Goldman-SEC settlement

I would just draw your attention to interesting posts by Barry Ritholtz and leave it at that but with one admission: I too thought that the settlement sum was too small (550 million US dollars). Barry does not think so. I think you should take his word and not mine.

here are the links.

Comments worth commenting on

Two recent edits at Business Standard are good ones. One deals with the issue of India’s demographic advantage. It cites the TeamLease India Labour Report 2009 to make the argument that the demographic dividend is neither automatic nor is it being worked on to turn into an advantage. I would add one more to the list of consequences that the Edit mentions. It is that disaffected and unemployed (or, unemployable) youth could be potential recruits for the fast-growing Naxalite movement in India. I have downloaded the Team Lease Report. For those interested, it is here.

The second edit expresses its disappointment at the Supreme Court allowing extension of reservations for OBC, SC and ST beyond 50%. I cannot agree more.

In the same breath, one has to mention the MINT edit on the Supreme Court upholding the legal requirement of Indian political parties having to swear loyalty to socialism. While the Supreme Court decision in favour of dropping that requirement might only have been symbolic, it would have made many sit up and take notice. It would have been a blow against the hypocrisy of India’s political parties. The two concluding paragraphs of the Edit are worth mentioning:

Unless the political class embraces a system of ideas and sheds its duplicity, it’s only encouraging apathy. Given that India’s left and right joined hands in a bandhthis month solely to posture against the Congress, perhaps that day is still distant.

Who can blame the middle class, then, for staying distant too? As far as it’s concerned, there are no accessible candidates who speak the language of ideas, especially the ideas that it’s starting to understand— those of free markets and free people. [More here]

I cannot agree more with the first para cited here. The BJP was as bereft of ideas and imagination as it was predictable for the Left to protest. The second paragraph can be debated and discussed ad nauseam/ad infinitum.

T. N. Ninan makes his point to the left-of-centre brigade in India with his characteristic subtlety and understatement. But, it is no less effective. He raises the question of whether efficiency improves equity in outcomes with an implicit suggestion that it does. I agree  – certainly, from the current starting points in many contexts in India.

Dylan Grice’ summer reading list

FT Alphaville has a post on the summer reading recommendations of Dylan Grice of SocGen whose name has appeared frequently in these pages. Among the books he suggests, I read ‘Lords of Finance’ last year and it did leave a big impact. I have commented on it more than once in this blog. Among his ‘To Read’ list, I have Raghuram Rajan’s ‘Faultlines’ myself. Yet to start. I have Matt Ridley’s ‘Rational Optimist’, Atul Gawande’s ‘Checklist Manifesto’ too, to read.

I have read this year, Yasheng Huang’s ‘Capitalism with Chinese Characteristics’. Very intense and not-so-easy read but full of insights. Read Seth Godin’s ‘Lynchpin’ – brilliant in parts. It is a small book. It talks about how employees can become lynchpins to their organisations. Read and finished finally ‘Animal Spirits’ by Akerlof and Shiller. Very, very laborious. Could have been a lot more cogent. Read James Tooley’s ‘Beautiful Tree’ – a very good book. Recommended reading for those interested in development and on figuring out how to go about finding answers for development questions – not from arm-chairs but from empirical work/field work and data gathering.

I must mention the book that had brief biographies of 21 great South Indian Classical Musicians. It was marvellous reading. Some of them lived a life of high principles (Madurai Mani Iyer). Many were lavish. Many were generous (Sembai, GNB). Most wives of male artists were extremely accommodative of their husbands’ preferences and disciples. They willingly participated. It is also clear that, while there were many anecdotes of jealous and small minds, most acclaimed artists did not hesitate to share all that they knew when they spotted talent. A truly marvellous book for those interested.

American exceptionalism

I fully endorse this Lexington column in ‘Economist’. It is about time America hunkers down to do some real work. The real reason for the crisis was the mistaken perception that the economic boom of the 1980s and 1990s was due to their policies rather than a serendipitous combination of factors. That is what gave them the confidence that all risks would be automatically taken care of, now that they had moderated the business cycle itself and that they could turn on and off the monetary spigots as they wished ,without consequences. Even now, there is no sign that the message has been grasped.

