Debt - "A Productivity Arbitrage"

So it's been a little over an year and the same question comes to haunt us all over again only this time it is much more bigger and treacherous. The issue is the same - "The World is just too leveraged"

The first question to ask is what really is debt? In my opinion it is basically a mechanism to exploit productivity arbitrage or a way by which a lazy buffoon with lots of capital can gather even more capital. Let me explain.........

If I find a person who has an ability to do good business and I have the capital but short on ability then I would lend him the money; sit home and watch Fashion TV while that man toil to reap rewards for my capital - This is what I call "Productivity Arbitrage". The reason that the Western World was able to gather so much Debt was because it had much higher levels of productivity and so the people were to willing to lend them.

Post the IT revolution of 90s this productivity has come to a plateau, infact because of their ageing demographics, especially for Europe means that productivity is actually declining.

But true to the Human Nature of extrapolating the past to the future meant that the trend of Western World getting more and more debt didn't stop. What was worse was that this money instead going into asset creation went to fund the current consumption. Any growth achieved in this way today directly means slow growth later. A question that comes to mind is why did this start to happen, why this world started spending rather than investing?

If I give you some money today you can either start your own business and may make a future or end up with nothing or else consume it on the usual human vices. With the productivity levels declining, the Western world would rather spend that money as with falling productivity the chances to achieve success in investing also starts to decline. However the lazy buffoon conglomerate of some countries and banks were lost in their Cinderella world. What is worse is that the government is actually protecting them as was apparent in the Greece crisis. This has set a wrong precedent of Moral Hazard. What it tells the world is to LEND! LEND! LEND!!!. Take the hard earned money of a small man and lend it to countries & businesses who fliters it away, make pennies on the deposit/lending spread and sip your martini. When these countries and businesses would not be able to pay you back these banks would be protected again by money of the poor citizens who would end up paying for the continuation of their lavish lifestyles and for their stupid fallacies.

This game is now coming to an end. All it would take is a failed auction of any of the Western country or Japan and then all hell would break loose. The world would see a catastrophe never seen before.

Debt which started as a genuine productivity arbitrage instrument with the onset of this century has become the wildest instrument to speculate in the hands of well attired but ill advised banks who are protected by even more ill advised governments but their capacity to save them is reducing ever moment. The best thing would have been to take a few years of recession, however to save a few Capitalist Cronies the world is heading towards a disaster. I am afraid I can't be bullish anymore though one thing is for sure that when we come out of this the Wheels of Fortune would have changed and the countries who are in good shape would benefit from it.

I would continue to explore this issue much more in my later articles and how one can make money in this environment. Next article would probably be on the 4 pins of this square garden - The US, Europe, China and Japan. I always say "Let there be chaos before the pattern emerges", However today all I would say is that "Don't find pattern in this chaos". Till Next time...........

Economic Prosperity and Human Development Index.. Means determines the End

There are three ways to wealth, You are born rich, You become rich with toil and some luck or You Marry rich......... The way you acquire wealth determines an individuals personal development and consequently of the society as a whole because ultimately Economic and Social development go hand in hand provided you have toiled for it.

There are countries that have struck wealth merely by the grace of divine factors. Middle East Nations of Saudi Arabia, Iran and many more.... because they got this wealth accidentally (by discovery of oil) their societies never got time to develop into modern civilized ethos. The result these countries even with the highest per capita incomes have among the lowest level of human freedom equivalent to that of the medieval periods. There laws are archaic and inhumane, their way of living highly conservative and violent so much so that these nations could be termed as "Band of Terror", so much so that this phenomena can be termed as "Black Gold Curse" for the entire world.

Let's move West, here the people have acquired wealth over a period of time. True, they were archaic as well... their ways of colonising nations and slave trade is very much questionable but my point is that these nations have evolved from that period. As they gained wealth and because they gained it from toil they advanced on the human development index as well. The paradise of Europe as we know it today had seen extreme dark periods which culminated in the form of WW-II in which the extreme form of inhuman barbarism was at display. However learning from it's mistakes inline with their economic prosperity so has moved the society, whereas this was not possible in the first case as the Gulf Nations got it easy and never did any such mistakes upon themselves from which they can learn and hence now the world suffers.

