Monday, February 8, 2016

Lost half-decade for the world markets

Japan’s lost decade is a well known thing of the past and studied by many. But now it is time for the entire globe to witness the same. 2010-2015 seems to be lost five years for the financial markets. Be it Dow Jones or DAX, they are already at two at years low and breaking the long term supports which may open the gates to another 20-30% fall in this year that will take them to where they were in 2010. 



Copper is going back to 2008 levels and Crude is already below that. For crude it is already a lost decade. For others it is not yet, but if the slowdown continues for couple more years, 2009 to 2019 has the potential to become a lost decade for world’s equity and commodity markets.

Reforms of Modi or Obama, policies of Bernanke or Rajan would have helped their respective economies from getting worse but they do not seem to offer any resistance to the market forces which are at play now.

If you are an equity or mutual fund investor, your investments would be showing negative returns. Accept the reality, you knew stock market investments were risky. And playing for a V-shaped recovery may not be wise. Probably it is time to sit on the sidelines for indicators to turn around.

Wednesday, February 3, 2016

King of bad loans and the ending domination of PSU Banks

If you follow the stock markets, you know that Bank Nifty (an index of 12 Bank stocks) is at two years low. It has lost 25% from its top. Markets do not go in one direction always. What is happening in global markets is affecting India too. But it does not mean there are no issues in Indian Banking system. It is plagued by bad loans. Thanks to the king of good times, he is the king of bad loans too. He is not alone; he is followed by many who are not as flamboyant but yet owe big money to banks. Steel, Power and Infrastructure companies have a bigger share in causing depression in the banking system. But again the bad loans are nothing new. They are bothering the banking system for couple of years. Banks were writing off these loans in small proportions taking hit in their profits. But Modi getting elected in 2014 with a big agenda of reforms had brought fresh wave of hope, so Bank Nifty too had seen a new high. But all that seems to be deflated now as we are getting back to reality on the ground. When the credit growth has taken a hit, bad loans still remain bad, how do you write-off bad loans without capital erosion? Forget profit making, capital is being lost, no wonder Bank Nifty is gong back to where it was two years ago.

If you look into the details, it is Public sector banks having higher bad loans, so when some of the capital is written-off, Govt. will have to inject capital (from tax payer’s money) for these banks to continue their normal business. But anyway their domination is lost to the booze. When they come out of hangover they see that they are left far behind in the race.

The irony is, irrespective of you consume alcohol or not, your money was paid for the mistakes of liquor baron and his alike. This is India, a land of contradictions. This is where Gandhi and Swami Vivekananda were born and so many bad souls too.

Sunday, January 31, 2016

Book Review: The Monk as Man by Sankar

It was more than 100 years ago in the state of Bengal. A young man who had a BA degree was on the lookout for a job but was failing miserably to get one. His father was dead; his siblings were too young to go work. His family had to fight many lawsuits with their relatives and they were at the risk of losing the house they were living in. Seeing there is not enough food in the house, he would inform his mother that a friend has invited him for lunch and leave the house so that others get a better share. And he would go hungry. He got a job to teach at a college but the management did not like him so he lost it in three months. Again he was jobless, hungry and desperate. But his willpower was tremendous. Before he got another job he had decided to become a monk. His mother called him ‘Bilu’ while his given name was ‘Narendra’. For the rest of the world he is known as ‘Swami Vivekananda’.

That is the summary of the first of chapter of this book – ‘The Monk as Man; The unknown life of Swami Vivekananda’. As the title suggests, it is about the human side of the great monk. His thinking was legendary but he was struggling to have an earning to keep up with the needs of daily life for his family. He became a monk but did not cut-off his relationship with his mother. He was a loyal son to his mother his entire life. His mother outlived him. When Swami Vivekananda knew his end was nearing, he had asked a disciple to take care of his mother.

He was fond of many animals and birds in his Ashram, with which he conversed and had a special relationship. Most of them died soon after Swami Vivekananda passed away. His fame got spread all over the world as he aged but his health deteriorated. He suffered from diabetes which had made his right eye blind. Asthma was not giving him a proper sleep. He was growing impatient in his last years and was not nice to all the people around him. He had told people close to him that he would be gone before he was forty. And he kept his word. He had thought time was ripe to leave the body and a heart attack was just a reason to bid a bye.

He told that the spiritual momentum set in the Ashram will be alive for next 1,500 years. He said he was not imagining but seeing it. Hundread years have passed on since then and we witness that Sri Ramakrishna Ashram is doing fine in spreading the message of the great monk.

This book is the biographical account of Swami Vivekananda without getting into his teachings or spiritual aspects. A monk is a human being too. This book provides the account of the great human being India has seen in its history.

Tuesday, January 26, 2016

Educated migrants and Bangalore’s economic growth

Look at the population chart of Bangalore. Its population has grown 25x in the last 70 years. Formation of Karnataka state with Bangalore as capital helped it attract first set of migrants. Becoming home to many public sector companies did bring in the second wave of growth. Thanks to IT, Bangalore’s population saw a steep growth in the new century. And this wave was different than the earlier one’s as it attracted the educated migrants with higher incomes. (Link: http://timesofindia.indiatimes.com/city/bengaluru/Bangalore-gets-lions-share-of-educated-migrants/articleshow/18344203.cms). These new migrnats to the town took the GDP per capita of Bangalore to 3x of national average and made it cosmoplitian. If someone wants to witness India’s growth story, they better begin with Bangalore.

