Vijay Kumar Gaba

Friday, October 26, 2018

It is, what it is.

Some food for thought

"A position of eminence makes a great person greater and a small person less."

—Jean de la Bruyere (French Philosopher, 1645-1696)

Word for the day

Dirigible (n)

An airship;

Designed for or capable of being directed, controlled, or steered.

First random thought this morning

The premier investigation agency of the country, The Central Bureau of Investigation (CBI), had always been mired in controversy. Almost every government in past 40-45 years has been accused of misusing the agency to further the agenda of ruling party. All politicians accused of wrong doing by the agency have invariably termed its action as political vendetta. Even the Supreme Court on many occasions has raised questions over independence of the agency.

This suggests that the country in general and political class in particular, has little faith in CBI. Ironically, the politicians from all parties have always wanted CBI to investigate their allegations against each other.

The recent controversy involving CBI and the government's response in removing the top officers must be seen from this prism, in my view.

I guess, the response of the government is decisive and shall lead to structural reforms in the working of the agency. We shall see, in near future, a comprehensive constitutional framework to ensure credibility of the agency and brining transparency and accountability in its operation.

The situation could be compared to the circumstances that led to autonomy of election commission about three decades ago, making it one of the most respected institutions globally.

I am not too worried about the dust and din being raised for now.

Chart of the day

It is, what it is. Diary

After going through numerous research reports about the current state of global economy and markets, I have come to a conclusion, which many would like to term cynical, preposterous, myopic or even bizarre. But it is what it is.

I feel we are fast approaching a stage, where trends begin to deviate from historical path. This is the stage in global history where the economy makes a "shift". Forecasting the direction and trajectory of this shift is not possible using the conventional tools. The forecast has to be institutive (or speculative if you like the word better).

I find most of the contemporary research suffers from one or more of the following limitation, viz., treating the current turmoil:

(a) A normal financial market correction, mostly led by higher valuations of equities in a rising rate environment; and fall in bond prices due to US rate hikes and fiscal slippages.

(b) A usual cyclical economic downturn, led primarily by peak employment conditions in US and rising inflation.

(c) A usual cyclical correction in global economic cycle led primarily by rising US rates, tariff related disruptions in trade, and higher crude prices due to OPEC curbs and Iran sanctions.

(d) A pause in secular bull market led primarily by geopolitical concerns as specter of cold war revisits.

(e) A global liquidity event led by unwinding of USD carry trade as US rates begin to climb and trade related disruption caused USD supply to contract materially.

(f) Two engines of global growth EU and China are not functioning properly.

My intuition says, these reports perhaps suffer much from ad hocism and myopia.

I see the current market turmoil as part of the Endgame for the biggest bubble ever created in the human history. The pain that was suppressed by artificial liquidity (only book entries without even printing the currency) created in the wake of market freeze post Lehman collapse, is beginning to hurt again.

The global trade and geopolitical balances that got skewed in post USSR (Coldwar) world, and further exacerbated post China's entry into WTO in early 2000s, shall seek to return to a state of equilibrium.

This gigantic rebalancing effort, inter alia, shall see:

(a) China seeking a respectful place in the global arena, given that it has subsidized the global growth with cheap labor and capital for almost two decades now. The Chinese State shall fight the global powers which do not find China (not being a democracy) suitable to sit on high pedestal with them; and the internal dissent from vast majority of people that shall seek freedom from decades of suppression.

(b) Europe seeking an alternative to the common market, as the common currency experiment seems to have failed in bringing equity to disparate regions.

(c) The third generation of the losers of WWII (Germany & Japan) seeking to obliterate the guilt from their national consciousness and seeking an equitable role in global affairs.

(d) Countries like Russia, India, Australia, Korea seeking a commensurate role in global affairs and metamorphosing the world into a multipolar field from the current unipolar field.

(e) The world seeking to correct the demographic imbalances by changing the norms for cross border movement of people.

Intuitively I feel that India may have a large role to play in this whole effort. The top level political and corporate leadership perhaps recognizes this opportunity too. However, I do not see any vision or plan to prepare the 1.3bn people for this opportunity.

This is where the greatest risk to Indian economy and markets lies, in my view. Bothering about meaningless things like elections, kilometers of road made or not made, failure of few NBFCs or banks, etc. could just be a distraction, a rather fatal one.

