Salvator Mundi and stock market bubbles

Before Leonardo da Vinci’s painting, ‘Salvator Mundi’ went up for sale, this is what the New York Times wrote:

This is your chance to buy a genuine Leonardo da Vinci painting. The last da Vinci painting in private hands, “Salvator Mundi” (Saviour of the World), is expected to fetch $100m at a Christies’ auction in New York. Sotheby’s sold the painting, unaware of its true provenance, in 1958 for £45. In 2011, the work was confirmed as a genuine Leonardo and unveiled publicly — the first discovery of a painting by the artist since 1909.  [Link]

Eventually, an unknown buyer paid USD450 million for it. This comes days after Christie’s sold some impressionist art works for USD479 million. [Link]

In the meantime, Greenlight’s David Einhorn thinks that most of the problems that caused or were raised by the crisis of 2008 have not been resolved. He is right.

Conor Sen, writes for Bloomberg that the big five technology companies could destroy the tech. ecosystem. He too is likely right.

On Monday evening, Venezuela missed a deadline to make an interest payment on its bonds and thus officially defaulted.

India’s Reliance Communications missed an interest payment to China Development Bank and thus has ended up in default. RCom’s Anil Ambani has managed to do what the Indian governments in the past could not do:  hurt China’s interests! Aircel may have defaulted too.

Ajit Ranade’s piece on coal shortages in power companies confirms that India is leader nonpareil in sub-optimal functioning and turning simplicity into complexity.

India’s DMart is more expensively valued than Walmart. Indian IPOs in general are too richly praised to be sustainably rewarding to investors. [Link]

Rakesh Jhunjhunwala says that there is lot of froth in Indian IPO market. He thinks that the Indian stock market may experience a sharp, swift correction and seems to be bearish on the rupee to boot, for 2018 although he presents it differently. [Link]

Andy Mukherjee has a lovely piece on how (Mukesh) Ambani is taking on Amazon in India. A great line:

The e-commerce industry, including online food delivery, is just $15 billion a year, or 40 percent less than Alibaba Group Holding Ltd.’s Singles’ Day sales in China. [Link]

Will be an invaluable case study for B-School students.


Tired, old and unhelpful

Read this Edit in ‘Business Standard’ on how India should be cautious about not ‘irking’ or ‘annoying’ China by joining the Quad – U.S, Australia and Japan with India included.

An unfortunate edit especially the finishing note. What has India got to show for its ‘non-alignment’ with respect to China and for being mindful of its sensitivities? Even as this Edit was being written, China was harping on the lack of consensus in the U.N. Security Council on the lack of consensus in the Security Council on declaring Masood Azhar a ‘Global Terrorist’.

When will we be ready or what would it take – over and beyond what has happened over the years – for us to shed old shibboleths and repeat the tired, old advice that have nothing to show for them in terms of results on enhancing India’s security or standing?

Read Richard McGregor here and here as to what and who is driving China’s (what it sees as its inevitable) quest for dominance. These Edits are pointless.

DIY assignment: Off-balance sheet assets in China’s banking system

China’s Financial Stability Report for 2016 published in 2017 is now available in English. You can download it from here. It does not show up under the tab, ‘Financial Stability’. Under that tab, you can download the 2016 report which covers the year 2015.

In the 2017 report, go to the Chapter on Banking Sector (page 48 as per their page number; not as per the PDF file. As per the PDF, the page number is 64) and understand the figures of assets on and off-balance sheet in the China Banking Sector.

Do the same thing with the 2016 report. Go to page 53 of the document. That is page 69 of the PDF document. Find out the off-balance sheet asset size.

The on-balance sheet asset size comes at the beginning of the Chapter in each of the reports.

You can also get the nominal GDP of China from one of the earlier sections.

Now you are ready to do your math on China’s banking system assets and their ratio to GDP, etc. (on and off-balance sheet).

You will know why we have a ‘recovery’ in 2016.

This is what I was alluding to (without proof but with some intuition) in my MINT column which wondered whether the global recovery was statistical or real. Well, I should have asked if it was financial or real.

A report by Macquarie Research (not available in the public domain) released few days ago is cynical but also correct. It backs the perennial doomsday machine to continue because, without that, financial assets worth some USD400trn will be exposed for their hollowness as they are backed by real assets worth far less or nothing.

It is liquidity and leverage or nothing.

Working Capital for small businesses in India

For Small and Medium Enterprises (SME), a big issue is the availability of working capital and the cost of financing it. See the earlier blog post on the productivity of working capital.

SMEs that supply to big corporations are usually at their mercy for payment of invoices. If the buyer is monopsony, then the supplier’s bargaining position is even weaker. Nor can they afford to pursue legal remedies against recalcitrant corporate customers. Such remedies will be costly, protracted and may ruin the business too. ‘Factoring’ is the answer. SME suppliers discount their receivables and bills of exchange with banks who buy them (with or without recourse to the SME, in the event of non-payment) at a discount and then collect the proceeds from the corporate buyer.

