Food Inflation hits 19.95%

Is it good news or Bad news? Its bad news for all the consumers but may not be that bad for the producers. I think the biggest beneficiaries of the food inflation are the farmers. With eChaupal and the modern communication (cell phones), they can find out the prevailing rates for various produces across markets (local and global). This gives them an opportunity to negotiate the rates better. The biggest losers though are the urban people. They are at the mercy of wholesalers. From a purely political pov, it may not have the severe backlash in an agrarian society such as India. If there are severe side supply side constraints, then perhaps the govt can allow import of vegies and pulses. We have enough Foreign Currency reserves to cushion the imports.

Bottom of the Pyramid (BOP)

I read about CK Prahalad's vision for India to build 500 new cities to accommodate migrating population on rediff. I could not agree more. In fact I've been thinking about it for some years now. Thats what we need to do. Build cities from scratch. Perhaps all district centers should be planned to accommodate upto 1 million people. That way we can move rural people to city centers and move away from agrarian society to manufacturing based society.

This led me to drive down to the local library and bring back the book Profits at The Bottom of the Pyramid.

I'm yet to start the book but I'm pretty excited about it. Long ago when I was doing my MBA, I did my summer project in the wilderness of MP (Dhar and Obedullahgunj) that's where I first formed the thought of the concept. To have sustainable progress, it has to be profitable rather than charitable.

Its good to know that someone like C K Prahalad thinks the same.

Can't wait to start the book.

Lets Build Some Cities

I read about CK Prahalad's vision for India to build 500 new cities to accommodate migrating population on rediff. I could not agree more. In fact I've been thinking about it for some years now. Thats what we need to do. Build cities from scratch. Perhaps all district centers should be planned to accommodate upto 1 million people. That way we can move rural people to city centers and move away from agrarian society to manufacturing based society.

Lage Raho IRCTC

I read this article in Business Standard today. This is awesome news. India is moving to internet slowly but surely. I've been a regular customer since 2003. Sometime in 2005, I got a mail from them thanking its users, stating they hit 100,000 tickets a month. I smirked, ha! 100,000 a month, about 3300 a day. India is a loser on internet when compared to other countries. We will take a long time to get there blah blah. Just 4 years from then I now read people reserving 300,000 tickets a day. This is phenomenal. This to me is harbinger. India has arrived to internet. If you build it, they will come and click.

Really happy today to read this article. I'd long been a skeptic. Now I'm a convert.

Housing Price to Rent Ratio

Historically the price to annual rent ratio in the US was around 16-18 in most places, rarely going above 20 except in places like California. When I compare that to India, I see the ratios in excess of 30 in most places.

This is really high compared to US. In US the interest rates are around 4-8% vs 10% in India. The tenure of loan in US is about 30 years while in India its 20. In US the entire interest amount is tax deductible while in India its only upto 1,50,000. In us there are no tax deductions on rent while in India we do. In India, the rent control acts etc are so heavily in favor of the tenants that owners prefer keeping the house empty. This reduces the supply of rentable property. All of these factors point to a lower price-to-rent ratio. But its not.

In my view the properties in India are far overpriced than in US. Given the above one would expect the ratio to be 10. I do not see prices correcting that much. I think its not worth investing in a housing property unless you see remarkable growth in real estate value of the house. Housing as investment is really not worth it. One should buy a house only to live in it.

Indian IT Exports

About 4 years ago I read a post in rediff about a Mckenzie report that projected India to achieve IT exports of $62 billion by 2008. It sounded phony and I mentioned so at that time in my blog. Today I read this article in TOI stating India achieved $50 billion in IT exports in 2008. Falling short by 20%. I really would like to know how these projections are made. I understand the need to make these projections, so that the CEOs and IT pundits and drop these numbers to project their own interests, but seriously, I do not think there is much thought behind these models.

Partial Capital Account Convertability

I've read all but last 30 pages of the Paul Krugman's book. This has been an enlightening book on economics. I refrain from hyperbole because I read so little, its tough to compare with other books.

