Market efficiency, anyone?

Having watched the stock of his company appreciate nearly 14-fold during the dotcom bubble, and then collapse 95% during the bust, Sun MicroSystems Founder Scott McNealy was bemused that investors ever considered paying what now looks like a rather diminutive 10 times sales for the computer hardware company’s stock at its peak in 2000.

Why? This is what he told Businessweek in 2002:

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realise how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking? [Link]

The above is worth recalling as stocks scale new highs in the United States. Are private markets faring any better? No. They are delivering superior returns through financial engineering, says this article in FT (ht: Gulzar).

Who is responsible for this? Central banks with their zero interest rates and QE policies. What are they doing now? They are doubling down on both.

Do not know when but it is not going to end well.

What does the record high for S&P 500 stock index mean?

The day after the S&P 500 scaled new heights (it did so on Oct. 28), it is a coincidence that I stumbled up on a review of three new books on Capitalism and Inequality by Edward Luce for FT.

The review was written on 9th October 2019. So, it has not become irrelevant.

The following observations from ‘Bloomberg Opinion Today’ dated October 24, 2019 is particularly relevant in the current context:

WeWork: What Have We Learned?

There is really no more 2019 story than the story of WeWork.

This one has everything: A corporate leader in the mold of L. Ron Hubbard vaporizes piles of a billionaire’s dollars and still walks away a billionaire himself, while thousands of his former employees angrily wait to be fired, just as soon as the company can scrape the cash together to give them severance — though it did manage to prepare severance packages for the CEOs. And people wonder why socialism is in these days.

WeWork, now formally The We Co., yesterday took a bailout offer from its top investor SoftBank, the vehicle of that first billionaire, Masayoshi Son. Softbank has kept throwing money at We even as the commercial real estate startup’s imaginary valuation shrank from $47 billion to $8 billion. Now it owns the bonfire. But through the magic of accounting, SoftBank gets to control WeWork without technically “controlling” it, meaning it keeps the bonfire from lighting up the rest of its balance sheet, write Tim Culpan and Shuli Ren. 

Son will probably be fine. And aside from the WeWork employees about to lose their jobs, it’s easy to laugh at this wild story because it won’t have much impact on the rest of us. We could even, as Matt Levine does, call We founder Adam Neumann basically a financial hero for spotting a market imbalance, located somewhere in the nexus between Masayoshi Son’s brain and wallet, and profiting from it.

But there’s a broader and somewhat scarier lesson to take from this too, writes Mohamed El-Erian, one about how a decade of easy money and a desperate need for yield keeps pushing investors to take ever-bigger risks. The longer this goes on, the more inclined we become to ignore stuff like a company founder locking up control for 300 years. We have met the enemy, and We is us. [Link]

Edward Luce in his review (attached) wrote: “No system, whether liberal or illiberal, can tolerate plutocracy indefinitely.” [Link]

But, plutocracy is now planning space trips for the summer!. Check out the article in FT on Virgin Galactic’s USD2.3bn valuation at public launch. Do not fail to read the comments under the article.

Tax cut, the stimulus effect and other links

The Financial Times had the following header, “Sugar rush from India’s tax cut starts to wear off” in an article yesterday. The contents were less negative. Stock market euphoria might or might not fade. But, the medium-term positive impact on corporate cashflows and hence on investments will be there. It might take some time.

Abhijit Banerjee, one of the winners of the Swedish Riksbank Prize for Economics, had wanted India to roll back the corporate tax cut. He has argued that the sure way to boost economic growth is to put money in the hands of the people and that the resulting higher demand would boost investments. Fair enough.

But, whether tax cuts for big businesses are an unfair advantage conferred on big businesses are entirely a matter of context. In the Indian context, the tax cut offered seems par for the course. The best response to the point put forward by Abhijit Banerjee came from R. Jagannathan, Editor of Swarajya, through his regular column (‘Arthanomics’) for Mint. He had explained beautifully as to why, in the Indian context, the corporate tax cut was not wrong and that higher taxes would not be welfare-enhancing. It is an important read.

Now, back to the context of this blog. I came across this review of the recent book by Piketty (ht: Ramagopal). The review was somewhat short and ended abruptly but it had an important statistic:

Per capita income growth was 2.2% a year in the U.S. between 1950 and 1990. But when the number of billionaires exploded in the 1990s and 2000s — growing from about 100 in 1990 to around 600 today — per capita income growth fell to 1.1%. [Link]

Piketty has a point about extreme inequality. But, I am not sure if forced redistribution would work simply because political economy forces would not allow the redistribution to happen. There is a moral hazard. Nations can cheat and allow tax arbitrage even if they agree on harmonisation of tax policies and rates.

