they are told not to come to school if it is too cold, too hot, or too dirty?

The better course would be to guide children about the risks and train them to weather these risks. Hiding them behind doors will only make them escapist and materially weaken their survival instincts.

Strategy Review - 1

In the wake of global financial crisis (GFC) in 2008-09, almost all big central bankers chose to follow what is now popularly known as non-conventional monetary policy. They expanded their balance sheets at exponential rates, by buying government as well as corporate securities; maintained rates at close to zero level (some even went below par and used negative rates). The objective was threefold: (a) To stabilize the financial markets and (b) to support sustainable faster growth; and (c) improve employment.

Most central banks were extremely successful in stabilizing the financial markets. Many large financial institutions which were at the brink of failure have revived and even strengthened their positions.

The objective of faster growth has so far been met with partial success only. There are pockets like US where growth has recovered but peaking at much below the pre-crisis level highs, whereas many other economies are still struggling to return to a sustainable growth path.

Employment conditions have improved materially in US and a few other places. But elsewhere there is not much evidence of any sustainable improvement in employment levels.

But if we see on global basis, the economic growth has not been encouraging as the large emerging economies (BRICS et. al.) that were racing fast during the crisis have slowed down considerably, since then.

Another thing that has not seen any material improvement is the status of indebtedness in various economies, especially those which were at the core of the problem. Their debt profiles have in fact worsened over past one decade.

A number of analysts has expected a hyperinflationary situation in the wake of extraordinary liquidity pumped into the global financial system as a result of quantitative easing (QE) program of various central bankers. It did surprise many that despite trillions of dollar being pumped into the system, inflation failed to pick up. Most developed world central bankers are still struggling to meet a modest 2% inflation target.

It is therefore reasonable to conclude the following from the above:

(a) The additional liquidity and fiscal profligacy since GFC has been used mostly to support markets and service the debt; and not create additional capacities or generate demand.

(b) It has perhaps been in the best interest of the debt laden governments to keep the cost of capital (interest rates) low, so that they can service the humongous debt without much difficulty.

(c) The employment levels may have improved in quantitative terms, but qualitatively there is not much improvement. Wage levels continue to remain poor and job certainty low. Consequently, higher employment levels are not reflecting to the desired levels in household demand for consumption and investment. On the contrary household leverage has risen past the pre crisis level in most economies.

(d) Since the entire effort since GFC has got mostly constricted to the financial markets and transactions, the demand for real goods, and therefore inflation, has lagged. The spurt seen in commodity prices in recent times can be attributed more to the supply restrictions (due to shut down capacities or scaled down production) rather than any pickup demand or liquidity issues.

But things may change going forward. New capacity additions and changing technology in automobile sector and popularization of renewable may be leading to rise in demand for few commodities like copper and aluminium etc.

This brings us to the our main topic of implications of the recent developments on Indian economy and the changes needed in investment strategy. In my view, the following global trends shall have meaningful impact on Indian economy in next few years:

1. The growing influence of right wing nationalism shall lead to more restrictions on trade, capital flows and labor movement. Active currency management may also gain currency even with many free market economies.

2. Higher (if not hyper) inflation shall occur and stay for long.

3. Electric mobility and renewable power shall gain popularity much faster than a majority of analysts are predicting today. Peak oil demand may also occur much before OPEC's forecast of late 2030s.

4. The geo-political tensions shall remain at higher level, even if it does not materializes in a conventional war. The cold war could be intense and protracted this time too. India so far has tried to maintain a balance, playing ball with both the potential groupings. This however may not be a sustainable strategy and Indian may eventually end up in a US led group. Worsening of relations with China, Russia and other major trade partners could have serious economic implications for India...to continue tomorrow.

Also see

In search of black swans

Assimilating the change

Friday, November 10, 2017

Assimilatng the change

Thought for the day

"What is the answer? In that case, what is the question?"

—Gertrude Stein (American, 1874-1946)

Word for the day

Razzle-Dazzle (n)

Showiness, brilliance, or virtuosity in technique or effect, often without concomitant substance or worth; flashy theatricality, e.g., The razzle-dazzle of the essay's metaphors cannot disguise its shallowness of thought.

Malice towards none

In childhood we had summer vacation and Christmas break.

My children now have (a) Heat wave vacation in May; (b) Cold wave vacation in January; and (c) Smog break in November.