New Indian rupee symbol

Came across the new symbol for the Indian rupee in the Business Line.  It looks like a mix of Euro (mirror image), pound sterling and yen. It can also be thought of the mirror image of the ‘hammer and sickle’ symbol of the Communist Party of India (Marxist).

The new symbol, which is a blend of the Devanigiri ‘Ra’ and roman ‘R’, has been designed by Bombay IIT post-graduate Mr D. Udaya Kumar and approved by the Union Cabinet today. Mr Kumar’s design was selected from amongst 3,000 entries received in a public competition. The entries were evaluated by a jury headed by the RBI Deputy Governor.

China has it under control

No matter how much China ascends on the global stage, its statistics continue to befuddle market participants. China released its first half growth figure but not the second quarter growth figure.  In the first quarter, GDP grew 11.9% y/y and now in the first half, GDP is said to have grown at a rate of 11.1% y/y. Of course, it is not difficult to estimate a q/q figure, based on this. But, one can understand the extent of difficulty from this statement:

China publishes growth figures on a year-on-year basis but does not release a sequential, seasonally-adjusted growth figure which would give a more accurate impression of the direction of economic activity.

Private sector estimates vary considerably, with Goldman Sachs putting the implied quarter-on-quarter growth rate at 8 per cent on an annualised basis, while Standard Chartered estimated a growth rate of 10 per cent. [More here]

Stephen Green of Standard Chartered thinks that they have managed to cool the parts of the economy that they had wanted to cool, without derailing the overall growth momentum. In the absence of evidence to the contrary, we should take his words at face value.

In essence, there would be a lot of speculation on where Chinese economy is headed – is it slowing down or is it overheating, whether it is now more domestic demand led or still captive to global demand, whether property sector is cooling or is it still red-hot, etc.  Perhaps, China prefers it this way.  Investors do not seem to mind for now since the country has a huge population base, fast economic growth, appetite for technology, etc. Once growth slows – in five years’ time to around 60% of the current growth rate – then, it can no longer get away with the current degree of opacity and non-transparency.

To be sure, all countries take liberties with their statistics these days – more so, than before. Even the media, donning the nationalist mantle,  package them differently. For example, US retail sales dropped for the second month in a row. But, excluding auto and gasoline sales, they did well!

Here is a sample from Wall Street Journal online news-alert:

U.S. retail sales tumbled again in June, threatening to drain steam from an economy saddled with high joblessness. Sales fell 0.5% from the previous month, the Commerce Department said. Excluding auto and gas sales, though, sales rose 0.1%. [No link]

In other news, China continues to adopt tactics consistent with its long-term goal of becoming the world’s pre-eminent power. Sample these:

PetroChina, China’s largest listed oil and gas producer, says it would “welcome” closer co-operation with BP as the embattled UK group struggles to cover liabilities arising from the Gulf of Mexico oil spill disaster. [More here]

German export upswing – partly caused by a weaker Euro at the margin – is attributed to China, not by commentators but by the exporters themselves:

“Without China we would hardly have seen this recovery – it’s a frightening trend,” said Hannes Hesse, managing director of the VDMA engineering association. Demand for textile machines was “almost exclusively” Chinese.

“Demand?” said Diether Klingelnberg, chairman of Klingelnberg, a maker of machine tools based near Cologne. “It’s China, China, China by a long way, then India, Brazil, then Russia – and the US remains weak, as do many of our European markets.” [More here]

The story below is fascinating and gives an excellent insight into the psyche of China itself and the extraordinary obsession it has, with the goal of becoming the top-dog. Westerners, forgetting their own stories of stealing, bribing and violating IP on their way to the top (read ‘Kicking the Ladder’ by Prof. Ha-Joon Chang of Cambridge University), would shake their heads vigorously in disapproval. Indians, part in jealousy and part in frustration, would try to paint themselves as morally superior to the Chinese. Both reactions would be spurious and wrong:

It is a lesson on the risks for foreign companies doing business in China.

Japanese executives lab-oured for years to persuade Beijing to choose their Shinkansen system to cut travel times between cities.

But Chinese officials played them off against other foreign suppliers in order to acquire the technology and expertise needed to create their own high-speed rail sector.

Celebrating the introduction of its first high-speed trains in 2007, the railway ministry crowed that Sifang and other state-owned companies, working with Bombardier of Canada, Siemens of Germany and France’s Alstom, had managed to acquire their high-speed rail technology at a cost “clearly below” standard prices.

