Back and in deep freeze mode

Yeah, I am back to blogging after a 100+ day hiatus. No reason. Just found nothing exciting to blog.

A few minutes back, I read a nice piece by Greg Pytel titled “A US way out” and I almost froze. Here’s the excerpt from that chiller of a post –

“Washington Times compares the US model to Franklin D Roosvelt’s New Deal. However the current financial crisis does not resemble the 1930’s depression in its root cause. The current crisis is a result of a giant global financial pyramid collapse that left a quadrillions of dollars liquidity hole. Therefore President Obama’s actions may not be modelled on the New Deal, but on some other premise…

Considering the current US debt and its rate of increase, the US borrow and spend solution reminds an insolvent person who keeps on borrowing money, as long as there is anybody “silly” enough prepared to lend him. He knows that at the end of this process he will not pay anything back but simply declare bankruptcy, write off the entire debt and start its financial life anew.

The US, as the country, is economically and militarily powerful enough to declare that it no longer honours its debt and its currency. Effectively the dollar could be written off as a currency. As around two thirds of world reserves are held in dollar they will be written off. The US will have no debt.”

And then I read “History of Collapsed Dollar” in Commodityonline.com and Pytel’s hypothesis didn’t seem like a fictional conjecture at all. It could get catastrophically real.

“As with any fiat currency, the Continental dollar [USD version 1] later collapsed due to inflation. With politicians unwilling to fix the deficit and instead choosing to inflate the currency, the currency was left in ruins. The Continental dollar was eventually recalled by Congress and redeemed at 1/40th its face value. In a very few localities, it remained in existence for many more years, where it eventually plummeted to 1/1000th of its issuing value.

The factors that led to the demise of the first currency of the United States are the same that are leading the assault on the current US dollar. History shows us that when fiat currencies fail, precious metals remain as a standard of wealth and an accepted medium of exchange.”

And I now turn to a new asset class that I had shunned so far. Paper Gold. Gold ETF, I mean. Googled up and landed here. I will watch the price of Gold for next 4-5 months and might end up investing in this by August, 2010.

Just wish Barack Obama allows me time till then. Amen.
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Who is calling the money shots?

Who is India’s monetary authority? Is it RBI or Ministry of Finance? Traditionally RBI it is but of late the center of gravity is shifting more towards North Block. The pattern is too obvious not to be noticed—the real decision-makers are now in the central secretariat in New Delhi. Ideological divide, perhaps? RBI remains the statutory authority, but it is an open secret that the man in charge is P Chidambaram. A peskily independent RBI governor has retired, and a strong-willed finance minister has made sure that he will not be faced with another situation where his views are either ignored or not acted upon.

First, a new governor of Reserve Bank of India was appointed and, in a symbolic departure from past practice, the new incumbent went across directly from the finance ministry. Then, a new ‘liquidity committee’ was set up, chaired by the finance secretary. Now, a new economic advisor with a strong background in finance has been appointed in the Prime Minister’s office. A day later, the finance minister calls the heads of the state-owned banks with the intention announced in advance that he wants bank lending rates to drop. On cue, immediately after the meeting, one bank chief after the other announces interest rate cuts.

Critics of Dr.G.V.Reddy (Raghuram Rajan and Percy S Mistry) often argued the western orthodoxy that RBI should focus on a single objective of achieving a target rate of inflation. They usually oppose central bank interventions in the currency market, want quicker movement towards capital account convertibility, greater integration with global financial markets and the introduction of sophisticated financial instruments. But traditionalists supported Dr.Reddy with the counter-view that the financial crisis that has gripped the western world is not an advertisement for financial integration, that India can do without the periodic financial crisis that has consumed other developing countries with open capital accounts.
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I like a hybrid. Coming from a business family and community, one can understand why Chidambaram is hawkish on stock markets (except in matters of FDI ceilings where he surprisingly shoots down CCEA and DIPP moves seeking to allow FII to breach them). While RBI should indeed be the strategic authority, constructive suggestions from Ministry of Finance and other regulatory authorities can be heeded if not obliged. Controlling inflation is indeed the primary responsibility of RBI, but inflation is not the outcome of monetary logistics – it is rooted in market demand and supply imperatives. RBI can at best control money supply, hike or cut CRR, SLR or Repo rates but it can’t stop you from paying a higher price or ask you not to buy stuff. It could not even bring down the inter-bank call rates that hover around 11-12% as opposed to the normal 2-3%, despite the recent rate cuts. That can only be possible if the economy has multiple sources for fund flows. It can infuse or squeeze out liquidity to an extent, but it can never replace a generous flow of funds coming from a buoyant global sentiment. Over-indulgence by either would lead to catastrophic outcomes.

