Investors are Dancing - But no music can be heard

Is a Financial Tsunami Building up?

Just as the stock price of Tesla kisses $2000 (and by the time i finish writing this piece, it might be $2200) and Apple is way past the 2Tr$ Marcap, I receive a text message from an enthusiastic friend of mine who first started investing a few months ago (March 2020) after being forced to work from home and shared his stellar success at his new-go at the markets. He shared his desire to be a professional fund manager and started exploring ways to get a SEBI license to be a RIA (Investment Advisor) or a Portfolio Manager.

Being an investor since 1992 when I made my first investment and having managed funds for family and friends all life and now as a professional Fund Manager since the last few years, and having seen euphoria and fear again and again, I can say with some degree of confidence that this time it isn’t different and something is about to give way.

Covid has been the most unfathomable disruption, the likes of which hasn’t been seen by anyone alive today. The concept of Black Swan stands redefined which – till now – was an unexpected and improbable event and people would often relate to it by comparing it with a Tsunami or an accident or a sudden unexpected failure of an enterprise with global ramifications.

No one had ever imagined that within days, the global borders would be closed, airlines across the planet would be grounded (95% still remain grounded as I write this), and all levers of the global economy (travel, trade, manufacturing, shipping) would come to a grinding halt. ‘Sudden Stop’ in global economy was an academic expression that became a reality almost instantly.

Some 30 million Americans lost their jobs (more than 3 times than the previous highest), markets crashed by about 40% in 3-4 trading sessions, China got blamed for its alleged Chinese Virus, oil hit (-) 37 $ while the global leaders remained clueless and the only policy response was a complete lockdown of nations as leaders grappled with the  enormity of the situation.

Hundreds of millions of people have lost their jobs and millions of small businesses have shut down forever and the economic contraction has been so secular that some of the most high flying businessmen and executives have resigned themselves to the new normal only yearning for their basic needs to be met for their families and themselves.

While some countries have shared the real data and the extent of severe and unprecedented economic contraction, most have conveniently chosen not to release the same either to avoid embarrassment or to avoid panic. But imagine, for a second, that everything (revenue, earnings, profit, salaries, rentals, commoditiesetc etc etc) gets deflated by 40-70% - what effect it is likely to have on the global economy.

If the savings rate from income varies from 1% to 25% in different parts of the globe (it is believed that more than 70% Americans have less than $500 in savings and the max savings rate is about 25% in China and India), it is safe to assume that every person on a monthly salary / entrepreneur is already digging into life investments and assets to keep afloat as the inflow (after salary cuts or loss of income) is far lesser than the outflow. Majority of my friends and acquaintances have either stopped their SIPs or redeemed their Mutual Funds. I read that last 2 months have been the worst for the MF industry because of incessant redemptions and negligible inflows.

And Yet…

The Indian and global stock markets have shown immense resilience making these an easy ATM to churn out daily profits for Robinhooders.

Human memory is short and 10 years is a long time to lose and gain confidence all over again and the stars (Corporations and Executives) of yesteryears fade away while the new ones emerge on the evolutionary principles of Creation - Preservation and Destruction

It is believed statistically that 95% of market participants and fund managers have less than 12 years of experience which implies that only 5% have seen the crash of 1987, 2000, 2008 and a few other mentionable flutters in between. And human mind is generally tuned to be optimistic as hope and evolution trains the mind to expect a better future always in every which way. Little credence is given to people who invoke caution and sometimes border pessimism as a result of lifelong experiences and perhaps that’s the reason the world is deriding WarrenBuffett for having lost a decade by underperforming and not investing in Tesla and Amazon and all the 30 yr olds have seemingly outperformed by simply investing in Tesla or Kodak or Overstock kind of shares.

Parameters such as performance Ratios, Profits, Real cash in the hands of shareholders have lost every mentionable significance and price earnings of 200/300 or even 1000 in case of Tesla seems like 'THE' new normal.

And while the bears have been irreparably scathed in this recent melt-up, it would be prudent to remember that over long periods of time, either the price catches up with the fundamentals of a stock or the fundamentals catch up with the price,  but just to put the things in perspective (and I know nothing about Tesla and am not a Tesla basher sitting here in India – but it’s a good example) if Tesla was to maintain its present earnings, it would take about 1000 years to fully recover ones investment through Tesla s present earnings. Anyone who buys a Tesla stock now is valuing it at approx. a million dollars for every car sold.

Markets are a beautiful place that allow immense wealth to be created and accumulated for people who have patience and discipline but history is replete with examples of more than 70% of investors of all times to have permanently lost capital by chasing garbage (aka penny stocks) that seems to provide short term euphoria.

Lets talk of a few Indian stocks and themes or should I say wealth destroyers.

Between 2003 and 2008 Infra and Housing was a great story and a mere ‘infratech’ (use of tech and infra) in a company s name would get it rerated. Unitech, IVRCL, HCC, NCC, Sintex, DLF, …………… have destroyed almost 99% of shareholder wealth and most of these names have got delisted leading to permanent destruction of wealth. During hay days these were stocks that were the market darlings

Then came the era of banking and finance. Between 2009 and 2018 NBFC s and Banks had a dream run before the euphoria and invincibility of the sector was popped by the ILFS, Yes and DHFL type of fiascos and recently while a top outgoing CEO dumped his entire shareholding and ESOPS of 26 years in a jiffy (perhaps to pay for the expenses of grocery, maids and electricity bills during tough times amidst the pandemic), the gullible public and minority shareholders will be the last to keep holding the hot potatoes and the music would stop suddenly.