Now KHI and fellow 2004 consortium members including Mitsubishi Electric and Hitachi can only watch as Sifang wins itself a leading role supplying rolling stock to a Chinese high-speed rail network expected to grow to 16,000km by 2020. [More here]

Of course, all the short-cuts would amount to nothing if it was not backed up by industriousness and intelligence:

A Japanese executive familiar with the 2004 deal says members of the KHI-led consortium realised the deal could help give China a start in the industry, but they “could not imagine” the catch-up would be so fast. [More here]

Lastly, FT’s China Confidential (available only for subscribers) documents the improvements happening in rural finance in China along with enhanced trade between holders of rural land-use rights and those who want them. It is unlocking rural purchasing power too, besides the increase in minimum wages.

From what one gathers superficially, China’s rural credit co-operatives and ‘Village and Town Banks’ lend to small and micro enterprises too. If this is true and if it is beginning to gather critical mass, it is a huge step-up over India’s microfinance sector that focuses on lending to individuals. China, in other words, is doing what my guest-author Satyan Mishra recommended for India’s Micro Finance Institutions (MFIs) here.

To get it all in one place, I should remind readers of the good work that their public education system is doing, compared to its woeful state say, in India and other developing nations.

Or, for that matter, this comment by Mckinsey analysts on their urban planning in contrast to India’s lack of it:

While India has barely paid attention to its urban transformation, China has developed a set of internally consistent practices across every element of the urbanization operating model: funding, governance, planning, sectoral policies, and the shape, or pattern, of urbanization, both across the nation as a whole and within cities themselves.

India has devolved little real power and accountability to its cities, but China’s major cities enjoy the same status as provinces and have powerful political appointees as mayors. While India’s urban-planning system has failed to address competing demands for space, China has a mature urban-planning regime (emphasizing the systematic development of run-down areas) consistent with long-range plans for land use, housing, and transportation.

The starkest contrast between the two countries is that China has embraced and shaped urbanization, while India is still waking up to its urban reality and the opportunities that its cities offer for economic and social transformation. [More hereyou may need to register with Mckinsey Quarterly to read this article in full]

Stringing it all together, one gets the impression that China is under control of its destiny, for the moment and, chinks, if any, appear in its macro rather than the micro, contrary to what is widely believed. Its problem areas have arisen from its command-and-control model of managing macro-economy without letting prices send the right signals to all stakeholders.  If they do not fix it in short order, it has the potential to cause a big setback that all obfuscation cannot conceal.

But, I think they know it.

Popular delusions

I have shamelessly borrowed the title used by SocGen’s Dylan Grice for his weekly (?) comments on financial markets, economies and their interaction with human psychology. These are available only to clients of SocGen. He is becoming a MUST READ.

In one of his recent pieces, he has cast doubts on the long-term sustainability of fiscal austerity in Europe, in the absence of off-setting ameliorative factors such as economic growth and unemployment available from, say, external demand. The oft-cited examples of Sweden and Canada in the 1990s occurred at a time when global growth backdrop was supportive and currencies could be weakened substantially without retribution. Europe cannot do that, beyond a point.

The most famous example he cited was that of Mrs. Thatcher who rode to office on the popular discontent with labour unrest and deteriorating public services. She promised tough love. Within three years, her popularity had plummeted and economists wrote open letters asking her to ease up on her tough love. The Argentine miscalculations on the Falklands rescued her government.

Nonetheless, ‘Economist’ appeared to bolster the Euro-optimists:

Crucially for those who believe in a happy ending to this crisis, voters seem made of sterner stuff than politicians feared, and can also see the need for structural reforms. Between 2005 and 2030 the working-age population of the European Union will shrink by 20m, and the number of those over 65 will increase by 40m. Thanks to the focus on crumbling public finances, that demographic time-bomb is now a common part of European public debate. Governments in places like Britain or the Netherlands have been able to propose paying pensions at 67 or even 70, without angry protests.

