RBI's 'Smart' Moves Taking India Down & An Arb Opportunity

Financial Thoughts screamed at the top of the voice on 21 Oct 2011 against the indiscriminate monthly rate hikes by RBI. On a blog post on that date Financial Thoughts predicted as follows:

“Those who support further indiscriminate rate hikes must go back to US in 2006 when US Fed was blindly hiking the rates in pursuit of a mirage, which achieved nothing but a fantastic economic collapse in 2008”

Now many economists say that the glory days of India’s near 10% growth is over and may slip back to the Hindu growth rate. If that happens all credit must be given to the (foolish) policies of RBI.

RBI has almost killed the economic growth in India through reducing liquidity and ensuring that no-one can borrow at reasonable costs from banks and do business. As the expansions are put off and the customers decided not to buy as cost effective borrowings are not possible, the business in India got impacted. The recent IIP data tells more about this chilling story – all orchestrated by RBI

RBI is supposed to rescue banks in dire situations. But RBI is now ensuring that many banks in India will face a dire situation with increasing bad and doubtful debts by killing the growth. Many a business in India will struggle to repay as they are unable to generate business volume – again thanks to RBI who has ensured that the interest rates remain high. (Of course this will create more unemployment in an already overpopulated country, giving rise to social tensions!).

But RBI doesn’t care. It goes ahead with its anti-Indian policies with impunity.

Arbitrage Opportunity

After encouraging short sellers (through comments in Nov 2011 that conveyed message that RBI won't intervene.......) to take Indian rupee to record lows, which in turn caused a flight of FII and FDI funds, RBI has decided to attract more dollars by freeing the interest rates on NRE deposits. What a bold idea!!. You got an easy route to get dollars through FII and FDI but you follow own foolish ideas and policies and you get into a situation that resulted in taking such a drastic steps. (India must think of calling back Bimal Jalan or Reddy as RBI Governors)

Such policies provide something great for discerning investors. Well it has a great arbitrage opportunity. But this is limited to Non-Residents. (Don’t know why, usually residents get step motherly treatment in India). Borrow at LIBOR or EIBOR where the 1 year rates are less than 2%. If you borrow from banks, then they will add margins and say you can borrow at 3%. Take the funds to India and park it some of the banks who offer rates as high as 10% (e.g. Karur Vysya Bank) as repatriate-able NRE deposits. Then get into a hedge and cover the position (if you strongly believe India rupee will appreciate, then you can take the risk and leave the position uncovered). Assuming that the cost of the hedge is 1%, your arbitrage gain can be as high as 6%. If you are able to do this on one million dollar, your arb gain is $60k. If you gamble and leave the position open and if the Indian rupee appreciates, the gain could be much more.

(Disclaimer: All investments & arbitrage deals have their own risks. Author does not accept any responsibility or liability for the above mentioned arbitrage opportunity. Above arbitrage opportunity is mentioned for education and discussion purposes only. No investment or arbitrage advice is attempted in this blog, which is just a hobby. Anyone attempting investment or arbitrage must do his/her own study, due diligence, situation analysis and must take the advice of an authorised financial consultant.)

Indian Economy Under Attack & a sleepy leadership

Indian economy’s Achilles’ heal is its foreign currency reserves. However, in the recent years the forex coffers were overflowing thanks to the inflows from IT companies, investments in the growing stock market on the strength of a strong economic growth exceeding 7% while FDI also flowed in to tap the unlimited potential in India. India did not grow much during Nehru’s& Indira’s socialism. Both father and daughter were out of touch with reality and never understood the economics of positive capitalism nor the historical tradition of strong business culture of India. Some of the communities/castes in India are so business oriented that they left their mark all around the world including Europe, Africa, US, etc. (Ask who dominates some of the economies of Africa and who is the richest person in the UK – the answer is Indians)

Well Mr. Narasimgha Rao ended the stupidity of ill-conceived socialism and gave free hand to his then finance minister Dr. Man mohan Singh. Thereafter India boomed as the entrepreneurial spirit was freed from its bondage. India might have got the freedom in 1947, buts its economic freedom was in 1991.

Unless the current government show the will to pursue and do what is good for India, Indians and Indian economy in the long term, India’s growth story may soon be forgotten!. Financial Thoughts is concerned about the following two aspects:

1. Why does the central government hesitate to allow FDI in retail sector? We are not speaking about 100% but 49% or 51% in multi brand type. What would have happened to India if India rolled back its IT initiative just because there was a strong opposition and strike? Hope finance ministry shows some leadership in coming out with feasibility study supported by numbers to show and convince the opposition why the FDI is step in the right direction! (in my current role as Director-Consulting of a multinational consulting firm, I am involved with several feasibility studies.) It is a shame if Indian finance ministry lacks this talent!

2. RBI and its interest rate. Another set of IIP figures were released recently that show the dismal performance. As Financial Thoughts discussed in an earlier blog article, it is the unbearable interest burden RBI puts on the business. Someone was trying to justify higher interest rate saying that that RBI is concerned about India’s poor and it wants to fight food inflation ! What a joke? India’s retail distribution system is among the most inefficient in the world and every year tons & tons of wheat and grains decay in Food Corporation of India’s rat infested godowns! Improve the distribution system with the foreign retail giants and modernize the warehousing, storage and distribution.

Another reason is the corruption. Whatever grain put into the government sponsored subsidized system meant for the poorest of the poor gets diverted into black market by corrupt officials.