And Now

We have the API and the pharma theme on an assumption that all the medicine factories on this planet will stop production and all pharma orders will come rushing to Indian companies and the world population might start eating medicines instead of fruits and vegetables all produced by Indian pharma companies.

The same story gets repeated again and again. While the robinhooders are gloating in the wealth created by some new age, recently discovered pharma companies doubling in the value in less then 2-3 months, the end is always painful when the music or the party stops. And by the way graphite was the pharma of today or pharma/API was the graphite of those times.

The 5% people who have been around, all of them understand this, having gone thru cycles, but the 95% neither have the wherewithal or the research to truly fathom the depth or the lack of it in the present euphoria.

Every crop must be harvested at a specific and optimum time, lest it should rot. Same goes for ones stocks, corporations, businesses. Buying or creating is natural to ones instinct of evolution, letting go / harvesting is an art which very few understand or develop. And most end up in a feeling of regret esp small and minority retail investors who fall in love with their stocks, cannot sell and take the profits home.

The trouble is that most fund managers are obliged to be eternally optimistic (ignoring the risks) else they would face redemption thereby leading to lesser fees for the fund-house. Very few investors realize that cash in itself is a strategy and a position worth considering and to be in from time to time.

As Howard Marks says “To be a disciplined investor you have to be willing to stand by and watch other people make money on things that you passed on”.

Irony of the markets is well evidenced, rather strongly in just this one case in point :- PVR Cinemas

PVR used to be a perfectly fine and a successful popcorn and coke reseller till the pandemic struck and just 11 days of disruption in March saw its profit fall thru the floor. The future is bleak with zero sale in first 2 quarters and any of the movie buffs whom I have spoken to in Delhi, Bangalore and Bombay (where PVR has max screens) are not going back to a cinema hall as people have found a new freedom on OTT platforms and using affordable projectors at home and replicating a cinema hall effect without risking oneself to the virus-exposure. 

Producers are preferring - selling to and releasing movies through OTT platforms as that reduces their risk to zero. And yet retail investors are finding virtue in this company that has zero sales, bleak future, debt ridden and trading at 300 times its trailing earnings and no visibility of the future earnings. Some PVR stock lovers say – all will be well in a few years, we are looking at 2030.

CNBC has single headedly taken it upon itself to create a euphoric environment shrouded by global liquidity and has allowed all dubious promoters to talk up their stocks only on the base of 'positive commentary' as if the alchemist in them can turn just commentary into profits, cash and dividends.

On the other had a company like ITC that produces more cash and profits than all the other 6-7 top FMCG companies, is debt free, is trading at abysmally low valuations (15 times trailing earnings) and yet the robinhooders find it less appealing.

This dichotomy will self correct sooner rather than later and will come with its own collateral damage which most new entrants in the markets aren't ready to handle.

Harvest Your crop, take profits off the table, let some notional profits be lost along the way but evaluate the risk and reward that any company, valuation, story, potential – offers.

If this fine art of valuation equilibrium can be discovered, small investors would do themselves a great service of increasing their longevity in the markets and protecting their capital.

Enjoy the party, stay close to the door, so when the stampede starts, You can safely escape without being trampled.

My twitter handle @manurishiguptha

www.manurishiguptha.com

www.mrgcapital.in

10 Commandments for promoters of Listed Companies

If You are a promoter of a listed company and your basic idea is to loot the gullible public by privatising profits and socialising losses as recently done by Uber and tried hard by we-work this piece is a waste of time for you. If not read on…..

Google.v top wealth destroyers in last 2 years and You will deduce that the behavioral pattern of all companies and their promoters is shockingly congruent. Malafide intent of promoters has resulted in almost entire market capitalization being eroded away and gullible minority shareholders left holding just an entry in their demat statement.

At least 1-2 friends/acquaintances send me their portfolios each day for a review and the list of defunct companies in those, is shockingly long. Thousands of companies have just vanished since early 90’s and the erstwhile promoters must all be sipping mojitos in some Caribbean country such as Antigua. A sampler of these is pasted here for nostalgia. Some names were the darling of markets - Pentamedia graphics, Aftek Infosys, Crest communication.........

In a short life where the vicissitudes of health, fate or accident could just kill you instantly doing a Houdini on your minority shareholders, wont take You anywhere. But philosophy of life later or in some other piece.

This is not Your Pop’s company

Even if you own more than 50% of the company you are responsible for and towards the minority shareholder who has no access to your operations, books, has no say in management decisions and sometimes millions of shareholders end up trusting their hard earned money by investing in your company in the belief that You would do justice to the job that you are supposed to do. You are a representative of the smallest shareholder who doesn’t have a voice.

Don’t overdraw Your salary and misuse Your perks

It was shocking to hear way back in Sep 18 that the promoters of Apollo Tyres were drawing close to 12 million dollars in salary + perks (upto 300% of the salary) . Obviously minority shareholders revolted and the stock price tumbled and never ever recovered from there. More erosion happened in the market capitalization of Apollo Tyres when investors realized that the promoters were running a public company like their piggy bank rather than by the loss through their skyhigh salary, despite the muted cyclical performance QoQ.

Are You kidding me - Its appalling, when as a minority shareholder I learn that the manager of my company (call him promoter for the purpose of respect) is drawing more salary than the base salary of CEO of Google , Apple and Microsoft.