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Crude breaches $100; So what?

Quoting at $98.49 a barrel, crude violates the $100 psychological level. Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27 percent. Still, prices remain close to 14 percent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.

Now hang on, don’t rush to the gas stations. The dollar has breached Rs.45/- level, so you pay almost the same in dollar terms, pal ! Mukesh Ambani’s mole in cabinet has already sounded you out ;-)

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Economy? Go to hell !

“The battle against inflation will likely come at the expense of economic growth, which looks set to decelerate in the second half of 2008 amid cooling domestic demand and persistent external weakness,” says Sherman Chan, an economist with Moody's. The recent decline in global oil prices will not lower India's rate of inflation, which will remain "stubbornly strong" in the coming days despite monetary tightening by the central bank. Until next June, energy prices will also remain notably higher on a year-ago basis because of the cut in subsidies two months ago. The rise in global commodity and food prices is still a major driver of inflation in India. The retreat of oil will only help ease the pressure on the government to further raise domestic energy prices, according to Ms.Chan.

Makes sense. Now read what the Deputy Chairman of Planning commission Montek Singh Ahluwalia has to say. The fiscal deficit target set at 2.5% of GDP for 2008-09 is set to be higher by a significant margin. It is estimated the deficit will be breached by almost twice the budgeted target due to high oil prices and a whopping fertiliser subsidy bill. There had been a substantial increase in off-budget numbers and there were good reasons for this. He said the fiscal deficit is not a long-term problem as, next year, some of the increases would not be repeated and a significant revenue buoyancy would help ease the situation.

All hopes. On the ground inflation remains the growth killer. RBI can raise interest rates, mop up dollars to arrest a falling Rupee (that inflates oil bill) and introduce monetary measures like hiking CRR and Repo rates. Now the key element is augmenting commodity supplies. Who controls that? Commerce and Industry Ministry? It’s just a toothless caricature of its once powerful self (when quotas prevailed and licence raj was full on). Now I conjure up its icon Kamal Nath only as our emissary at WTO to make sure the talks fail!

Enough drama. Getting back to reality. Raw material costs are up 26% while interest charges are substantially higher at 34%. But instead of passing on these higher costs through price hikes, companies have retained them on their accounts so that growth is not compromised. Is this compromise sustainable at such low net margin growth? But then, there are more important issues to resolve!

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The charity incentive

“The Inflation can drop below 8 % if confluence of factors like fall in global crude oil followed by a good monsoon work”, says Prime Minister's Economic Advisory Council (EAC) Chairman C Rangarajan.

It touched 11.98 per cent for the week ended July 19.

And then? The improved fiscal conditions would be used as an excuse to pursue populist schemes in an election year. The government already have to fund the generous farm loan write offs ($18 billion at the last count) and the liberal pay hikes to the government staff ($5 billion in arrears and $2.5 billion annual outgo). The latter is now deferred (a bungling government waking up to the folly?) emphasizing the thoughtlessness of the award. Now I think of the majority tax paying tribe that gets no benefit from any of it - the non-government employee citizen or a farmer with no loan outstanding. You think I am biased? Here is Moody’s rating, for the record !

I might rather donate all my taxable income to the Red Cross. That will make me feel a lot better.

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Come hell or highwater

Come hell or highwater, private equity goes about its business.

During the first half of 2008 while public markets choked by a grisly hug, PE funds did 207 deals worth $10.4 billion , as against 178 transactions worth $6.69 billion last year same period. Average deal size increased to $59 million compared to $41 million during 2007 same period.