Coming Home... India never had any such gold struck opportunity falling it's way, so it has to toil itself hard and in the process I am sure the society would get better. From what I have experienced not only do we have to develop economically but culturally and socially as well, but this quite normal as economic and social development go hand in hand.

Cases like China would also be interesting to see, how they develop where the economic model of growth followed is somewhat different than it is followed in India, though the toil of the people in improving their lives is apparent in both cases. So the next time the actions and behaviour of a person can also give an insight into not just his social and economic background but also of his nation. So the Means determine the Ends...with this thought, till next time..........

The Economics Behind Size 0 - Women Waistline, an indicator of economic growth

With the economy and markets taking a breather before their next move, I thought it’s time to talk about something that is a little lighter and shows that economics play a role in every small and big social aspect of our lives.

‘Size 0’ a phenomena that started from the ramps of London and Paris has caught the fancy of some circles here in India too. Technically ‘Size 0’ is a figure of 30-22.5-32 inches. I am yet to meet a person who says that Size 0 is a figure he likes. So the question that arises is why is size 0 such a rage in the fashion world and among many women. This is where the foundations of economic development kicks in. 

In economics we generally study state of equilibrium, however realty is that the state of equilibrium is just a mirage. The forces on either sides of the curve swing between extremes for a very long time till there is maturity in the markets and that's when you get the equilibrium state. The era after the World War brought about a prolonged period of economic boom. The lifestyle of the society started to change dramatically and this included the eating habits... with more processed foods to excite the taste buds now available the society went berserk after them. This is the vary first stage in economic development of a product wherein that product experiences dramatic growth rates almost to the point of maniac rage. Some stocks in markets become speculators puppies and market darlings at the start. This stage is what we call irrational exuberance. So we observe that since the onset of 1950s fat bellies were a fashion statement. Plumpness was not just considered fashion but acceptable. 

The reason: Simple because the more plump you were would imply that you had the resources to enjoy the expensive food and luxurious lifestyle of relaxation and enjoyment. This is exactly the stage where we find our society (India) today. Here plumpness is considered acceptable because that implies that you have the resources to enjoy life. Money to have good food, servants at home and cars to drive.

Since the onset of 21st century things started to change in West. 'Size 0' started to come in fashion, the twin forces on the economic axis started to shift from one extreme to another, irrational exuberance  resurfaced but on the different side of the spectrum. So the question how did it all changed and why did it all started.

The reason: As the economy grew and people became richer the most common need of almost all people was satisfied, which is good food and a good lifestyle. The first economic stage was complete. People with far greater resources needed to become different and so they shifted to altogether a different lifestyle which involved a diet of lettuce leaves/ rucola, fruits, proteins and very limited carbs. Ideally such a diet should not be that expensive, but hey since the rich people are after this diet and they have a higher purchasing power this diet became very expensive and envious to have. Trust me the food bill of my Sunday shopping that involves purchase of fruits, Soya Milk, Tofu and Juice is far greater than all my meals over the week. And yes not to forget the booming gyming and fitness industry that started. This again became a fashion statement and mark of high social strata. Because only rich people can afford it. Average middle class can neither afford it nor would get the time from it's daily chores to go for it. While the rich can take care of their work on cellphone or internet and take time out for gyming, good food and taking care after themselves. Only some stratas of our society (India) are beginning to reach that level and hence it shows that we still have a long way to go in terms of economic growth.

The extreme changing trends in the body structure and eating habits of humans shows that we still have to mature even with respect to the most basic human need "Food". Something as basic as food which is composed of basic nutrients can be an indicator of economic development and social status is indeed quite interesting. What impact is this trend going to have on the food industry right from agri engineering ,production, processing and distribution would be interesting to note and be cognizant about for future investment decisions. Maybe companies like McDonalds may face rough weather in the future while chains like Whole Foods may do very well, maybe the global demand of food products may shift from carb based to more protein and vitamin based food products. All I can say is that we are living in interesting times and for good or bad the current trend is towards Size 0. So the next time you look at women's belly remember that her waistline not just tells how fit and beautiful she is but also how fit , beautiful and rich is the country in which she lives.