The company is struggling for growth, costs are increasing and the father son duo are breaking all records while owning only 41% of the company. Nothing gives them the right to short change the rest of the 60% shareholders – just because they don’t have a voice. Obviously the company’s EPS is falling with religious regularity over the last few years.

I know of a popular Entrepreneur in India who claims that he hasn't taken a salary hike in 10 years and only  draws some 2 Mil USD per annum. Its public knowledge that his electricity bill is 1.3 Mil USD. Isnt it obvious that minority shareholders are unknowingly paying for all his lifestyle and his expenses? 

Lesson – No one ever gets a second chance in life and in corporate world unless you are making a movie – life isn’t a film shoot where you can keep taking a retake unless you achieve a perfect shot. You f%$# up once you will never be pardoned.

Never take personal holidays in the garb of an official trip

I know a lot many promoters who travel along with families on company expense. And mostly in the garb of an official trip. Imagine giving a pro-rata travel subsidy to all shareholders. You can get away with all this for a while, but one day it will catch up with you because its just not right. And You and Your share price will be punished.

Don’t load the company with expenses of personal staff

Your being at the helm doesn’t give you a right to seek subsidy for your personal staff expenses from the minority shareholders. Lead a lifestyle that’s afforded by Your salary that’s approved by the board and is in public domain. There is a verified story that our Ex Prime Minister Sh. L B Shastri ji personally paid when family used the official car in sharp contrast to today's national political leaders and CEO s and promoters of listed companies who use the nation and their corporate authority as their personal piggy bank – and that too shamelessly.

Watch Your words in Public Domain

You Gentlemen are the custodians of the company’s public image and reputation. Your public conduct and character and any tongue malfunction can have ramifications that are sometimes hard to fathom. If Paytm was a listed company I would have been very very wary of buying its common stock and if bought – holding the same after the stellar performance of its founder Vijay Sharma.

Demonstrate benevolence and humility

What goes around, comes around is well known to everyone. But very few can fathom the intensity and quickness of ‘coming around’. If You are riding a crest of success, you will most certainly see a trough and a tempest sometime later in Your journey as a promoter. Build reputation and relationships through benevolence and humility so that the world conspires to give you support when required. Lehman Brothers was the big daddy when it opposed the bailout of Bear Sterns in March 2008 when BSC was going down and while there is very little evidence or data, the rumor has it that Lehman was left alone when it needed the support a few months later and while Lehman’s assets and liabilities matched to a great extent, the powers that be – allowed Lehman to sink while teaching them a lesson.

The lifestyle of Dick Fuld would have put God to shame and when his company was in trouble this CEO who was like a tiger riding a tiger just couldn’t get off – and neither was he allowed to – by his alleged friends.

Don’t flash your expensive toys and lifestyle

In an ideal world the promoter is really the Chief Servant of the minority shareholders and in good times the media christens You as the Branson of Your respective country ala Mr. Vijay Mallaya but don’t sympathise with You when You ever land on thin ice. On the contrary media pulls the carpet under  your feet when you would least expect it. If Mr. Mallaya had kept a low profile during his tough times, he would have easily come out of his troubles and could have still been enjoying his envious Villa in tropical Candolim rather than weathering the biting cold of the Hertfordshire. Does anyone know that Mallaya’s 1 Billion USD in debt is a fraction of the top defaulting companies in India. If only he had postponed Eminems trip for his 60^th he could have gained some sympathy and some reprieve.

The system and the regulator comes after You even more harshly when they see a diluted intent. Naresh Goyal of Jet smartly offloaded his headache to the Govt and the Banks (SBI) and maintained a low decibel lifestyle and almost took that proverbial Houdini flight recently while on the other hand the regulators are still counting cars and houses of the Wadhawan clan ( HDIL and DHFL ). One hell of a capacity - this Wadhawan family has to create a systemic faultline.

Lead a frugal meaningful life

Inspite of being billionaires, all the founders of Infosys lead a simple inspiring life. Help the society thru genuine foundations and philanthropy. They talk of values more than the wealth they have created, they talk of their social responsibility and they don’t hesitate to call a spade a spade (even at the cost of wealth erosion in stock price) when they see anything wrong. The analysts have written off Infosys many times but I have always tanked up on the share when its going thru the seemingly ‘baddest’ time - to my financial advantage.

The culture and character of organisations that is usually set and left to flourish by the promoters is often unshakable and its like the stuxnet virus that keeps flowing in the proverbial veins and arteries of the organisations for infinite periods of time to achieve the end objective and common compelling goals of the organisations. And that’s why Infy always emerges stronger from every momentary crisis thereby creating swathes of loyal shareholders who don’t ditch its stock or the ‘proud part ownership’.

Don’t borrow based on excel sheets and best case scenario

I have professed before (in a lighter vain) that the biggest disservice to the corporate world has been done by Bill Gates for making Excel program that allows the new age CFO s and analysts to make specious assumptions of growth and plot it for tens and tens of years by just dragging the formula across infinitely convenient columns and make anything look rosy.

The gullible promoters fall for the elusive growth trap and start expanding to achieve what?? More promoters fail because of leverage than the ones who are able to manage leverage to their advantage.

I knew of a CFO at close quarters who would tell his battery of analysts to just make up the numbers to borrow from financial institutions thereby putting both the promoter and the business in harms way. The CFO moved on to meet his eventual fate of karma etc but the promoter was left holding a cluster of hot potatoes and an unmanageable debt portfolio.