May also like to read the following:

America's closest Asian allies are all pushing for stronger ties — with India

Thursday, October 25, 2018

Beyond liquidity vs. solvency debate

Some food for thought

"If man makes himself a worm he must not complain when he is trodden on."

—Immanuel Kant (German Philosopher, 1724-1804)

Word for the day

Hooly (adv)

Cautious; gentle.

First random thought this morning

Going beyond the gloom in stock markets and the muck flying on news channels the whole day (yes it is no longer confined to prime time now); a brilliant season has started.

In north India the weather is beautiful. Pre winter nip in the air is brilliant. Flowers have started blooming.

It's festival time all across the country.

Durga Puja has just ended and Diwali festivities have already begun. Card and drink parties have already started in posh South Mumbai, South Kolkata homes and South Delhi farm houses.

The festive fervor is enhanced in Central India by the colorful and noisy election campaign.

Celebrity marriages (Ambanis, Deepika-Ranbir, Priyanka-Nick) scheduled in next two months are also adding to the joy of middle classes. These marriages are being watched with great anticipation. Many aspiring couple (and their parents), event managers, dress designers shall draw inspiration from these celebrity marriages.

Switching off your TV and phone in the evenings and taking a walk to local markets, could really cheer you up, if you are feeling bit low.

Chart of the day

Beyond liquidity vs. solvency debate

As the fresh breeze of liberalization and globalization entered India in early 1990s, there came many new businesses. In the initial phase these businesses were less regulated and promoters had little experience. They experimented, in many cases rather aggressively. Few of them survived. For example consider the following:

(a) The original Airline monopoly of India AirIndia is almost bankrupt. Amongst the first set of private airlines, which started business in early 1990s, only Jet Air survived but struggling. Most like Sahara, ModiLuft, East West, Damania and NEPC, etc. ended miserably. From the second set Kingfisher, Deccan and many smaller ones went kaput. The latest set IndiGo, GoAir, Vistara and SpiceJet is surviving well and making money too.

(b) The original telecom monopolies BSNL and MTNL are almost bankrupt. From the first set of private operators Reliance infocomm, BPL, Tata Teleservices, Escotel Spice, Essar Hutchison, HFCL are out of business - sold off or shutdown. Airtel survived & thrived, Idea has merged with Vodafone. Amongst the late entrants, Aircel, DoCoMo, Uninor went out of business. The latest entrant Reliance Jio has emerged a winner.

(c) In case of mutual fund industry, the original monopoly UTI ended miserably. From the second set many like GIC, PNB and Indian Bank shut shop and few like BoI, BoB, Canara are barely surviving. From the latest set the first entrant Morgan Stanley and others like HSBC, DB, Fidelity, Goldman Sachs have sold off. Top

(d) Many amongst the first set of private banks did not do well. Likes of GTB, Times bank, Centurion Bank, Bank of Punjab had to merge with larger banks. ICICI and IDBI reverse merged with parent institutions. HDFC Bank and Kotak, Yes and IndusInd have done very well. From the latest ones, we need to see how many are able to build a sustainable business model.

(d) Similarly amongst the first set of large private road and power asset developers many like IVRCL, Gammon are bankrupt, some other like Reliance Infra, GVK, GMR, Suzlon are struggling. A large number of old real estate developers like are already bankrupt or struggling to survive.

(e) A large number of steel manufacturers ended bankrupt in 1990s, just when the Indian economy was moving to higher growth orbit from the Hindu rate of growth orbit. The story is repeating two decades later.

(f) In a perennially energy deficient country Reliance failed to make much headway in oil & gas exploration business. After a struggle of more than a decade, they have almost abandoned KG basin gas operations. The other notable investor in oil & gas exploration business Videocon Industries is already bankrupt.

This all has happened when the demand for airlines, telecom, mutual funds, roads, steel, cement and power has grown all through these years.

I am noting these events because I do not want to get involved in the current popular debate about non banking financial companies in India. Those in their forties and fifties would remember that the measures subsequent to the previous banking crisis in early 1990s caused mushrooming of thousands of NBFCs in mid 1990s. Every street in the tier I and tier II cities was filled with sign boards of companies with suffixes like Finserve and Finlease. Less than 1% of those companies exist today.

This is certainly not merely short term liquidity vs. solvency issue. This is about the paradigm shift in market place and ability to survive the change. This is also about maturity in valuing these businesses.