Hold this thought, till next time.............

Corruptionomics - It's not all Black and White

The Nifty crossed the 5000 mark last week.... So right now talking about markets might look a little incongruous, hence it's time to talk about something offbeat..... 

"Corruption", the word sends some vivid imagery across the mind. Setting ethical issues aside its time to analyse this issue of corruption differently..... There are obvious disadvantages of corruption:

- It increases the cost of production

- If the money is channeled outside the country in Swiss accounts, Cayman Island hedge funds it's further loss to the country, though these days such money is finding it's way in the stock markets

- Investing in land in this country is still partly done in cash and an ideal investing source of Ic (corruption income)

- Corruption Multiplier, this is the most serious effect of corruption. Let's say an x amount is given as part of corruption for construction of a house, over a period of time this amount x becomes part of internal psyche then this amount increases from x to x+c

- The control of money supply (M3) is lost by the central banks

However corruption is not always bad and it's predominantly because of 2 reasons:

- The cash generated in the corruption economy is either invested in land, parked outside the country or used in consumption and this spend on consumption ultimately finds it's from black to white.....

- However the biggest advantage of corruption is that it can increase the pace of work..... All big projects take sometime because of the red tape and infinite number of clearances and rules, corruption can short-circuit all this and ends up actually reducing the cost of project (because of the short time in which a project is executed)

So the question that one must ask is that is "Corruption Good or Bad"..... and the answer unfortunately is that it's not all Black and White, while in day to day work corruption is undoubtedly bad as it ends up just increasing the cost of production as the money paid as part of this system doesn't actually quickens the work.

However if corruption is smart, tactful and artistic then it is of great value.... Greed forms the bedrock of human development and prosperity. It is the basis of Capitalism with corruption forming one of its important ingredient. It's just like a dope that if taken everyday would soon make economic framework look like a debilitated patient but on a rare basis can give an instant kick to the economy taking it to a new high..... The crux of issue is if corruption happens so much that it can improve the speed of the project so much that it can reduce it's cost it is indeed beneficial. However even in this case it has to be rare and done by very smart people else it would channel down to the bottom to average morons and when this happens the disadvantages of corruption would surface......

Moral of story: Corruption is one of the most effective weapon in Capitalism but only meant for smart people........

Markets - A Recovery or A Fluke - Part 1

Markets always have the dubious nature of surprising everyone, a bull market will make even the biggest bulls gasping for breadth while a bear market would in the end make even the most vociferous bears taking cover. While I am not at all convinced by the recent upswing in the market but then I could be one of the many who are thinking the same and the market could prove all of us wrong, nevertheless it would be foolish to go short in such a market, at best short condors/butterfly static trades might work for the time being.

The reason I wrote the last article was to set a setting for this article and the following ones, to emphasise on the importance of asset over cashflow. Hold this thought while you read on. The world was on the verge of a collapse (literally), the governments across the board came up with stimulus and relief packages, with relief packages of over 10% of current world GDP flowing in a span of 1 year it's a lot of money coming into the system in such a short span of time.

Ceteris Paribus if I put this kind of money flow in this basic Keynesian equation:

Y= C +I +(G-T) + (X-M) the economy size increases proportionately. The issue here is that this is just a very instantaneous type of equation i.e. captures just the moment. The point is that because of such Herculean government spending the global economy that was falling apart at rapid pace not only stopped falling but infact has even started to grow for the time being.

What the government's across the world did was important and should have been done but it would not be enough because there is a structural misplacement in the global economy (would discuss this in the next blog) and that the worst is yet to come and this is just the part 1 and unfortunately the global slowdown might be longer than earlier anticipated. Here is the thought process behind this argument.