In this VUCA world and environment – even if someone is God s gift to mankind, an unknown variable or an unknown disruption will take the wind out of Your sail and at that time margin of safety is what would hold You in good stead rather than being hit by the train – head-on from which the recovery is impossible. Simply follow what Buffet says “find a reason not to invest and then find a compelling investment” rather than the other way round.

Don’t frivolously announce buybacks to hide Your mess

We have seen in Indian markets that the moment a promoter is caught with his pants down they announce a buy back as a distraction and diversion (D&D) tactic. Markets are intelligent and now the investors even more. And D&D will oft be punished brutally and sometimes it becomes terribly difficult to emerge victorious from that. PC Jewellers announced a buyback to skittle away attention from its abysmal corp governance when it was caught.

Of course it was D&D and the stock that was the darling of the analysts and traded at some Rs 600 is now trading at Rs 20, a 96% wealth erosion…..

Declare dividends as evidence of performance and real cash

Only hard cash in the hands of minority shareholders is an evidence of your performance and intent. The translation of EBIDTA to PAT is the only real evidence of performance. Don’t hide your mess in the below the EBIDTA line items. Investors are wise and investors are unforgiving. Share the company profits with shareholders. Declare dividends to allow cash to flow to the mute believers in your performance. Cash is tangible and its rewarded. Promise of just the elusive capital appreciation doesn’t hold water with today’s well informed investor.

Above all – Don’t ever lie

When in doubt – Disclose, has been Mr. Narayan Murthy’s dharma for the longest period of time and is gospel truth for corporate conduct. No matter how bad the news is – Disclosure will always hold You and Your company in good light

As we see hundreds of companies that are trading at abysmally low valuations struggle to emerge from even the realms of nothingness, some of the top companies where the quality of promoter and management team is impeccable, continue to outperform the indices and are rewarded through very rich valuations.

And Lastly

Watch the movie – Snowden / Enemy of the State

Rules are tightening and technology is so advanced that most of us cannot fathom. Surveillance agencies can listen to every conversation, track every movement, map all spending patterns to draw conclusions. Basically hiding and doing a Houdini on the Bankers and Shareholders will become more and more difficult. What the MD of Bhushan Steel recently did like many of his brethren in the past will become almost impossible as new Govt policies come into effect and whats the point in hiding in a remote island / country , away from the family, not able to return with a solace that You have billions stashed somewhere.

A noble life full of respect and love from the people around You, cannot be founded on the bedrock of fraud and diluted intent. When we die ( which we most certainly will – sooner than we think ) we become a body in a second from Mr. So and So. Remember this and life will be just fine and world will become a better place.

Manu also writes for the Huffington Post

The day India’s fate changed for better

I was in the UK attending a tourism meet when I was raising a toast for Trump, not because I agree with his indiscretions etc but because I was right. I was right in believing in June just after Brexit that Trump would really prove all pollsters wrong. And he did. But what greatly enhanced the feel and the high of the bubbly on my tongue that evening was the announcement of demonetisation and scrapping of the 2 largest denomination notes in India.

And that I thought required balls of steel and is the single biggest revolutionary step since the reforms of 1991.

And while the naysayers, most of them uneducated or politicians (read opposition), are crying hoarse over the move and marching around the parliament over-amplifying the plight of the people facing some difficulties, most cannot bear the shock of seeing their ill-gotten wealth become worthless in a fraction of a second. Mark my words no one of these protesters is worried about the poor farmer of an auto driver who is facing the difficulty. Most of these drama masters are suddenly cashless for there are assembly elections round the corner and election in India cannot be fought without cash in hand.

As a salaried employee since last 23 years, I haven’t really understood - what is black money. Never felt it, never touched it. But made me angry, very angry, to see people around me earning less, paying a fraction of income tax that i pay and having a better lifestyle than me, showing off cars that they don’t deserve to drive or haven’t earned with their hard work, working much lesser than me, less educated than me, and having seen no struggle in life. All thanks to a well-oiled machinery that generated a parallel economy – some say 50% of India’s GDP.

Paying cash for jewellery, land, holidays and cars had become a fashion statement and this breed with swathes and swathes of black money had blatant disregard of the nation or of the honest tax payer.

How would we expect the governments to develop infrastructure when infinitely large amounts of money for public welfare would get siphoned off because of the fertile environment that accepts and breeds black money.

It’s a sad state for any nation that among the ‘global lasts’ in ease of doing business

Why : because an honest entrepreneur just cannot wade his way through setting up an enterprise without the infinite hurdles of bureaucracy and archaic laws and unfriendly labour policies. At every step businesses have to earmark upto 15% of their capital to grease the system to facilitate licenses and permissions. By the way that’s if one doesn’t have to give a 20% equity to the politician in power.

It’s a sad state for any nation when a person walking on a footpath just drops down in a gutter and dies.

Why : because the local area engineer has taken a bribe or allowed the contractor to go scot-free without really completing the job.

It’s a sad state for any nation when banks lend to corporate entities without an adequate collateral cover and hundreds of billions of dollars of loans become delinquent.

Why : because of an inconvenient relationship between bankers, politicians and unscrupulous entrepreneurs.

The list and arguments are long but the gist is clear. The nation where 50% of its economy is a shadow and unreported, it will always create hyperinflation and assets and commodities will be unaffordable to a common man.