Standard Chartered topped the charts with its $830 million investment in property fund of DLF Ltd, followed by Providence equity’s $640 m in idea cellular. Others include Symphony Capital's $450 m investment in DLF Assets, L N Mittal and Farallon Capital's $399 million in Indiabulls Real Estate and investment firm J P Morgan's 300 million dollar investment in Tower Vision India.

I like the way they go about business as usual. Oil prices are slowly receding and Y.V.Reddy is bent on reining in inflation. That’s the way it should be. Growth is not the purview of Central Bankers, that’s for M/o.Finance to handle by accelerating pace of reforms. Now that the Left is out of the ruling coalition, Govt. has a lot of bandwidth to flex its muscles. Rate hikes hit back with a lag, so it’s important for us to brace up before we are blown all over the place. Pretend as usual and go about life, investment and all.

Things will fall in place. Or where they fall is exactly their place.
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Socializing Capitalism...?

At the recently held meeting of energy ministers in Jeddah, P.Chidambaram, our Finance Minister (FM) proposed a Price Band Mechanism – that the consuming countries must guarantee that oil prices will not fall below an agreed level and producing countries must guarantee that oil prices will not rise above a guaranteed level.

Seems fair to Oil importing countries as of now… Now what if the Oil exporters demand a similar price band for their imports - iron ore, steel, consumer goods, IT offshoring contracts and even currency exchange / global interest rates - can the world cope?

What could be its economic nomenclature – socializing Capitalism or Capitalized Socialism?

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Sack all our economists and refund all my taxes

Life isn’t getting any easier for us in India. Try telling me we’re living in one of the fastest growing emerging economies. This blog has been particularly skeptical of the inflation figures (7.82%) put out by our economists, promptly echoed in parliament by Finance Minister. All in a country headed by a veteran economist Dr.Manmhoan Singh. Now The Economist – may not be the last word, but is one journal that carries some shred of credibility amongst its vast reader base spread across the world – stands by me as it says "delays in data collection in India can mean big revisions to inflation... The latest wholesale price rate inflation rate might therefore be pushed up to 9-10 per cent," reports Business Standard.

There is no dearth for basic computing skills in India. India is a net exporter of IT services. Still our data collection methods are so archaic, full of holes and make believe. Could it be intentional to avoid being grilled in parliament by opposition benches? Or worse, do they believe what they say?

Hardly does it bode well in a country where 70% of people’s savings are through state run savings such as Provident Funds, Savings Bank, Term deposits, Post Office MIS yielding 8% returns. And a 10% inflation means they lose 2% of their savings with every passing year. In India, prices are rising much faster partly because food accounts for a bigger chunk of our Consumer Price Index and so the hit is felt way below the belt more by the poor millions. Banning futures trading in several commodities may help cap inflation and public rant. But letting prices rise is a far better way to reward farmers than waiving loans of $16 billion owed by the rich among them to the banks.

The least the government can do is, I repeat, refund all my taxes. Last thing I want is my money going to enrich another loan dodging farmer :-)

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Squeeze the Sheikh of every last Dirham and....

On Sunday US President George W Bush blamed India for rising global food prices, provoking a backlash from Indian politicians, who retorted that the US policy of promoting corn-based ethanol in motor fuel supplies has had bigger impact on world food prices.

Now I felt like a good laugh. Here is the President of the most powerful nation in the world asking a third world country of 1.1 billion people not to eat. Bad advise. Has the debilitating American economy dented Bush administration’s straight thinking skills? May be India can solve world food problem as he’d like to think; but should it starve itself in the process?

I think of a natural hedge. Oil prices surge above $122 per barrel. India is a net importer of oil and the price rise leads to inflation of over 7%. How about revoking the ban on export of non-basmati rice and exporting the grain at $ 2000 a ton to OPEC nations? Could it not offset oil price rise?

Squeeze the sheikhs of every last Dirham…. And buy their oil with some of it.
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Too much for a single day?