This has also been a journey of discovery. I have come to appreciate India's stand on partial capital account convertability. Its been demonstrated time and again, how assets bubbles are created through foreign investments and how a country could face financial crisis owing to no fault of theirs but only because of speculators, sentiment and lack of depth of their own financial markets.

I have now started believing that unless a country has enough depth in its own financial markets, it should not let free inflow and outflow of capital. The sheer volume and speed of the flow and cause bubbles or busts (depending on which way the flow goes).

The reason India remained relatively unaffected by Asian crisis, and to some extent US meltdown is because of these curbs, regulations and checks. I now see the wisdom of it. A country needs to manage its transition to prosperity on its own terms. India is doing it, and so is China. Chinese Yuan used to quote @8.25 in early 2005 and around the time I visited Shanghai. Today its quoting @6.8. Its about 16% gain in 4 years. Its gradual, managed and thats how it should be done.

Corollary to Previous Post

US stock mkt has gone up for the last 7 sessions. This is indeed good news for the investors. My view is that this is largely due to increased liquidity. Another proof of increased liquidity is emerging markets. As the financial crisis threatened the US economy, the investors sold their holdings across the world and flocked back to the US. Now that the monetary policy is easing, the money is flowing back to the emerging economies.

In principle, US is a leaky economy, i.e. if there is too much liquidity and PE is high, the money will exit US shores and go to rest of the world in search of better returns. In the 60s,70s and 80s, the world was relatively closed. But with globalization, capital is flowing to developing economies in search of above average returns.

It is my view that US mkt is saturated and therefore there will not be too much upside to stocks in the US. In the coming years, the spending in US will be fueled by growth of investments outside of US. Just like the housing and stock bubbles, US money will now stoke bubbles in emerging economies and fuel internal consumption backed by gains in these economies.

The interest rates in the US will remain depressed for years to come as these investments will bear fruits only some time down the road.

The same happened in Japan in the 90's when interest rates were depressed to 0 and capital was available cheap. The east asian economies swelled due to capital inflows from Japan. Investors could borrow cheap from Japan and then lead at higher rates in countries like Thailand, Korea, Mylasia etc. Only this time the amount of money will be bigger and will create bubbles in developing countries across the world.

The good news is that Indian stock market will receive a lot of money from US investors, at least in the short run.

Anatomy of a Crisis

I'm reading "The Return of Depression Economics" by Paul Krugman. A very enlightening book for a coffee table economist like me. He traverses the history of meltdowns across the world from Latin America to South East Asia. A very interesting journey indeed. This journey triggered a thought in my mind. If its brought out later in the book, I'm not aware. Its not there in the first 100 pages and given my ageing memory I thought it best to write it down before I forget it. So here goes.

Size of Economies
All these crisis economies (Mexico, Argentina, Thailand) etc. are essentially small, unlike US or Japan. The businesses within the country do not have much power to move the indexes too much for their lack of resources. The outside players such as US and Europe pump in money or pull it out as they feel. Though the money they pump in or pull out is small change to these countries, they are substantial sum when compared to size of these economies.

I've read somewhere that speculators add liquidity and depth to the market. In financial markets of these countries when sentiments change, the first world speculators collectively move to one end of the spectrum (buy or sell), lets say 10 funds. Even if there are 100 other operators within the country that wanted to buy at lets say 10% less than current price, they can't buy all the load thats coming their way. This reduces the prices beyond their natural bottom(bottom it would have settled if external and internal operators had about equal buying powers).

The sheer size of their economies makes these countries more susceptible to crisis. That's how I could explain the Contagion effect.

Currencies
Another point. When these countries face crisis, the currencies get hammered because the pulls out the money. However, when a Crisis hits the biggies, the currencies appreciate. For example, before the 2008 crisis hit US, Rupee was trading at 43 per dollar. The moment Crisis hit us in September, rupee dropped to 50 and beyond, more than 15%. India is not much of an export driven economy compared to lets say South Korea(25% of GDP vs 40% of GDP. They have comparable GDPs). I also checked Australian Dollar vs USD The AUD dropped from 1.2 in Sep-08 to 1.5 Dec-08. Why did this happen?