The idea was included in the report of the Raghuram Rajan Committee on Financial Sector Reforms in 2008. Then, RBI appointed a working group which submitted its report in November 2009. RBI then issued a concept paper in 2014. Then, the draft guidelines were issued followed by final guidelines. Receivables Exchange of India (RXIL), India’s first Trade Receivables Discounting System (TReDS) started operating only in January 2017.

The time taken underscores the glacial pace at which crucial reforms that would lift the economy on to a higher growth path are pursued.

The world over, on providing working capital to small suppliers, things are moving much faster (ht: Gulzar).

Six months later, hurdles to the smooth of functioning of RXIL are emerging. Companies are wary of uploading invoices lest competitors come to know about their suppliers. Second, this is important, “since TReDS is a transparent system, they (companies) necessarily would have to settle the suppliers’ invoices within 45 days of acceptance of goods/services rendered.”

From a policymakers’ point of view, starting from the Panel Discussion on Agriculture and the posts on India’s informal, small and large factories, three interventions are becoming clearer:

(1) Risk mitigation in the form of a functioning crop insurance market with the Government bearing the premiums payable to cover not only yield, output but also realisation risks.

(2) Irrigation coverage – canals, inter-linking of rivers (long-term and huge capital commitment), rainwater harvesting (ongoing and needs top-level ownership like in the case of ‘Swachh Bharat’)

(3) For informal enterprises, financing via Mudra Loans but with performance caveats

(4) For small enterprises, working capital access – discounting, factoring, etc.

(5) For small and informal enterprises: revamp, re-design and re-energise the Skilling Initiative. Make contributions to Skilling CSR Compliant (if not already done). Tie it up with big corporations. I do not know if there is further work to be done on the Apprenticeship Act.  It has been passed. Have the rules been framed under the Act, been notified and circulated?

(5) For all: stable, reasonable tax regime that is non-vindictive and non-usurious in its administration. An immediate fallout of it is GST rationalisation of rate structures and further lowering of rates. Bet on economic activity and not on economic policing.

(6) Government to expend fiscal resources on bearing more labour payroll deductions for entrepreneurs (increase the salary cut-off limit for government reimbursement)

(7) Follow through on corporate tax rates reduction with elimination of ad-hoc exemptions

Without any trace of immodesty, I would venture to state that if the Indian Government could focus on these seven for the next eighteen months, it will have done a lot to relieve the economy of the strains and stresses it is facing now.

Productivity of Indian factories – small and big

Defining productivity is one of the hardest things on economics. A well-known economist-journalist reminded me of it when I used that word in an email and he asked me for my definition. It is hard. It is a bit like beauty and obscenity. You know it when you see it. Of course, it is not as hard as those concepts. In factories, labour productivity can be measured. But, capital productivity is somewhat more problematic and low productivity may not be entirely for internal reasons.

Suppose the construction of a factory begins in year 1 and some capital is committed. But, let us say, approvals take forever to come – environmental, legal, utility connections, etc.  Here, capital has been committed and invested but yet, there is no production to show. There is unproductive capital here. But, one cannot say that it is the fault of the enterprise or the entrepreneur.

Total Factor Productivity (TFP) is even more complex.  It is the residual. Output growth that cannot be explained by input growth is TFP.

Further, in the case of India, with services dominating the economy, it is even harder to get a grip on productivity. Measuring productivity in service sector could be problematic as there could be a conflict between the micro and macro on this. This is not the place to elaborate it but more on that on another occasion.

It took a laborious (for me) blog post to establish that units/factories covered by the Annual Survey of Industries are not ‘informal’. They are registered under the Factories Act, 1948 under Sections 2 (m) (i) and 2 (m) (ii). They are not covered in other surveys of unincorporated and unorganised enterprises by the NSSO, etc.

Therefore, productivity of the smaller factories – to be presented below – is not the same as productivity of informal manufacturing enterprises.

I prepared two Tables on productivity statistics for Annual Survey of Industries (ASI) – Factories. The latest ASI is for 2014-15 released in March 2017. The tables below are based on statistics presented in Statement 11-A (‘Principal Characteristics by the Size of Employment’ – Section 7, page no. S7-3).

Productivity statistics for Factories with 99 or less workers

Productivity statistics for Factories with 100 or more workers

The Tables are along expected lines.

(1) Capital productivity of smaller units is better because they deploy lesser capital. In a relatively capital scarce country, that is better. But, is it true that India is still as capital starved as it used to be, with capital flows being global and Indian savings rate being upwards of 30%? In fact, how much of the capital scarcity is because Governments capture a large portion of the national savings through the banking system?

(2) Labour productivity of larger units is much better because they employ fewer workers relative to the output or GVA they generate.

(3) What is interesting is that on capital productivity measures, smaller units are not decisively better off.  GVA/Invested Capital Ratio is the same for both small and big factories. Productivity of working capital is far better for larger factories. Of course, that tells us how big a constraint working capital is, for smaller enterprises. That will be my third post.

(4) Output/Wage Ratio (in Rupees) is better for smaller units. May be, because they do not pay well? But, GVA/Wage ratio is much better for larger factories.