Modi has come so far, What he has done can cost him elections in 2019, the vote bank at the bottom of the pyramid is huge and today they are the ones who are in queues for hours trying to exchange a mere Rs 2000 (250 USD). Modi must hold his ground and take this mission to a meaningful closure thru a few simple steps such as.

1. Make income tax records and returns of every individual in public domain. So that for every thousand rupees spent beyond a persons means, there are a thousand eyes that observe and report.
2. Modi gave every Indian an opportunity to open a bank account, the same should be made compulsory by law and no one should be allowed to deposit or withdraw more than Rs 2000 ever.
3. Facilitate the digital environment of wallets and cash transfers. Whether one is buying a kilo of potatoes or an apartment worth 10 million USD, choke the system to an extent that only a bank transfer or a digital payment works. PAYTM, MOBIQUICK, and the likes of these companies can play a significant role in building a transparent nation.
4. Reduce banking transaction costs on credit/debit cards to a few basis points rather than the present few hundred basis points.
5. Make any cash more than a couple of thousands worthless. If you cannot transact in cash, you would not want to generate it.
6. Rather than reducing the size of balance sheet of the central bank (RBI) to the extent of the monies collected, spend this money on building roads and airports for next 20 years and not for the next 2 – which in the present scheme, by the time are commissioned are already out of capacity.
7. Create a central registry of all land records and link transactions to Aadhar and PAN to reflect in form 26 AS.
8. Above all, rudimentary as it may sound, pass a motion in parliament wherein financial misappropriation is treated as severely as rape or murder in the eyes of law.

Aristotle aptly said about 2300 yrs ago that “Man when perfected, is the best of animals, but when separated from law and justice, he is the worst of all”

Let the fear of law and judiciary percolate in the minds of every Indian citizen.

I wasn’t the biggest fan of PM Modi and believed that I had strong arguments in disagreeing with his rhetoric of his vision of India and his actions thereof. But today I believe that just that extra push, just that little reform, just that fear of God and justice can set India on a path to being a nation that it was 3 centuries ago when India’s GDP was 25 % of the world GDP.

Mr. Modi I am changing my opinion and I am falling in love with you, you are just a few steps away. Hold your courage of conviction in what you are doing.

Manu also writes in Huffington Post

Twitter @manurishiguptha

Goodbye Dr. Raghuram Rajan

Once upon a time there was a great manager in a great organisation who did wonderfully well. He was there on the basis of his competence and past track record. He had many great predictions to his credit and was a person respected for his knowledge and competence in his subject.

His boss though was a typical type A personality, rags to riches, rose to the top of the corporation, almost uneducated, but a man with amazing statecraft and could not bear the idea of an individual a many times more intelligent - reporting to him. This manager had the confidence to call spade a spade, could take all great actions in the interest of the corporation, was loved by all the customers and vendors of the corporation and also by all his colleagues.

But the boss, delusional and self-consumed in his hubris wouldn’t have any manager in his corporation who could look up in the Boss’s eyes, take rational decision, and challenge the usual.

The Manager quit. The Boss was happy. The corporation suffered. And it was business as usual.

While this is a story (with minor variations) of almost all corporations around the world but, If You haven’t been able to figure out by now what I am talking about/writing about at the expense of my sunday afternoon glass of Chardonnay you might as well close the browser.

____

I was having an idyllic drink with my dear friend Sundeep Sahni last Sunday on the 12^th June and were discussing the usual. A banter about the Brexit, Raghuram Rajan’s term, the state of the economy and the stress in the global markets that’s still hidden from the eye of the common man. Sundeep was so sure that Rajan would get a second term. Sundeep’s argument was:

• Rajan is too good and intelligent a guy to be consumed by petty politics
• India needs him
• He has brought in fiscal discipline
• He has exposed crony capitalism
• Forex reserves are at a life time high under his stewardship
• India’s respect as a meritocracy driven nation is highest in the international finance and business community
• And he can call spade a spade

My argument was:

Calling spade a spade is the biggest problem

Yesterday Sundeep called me and said – ‘My God You were right’

Modi would have never allowed Rajan to stay on and neither would Rajan have stayed on - and it has been so evident in the last 2 months.

Anyone reading this piece is educated enough to realise and acknowledge that…

• Subramaniam Swamy had no guts to raise an issue without the tacit permission from the top
• He is a drama master for the Government
• When the contents of our deep freezers have to be ratified by the religious zealots of the establishment, how could a man be allowed to take decisions on the interest rates and fiscal policies of the nation (no matter how good and beneficial they were)
• Rajan created a system that exposed the severe fault lines in the banking system. A system that was definitely used, it is believed, to siphon off over 100 billion dollars.

It’s a shame that Mallaya is being trolled beyond imagination because he defaulted on a billion dollars in business losses. Afterall everyone took a risk - the businessman and the lender as well. No one has raised a question on the massive debts that are lurking in the banking system. And this is what we know of. Mallaya’s only real fault – he kept walking around and getting photographed with arm candies by his side when the employees of Kingfisher were in dire straits.

Mallaya ran a loss making airline and banks kept funding it without adequate underlying security/collateral. And if they did, why the fuss now if he isn’t able to repay.

Try raising a small loan from a nationalised bank. They would want a collateral for a collateral. There is no way in hell that you would be able to default.

And Mallaya’s ‘Kingfisher’ brand was taken-in as collateral to the tune of almost half a billion dollars by State Bank Of India. Did they dream of rechristening State Bank India to Kingfisher Bank of India in-case Mallaya defaulted or did they plan to co brand Kingfisher with SBI on T shirts and souvenirs and turn it into a multi-billion dollar enterprise?