Even in France, where most voters told an opinion poll in June they considered a proposal to increase the retirement age to 62 “unjust”, few dispute the idea that the current state-pension system faces insolvency. The left and right merely disagree about who should pay to fix this. In Greece, the most disruptive strikes have been staged by hardline Communist trade unions, with larger unions showing some restraint. The press, meanwhile, is filled with commentaries about how the country must live within its means, and how much things must change. [More here]

However, an interesting post at ‘Big Picture’ once again reinforces the sceptics. The source of the post and the charts therein is a FT article. Europeans support spending cuts but via cuts in overseas aid and defence. They do not want austerity to touch government spending on health-care and education.  Nothing wrong with that except that there is not much to cut in overseas aid.  In other words, the jury must be out on whether austerity works until it starts to bite.

China’s sovereign ratings

More to follow on China where the story is getting better. But, that has to wait. Good friend Nitin Pai alerted me to the sovereign credit ratings issued by a China ratings agency. They have a good website too.

That is smart. Very smart. US and UK get AA ratings (latter AA-) with a negative outlook. China gets one too (AA+) with a stable outlook. India gets BBB with a stable outlook. Full release here. This is the way to go for Asia, if it has to become a dominant region. GDP alone does not do it just as nuclear bombs and missiles alone did not do it for U.S.S.R.

US unemployment

A sign of times that former Intel Chairman and CEO Andy Grove had to write a piece like he did in BusinessWeek. The magazine, it needs reminding, is now owned by Bloomberg. Tax on off-shore output is his proposal:

Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations…. If what I’m suggesting sounds protectionist, so be it. [More here]

He may be on to something here when he comments on the undervaluation of manufacturing.

How could the U.S. have forgotten? I believe the answer has to do with a general undervaluing of manufacturing—the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs.

More accurately, it was overvaluation of service sector jobs and career relative to manufacturing – consulting, banking, broking and insurance, not to mention the knowledge economy. But, the key hypothesis that he is stating is here and that can be verified:

Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry.

His hypothesis is that offshoring commoditised manufacturing breaks the chain of experience needed for technological evoluation. Is that the case? If not, his case for taxing product of offshore labour stands dismissed. I think he stands on a weak wicket. Or, does he?

This article from ‘Washington Post’ could not have assuaged his fears one bit:

Centuries after it led the world in technological prowess — think gunpowder, irrigation and the printed word — China has barged back into the ranks of the great powers in science. With the brashness of a teenager, in some cases literally, China’s scientists and inventors are driving a resurgence in potentially world-changing research.

Vivek Wadhwa refutes Andy Grove with this claim:

The Kauffman Foundation’s analysis of Census Bureau statistics shows that net job growth in the U.S. economy occurs only through startup firms. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new outfits in their first year added an average of 3 million jobs annually.

I am not sure Andy Grove was exactly calling for protection of established American companies although his proposal, in reality, might amount to that.

Why are they both silent on the vast quantities of money, compensation and wealth that American executives and the wealthy have accumulated for themselves? Check this out:

The income share of the top 1% of the population went from around 12% to 21%; the next 19% saw their income share rise a princely 1% from 39% to 40% and that of the bottom 80% saw its income share drop from around 48% to 39% [More here]

CEOs’ pay as a multiple of average worker pay is still at 344 times, although off from a peak of around 531 times, it is still far removed from the ratio of 42 times in the 1960s. The article claims that a comparable ratio in Europe is 25:1. [More here]

The emphasis on shareholder value has been a smokescreen to chase short-term stock market performance since most executive pay is linked to the performance of the common stock of the company. The best way to boost stock price is to retrench workers. No wonder American corporations are flush with cash today.

A true capitalist has no concerns with people becoming rich through the sweat of their own labour but a system in which an executive with no interest in the long-term future of their corporation can obtain rewards in a few years that ensure a life of ease and comfort is a perversion of the whole idea. Capitalism is about rewarding those people who put in the hard yards and get a few breaks – not about offering huge windfalls to greedy executives who happen to ascend the greasy pole. [More here]

I am very impressed with the recently discovered PsyFiTec Blog (ht: Paul Kedrosky). The quote above is taken from this blog.

I like Felix Salmon’s comprehensive post on the US unemployment. I think he is right, in the American context, when he talks of giving labour unions more recognition and power:

Without unions and minimum-wage laws, corporations compete on who can pay the least. With them, they compete on who has the best employees and they invest significantly in those employees. Which is exactly what we want, especially since raising the minimum wage is unlikely in and of itself to increase unemployment visibly. [More here]