America and Europe have huge hordes of money. Though most of that money is invested in US and Europe, a significant part is also invested in other parts of the world. So when a credit crisis happened in the US, all this money across the world flooded in to the rescue bolstering liquidity cushioning the fall. Same with Yen. The Japanese had the 12% contraction in GDP (Q4 2008) vs 6% in US. Their currency actually appreciated against the USD (112 in the end of 2007 vs 90 at the end of 2008).

In effect, the anatomy of crisis in Big and Rich countries is a little different. They are better protected against the crisis just because they could call upon investments in other countries to cushion the blow.

Punishment to a small country for their economic sins is far harsher compared to the rich. Didn't I just prove the social aspect of crime and punishment in economic terms. Ha!

Headed for a Jobless Recovery

The size of the Balance Sheets for US banks and companies is shrinking. Companies are fighting to stay profitable in this challenging environment. And they will succeed, I'm sure of that fact. Challenge is how to grow the company. No one is focusing on it and I do not think it would be on their radar for some time. As a result, companies will turn around. Leaner, meaner(literally) and profitable. If the companies fire enough people, shut down enough plants and cut enough costs and yet survive they will eventually be profitable, albeit with a smaller revenue base. However, the people that were spitted out with pink slips will not be assimilated back in the system anytime soon. Net, Net this will be a jobless recovery and it may take a decade or more to reach full employment of 4-5%.

Illusion of Progress

Level A is a constant.

In 2003 joined my present company. I reported to X who reported to A. I was a PL. In 2004 I got promoted to PM. At the same time a layer was created between X and A. So Me->X->Y->A. In 2005 I started reporting to Y. So Me->Y->A. In 2006 I got promoted to AGM and shipped to US. Here once again reporting became, Me->X->Y->A. In 2008 I got yet another promotion to become a Delivery Manager and my reporting became Me->Y->A. In 2009 Y introduced another layer and currently my reporting is Me->Z->Y->A. That is after 6 years in the company and 3 promotions.

I call this illusion of progress. Its quite Dilbert like.

Fed is Printing money. Want Some?

Over the last 3 months, BSE has almost doubled. How much of that is to do with the fundamentals? I think very little. The Exports in Apr were down 33%. Satyam just showed the back door to 10000 employees. Why are markets celebrating? Is it because of new found confidence in the congress govt? No, I think its because of increased money supply from the US. Here is the theory. Ben decides to pump prime the economy by printing money. But the money does not stay in US alone. It leaks out of it. See how porous the US borders are (Mexicans are leaking in and $ is leaking out). Once out that money finds its way to India and other emerging markets.

Last fall, decline in Indian mkt was sharp largely because of flight of capital from India to US / Europe. The tide has since turned and what we are seeing that the swell of the tide is equally unrelated to fundamentals.

If this money had stayed in the US it would have a multiplier effect. But as its leaked out, that multiplier effect is lost causing Ben Bhaiya to print even more money. If the money does not find its way to India, it finds its way into the speculative Oil market. The US oil consumption is down to 2000 levels and yet the oil prices are going up.

I used to think that India should deregulate the gas prices to let them find their own level. However, given that the speculators can skew the market on their whim and how volatile they have made the oil market, I have started to wonder if India is right in regulating the gas prices. The price stability is far more preferable compared to wild swings.

Cramer VS NOBEL

Yesterday Mr. Mad money spent 5 minutes blasting the Nobel laureates such as Paul Krugman and other PHDs to stop fear mongering. To stop spreading fear in the people about weak economy. He feels all these PHDs should should shut up and listen to what he has to say. What he says is really is a bull byproduct than the bull rally he keeps talking about. He is predicting housing recovery by 30-Jun and that US recovery will be V shaped.

30-Jun is just about 6 weeks away. We'll see. The April housing report though does not seem very rosy.

Nano Bookings ~200,000

This article in Business Standard confirms that Nano is not as great a success as people had expected. Some analysts expected more than a million bookings. But this is not to be. A Car is not just a way of commuting. Its also a social expression, Status Symbol and small cars are going out of fashion (read affordability going up is pushing out small cars).

About a year ago, I had expressed my skepticism about Nano's success. India is not as poor as Ratan Tata would have you believe. With second hand cars market booming and all kinds of cars available on EMI almost immediately, why would someone want to wait a year for a car?