Most of these IT, ITES, BT, Pharma jobs were in export oriented firms. So for every one job created in this sector, at least one more job was created in the domestic services such as Education, Healthcare, and Transportation. That helped attract migrants from everywhere, within the state, from neighboring states, from distant north and east regions too. And it became home to many returning from abroad. You will also find non-native expats living in Bangalore with ease and comfort as well. If we assume there are 5 lakh residents of Bangalore working in IT and related sectors, another 5 lakh people in indirect services, and add two dependents to each of them, they would add up to 30 lakh people or approx.. 30% of Bangalore’s population. So what happens to the US economy concerns Bangalorean’s than the domestic economy.


Since it was already home to IT, e-commerce (Flipkart and Amazon) took roots here and it is seeing higher number of start-ups. Infrastructure development also provided jobs to many making it a self-reinforcing phenomenon. This nice story would continue provided the IT run continues. But it is facing many challenges. As the sector is reaching a maturity phase, its growth rates have slowed down to single digit as it is fast approaching saturation. Automation, cloud computing etc. are changing the resource requirements needed in the IT sector. As a result the numbers of new jobs are not growing like before. With that, new migrants coming into Bangalore is also slowing down. Moreover Bangalore’s road infrastructure is not sufficient enough to move around easily. Costs have gone up a lot in the past decade. Either due to cost or for other reasons, if IT companies begin to explore other towns, though it seems less likely, it would affect Bangalore’s economic growth. Migrants can leave as fast as they come. And the supporting jobs too would be gone in no time. E-commerce has too many players and some of them will have to wind up their business and a majority of start-ups too would run out of cash if they do not produce a marketable product. If and when such a thing happens, it will be Bangalore which will see the worst impact. Self-reinforcing phenomenon will become a self-defeating process with support jobs too disappearing. 

Will the IT industry find new avenues to grow? That would decide what happens with Bangalore’s growth too.

US interest rate up by 0.25% but equity markets are down by 20-30%

This would look weird. After US Fed raised interest rates by 0.25%, all emerging market currencies (including Rupee) started their downfall and equity markets all over the world are falling sharply, they lost 20-30% after the Fed’s announcement has come in. How can this small change in capital costs have such a big impact on the stock markets?

Reducing money supply in the system
My hypothesis is, it is the liquidity contraction in US which is causing the damage and not the interest rates directly. Here is my attempt to explain. First we need to understand that, all central banks decide the rates first and to ensure market follow that rate, they adjust the money supply or the liquidity in the system. Increase in the money supply will make rates drop. Reducing money supply will cause rates to rise. So when US Fed increased its rates, it had to cut its money supply in order to ensure interest rates catch up with decided rate. Let us look at the data.

US M0 Money supply. Source: Tradingeconomics.com

Data shows that M0 money supply in US dropped by $24B in the last month. That much money disappeared from the system. When we get next month’s data, we will see that trend is continuing. This reverse money flow triggered a serious sell-off in the equity markets and damaged many currencies as the money had to be converted into US Dollar before it got back to US central banks and finally disappeared from the system. Even a sell-off of $5B can pressurize the equity markets as there won’t be buyers for such a big sum sitting on the sidelines, so that leads to price erosion very quickly. As selling intensified (remember this money will not come back into the system), equity and currencies saw a bigger damage.

How it all started?
If you see the chart, Fed’s balance sheet started expanding after 2008 financial crisis. Their decision to print new money (through QE) to save their economy led to increase in balance sheet, from less than a $1 trillion to $4 trillions in a five years period or so. At the end of 2014, they decided to stop QE’s, so balance sheet expansion had also stopped from then. And in the end of 2015, they decided to raise the rates. This reversal led to contraction in money supply now in the beginning of 2016. Whatever went up with easy money, is seeing a reversal too but the correction is very quick.

How long it can go on?
If Fed raises rates again, we will see further contraction in money supply in the US and it adds to pressure in global equity markets and currencies. If they delay their plan, markets would see a breather. If they announce a fresh QE, markets will see a new high. Most likely scenario is, they will raise the rates in a slow manner. That would mean markets may not come back quickly and remain depressed for some more time or throughout this year. Whatever air was there in the markets, probably it is gone by now.

Is there a new recession around the corner?
No. Since US economy was doing good and employment levels were high, US Fed decided to raise the rates. But the adjustment in money supply resulted in revaluation of asset classes. Dollar gained at the expense of other currencies and a rout in commodities. This correction may not be indicating any problems with the economy but those who depended on easy money would do badly.

What will happen to Rupee?
Rupee, commodities and real estate will see headwinds until the turbulence in internal market calms down which is likely to last for the entire year. Comparatively India is doing good but that would offer no big relief to Rupee. Though Rupee may not see huge damage from here, it may not go back to 60 (for a dollar) levels any time soon. 65-70 will be the new norm. The financial markets made a bad start in 2016 and the data suggests that there would not be any strong reversals and 2016 is most likely to remain a depressed year for market participants.