OECD’s proposal for taxing the income of multinationals would be an important step forward, if it came about. In fact, this could be one of the most far-reaching tax reform to be proposed in recent years. Without that, redistribution of surplus between labour and capital would be a non-starter. However, it is chastening to note that OECD has been at it at least for six years if one went just by the first page hits when one searched for ‘OECD TAX PROPOSAL’

This F&D article (somewhat long) has a very useful overview and a wealth of links to pursue. It links tax-havens and tax-evasion to ‘Too much finance’. In other words, the jurisdictions that are willing to act as tax havens end up suffering from the ‘Finance’ curse.

One wonders if the post-Brexit Britain wants to or can double down on its role as a financial/tax haven?

Swedish Riksbank and poverty

The 2019 Swedish Riksbank prize for three economists who have done extensive work on poverty and how to deliver poor out of poverty has attracted a lot of attention, pride and noise in India because one of them is an Indian-American. One understands from newspaper reports that he is an American citizen.

This blog has never really commented on the annual prizes awarded to economists every year. It is not mandatory. The only time I had a strong feeling against the award was when Eugene Fama was given the prize in 2013 for his work on (financial) market efficiency.

These prizes are judgements of people in a committee. So, disagreements of outsiders with the committee’s judgement, on occasions, should not be a big surprise nor a source of disappointment or anger on the part of those who happen to agree with the Committee’s decisions.

Those who disagree have no reason, however, to conclude that the committee made incompetent decisions because the committee, arguably, pores over far greater information and spends a lot more time deliberating than those who take to twitter to vent their disagreement and even anger at the choices. That is unhelpful.

Much of the anger stems from the political stances taken by some of the recipients. But, the Riksbank Committee does not give them awards or deny them awards for their political views. So, questioning the decision because the recipients hold different political views is unreasonable. 

Some of the past awardees, on their part, have ‘monetised’ their award by espousing strong political views. The moment they enter the political boxing ring (or, the cesspool), then they should be willing to trade blows The discourse is not often civil in such spaces. But, they cannot complain because they chose to enter that arena.

As for the awardees this year, I have not followed their work that closely to make rigorous observations. Interested readers should refer to the ‘Urbanomics’ blog of my coauthor Gulzar Natarajan. You can sample this blog post of his. 

The quote attributed to Arvind Subramanian by Devesh Kapur (ht: Gulzar’s post above) in this article is worth recalling:

When asked how many of these expensive RCTs had moved the policy needle in India, Arvind Subramanian, Chief Economic Advisor, GOI, was hard pressed to find a single one that had been helpful to him in addressing the dozens of pressing policy questions that came across his table. By contrast, the compiling of just some key facts on learning outcomes by Indian NGO, Pratham, has had a big impact on policy discussions in education, because it is backed by a degree of specific knowledge and engagement that is more credible and persuasive. [Link]

On my part, I will simply use the occasion to highlight some other related issues which may or may not be directly relevant to their work.

At the core of the Randomised Controlled Trials (RCT) is the belief that, somehow, it is possible to make Economics a physical science by following the controlled experiments that are eminently doable in physical sciences. But, facts and behaviour in social science are embedded in contexts. They are inherently not falsifiable. Hence, not sure if RCT could capture all the nuances. Consequently, the reliability of the conclusions drawn from such experiments might be suspect.

The second point is that most economists do not keep in mind the asymmetric and non-linear nature of the relationships between economic variables and between causes and effects are asymmetric. That gives rise to the law of unintended consequences (=road to hell being paved with good intentions). For example, see this story on microlending in Sri Lanka gone awry. 

While the story of microlending in Sri Lanka need not be a case of the law of unintended consequences, it is a case of the gap that exists between goals/intentions and real-life outcomes.

It is useful to ask why economic relationships are asymmetric and non-linear? Because, humans are. Loss aversion is a classic example. We value what we don’t have and once we have it, its value goes down. That is asymmetry. This has implications for policymaking.

When folks tell surveyors that they value something and would be happy and better-off if provided, one can never be sure that they would value it as much if given and, hence,  the effect may not be what policymakers expected.

Reason why economic relationships are asymmetric and non-linear is that there are only few positive factors but several hygiene factors that influence human behaviour. Hygiene factors matter only in one direction. Positive factors do in both directions. But, hygiene factors far outnumber positive factors in our lives.

However, on balance, any research or methodology that challenges conventional wisdom on an important topic such as human impoverishment and raises fresh set of question must be deemed useful. The work of the three winners of the Swedish Riksbank prize for economics in 2019 passes that test.

Postscript: The World Bank published a report called ‘Voices of the Poor’ in 1999-2000 that simply listened to them. You can find it here.

Quest for jobs

The project that started in 2018 finally attained its logical conclusion two days ago. On Wednesday, Carnegie India published the joint paper that Gulzar and I began writing last year on how to view entrepreneurship as an answer to India’s job creation.