To measure the true success we need to wait till people start driving the first cars rolling out of the production lines. If these cars face any problems that get published in the media and catch public fancy, we may see cancellations of existing bookings. I say we give it another year and see how it goes.

Housing Sector In India

DLF posted their results for the 4th quarter and the entire year.

Is revenues plunging by 97% is not a catastrophe? House buyers have just clammed down. Comparing it to US, where the dust still hasn't settled, the house sales are actually flat or marginally lower over last year.

I think the only reason India is still standing is because housing and mortgage industry in India is still small compared to other parts of the economy and so not so badly impacted by this precipitous fall. Ppl are much less leveraged and they can hold on to their houses for ever rather than sell at a lower or default. This only makes the housing mkt in India very illiquid in times of downturn. Also, this means that it would take a long time for this housing crises to correct.

Sidebar: How is DLF still making money with 3% of its revenue? Unless all its costs are variable costs, this just does not seem reasonable. What about interest payments to banks and other depreciation? The sales came doen from 1600 crore to 56 crore and yet they made 30 crore profit. I accept I do not get the real estate business.

An Interim World

Interesting Article this one. Freddie Mac Interim CEO thanks ex-CEO to take on the role of Interim CFO as the present Interim CFO committed suicide.

So much so for govt run organizations. After all govt is filling in as Interim Caretaker till Freddie can wriggle out of Interim Crisis ;)

Books This Year

Disclaimer: I'm not a voracious reader.
I generally read about 3-4 books a year. This year has been slow as usual. I started with White Tiger. I loved the brutal, honest, vivid and sometimes repulsive description of life in "The Darkness". Anyone who has journeyed across India in a train can recall how apt the descriptions were. The character of Balram Halwai was too gray and almost impossible to judge. As Oscar Wilde once said, "Every Saint has a past and every sinnner has a future." In the end I'm unable to feel happy for him though he comes out of the predicament on top. I believe Balram had something in common with the tycoons, the dictators and hardened criminals. I call it self centeredness. Anyhow, the book is a gem.

The second one I read was Amitav Ghosh's Hungry tide. I thought there was too much prose in the book without adequate meat. It meandered like the river itself and never really got my interest. I liked Piya's character. I admire women with resolve and conviction. But then the author spent too much time showing off his knowledge of geography, aquatic life in the Ganga basin and such, impeding the flow of the book. I would not recommend it.

Satyam, A Happy Ending

And the winner is... Tech Mahindra! Good job Govt of India! There are are purists that say that govt. should not meddle with business of business. Yet, I could not think of a more expeditious way of handling satyam sell off.

I think responsible governance means knowing when to step in and when to step out. A few months back I read an article in NY times about YV Reddy, our ex- RBI Gov. The columnist went on extolling his work in keeping a check on the banks and regulating their investments in the realty sector. YV Reddy, tried the best he could to rein in the real estate bubble. He disallowed ECB, asked banks to raise risk weighting for real estate investments, limited the exposure banks could have to real estate and raised interest rates. Not that it completely deflated the housing bubble, but it did help in moderating it.

Regulation could be good and bad. Only history can tell if the decisions taken today had the desired results. Obama is making some very bold moves. These could help restore confidence in the US financial sector and US economy in general or plunge it into the abyss of debt for generations. Is he doing the right thing? Lets wait a few years till History Channel brings back the Credit Crisis of 2008 to your idiot box on prime time.

Road to Recovery

Starting 9-Mar-09 when Vikram Pandit, the CEO of Citi sent out the internal memo stating Citi made money in Jan and Feb, Dow has rallied from 6500 to almost 8000. Same with markets world wide. Indian mkt has bounced back from 8K to 10K.

In fact I have started seeing some mkt reports stating the recovery is just round the corner, sometime mid year, and it would be a strong recovery.

I somehow do not think so. I think, this is a false start. The malice is so deep and so wide spread, its going to be at least a year before recovery kicks in.

So I'm predicting that the stock markets will fall again. I've been wrong on numerous occasions. Lets see if this is one another one.