A guy like Rajan was dangerous. Utterly dangerous to this caucus. And he had to be removed.

So a nationwide drama was created to embarrass him and raise questions on his integrity and his patriotism. My God – Swamy called him an agent of the American Corporations or CIA.

Any self-respecting, educated, subject knowledge expert doesn’t have time for all this bullshit. For he/she knows that the corrupt system doesn’t deserve him/her. Remember the protagonists in Ayn Rand novels.

And then….

Rajan knew better as well.

He could see that the world is on a precipice of a serious financial meltdown. I have repeatedly said in my previous pieces that 1929 or 2008 would look like a walk in the park. When that happens and when the big bubble bursts no one knows. It could be 6 months or 6 years. But whenever it happens it will be far more painful than Sep 2008

And obviously Rajan wanted to leave on a high. He did what he did and did it beautifully. Only people with innate knowledge of economics would agree that controlling inflation by a few hundred basis points is far more important than a few hundred basis points of growth in GDP. And he did get a grip on inflation.

Rajan could foresee that rupee’s sharp decline is just round the corner and the cascading effect of global issues on Indian canvas of finance, growth and banking would have been huge and seriously difficult to manage.

And in the face of such degenerate pettyism by the so called patriots why would have Rajan sacrificed the comfort and respect of being a top academic on this planet for the corruption stained corridors of power in the North Block.

Lets see 'NOW' India achieve 10% growth in GDP and a strong Rupee – now that Rajan will be history soon.

If Chetan Chauhan can be the boss of NIFT the next RBI governor could well be Mohan Bhagwat.


Manu also writes on Huffington Post 

The Run Rate Conundrum - 'Or the beginning of The Great Depression'

Being a citizen of a country obsessed with cricket, the only run rate that I ever knew was the runs that a batsman makes per over and that i thought defined the run rate - till recently when I realised that even businesses (read new e commerce world) are getting discounted and valued on their run rates. It must be very interesting for those old brick and mortar industrial houses such as the Tatas in India and Walmart

in the US that flipkart and facebook are valued more than these over a century old business behemoths. What took billions of man hours to build has now been surpassed in value by young turks who took their ideas to fruition in a matter of a few years.

Hats off to these young companies for what they have created in such a short period of time.

But there is another side to this story of how the calculations based on ‘run rate’ have brought the world to the precipice of destruction and collapse.

And 2 sectors, one with which I am closely involved - hospitality, and one which I am closely watching lately, are perfect examples of how Bill Gates has done an immense disservice to the human mankind by inventing that little devil (thats what we will call it from now on), the ‘ + ‘ sign on the excel cell where you plot the run rate for the shortest period of time between the two cells, drag the cells to a time period of convenience, where the potential extrapolation of that run rate makes Walmart’s annual sale look pale in comparison to the run rate and get millions of dollars of funding for the idea that is yet to hatch.

In late 90’s it was as easy as registering a domain and coming up with an idea. And a couple of million dollars could be raised easily and the founders would start surviving on Dom Perignon in the hope of a Nasdaq listing just a few months from the conception of that idea.

What happened in early 2000 and the dot com crash merits no explanation or waste of time of the readers of this piece.

The consultants and investment bankers who had deployed trillions of dollars of funds (..of HNI’s , pension funds, 401K in the US etc) in these dot.com companies and earned and digested their deployment bonuses (because no one ever made any profit) suddenly became lecturers and advisors on topics such as how the chaos of 2000 could be avoided.

Relying on the perfectness of the short human memory, about 7-8 years later these investment bankers got a brilliant idea and a new scam of CDO’s emerged on the premise that house prices will go up infinitely and incessantly across the globe and a simple burger flipper ended up owning 3 houses because of cheap credit and loose control on credit checks and what followed consumed the likes of Lehman and over a hundred banks across US and Europe. But the investment bankers had already encashed their ‘deployment bonuses’ and share of the brokerage incomes by doing a circular trading of these Collateral Debt Obligations and who was left behind holding a carrot? The commoner who was enticed to buy his second or the third home and the pension funds and the hard earned money of HNI’s (that was siphoned off by the likes of Madoff and hundreds of fund managers of these Ponzi schemes).

And - Because many of these institutions were too big to fail, it was all eventually funded by governments thereby expanding the balance sheet of the respective central banks and during this time when people were losing their homes and losing jobs, interestingly the global sale of ultra luxury goods was at an all time high and there are no prizes for guessing who was stoking this insatiable demand of these luxury goods (Louis Vuitton, Hermes, Dom Perignon, Rolex and Cartiers of the world)

Almost 7 years later (I am convinced that collective short term human memory begins to fade after 5 yrs and is completely wiped out in 7) we are seeing a frenzy like never before where people say that ‘this time it’s different’ because the businesses have actual run rates and e commerce activity has actually taken off and the approx. 16-17 trillion dollars that’s conveniently printed by the US Fed needs deployment and therefore the same cycle all over again.

While we are yet to see many/any of these multi billion dollar companies churn any positive cash flow, the distribution of deployment bonuses is at an all-time high.

I was amazed to hear that a Japanese company paid out close to 135 million dollars in a year to one of its rockstar executive for deploying approx a billion dollars in the same time period. That’s 13.5% in deployment fees/bonus. (this example is over-simplistic but is being mentioned just to make a point)

Small companies selling salads, idlis, sandwiches, rotis are getting obscene amounts of funding because they are allegedly having an exemplary run rate and conveniently someone is seeing immense potential of growth because of a 15 day run rate which if you extrapolate using the devil ‘+’ on excel makes this company/portal worth a couple of billion dollars.