First random thought this morning

In last one month two criminal cases have shaken everyone's confidence in Indian legal and judicial system. In infamous Aryushi murder case and Pradhyumn murder case, police, administration and lower judiciary seems to have acted purely under influence of perceptions created in media (electronic, print and social).

In knee jerk reaction steps are taken ruining innocent lives. Police arrests people based on media hype. Judges deny bail on ground of morality rather than legality of the case. State administration announces relief and mitigation measures based on TRP of the issue.

It's scary scenario. If you are not scared, pray you do not become the victim one day.

Assimilatng the change

As mentioned yesterday (see here), a number of changes are taking place in the global order that shall certainly have far reaching impact on our lives. Even though many of these changes may not look like so profound at this point in time.

It is important to note that we perhaps have seen the longest period of peace in Christian era with no major armed conflict since Vietnam war ended in 1975. The conflicts in Iraq, Kuwait, Afghanistan, Somalia, Bosnia, Syria etc. have been localized and never threatened the stability of world order. This non-violence and peaceful co-existence is not the basic human instinct in my view. It is critical to see that the beast that has been sleeping for 50years does not raise his head.

The three changes that are worth taking note are listed below. In my view, these changes are profound and will have far reaching implications for the global order.

1. Elevation of Xi Jinping

The amendment of the party constitution effectively confirms Xi Jinping’s as the Mao Zedong of the 21st century – a top leader with no constraints on tenure or retirement age.

As the Independent puts it "The inclusion of Xi’s name in the party’s document makes him only the third Chinese leader to be so honored, with his ideology joining Marxism-Leninism, Mao Zedong Thought and Deng Xiaoping Theory as a “guide to action”. It will now become compulsory learning for Chinese students, from primary schools through to universities."

After Mao, Communist Party ruled through a system of collective leadership. Now the party moves backward, again betting on a man who aims to restore the party’s central role in society, and nation’s central role in global affairs.

Xi Jinping thought embodies two important principles (a) the Party is in control of every aspect of life in China, from the economy to the internet, politics, culture and religion; and (b) China is on a path to become a true global superpower on its own terms. This puts to rest the expectations of China opening up and becoming more democratic as it became wealthier, converging its interests and political system with those of the West. The idea of political reform in a Western sense is now firmly ruled out.

Xi’s wants a nationalist, assertive China that will not threaten the world but will resolutely defend its interests.

Mao’s era was marked by revolution, Deng’s reformed and opened up China putting it on the path to become a global economic power. Xi’s era is likely to be characterized by full control and nationalism. To me it effectively seems like end of the unipolar world that emerged post collapse of USSR. I see Xi's OBOR endeavor as nothing but an attempt to erect the second pole in global geo-politics.

2. Right wing swing of global politics

If someone is thinking that Macron's victory in France has put breaks on the meteoric rise of right wing nationalism in global politics, he/she may be terribly wrong, in my view.

The swing that was widely recognized post Brexit vote last summer, has only gained strength since then. Political developments from US, UK, Spain, Czech Republic, New Zealand, India, et. al. all provide strong evidence to this trend.

Such rise in right wing nationalism historically has invariably worked against the notion of globalization and threatened the global peace.

3. Arab spring 2.0

The recent developments in Saudi Arab are most significant. It would be a mistake to see these developments as localized intra family struggle for power.

This must be analyzed in the context of (a) declining oil economy and rise of electric mobility; (b) strengthening of global alliance against Islamic fundamentalism, especially in view of the rise in terror attacks in Europe, that (c) forced isolation of terror sanctuaries like Qatar, Syria, Yemen, Lebanon, and Pakistan.

The elevation of crown prince of Saudi Arab Mohammad Bin Salman, who vows to transform SA economy beyond oil, implement radical politico-religious reforms, curb terror funding and end hostilities towards Israel to work together for a larger objective is an encouraging sign.

Nonetheless, these developments raise the specter of an armed conflict in the region, with China (and its ally Pakistan) and Russia taking sides with Iran, Syria, Lebanon and Qatar.

Besides long term geo-political implications, a sharp spike in energy prices could create imbalance in global markets. The positive would be a strong push to electric mobility (advancing peak oil demand forecasts from late 2030s to mid 2020s).

I believe that the world is certainly moving fast towards the new dawn.

The transition, like any previous episode, will obviously be tumultuous. But the opportunities will also be tremendous, as always.