Wednesday, October 24, 2018

Discontented, unhappy but not distressed

Some food for thought

"Stupidity is also a gift of God, but one mustn't misuse it."

—Pope John Paul II (Polish Saint, 1920-2005)

Word for the day

Branstorm (v)

To conduct a campaign or speaking tour in rural areas by making brief stops in many small towns.

First random thought this morning

कर्मण्यकर्म य: पश्येदकर्मणि च कर्म य: |
स बुद्धिमान्मनुष्येषु स युक्त: कृत्स्नकर्मकृत् ||

"Those who see action in inaction and inaction in action are truly wise amongst humans. Although performing all kinds of actions, they are yogis and masters of all their actions." (Chapter 4, Verse 18, Shri Bhagwat Gita)

The Lord himself guided the humanity — a wise person, whose actions are burnt by the fire of knowledge, escapes from karma by keeping his actions free from desires and attachments, remaining contended and taking refuge in nothing.

Performing actions without expectations and without worrying about the outcome, frees the doer from bondage of Karma.

By living the life spontaneously, with unflinching trust in the Lord, one demolishes all boundaries setting himself/herself free from fear, insecurity, dependence, compulsion, and conditioning to the environment.

This is plain conventional wisdom, on which most Indian, especially majority Hindus, are raised upon.

Many in the position of power often claim to be devout Hindus and frequently quote from scriptures. Those in principal opposition parties have also claimed taking up the study of scriptures.

But do we see any reflection of what the Lord himself guided, in their personal, social, professional or political conduct. At least I cannot. To me, their actions appear invariably driven by parochial self interest.

How would this situation get corrected?

Chart of the day

Discontented, unhappy but not distressed

Last week we travelled through the states of Madhya Pradesh (MP) and Chhattisgarh in central India. Both these states are going into assembly election next 6-8weeks. Both the states are being governed by BJP since 2003. These states are considered crucial for the BJP's 2019 campaign, as presently BJP holds 37 out of 40 Lok Sabha seats in these states.

We covered 13 districts of Madhya Pradesh spanning over 5 divisions of Chambal, Gwalior, Jabalpur, Sagar and Shadol), and . 12 districts of Chhattisgarh spanning over 3 divisions of Durg, Raipur and Bilaspur.

The objective was to observe the prevalent socio-economic conditions and assess the political mood of the people.

Without going into too much detail, I would like to share the following key observations and assessment with the readers.

Political assessment

(a) BJP is likely to lose in the state of Chhattisgarh. The ruling party may lose a substantial chunk of tribal votes as well urban middle class votes in the state. Ajit Jogi led JCC and BSP may register decent vote share in select pockets. But Congress led by Bhupesh Baghel seems set for returning to power.

(b) In Madhya Pradesh, the situation is complex. The certainty is that BJP will lose both vote share and seats from its 2013 position. A large number of seats may be decided with thin margin. At present all three scenarios are possible, viz., (i) BJP wins a simple majority; (ii) Congress wins a simple majority; and (iii) Both parties fall short of a simple majority.

If I have to bet money on election outcome, I will bet on scenario (ii) - Congress wining a simple majority.

(c) There is definitely no Modi wave this time. In fact, many local candidates may prefer not to use Modi's pictures in their campaign material.

(d) Shivraj Singh remains popular, but may suffer from anti incumbency of central government. Kamal Nath is most preferred CM candidate after Shivraj Singh.

Socio-economic assessment

(i) Rural population is not in distress but quite discontented. No one is dying of hunger, but younger generation does not see future in farms and villages.

(ii) The state of urban population is no different. There is no distress. But people in general are unhappy and agitated. The confidence in future growth and prosperity is low.

(iii) Liquidity is poor. People have low cash and discretionary spending is lower. The pain of demonetization is still lingering.

(iv) The people are agitated in general. The outbursts are spontaneous and frequent. The trust deficit is widening. The conditions are explosive. The good part is that administration recognizes this and hence response could be prompt. The bad part is there is little effort to diffuse the agitation. The ugly part is politicians are not averse to adding fuel to fire.

(v) The concept of development has been trivialized brazenly. Normal maintenance effort like road widening, drainage cleaning, regular pick up of garbage, replacement of transformers, providing sever lines etc are sought to be passed on as good development. The whole development paradigm thus seems seriously malignant.