Why?? Because they sold 2 pieces of their product on the day of the launch and ever since they have been registering a 100% growth in the last 30 days. And none of the investment bankers want to miss this opportunity to own these growth stories. Is this sustainable? I don’t think so. And I am quite sure about it. On the 31^st day of course the run rate isn’t the same but the funds have been deployed for accelerated value creation.

During the times of irrational exuberance everyone only talks of growth potential and entrepreneurs only look at their product and imagine that every single person on the planet is their potential customer and an infinite demand is assumed and therefore exuberance. No one realises that in the hyper competitive and efficient market with negligible barriers to entry any great idea is great only as long as it’s in the mind.

Hotels are an interesting case in point. The consultants make the owners spend humongous sums of money on the basis of the ‘little devil’ and suddenly large investments on land and building seem recoverable but oops only a handful of hotels in this country have been able to recover their investments and majority of the hotels chains are reeling under severe debt and a popular chain ‘Leela’ is almost bankrupt and many other hotels will take over a hundred years to recover investments going by the actual run-rate.

But consultants have taken their fees and are looking for new clients and there is no answerability.

This will continue for ever unless:

• Every fund manager is made a part owner of the businesses where he is recommending investment.
'change the consultancy model from all authority and no responsibility to all authority and all responsibility'

• 80% and not 20% of the compensation of these deployment managers comes out of the positive cash flows of the businesses.
• Consultants are made to move from the model of ‘all authority and no accountability’ to ‘all authority and all accountability’.
• Consultants, investment bankers, and deployment managers aren’t allowed to ‘hit and run’ at the cost of the investor.

Till that historic instance in time some innocent child again shouts and says that the ‘emperor is naked’ this bubble will keep getting inflated and will consume the world all over again and if indicators are anything to go by and if the sum total of all present economic, political, financial, emotional and judgemental decisions could be plotted on some model to arrive at a result……

What lies ahead will make the depression of 1929 look like a walk in the park.

Manu also writes in Huffington Post

Case for appointing Google as the Central Banker

5 years after the worst economic meltdown (US housing et al) as i watch the indices erode shareholders wealth and the Indian currency plummet, i cannot help but muse over the underlying cause of economic crises in different parts of the world.

I have read of more than a handful of well known economists (Nouriel Roubini, Peter Schiff, Ron Paul, Raghuram Rajan etc etc) who claim to have predicted the housing bubble and almost all of them have something or someone to blame it on. These are people with considerable influence at a global scale. Yet nothing could be averted.

Housing bubble happened

US/Global deficits are at an all time high

Eurozone is terribly stressed. Greece Spain and Portugal are almost bankrupt

The Ver2. of Asian crisis is in the offing

Excessive liquidity flowed into Emerging Markets

Talks of stimulus-tapering have created a new crisis in Asia

My argument is that if so many Economists had the power and the intelligence to opine and take credit, why are we staring at such a dismal global scenario?

Human beings are driven by emotion of greed and fear (cognitive biases) and no one has the ability to take the most rational decision at the right time. (Thats God’s job really). So our central bankers all over the world have failed consistently. Since the time I developed a bit of understanding of economics, I have come across only 2-3 actions that central bankers take. Reduce/Increase interest rates by a few bps, Issue inconsequential - dovish or hawkish statements, give a dubious sense of calm to the citizens and opine liberally. Because that’s the easiest thing to do.

But has the world economics been sorted?

No! Actually its worse off than what it was 30 years ago.

But there is a counter opinion. Decisions taken by central bankers should be based on big data of cause and action and consequences. Only then can a global equilibrium be maintained. It is not humanly possible for the likes of Ben Bernanke, Mervyn King and Mario Draghi to analyse and act in absolute harmony that prevents future crisis and regulates overspending and irrational exuberance.

Between 2005-2008 maybe US interest rates should have risen far more.

Maybe Global salaries / benefits should have been drastically slashed to maintain export and industry competitiveness and reduced dependence on China that played havoc across the world with an artificially cheap Renminbi.

I believe that today no one can write algorithms and collect/analyse data better than Google. Why don’t we reduce our dependence on our central bankers and outsource this job to Google.

Google can analyse a 200 yr action history of central banks of over 150 economies on the planet and chart the action and consequence graph and effects thereof and create a perfect model for each and every nation and define the interest rates and all economic actions that have a bearing on our lives. Algorithms will take harsh decisions which humans fear to take. Algorithms will become perceptive and computers will develop intelligence to take rational decisions.

This is seemingly the only way out and we won’t get a chance to blame a banker or an economist because the world and nations would be in a state of equilibrium.

No one can deny that all of our economists and central bankers have failed miserably till date.

The case for a perpetual Christmas

Recession has been the most pronounced word of 2009. Some call it the credit crunch, some just blame it on their respective governments, some blame their luck, the economists write articles analysing the happenings through a seemingly intellectual eye. My understanding is rather simplistic.

Recession is lack of confidence. Recession is lack of balance.

Imagine a boat ‘the universe’ which is sailing in balance and suddenly everyone moves to one end. It is most likely to topple because of imbalance. This imbalance can be irrational exuberance (2005 – 2007) or unsolicited fear (2008-2009) and that’s what we precisely saw in the last 5 years.