I am definitely not eligible to analyze the full spectrum of the change and its wider implications. The idea of this writing is just to make readers aware and to motivate them to undertake intensive study of the patterns.

Nonetheless, I find it important to assess the implications for India and evaluate my investment strategy in that light.

...to continue tomorrow

Also see

In search of black swans

Thursday, November 9, 2017

In search of black swans

Thought for the day

"The earth is the earth as a peasant sees it, the world is the world as a duchess sees it, and anyway a duchess would be nothing if the earth was not there as the peasant sees it."

—Gertrude Stein (American, 1874-1946)

Word for the day

Logrolling (n)

Cronyism or mutual favoritism among writers, editors, or critics, as in the form of reciprocal flattering reviews; back scratching.

Malice towards none

0.00011% of 1.3bn is 1430. 33% of demonetized currency is Rs4.50trn.

If with all restrictions, 1430 people could deposit Rs4.5trn in banks in 50days, then our system is totally dysfunctional and I don't trust anyone.

First random thought this morning

The entire political establishment in the country seems divided in two camps - those supporting DeMo and those opposing it.

Both camps are using their full might (supporters issuing multiple full page advertisements in newspapers and hours of TV advertisements and those opposing holding protest rallies and public meetings) to highlight their viewpoints.

I have three questions - (1) How many common people are still bogged down by Demo? (2) Why does BJP still want to keep the DeMo alive? (3) Why Dr. Manmohan Singh is not retiring from active politics?

In search of black swans

Couple of weeks ago, I received a message in my mail box from a friend who has keen interest in astrology. I read the message with some passing interest and also forwarded (almost mechanically) to few contacts who I thought might be interested in astrology.

The message read like this:

"Saturn is ready to move its house once again from 26th October 2017. This is the last but the most significant change of 2017, as Saturn moves from Scorpio to Sagittarius, where it will be transiting for about 2 years & 3 months (till 24th January 2020) bringing major changes in our life that are currently not imagined, planned or on the anvil. Sagittarius is a strange sign for Saturn as it is an aggressive sign full of fire, openness & impatience. All these traits are just the opposite of the true nature of Saturn, which would ensure that changes in life would come in due to changed circumstances and mostly out of reactions rather than planned or pleasant coincidences of life!

Saturn in Sagittarius has a strange history in our lives as well as the history of the world. If we review the last time Saturn visited Sagittarius during 1987 to 1990, we had experienced a sea of changes in our world. History is witness to the foundation of the European Union in July 1987, end of Iran-Iraq war after 8 years, World Wide Web (internet) invented by Tim Berners-Lee, Unification of Germany & fall of the Berlin wall; Mikhail Gorbachov was given the Nobel peace prize & Boris Yeltsin became the president of Russia & last but not the least, Nelson Mandela was released. These developments initially during that time seemed small & innocuous but have changed the shape of our lives over the last 30 years.

The same cycle is seen again as our life is ready to change once more. It’s time when we should keep an eye on the modifications in our surroundings and be ready to accept and adapt."

I am no expert in astrology or international affairs. No part of my formal education included study of geo-politics, strategic affairs and international relations. I may therefore not be competent enough to comment on these events. Nonetheless, as a out and out commoner, I can feel that the extant Global Order is witnessing some material changes and these are likely to impact my economic life at least. I therefore need o

Some of these changes when seen in isolation may look like local in nature. But if juxtaposed to the other events that are taking place simultaneously in the other parts of the world, it is difficult to deny their potentially larger impact.

Three decades back when the world was ushering the big changes, India was still mostly a closed society (and therefore a closed market & economy) which was just beginning to open up to the world. The impact of global events was therefore mostly felt positively, as those developments made it easier for us to enter the global mainstream and integrate with the world economy. It no longer is the case. This time we shall feel the tremors in full intensity and reap the fruits too....to continue tomorrow

Wednesday, November 8, 2017

People over Markets

Thought for the day

"Communists are people who fancied that they had an unhappy childhood."

—Gertrude Stein (American, 1874-1946)

Word for the day

Netiquette (n)

The rules of etiquette that apply when communicating over computer networks, especially the internet.

Malice towards none

The question after all is "Will the Lotus finally bloom in TN?"

First random thought this morning

As per the latest Global Nutrition Report, more than half (51%) of all women of reproductive age in India are anemic. Not a medical expert, but I do believe that an anemic women is less likely to give birth to a healthy child.