(5) Similar is the story with respect to Emoluments.

(6) Overall output/input ratio is better for larger enterprises.

These two tables should help us design appropriate policy intervention. Some conclusions that emerge, in my view:

(1) India needs both large and small factories. In fact, small factories arise for the most part as part of the supply chain for larger factories.

(2) Working Capital Efficiency for smaller factories can and should be improved. The onus is on the Reserve Bank of India and on larger corporate customers

(3) Smaller units need labour skills and training

(4) Larger units need to improve their capital and labour productivity but not to beat their smaller counterparts in India but to compete globally. They must benchmark themselves globally.

(5) Clearly, the data do not make the case for the country to ignore the need to allow enterprises to grow big. There is no case for a ‘anti-big’ bias. In fact, if anything, ‘informal’/’unorganised’/’unincorporated’ enterprises may have even poorer productivity statistics than the small factories covered by the ASI.

Market Mania

Bloomberg has an article with some excellent charts on the ongoing Market Mania. The article is aptly titled, ‘It’s Market Mania for Assets All Around the World’ [Link]

This article has a dual message. On the one hand, it appears to feel that there is a ‘mania’. Manias are, by definition, not rational.  On the other hand, it does point out that global economies are booming in a synchronized fashion:

From Germany to South Africa, stocks around the world are in the throes of a spirited bull run, with global growth firmer and more synchronized in years….. …. investors bet the bullish business cycle will offset the hawkish monetary-policy outlook.

It wants to have it both ways. But, if we are left confused as to whether this is all rational or a mania (bubble), look no further than this article. Company changes name and the stock flies! – sounds familiar from 1999?

If you are still not convinced, check out this article too:

Wednesday morning, Amicus Therapeutics Inc. reported a final-stage failure on a rare-disease drug and said it was abandoning the medicine. But market reactions to these disappointments have been relatively muted. Amicus shares actually rose on Wednesday despite its bad news….

…. One of the best examples of the sentiment shift is Alnylam. Back in 2016, it stopped development on a leading drug due to a different safety issue, and its already weak shares plunged nearly 50 percent. In contrast, Alnylam shares fell nearly 16 percent after it announced its trial pause last week, but have since recovered nearly 10 percent. It’s true that last year’s news was much more significant than last week’s. Still, the fact that investors are mostly shrugging now says a lot.

A bubble pops

Hectic traveling continues. Traveled to a village called Dattwada in Madhya Pradesh, about 150 kms from Indore. The route goes via Tikri, Anjad (Anjad-Bharwani Road) and then to Dattwada. The heat was sweltering in end-September. No internet connectivity.  Back to the base in Singapore on Sunday.

Too many things happen for us to keep pace. We cannot. We cannot keep pace. We can try and keep peace with ourselves and the world. That is what we can and should try. The European economic and political stability bubble was pricked with the German election result. Christian Democratic Union of Merkel turned in its worst performance since WW II and the Social Democratic Party (SDP) turned in its worst performance from even earlier. The Alternative for Germany (Alternativ für Deutschland – AfD for short), deemed far-Right by the commentariat turned in its best performance and won some 94 seats, I think. AfD picked up votes in Bavaria State (where Munich is located) and in the capital Berlin too. As for what AfD stands, it is only thing to emphasise nationalism and security and seek tigher curbs on immigration and it is another to deny the holocaust. See here. The WSJ article has some useful charts.

Even before the elections in Germany, I had been sceptical of the romance of the so-called global ‘elites’ with Europe. They saw in Merkel an alternative to the isolationism of Trump. But, Merkel was disregarding the popular feelings towards immigration. Daily Shot, a nice collection of pictorial global economic snapshot from the Wall Street Journal carreid this chart on 6th September:

Pressing issue in Germany_Sept.2017

While I was searching for the chart above, I saw this one too.

Germany divided over Merkel policy_Aug.2016

Other charts carried in this article in August 2016 are equally interesting. The warning signs were there. Again, the elites and the biased media ignored them.

European economic convergence had not happened. Post-Euro introduction, it has been a story of divergence between Eurozone original 12. Further, IMF Article IV consultation report for the Eurozone stated bluntly that the Southern European nations had not used the windfall from low interest rates to put their fiscal house in order. They are vulnerable when rates rise. I had written about it in a MINT column recently.  It is a different story that IMF still advised European Central Bank not to raise rates, despite low rates encouraging complacency!

Over the weekend, there was a stabbing incident in Marseille (France) outside the train station. Two women were killed in a ‘terrorist’ incident. Such attacks are meant to create panic and hardening of attitudes among the locals. Alienation is what terrorists seek and such attacks succeed in breeding alienation as they strike very near ‘home’ for many. However, analysts and intellectuals would blame the locals for not wanting immigrants in their midst. It is silly to question the innate human need for security. Charity comes after security.

In Spain, Catalonia held an ‘illegal’ referendum. 42% showed up to vote and of them, 90% voted in favour of independence from Spain.

It is a difficult world. Europe is no exception. Indeed, Europe is arguably the epicentre of it. It was delusional to think otherwise.