By end of this year the debt of the great American nation would equal it's GDP, in other words the nation has to grow at around 3.5-4% annually to even pay it's interests!!! or else get into a debt trap or sell assets. Even at the best of the times US grew at around 4%, so simply put it US assets are going under the hammer, A 12 trillion dollar economy is currently driven by around 60 trillion dollar of assets, an impressive return of around 20%. But when this quantity of assets start going down the growth itself would start coming down and lower growth would mean more asset dilution leading to further lower growth leading it into a vicious circle. Europe is even in worst shape with debt ratios of many countries almost matching that of the US but even less growth. Lesser assets would further mean more exposure to event risk(last blog) and lesser financial stability. So while I believe that this temporary hump is because of this huge government spending all it has done is to shift the leverage from private balance sheets to that of government and the bolts of this ship would start falling apart once again but maybe not before it converts the last of the bears to bulls.

The next article I shall walk through the major countries of the world and talk about their debt situation and if and how they can come out of it, then after painting this doomsday scenario I shall talk (probably in the 3rd article) on how ultimately this issue would be resolved, by talking about the structural problem the world is facing today, till then hopefully enjoy the bull run......

Land or Stock where to Invest

The markets are at an interesting crossroads these days..... The classic "Bear Market Rally" dilemma - Is this rally a Bear Market Rally or a Bull market. But anyways let's leave this discussion for some other day..... Let's get to same basic investment dilemma, where to invest the money: Land, Stock.........

Let's first analyse Land as an investment asset - Let us say on a piece of land one is able to produce a crop yield of 100 rupees in one year. Taking a discounting rate of 10% we can come to the conclusion that the land would then be valued at 1100 rupees. 

Now let's say there is a productivity rise next year due to discovery of some new seeds, the rise would mean that the same land can now produce 10% more. The value of land rises to 1210 rupees. However if nothing of this sort happens my land still remains at 1100 rupees.

Now let's say that instead of just buying the land, I rent it start a business to grow crops and try selling some stocks of my business... at the average level of productivity of the economy I would

make almost no money and the value of my stock would be, yes you guessed it right "zero"

However I might be better than the average and could produce the crop at a higher productivity, so let's say instead of producing crops worth rupees 100, I produce crops on the same piece of land worth rupees 120..... My business would starts to make a profit but thats not all the 20 rupees I get can be reinvested in getting better seeds and that lets say increase my productivity by 9% anually!!! well because as I make more money I can buy even better seeds so now the value of my stock would be 2200 rupees!!!......

The story is still not over looking at my production strategy all those moron farmers copy it and now to my disadvantage (but to the advantage of the economy and the asset holders) start growing more. The value of land would then rise again and would catch up to 2200 rupees. What's more next year there is a drought that puts me out of business, the land prices suffer a decline but comes back to it's normal price that following year, unfortunately the business is not that lucky!!!

Now let's go to the third and final scenario.... I buy the land and start to till it.... Sell stocks in the market for this business, even if I am growing crops worth rupees 100 but can mantain the 9% productivity growth my stock would now be valued at 12,100 rupees!!!........ and now even if there is a drought next year my stock would still be valued at something as I still hold my asset which is land.......

So what can we conclude from this whole song and dance!!!........

- While investing in land is a sure shot investment decision, investing in stock is not so....

- Never invest in businesses with lower to average productive rates

- Even if the productive rate of the business is very high when it comes to taking a call of investing in land or a business "invest in land" unless.....

- the business "own its assets" and then do their production on it... and if this is the case then owning stocks is far better than owning land.....

- Land should be owned in places higher productivity rise is anticipated and most importantly the competition level is high

- To end the discussion I would add that the productivity of the economy and which means asset appreciation would happen in a society that encourages free flow of information or in other words is an open society, else after a point of time the productivity starts to decline and all the assets become worthless, this might be happening in some countries but because they are closed we may not know so soon... you can guess which countries I am talking about.........

My Article published in Financial Express....

My article published in the Financial Express; March 01, 2009 Edition, page 2