Tuesday, October 23, 2018

Looking for opportunity in politics

Some food for thought

Has anybody ever seen a dramatic critic in the daytime? Of course not. They come out after dark, up to no good.

—P. G. Wodehouse (British Writer, 1881-1975)

Word for the day

Tergiversation (n)

Evasion of straightforward action or clear-cut statement

Equivocation

Desertion of a cause, position, party, or faith

First random thought this morning

Somehow "Ambani" has become a dirty name in the political lexicon of India, though not so in the common parlance. I have been running a reality check with common people on "Ambani". The politicians, especially those from Congress and left parties, may certainly not like what a common man thinks about Ambani in general.

Believe it or not, Reliance Jio may have enabled more people than all the governments in past 25years would have done together. An increasingly large number of people from the economic fringes of the society are benefitting from very cheap but good connectivity. A Jio enabled phone is not only a communication device; it is in fact work place, market place and also a social hangout for them.

They no longer give "missed calls" and keep waiting for revert. They don't stand in long post office queue to send money orders back home. They are able to market their product and services effectively. They are "aware" of most new political, social, economic, and technological developments. "Conference calls", "Samples", "Work experience credentials" etc. are no longer prerogative of the elite.

The retail format Reliance Trends, is also mostly geared mostly towards lower middle class population and provides a decent value for their money, besides adding materially to their esteem value in terms of shopping experience and style.

I personally do not like to invest in Reliance Industries, or commend the social conduct of the Ambani family. Nonetheless, denying their economic contribution to the poor would be a crime. I hope, someday our government would recognize it adequately.

Looking for opportunity in politics

As the date for some key state elections draws near, the interest of market participants in the emerging political situation is rising. These state elections, like always in past two decades, are being watched keenly as indicator of the likely outcome of 2019 general elections. In 2013, BJP won comprehensively in three central Indian states of MP, Rajasthan and Chhattisgarh and went on to win a landslide victory in 2014 general elections.

I have always maintained that there no credible evidence available to suggest any correlation between the outcome of any election and Indian economy or financial markets. Post independence, the evolution of economic policy and markets has been a slow but consistent process.

Especially in past three decades, all governments have followed the same policy framework for development and growth, with highest emphasis on decontrol, globalization, inclusion & social equity. Besides, the advancement in technology has been used to bring transparency in administration.

The changes have been mostly gradual and incremental. The pace and direction of the change has varied according to the macroeconomic conditions, which in fact have mostly been a function of the global economic cycles. During periods of slow growth, policy changes have been focused on decontrol and globalization. Whereas during periods of high growth, the greater emphasis been placed on inclusion and social equity.

Two extreme situations in 1991-93 (balance of payment crisis) and 1998-2001 (economic sanctions post nuclear test and dotcom bubble bust) caused substantial acceleration in decontrol and globalization. In 1991-93 India had a minority government of Congress Party and in 1998-2001 India had a multiparty coalition led by BJP.

No government and/or political party (or a coalition thereof) has ever tried to disturb the status quo by introducing any disruptive changes (or reforms if you like it!) in the economic policies. The evolution of economic policy framework has been incremental and consistent.

Also, no government has so far managed to break away from the prevalent global economic cycle and produced any path breaking counter cyclical growth. Arguably though, there are few instances where Indian economy has missed the opportunity to partake in global economic upturn (e.g., in 2015-17).

A change like GST that may look disruptive at first glance, is commutative outcome of gradual incremental changes since 1985-87 in factor like (a) tax regime, (b) technological advancement; (c) availability of bandwidth and electricity; (d) integration of Indian economy into global economy; (e) organized sector in domestic trade and commerce; (f) interstate trade, especially due to decentralization of manufacturing to backward areas; and (e) federal cooperation especially the sharing mechanism of revenue and development expenditure amongst center and states.

I continue to believe that this trend shall continue irrespective of the form and constitution of government in any state or at the center. Accordingly, I assign no importance to politics in my investment strategy.

Nonetheless, concerns over the outcome of elections have bothered the market participants, for whatever reasons. These concerns have usually caused higher volatility and wild price movements in markets. To this extent I am interested in outcome of these state elections and the subsequent general elections. Any probability of regime change may provide me attractive entry points for investing in businesses, where I want to invest anyways.