Malicious Times

This is Victor Mallet’s (of FT) coverage of India’s flood relief response efforts in Jammu & Kashmir. This is the coverage in Bloomberg. Not that Bloomberg’s was scrupulously fair and objective – there was no need to talk about 2002 here – but it certainly was miles ahead of FT’s blatant bias and one-sided reporting with no attempt to verify allegations and innuendoes. Sample this:

Hameeda Bano, a professor of English and women’s rights activist, talks of “a deliberate genocidal attempt by the government of India”. Her husband, Nayeem Khan, a politician who heads the Jammu and Kashmir National Front, echoes local complaints that the Indian security forces, with their helicopters and boats – who say they saved nearly 200,000 people – rescued their own troops first, followed by Indian tourists and construction workers from Bihar and Uttar Pradesh, and ignored Kashmiris except for a few sorties for the benefit of television.

Such reporting is repetitive, tiresome and sickening. The intent of the West is as transparent as water and their sincerity is as transparent as mud.

Coming soon after his report on the allure of Modi fading  for foreign companies, he could consider changing his name to Victor Malicious Mallet.

Useful blog sites on China

I would recommend this site ‘Investing in China stocks’ for a good dose of reality check on China’s macro and other developments. Just the other day, I had posted a chart on declining FDI into China. That was from this site. The falling FDI (negative Y/Y change) is consistent with what I read elsewhere that major international brands were postponing expansion or even closing down their existing stores. They are not renewing their leases (Gucci, Swiss watchmakers, etc.).

This chart too is a tell-tale chart:

Here is the link. Well, this chart itself appears to have come from another site. This post has several other interesting charts.

The concluding lines in that post are worth thinking through:

Japan, USA, Europe and China all took turns to be the engine of the world economy between 1980 and 2010 but now we are engineless until circa 2020/2025. By demographics that means a global deflationary recession, or a depression. Passing through the solar maximum here in 2014 should produce dwindling speculation and economic activity and nudge the stock markets and world economy over the edge, feeding off each other.

I would say ‘Amen’ to that.

Intellectual clarity

The RBI Governor has completed one year at the office. The hype has subsided. When he took office, he came as a breath of fresh air in an atmosphere that was depressing and made depressing by the previous UPA government. Now, he is not in the centre of things. Perhaps, he would welcome it. His interview with Tamal in MINT was a good one. His comment about the eco-system that breeds corruption and deliberately bad lending decisions in public sector banks hit the mark very well:

You are demanding a huge amount of honesty in the system when you put people in charge of Rs.5-10 trillion of assets, give them absolute command, and tell them they are here for one or two years. If you give them that kind of structure—low salary, absolute command and a limited time period—you are creating a perverse incentive. The people who stay honest in the system are showing that it can be done, but the system has to be such that you recognize the temptation and you don’t require somebody to be above average in terms of honesty in order to stay honest in the system.

Also, he showed remarkable intellectual openness in minimising the role of ownership in banking.

But in the meantime, if I had absolute power, I would perhaps let one small public sector bank be privatized and see what happens. Learn from that….. To my mind, however, ownership is relatively a small aspect if you have the right governance.

This is not a flip-flop. If one read the Indian version of ‘Faultlines’ (I did it during my two months of back and forthing between Bangalore and Singapore in June-August this year), one would notice that he has been consistent. Even in that book, he described himself as a pragmatist rather than a capitalist or a free-marketer. This blog has consistently argued that economic policy-making would be a lot better if it was not bogged down by ideology. Economic policy-making has to be empirical and not ideological.

In fact, in that book, he had interestingly proposed that policies dealing with early stages of life (infants and children) could be more interventionist and welfare-oriented whereas policies dealing with adults could be more laissez-faire or market oriented. He explains the logic for this duality quite well. It makes sense.

(Postscript: I was invited to share my thoughts on his stewardship at the end of one year in the programme, ‘Macros with Mythili’. It was recorded on 3rd September. It was posted on the Internet this (19.9. 2014) morning, I guess. Here is the link. Dr. K.C. Chakraborty was the other discussant with Ms. Mythili Bhusnurmath.)