We dispel some myths along the way that India’s MSMEs are its strength. We see them more as a reality to live with – especially the micro-ones. They are subsistence enterprises.

The small and medium enterprises have to be allowed to grow. We outline some policy measures. The more often that I read it, the more I am pleased with the practical and pragmatic suggestions we have made. They are not dramatic and headline grabbing stuff but they are likely more effective.

A colleague asked me if we had used a Research Assistant to collect and compile so much of information. I proudly answered her that it was all our effort! No external assistance.

The full paper is available here. It is an easy read. has published excerpts [Link]

Tim Taylor, Managing Editor of the Journal of Economic Perspectives has written a detailed blog post on it. He had also commended our ‘Can India grow?’ book, when it was published in November 2016.


In this regard, it is encouraging to note that employment in India’s factory sector had grown at nearly 5% in 2017-18. This is based on provisional tables from the Annual Survey of Industries 2017-18. You can see the provisional tables here and the important Table 7 here.

How to place this near-5% growth in jobs in the factory sector? Pramit Bhattacharya’s article in Mint helps us place this growth estimate in context:

The latest numbers on annual growth of workers (4.8%) and managers (4.5%) do not qualify as a boom. The last factory jobs boom India witnessed was in the 2004-08 period, when the blue collar workforce grew at an average annual pace of 8%. In the four years leading to fiscal 2018, the average growth rate was much more modest at 4%.

However, the boom phase was preceded by a sharp contraction in the factory workforce in the years leading up to the boom. In four of the five years between fiscal 1999 and fiscal 2004, the factory workforce actually shrank in size. As a result, a part of the boom that followed merely replenished the diminished stock of workers across India’s factories.

It is an encouraging sign that we do have the capacity to generate manufacturing jobs. It shows that if we do really take a sledgehammer and a scissors to all the ‘Unease of Doing Business’, India can dispel the myth of ‘premature industrialisation’.

The policy proposals we had identified are our important contribution to India’s quest for jobs.

The Chinese exceptionalism at 70

Ruchir Sharma, chief global strategist at Morgan Stanley, has found that since 1950 there have been 43 cases in which an economy grew at an average annual rate of 7 per cent or more for a full decade. A full 35 of these booms — or 81 per cent — took place under an authoritarian government.

The story does not end there. Mr Sharma also found that over a longer time-frame, autocracies tended to lose their way either through sudden policy reversals or the leaden hand of the state.

Democracies, by contrast, generate stabilising effects that produce slower but more dependable growth. The stabilising effect of democracy . . . accounts for a simple fact: every large economy that has seen average per capita income grow to more than $10,000 is a democracy,” says Mr Sharma. China, with an average income approaching $10,000, is trying to become a large, rich autocracy but it would be the first. [Link]

Sometimes, we create our chances

A delightful story from the Nikkei Asia Review

Historic discoveries occur by chance. It was December 1982, and Yoshino’s workplace was undergoing a year-end office cleaning. With nothing to do that afternoon, Yoshino picked up an overseas research paper that he had ordered a while ago but had not had a chance to read.

Flipping through the pages, Yoshino came across a surprise find. John B. Goodenough, an Oxford University professor, had written in a 1980 paper that a material called “lithium cobalt oxide” works as a powerful positive electrode for rechargeable batteries. The only problem was that there was no negative electrode to match it, Goodenough had said. [Link]

Moral of the story:

This can be easily an hour-long discussion in classrooms. Is it by chance that he discovered the positive electrode? If not chance, what else was happening that made him discover it?

We could think about the message of the story in multiple ways.  In fact, the message of the journalist is that historic discoveries occur by chance. That is perhaps the smallest of messages and may even be wrong. Chances do not happen. They are created by application of mind.

He could have taken time off that afternoon; gone for Christmas or New Year shopping. Or, he could have gone to play golf. He has been thinking about the problem and hence, he decided to use his spare time to read the paper he had ordered and never read.

That shows that if you keep thinking about an issue, the mind (and the universe) eventually finds the answer or locates the source of the answer. The subconscious mind works in our sleep and produces an answer when you wake up. I am sure you had experienced it yourself

Simply put, the value of ‘plugging away’ at a problem is often understated and seldom understood.

Second, what you learn from this is the importance of finding these windows of time to do long-term thinking. We always deal with the ‘URGENT’ but it is important to create windows of time to think of the ‘IMPORTANT’.

We all get lost in the day-to-day trivia. It is important to find, create and utilise the time for long-term reading, for the reading that you postpone always because it is not urgent; because it is not mandatory; because it is not required reading for the course or for the exams!

Just as it is important to find time for reading, it is important to set aside time for reflection too. Only then, the mind gets to work on connecting the many dots that it has come across.