Business Standard cites M/o Commerce release and reports FDI equity inflows in the month were more than the entire annual inflows from 1991-92 to 2004-05. Inflows into India in February stood at $5.67 billion, the highest-ever during any month since 1991. On a year-on-year basis, the Feb inflows were 712 per cent higher than the $698 million inflows in February 2007.

So you took it to mean investment outlook in India remains strong since FDI is usually slapped with lock-in terms. With more money pumped into the system, can inflation be far behind?

So I get to read this and this. Both the key stock indices, the BSE Sensex (down 500 points) and the S&P CNX Nifty (down 124 points), lost some ground yesterday as the government announced a record inflation rate of 7 per cent, a three-year high. The latest surge is partly on account of a jump in metallic mineral prices. The primary articles sub-index, which has a weight of 22.02 per cent in the WPI, rose 1.8 per cent over the previous week on account of a steep 38.2 per cent rise in metallic minerals, a 4.9 per cent surge in vegetable prices and a 1 per cent increase in oilseeds.

It means “expect turbulence till you fly out of inflation headwind” – well that could be about 12-18 months till you get the full impact of all clamp down measures?

Burning question – what do we do? Left to myself, I would rather go fishing in style, if I get lucky like this guy, David Sneath !

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My fuel hedge - can I mail my car?

The military situation in Iraq is arguably improving, and Iraqi oil exports are beginning to flow again. Tensions between US and Iran have eased a bit. There are forecasts for a mild late winter in the United States, which should help bolster oil and gasoline inventories going into the spring and summer driving season.

So, why are oil prices going up now…?

Experts say the answer lies in the investment decisions of traders and hedge funds. With the markets in equities, housing, credit and currency shaky in the United States, traders are betting on oil and other commodities as a perceived safe haven. Recent interest rate cuts by the U.S Federal Reserve had underscored for traders the depths of the country's economic risks and led them to buy oil futures.

Vinod Khosla must be a sad man. He has been spearheading the new energy initiatives together with his friends from PE ecosystem and has been making some significant investments in solar and other non-conventional energy sector like wind and biofuel development, but so far they are making only a slight contribution to energy supplies.

To those holding euros or yen, the weakening dollar makes oil and gold look cheaper; they can bid up prices in dollar terms without spending any more of their own currency. Moreover, gold, and nowadays oil too, is seen as a haven when the dollar is weak—so the latter’s drop may be accelerating the former’s rise.

Is there a way to mail my car with me inside? I am a poor guy. I don’t want to be poorer. So what do I do? I bought MRPL stock so that I can offset my fat fuel bill with gains from stock price. That’s my inflation hedge. What say you?

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Had we known earlier....

Politicians like tennis more because it’s a game that lets one get the second serve in. In most other games, there's no second chance. By seeming a lot like their business of law making, the sporty metaphor gives them something to lean on. First make a stupid law that defies all logic for some self-serving reason and unleash the damage on the masses. When the goals are met (or emphatically unmet, like a first serve gone wide), try and make amends.

Earlier this year, the Indian Government worried about rising inflation denting its image before the Uttar Pradesh (U.P) elections, banned exports of sugar in a year of bumper production (sugar has a higher weightage in the inflation index). Incidentally U.P also has a large area under sugar cultivation and is home to a number of sugar mills. The move flooded the commodity in the domestic markets and prices slumped. Revenues and stock prices of sugar companies that were star performers suddenly nose-dived and their market capitalization went down almost by 70-80%. Not surprisingly, the UPA candidates were trounced by Mayawati’s BSP at the U.P assembly polls.

Elections over, it was time for the Government to review the wreck and rollback. Here’s the latest “had-we-known-earlier” – for sugar industry. The sense of timing was immaculate - the industry as a whole and its investor community has had hemorrhage already.

Recently I met my friend Rahul, who tracks sugar industry for a living at a leading brokerage. The guy looked a lot younger than his usual plump, flabby self. Asked him what had worked – the Gym or the diet.

He gave a smile and said, “I really didn’t have to go that far. I get enough exercise just pushing my luck.” I believed him.

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