Derivatives in Indian Equities Markets

First, my co-author Dr. T.V. Somanathan and Praveen Chakravarty wrote an Op.-Ed. in Business Standard in July on the rising volumes of derivatives trading by retail investors in Indian capital markets. They concluded thus:

Economic growth in India, driven primarily by private enterprise, requires large amounts of capital. Channelling India’s high household savings to such productive economic purposes is prudent. Appropriate taxation and other policy measures to wean retail investors away from risky, unproductive derivatives, to investing in primary and secondary markets will augur well and be the harbinger for healthy equity markets.

[Disclosure: I am the co-author of a forthcoming book, ‘Economics of Derivatives’ with Dr. T.V. Somanathan]

One would have thought that this statement was on par with ‘Motherhood’ and ‘Apple Pie’. Not quite.

Ms. Susan Thomas wrote a rejoinder to Praveen and Somanathan. In my view, her article did not make any substantive point. Most of her statements about the usefulness of derivatives (e.g., price discovery, a short-cut to overcoming funding constraint) were theoretical in nature and were not backed up by any proof in the Indian context.

Praveen Chakravarty, Ajit Ranade and I wrote a piece in MINT, pointing out that the ratio of derivatives trading vs. cash-market trading was well in excess of what was recommended by the L.C. Gupta Committee on Derivatives. We certainly did not propose any ban or restrictions but recommended spraying a bit of sand in the wheel of speculation.

Surprisingly, Mobis Philipose, a full-time journalist with MINT waded into the issue. I wrote a detailed response to the piece by Mr. Philipose. It is too long to be posted here. Here is the link:

A response to Mobis Philipose on Derivatives trading in Indian equities

Frankly, in our article in MINT, we had not said anything that the reports on Financial Stability issued by the Reserve Bank of India have not said. You can read what the RBI has said in my note linked above. World over, the crisis of 2008 has prompted remedial action. The complacency among capital market participants in India on the extensive use of and trade in derivatives is surprising, to say the least.

India’s ESP

That was the theme of a recent article in Wall Street Journal. Now, we can easily detect the article’s bias. The picture chosen for the article also gives the bias away. We can also justifiably question the sustainability of China’s boom, built on debt. In that regard, readers should bookmark this site. For example, check out this graph. I am giving a thumbnail below for easy viewing.






But, we are digressing. If we focus exclusively on the Indian challenges mentioned in the article, one has to admit that the list is very formidable and accurate. We should recall James Tooley’s brilliant book, ‘The Beautiful Tree’. While many other countries had India’s problems with primary education, China was an exception. Regardless of how China fares from here on (and it won’t be pretty, at least for the next five years), India’s education challenges are very, very serious.

PM Modi’s USP has to be ESP – Education, Sanitation and Power.

Market Mania

Some interesting links on financial markets. At the end of it, you can draw your conclusions.

This Reuters news-item features comments from the latest BIS Quarterly Review. I am yet to read the Review. BIS is concerned about elevated asset prices and holds ultra-loose monetary policy responsible for it. BIS also warns of the risk of low volatility and portfolio shifts by asset managers for Emerging Markets.

OECD has reduced growth forecasts for the world economy and Europe, in particular, for 2014 and 2015. Still 1% real GDP growth for France in 2015 is excessively optimistic.

Goodbye to capitalism and hail Financial Engineering – WSJ article on Share Buybacks by US companies.

47% of Nasdaq stocks are at least 20% below their peaks in the last twelve months. Same goes for Russell 2000 stocks. [Link]

Mohamed El-Erian questions the market’s rose-tinted glasses. I think it is more like investors are blind to certain things completely.

Martin Hutchinson on the death spiral of capitalism [Link]. There should be no doubt as to which way policy-makers will turn when asset prices crash.