China raising concerns about US Debt

Couple of weeks back Bernanke said he is going to buy back 1.2T worth of long term securities, to inject more liquidity into the market. Where is the Fed going to find $1.2T? What it essentially meant was that US is going to print 1.2T worth of money to dole itself out of the hole.

Now US is not like Zimbabwe which prints money at will. The reason is, most of the countries around the world use USD as their foreign currency reserves. China in particular holds more than 1T dollars worth of US treasury bonds. Its now feeling cheated as US uses its $ mint to work its way out of the mess. This would result in a sharp decline in the value of USD against other world currencies and China will be hurt as its parked its hard earned money in USD.

The problem though is, there is no other alternate currency that can substitute USD. Yen and Euro are worse off than USD and perhaps do not have the scale to become an alternative to USD.

There is some talk about coming up with some other international currency / basket of currencies as an alternative to USD. But in the mean while, if China / Japan lose their confidence in USD, the US economy is going to get into even bigger trouble.

Kindle the Devine Intervention

I've never been an avid reader. My wife though over compensates for me. She went to India last oct and has been missing the public libraries and the joy of reading. She could finish 6 books a week and still have time on her hands. All that changed once she moved back. We do have Crossroads right across from our house in Mumbai and she goes there every now and then to buy books. Yet she maintains that the collection is not as wide as she wants.

When I visited her in Feb, I gifted her an ipod touch and tried to show her eReader/Stanza (ebook readers for ipod touch) but could not get her interested in reading on an electronic device. A few weeks later, "The curious case of Benjamin Button" came to PVR and she loved the movie. She wanted to read the book and fortunately it was available under free books on Stanza. I showed how to download it and slowly her resistance dissolved.

Last week I read that Kindle is now available for iphone and itouch. Yesterday, we sat together (on skype) to set it up. She had seen seen revolutionary road last week and loved it so much that she badly wanted to read the book. Crossroads did not have it and it was available as ebook on Amazon for $9. It took us all but 10 minutes to set up Kindle, buy the book and download it on her kindle. By the time we were done she was as excited as our 4 years old when watching Chota Bheem.

Technology is shaping our lives in so many ways. This is just one of the things but it makes her feel she need not be in us to be able to enjoy the best books. I'm just happy to see her happy. If I could, I'd wind up everything and go back home tomorrow.

Gulaal Music

Haven't really seen the movie yet but heard the songs. Never heard such dark songs in my life. I could have bought the CD but then, some of the songs are not for casual listening at all.

Aarambh is awe inspiring. In contemporary movies, I do not recollect such a song being penned down. I loved Omkara song as it was like an Aalha and Gulzaar did a good job of describing Omkara as a warlord and Sukhvinder did a great job rendering it. Piyush Mishra seems to be a find. I'd say its the most inspirational war cry I've ever heard. Reminded me of Dinkar. I once owned Rashmirathi (his Kaayva on Karna) and this comes close. Real close.

I'm eagerly awaiting DVD release of the movie. Want to watch it.

Loved Dev-D

I saw Dev-D in the theater and loved it. Its in the same class as Maqbool and Omkara. Anurag Kashyap is one of the most audacious directors of our times(Vishal Bharadwaj is another). Paro's depiction is so unconventional that it just blew me away. The scene where she comes to his house and cleans it were one of the most poignant moments of the film. The songs are catchy. Emotional Atyachar is cool.

It was so refreshing to watch a contemporary take on a classic. The end, though a little filmy, did not seem unrealistic as most ppl say. Then perhaps I'm an optimist...

Looking fwd to view Gulaal. Reviews seem to be good.

US vs Japan

Japan had a huge foreign currency reserve when it plunged into recession in 1990. It kept throwing the reserves at the economy in the hope to revive it and yet did not succeed.

US on the other hand has a huge credit line with the rest of the world. It does not have much reserves to talk about but it can borrow from the entire world to revive its economy till? Till the world no longer believes its worth losing their hard earned money on someone who longer has the same credit worthiness as it once had and a bigger debt than it can service.

Give US another 4 years, by the time Obama completes his 4 years US will be in a worse mess than its today.