Over confidence burst the bubble - stock markets, real estate prices, easy credit (the ability to repay - notwithstanding).

And lack of confidence is preventing the recovery because people are overtly fearful.

Has there been any significant change on this planet? NONE. The same number of people have same ambitions and aspirations and same desires. People over spent and over consumed and stoked an artificial boom that could not be sustained. NOW they are under spending and preventing a recovery.

But Father Christmas is an exception – His birthday is celebrated with unparalleled zeal. He induces hope that is illogical and belief in magic that is never seen. Young gullible children are made to write their wish lists early in December so that the lists reach Santa well in time. People over spend, over consume, become irrationally happy, develop unsustained hopes and promises only to realise that Christmas does not last forever.

Credit card defaults, home repossessions and financial exigencies are quite typical of any January and Santa is missing. Because Santa does not exist. December creates an imbalance towards one side, January towards another.

Why can’t Human beings learn to be rational? Be positive all year round. Live within their means. Invest wisely. Spend for all their needs but none for their greed.

And we will never have an imbalance and will stop expecting Santa to do miracles.

Or simply put – Have a year round Christmas with rational exuberance.

Dollar’s hay days are almost over

Saddam Hussein was a tyrant and he cannot get any sympathy for any of his actions. But he was not executed for what he did to the Kurds or the alleged possession of weapons of mass destruction. He was executed because he started selling his oil in Euros.

For a significant period of time the US of A has been an effective global policeman. And rightly so – because if not US then who?

But the world’s biggest consumer of goods and services has been brought down to its knees by its over zealous spending population and the country is running a deficit of trillions of dollars that is likely to be its waterloo.

For as long as Americans continue to be the world’s largest (and biggest) consumers, no one can take the mantle away from the US. But gradually as the spending patterns shift and wealth shifts from the west to the east, the US$ will slowly and gradually bleed itself to death as the worlds reserve currency.

History has it. This is exactly what happened to the erstwhile reserve currencies of the world - Roman Dinar, Spanish Reale and the British Pound. The reserve currency status has allowed the country and its populace to live beyond its means and eventually be displaced forever.

UN says ‘New reserve currency must be found to end dollars undue privilege’, and rightly so. Because dollar has been and is the reserve currency, Fed could afford to simply add a few zeroes to it’s balance sheet and print money. Some say and ‘couple’ of trillion dollars.

If any other country had created a financial mess that the US and its bankers created, it would have been worse off than Zimbabwe, with a billion dollar note cheaper than the intrinsic value of a toilet roll.

This cannot happen overnight for dollar. It will remain strong for a foreseeable future but small incremental deterioration in its strength is inevitable and the world is beginning to take cognisance of this fact.

Is there an alternative? - No!! No country yet has either the intellectual or financial capital to challenge the dollar. China is too autocratic (almost harmoniously dictatorial), India a bit too nascent. But these two countries are formidable forces to reckon with.

It doesn’t matter how much China rants about the US$. They have financed the American debt of over 770 billion dollars in addition to their dollar reserves of over 2 trillion. So they need to ensure that the value of their investments is maintained. But future investments by countries must be in line with simple rules of portfolio diversification.

The moral of the story – Portfolio diversification reduces the un systemic risk. Invest while the world is still sceptical or else market efficiency will eliminate potential profits.

Where to invest – Renminbi, Indian Rupee and Euro…..

The rules of the global game have changed

US, Japan, Germany and UK (top 4) contribute roughly 40% of the global GDP and have held this position for a relatively long period of time.

Settlement in a western country used to be a thing of pride at one point of time and in some pockets of the world - it still is. In the hinterland of Punjab in India many people would erect large concrete airplanes on their rooftops to indicate that someone from that house is either settled in Canada, US or the UK. Within the village community, that family would be looked at with respect.

Employment opportunities were galore. The great Western dream (derivative of the great American dream) was a reality and anyone who had the will could have his way.

The biggest catalyst that drives an economy is its infrastructure impetus. Roads, Dams, Bridges, Power plants, Industry. For a long time (many decades after the II world war) these sectors were in a constant state of development and progress.

Steel consumption in the US rose in the post-War boom years from 50 million tonnes in 1946 to peak at 110 million tonnes in 1975 and then started declining to reach around 90 million tonnes last year. More significantly, employment in the US steel industry has gone down from over 500,000 in 1974 to less than 150,000 now. The second fundamental structural change has to do with a decline in the cost competitiveness of western manufactured goods arising from a steady increase in the wage costs. This has caused a shift to low wage countries in the east, first of manufacturing and, later on, even of services. Ironically, the unionised labour in the west, which was responsible for the high wage spiral, has been the worst hit by job losses in the current slowdown.

More than often I wonder that if all the infrastructure that is required for a given country is in place, what will drive the economy of such countries with an aging population and torn social fabric. My assumption is that the infrastructure demand of the top 4 peaked out at the turn of this century. Smart people saw an opportunity and shifted focus to financial products that started driving the economic indicators. CDO’s came into being and the ‘top few’ managed to maintain that position for another decade before the bubble burst and the world almost reached a precipice of collapse.

And the rules of the global game changed!

The western world has made itself totally uncompetitive by its wage system, social system and artificially expensive currencies that have killed the local industry.

Protectionism in immigration policies and trade policies is providing a seemingly effective shield to the western world. It cannot last.

The world is flat now and if Darwin is anything to go by – “Only the fittest will survive”