Re-run in Europe

I have been reading Yanis Varoufakis seriously lately and have all but finished his ‘Global Minotaur’. It is an excellent political economy explanation of the trajectory of the US economy and the rising importance of Finance (aka Wall Street) in the last three + decades. However, he fails to persuade me when he trumpets the same prescription for Europe. My disagreement with or, rather my scepticism of his prescription for Europe formed the nucleus of my column in MINT on Tuesday.  The two-year respite for the Eurozone appears to be over. Check out this link from Bloomberg about the election outcome in Sweden:

The outcome is the latest in Europe to see voters flocking to parties that channel angst about greater immigration, Islam and creeping globalization. In France, Marine Le Pen earlier this year won 26 percent in European parliament elections. In the U.K., David Cameron is facing an insurgency from the U.K. Independence Party. And in Germany yesterday, an anti-euro party swept into two eastern state parliaments. [Link]

Check out this development in Germany too:

Alternative for Germany swept into two eastern state parliaments yesterday, championing positions from breaking up the euro area to promoting three-child families and fighting crime on Germany’s eastern border. The party, known by the initials AfD in German, took 12.2 percent in Brandenburg and 10.6 percent in Thuringia after winning its first state seats in Saxony last month. [Link]

Professor Robert Shiller, in his latest article, draws a parallel with 1937. Well, more people are beginning to realise that a re-run of the events that led to the First World War and/or Second World War is beginning to take shape. We should remember that history does not exactly repeat itself but rhymes. This one appears to rhyme rather too well, for our comfort. It might be an exceptionally difficult 2015 for the world. I had alluded to this in two of my MINT pieces. You can read them here and here.

Thin and specious

Mr. Ninan calls Dr. MMS unlucky. It fails the test of empiricism. He enjoyed – for no ‘fault’ of his – five best years of economic growth between 2004 and 2008 (up to third quarter).  He then was presented with a collapse in the price of oil in the second half of 2008 and in 2009. He did not have too many monsoon failures to contend with (just one?). He inherited a good and stable fiscal and external deficit positions.

Unfortunately, PM Modi has not been so lucky. PM Modi had inherited an economy that was set back by several years, if not decades, by the outgoing administration. It is still reflected in poor numbers on Industrial Production.

Also, towards the end of his article, Mr. Ninan presents Dr. Reddy’s argument somewhat incompletely. Dr. Reddy, if I recall, advocated a balanced current account over a full economic cycle in his keynote speech at the annual NCAER conference in 2012. He did not call for elimination of current account deficit year after year, if I recall correctly.

Another thinly argued piece is this one in FT. It notes that the allure of Modi is fading for foreign investors. Provides no new or incremental information to back up this claim.  The problem with this article is that it deals with telecom mess and Coalgate. Both are UPA legacies. The comments by Marten Pieters has nothing to do with the NDA. It is a continuing mess.

For example, read Devangshu Datta’s article in ‘Business Standard’. It does a good job of cataloguing the issues that bedevil India’s power generation, distribution, availability and its viability, finally. The solutions are all not necessarily in the hands of the Centre alone. If States do not allow their power producers to price power economically and to sell to those who can pay for it, then the chain of problems builds up backwards all the way up to Coal India too. It is a big and messy legacy issue.

If one surveyed the global economy today, there are not too many economies for the MNCs to go to, frankly. They can beat the China drum but there is no sound any more. It is hollow. The FT articles is, thus, yet another example of Western pressure tactic without substantive content.

Common Convictions

In his Op.-Ed. in the Wall Street Journal, Henry Kissinger talks of the need to forge a contemporary structure of international rules and norms based on common conviction. He does not offer concrete and credible ways to bring that about. Not blaming him because, surveying the geo-political power balance, one can easily conclude that it is not going to be easy. The main reason is that the United States is not the same power as it was in the last millennium.

So, how to create a common conviction that gives rise to a ‘contemporary structure of international rules and norms’? In my latest MINT column, I suggest that the comity of nations (G-20?) must agree on certain facts and behaviour. I list them. They sound utopian, of course. So, what would bring that about? A crisis that creates more trouble – economic misery and social strife  – will force nations to bang their hands together. But, there will be pain before that. It almost becomes a pre-condition for co-operation.