One wishes, the government would accord the same priority to the quality of life index as it does assign to the ease of doing business index. After all, finding adequate number of healthy workers is also an ease of doing business matrix.

The thought came to my mind because our health minister, like all other ministers, had promptly commented on the recent jump in India's ease of doing business ranking, though no mention of this poor position on Nutrition index has been made.

For record, in past a BJP leader from Gujarat had attributed these anemic conditions to women's dieting habits adopted for vanity purposes.

People over Markets

Many readers have commented on my yesterday's post (see here). The most popular view is that I should not delve too much into technical jargon or background material; rather I should present my own views and suggestions based on my own assessment of the situation based on my personal experiences.

I bow to my readers' wishes and promise to keep posts simple and straight.

Now coming to the issue of finding suitable policy choices, determining the most appropriate amongst these choices, evolving a robust policy framework and establishing strong institutions to manage the policy framework so evolved - I have following to offer.

In my view, since independence the core of Indian economic policy framework has been Feudal; regardless of the fact that it is has been disguised as Socialist, Semi Socialist, and Largely Free Market at various points in time. Our political class has always taken pride in positioning themselves as the "Provider", rather than working as an "Enabler" of enterprise and "Trustee" of resources.

It is critical to note that after three decades we have a political establishment with overwhelming dominance. The overriding influence of the central leadership over the vast area of dominance (BJP ruled states now encompass ~60% of Indian population) allows near seamless economic integration of many large states like UP, MP, Maharashtra, etc.). At the same time the strong aspiration of BJP leadership to rule over the rest of the country (especially Bihar, West Bengal, Odisha and Karnataka) motivates them to focus on economic development of these regions as well.

The urgency and commitment shown in implementation of GST is more popular indication of the economic integration efforts of the incumbent government.

The even more relevant efforts include pan-Indian approach for railways and highways expansion, an apolitical approach for power sector reforms, efforts to establish a nationwide agriculture market, gradually phasing out tax incentives on area specific investments, amendment in mining laws that allows the mine holding states to draw a larger share in royalties and incentivizes putting manufacturing facilities closure to raw material, etc.

Replacing the legacy Planning Commission, which was empowered to make development plans in consultation with states, with a more advisory body NITI Aayog. While both the bodies came into existence through executive orders and depend on the government's will, the planning commission had assumed an important role in the 5yr plan based development model adopted by India since independence.

The new design however appears to suggest that we no longer want to follow the central planning model that was loosely based on the Soviet command based economic development model.

But at the same time, it nowhere suggests that we are ready and willing to adopt the laissez-faire model of USA, where markets are free and federal states are materially powerful.

Reconstitution of PMEAC also highlights the intent to accord more importance to the market economists over the development economists who have so far dominated the Indian policy making arena.

Though the intent and effort of the incumbent government to bring about changes in policy framework are commendable, in my view the Incrementalism may not be an appropriate strategy in current circumstances.

What we need is a revolutionary change, in the real sense of the term.

In my view, the feudal or quasi colonial model of development, that our successive governments have adopted, is not desirable. Considering the diversity of our country, and character of our democracy, we need to follow a participative model of development, where the local communities are made equal partner in the process of development. The focus of development should be people and not markets, which unfortunately has been the case in past three decades of economic reforms.

Also see

My 2 cents for PMEAC

Economic Growth: Goals are important, so are means

Jobs will come from services, don't stress manufacturing

Informal sector is core to Indian economy

Focus on farms, leave industry alone

Fiscal & monetary policy - avoid adhocism, focus on reforms

Don't mistake corrections for reforms

Public expenditure declining in quantity and quality

Trust your own people

In pursuit of appropriate policies

Tuesday, November 7, 2017

In pursuit of appropriate policies

Thought for the day

"The thing that differentiates man from animals is money."

—Gertrude Stein (American, 1874-1946)

Word for the day

Atemporal (adj)

Free from limitations of time

Malice towards none

Is one of the finest Indian actors of current times, Nawazuddin Siddiqui, following the path taken by the likes of Om Puri, Raghuvir Yadav, and more recently by Kapil Sharma.

First random thought this morning

There are many Indian youth in their 20s and early 30s actively participating in financial markets in various capacities, e.g., analyst, advisor, investor, trader and even money manager.

Most of these youth may not have real life experience of rising inflation and rates, a bear market in equities and bonds, financial crisis of global scale, high volatility, etc.

It may be appropriate time for them to take a break and study the past carefully and skill themselves in strategies for a market that may not be too benevolent.

In pursuit of appropriate policies

I have cited this example, in one of my earlier posts. I would like to reiterate it before I offer my views on the reforms in Institutions of Economic Governance, that has been identified as one key area by PMEAC for fostering economic growth.

Most of us would have encountered traffic cops hiding behind trees, electric poles, etc., waiting for someone to commit a traffic crime like jumping a signal or violating the prescribed speed limit.

It is usually annoying on an isolated road with scant traffic. Some of us would have little motivation to obey traffic rules under such circumstances. Many a times we even would not notice the traffic signal as there is no traffic on either side of the signal. You leisurely cross the signal and suddenly two cops spring up from nowhere waiving at you to pull over. Thereafter usually some negotiations are pursued and a suitable deal is arrived at.

But have you noticed that these traffic cops are usually not seen where serious traffic jams take place every day morning and evening. Have you ever seen a traffic cop filling a small two feet wide pit in the middle of the road, that is causing traffic jam of several kilometers. At least I have not.

So where is the disconnect?

In my view, the disconnect lies in the orientation of the personnel assigned the duty to manage the traffic on roads.

I did speak to some of them, asking "what is your primary duty?" A majority of them said "to enforce traffic rules". No one said "to ensure safety & security of people using the roads; maintain smooth flow of traffic; and/or properly guide the road users". None of them was aware of the bird named "right of way" on the road.

Prevention does not appear high in our priority of things. Punishment is what we pursue vigorously.

This perhaps applies to the whole spectrum of the public compliance management system - be it police, taxation, civic administration or anything else.

One may argue that it's not only the public compliance system, but the personal management also; as reflected in disease management at household level (including overwhelming use of self medication).

Our schools teachers are also mostly focused on the "marks obtained" by the students rather than focusing on the overall learnings and personality development of the students, including inculcation of traits like patriotism, nationalism and compliance.

Consequence is that we are popularly regarded as a society which is cynical; argumentative; performs only when whipped; complies only for the fear of punishment; and usually puts personal interest before the common interest. The trust abyss between police/security forces and citizens is also a consequence of this orientation.

Now coming to our main topic, it is pertinent to note what Joachim Ahrens highlighted in his 2002 book titled "Governance and Economic Development".

As per Ahrens, in the decades of 1980s and 1990s, the developing world has experienced two events of lasting significance.

First, external shocks, particularly the debt crisis at the beginning of the 1980s, hit the less developed countries (LDCs) and contributed (along with underlying policy weaknesses) to economic stagnation, a decline in real per capita income, and macroeconomic instabilities.

Secondly, a number of countries moved away from authoritarian rule towards democratization.

Numerous countries in Latin America, Asia and Africa responded to these shocks by abandoning their state-led development strategies mainly based on import-substitution policies and embarking on market-oriented economic policies emphasizing privatization and external liberalization, as the challenge of economic policy reform became more complicated.

The coincidence of these historical processes raised the question about the interaction between political and economic changes and the political economy of policy reforms.

Since, the political, social and economic changes are obviously strongly correlated, it is important to understand what kind of political institutions are conducive to formulating, implementing and enforcing appropriate economic reforms.

Moreover, since economists have usually treated politics and institutions as exogenous, they have been observing the effects of policies on economic development, but have generally no analyzed the determinants of policy choices.

Meier (1995) identified a low level of savings, a foreign exchange constraint, the lack of human resource development, and neglecting the agriculture sector as significant constraints that limit the achievable rate of economic development. Meier argued that an economy's ultimate success in narrowing the gap between its actual and potential rate of development critically depends on the political leadership's commitment and ability to implement and enforce appropriate policies.

As Ahrens highlighted, these days it is widely accepted that the stability of a government, the pursuit of appropriate policies and capacity for sound public management are at the core of sustained development.

...to continue tomorrow

Also see

My 2 cents for PMEAC

Economic Growth: Goals are important, so are means

Jobs will come from services, don't stress manufacturing

Informal sector is core to Indian economy

Focus on farms, leave industry alone

Fiscal & monetary policy - avoid adhocism, focus on reforms

Don't mistake corrections for reforms

Public expenditure declining in quantity and quality

Trust your own people