Can’t understand when these are the basic causes, how higher interest rates will control the food inflation. RBI is killing the business and economy in India. Finance Ministry is among the worst performer. Both RBI Governor (Subbha Rao) and Finance Minister (Pranab Mukerhjee) must be removed from the position.

It is the time for Annual Performance review for the managers of many companies, banks, etc. If we try to assess the performance, both these guys – RBI Governor and Finance Minister – must get ‘Not Met Expectations’ ‘Marginal/ Poor Performer’ etc. Under Jack Welch kind of management, both must be kicked out! More benevolent management would put them in some kind of performance improvement program, which Dr. Manmohan Singh must consider, if he decides continues with them.

The stupid RBI policies results in a vicious circles (i) Falling economic growth (triggered by the higher interest rates) will cause FII and FDI to fall, creating a vicious circle, resulting in more balance of payment pain because instead of attracting foreign currency, it will cause a flight f foreign investors! Hope India won’t become Argentina of 2001. There are many who are jealous of India and 'neo-George Soroses' could attack the Indian Rupee if they realise that the current trend of flight of FII will continue due to falling economic growth. RBI MUST ACT!! (ii) As mentioned in an earlier blog, falling economic growth will lead to bad debts resulting in reduced risk appetite of banks, further reducing the credit flow into the economy, creating another vicious circle.

Let us hope, some urgent prudent steps will be taken. Prudently, RBI must reduce the interest rates at the earliest to encourage more investment, expansion, CAPEX, etc. so that the economy starts growing above 7% attracting more FII and FDI improving/ stabilizing the exchange rates in India. The will avoid the vicious circles mentioned above.

India's next IT boom! FDI in retail sector

Prime-minister of India has made his stance very clear on FDI on retail sector. No Roll Back. Financial Thoughts salute him; and frown upon other myopic politicians who cry for roll back.

Financial thoughts believe this is one of the boldest decisions in India after the introduction of IT in late 1980s. During those days, I was in higher secondary school and when I used to visit Canara Bank branch where my dad was the branch manager, I had to wade through the protestors sitting with placards saying "Down with Computers! It takes away our Jobs".

This type of protests was common in front of banks, telecommunication offices and several other government offices. Communists and BJP were among the protestors. Congress stood behind the changes as it was introduced by Rajiv Gandhi. There were a few incidents where the protestors even turned violent and smashed computers. 

Now the history is repeating with FDI in retail sector. Let modern retail sector come to India. It will do wonders for Indian farmers. Now most of the perishables like vegetables get lost in transportation because of decay, etc. Hardly you can see a refrigerated truck in India. 

Moreover, the middlemen and traders ensure that the farmers live in poverty and they don't get the reward of labour. About 70%-80% of the value creation is eaten away by the greedy middlemen. It is they who protest! just as the lazy workers in the 1980s!

Did India lose because IT and Computers came to India? Didn't a new middle class of IT professionals boomed in India, fuelling consumption, which augured well for Indian economy and stock markets? Did the computers added jobs or took it away! As you know, it added millions and millions of jobs - the jobs that took India's fame across the world. IBM, Microsoft, CISCO and a lot other multinationals opened shop in India. No one complained?! 

Let us support at this juncture the bold decision of Dr. Manmohan Singh. It will create a sophisticated middle class in Indian rural sector, which will get their better reward for their produce and labour. It will improve India’s farm productivity- which is among the lowest in the world now. Let Walmart, Tesco and others open shop in India just as IBM and Microsoft did. That will propel India's growth to new levels. Of course, there could be some job losses - but like the IT and Computers, new jobs that will be created will be 10 times of what is lost.

Nasty Euro (Part IV) - Will Game Theory help to solve Eurozone crisis?

Just a few weeks back, the media was full of news of energetic Sarkovsky and enigmatic Merkel meeting together couple of times in a month and admonishing Greece. But now, both are at logger heads.

Whilst Germany (Merkel) supports Austerity Measures as the way out of crisis of Italy, Greece and other Eurozone countries, including France, who is most affected by Italy and Greece. France disagrees. They believe ECB must support these countries with European version of Quantitative Easing.

The result is there is stalemate, resulting in strong rumours and speculation that the time of Euro is over -it is just  a matter of time the modern "Continental System" of Euro collapses.

Let us see whether Game theory (a mathematical method for analyzing a person’s success based upon the choices of others) can help to find some solutions. It is reputed that Gordon Brown of UK used Game Theory to solve some of the problems, when he was heading the Finance of UK, during the premier ship of Tony Blair.


For those, who are not familiar with the theory of Game theory, let us explain with an example. One of the canonical examples of Game theory is called “ The prisoner’s dilemma”. This shows why two individuals might not follow the most logical action, even if it appears that it is in their best interest to do so. The example of the prisoner's dilemma is given below:

Problem: Two stupid men are arrested for some crime that will put them in jail for 1 year as maximum prison term. But the police do not possess enough evidence to convict them. After separating two men, the police offer both a similar deal- if one testifies against his partner (assists police), and the other remains silent, the testifier goes free and the other receives the full one-year sentence. If both remain silent, both are sentenced to only one month in jail for a minor charge. If each acts stupid, each receives a full 1 year sentence. Each prisoner has following choices (i) either to assist police or (ii) remain silent. What should they do?

The beauty of Game Theory problems are that it is not mathematical. There is no mathematical accuracy in the answer. This is the sort of decisions finance managers and economists face.

Coming back to the problem, each player is concerned with lessening his time in jail. There is a chance that they would want the other to get maximum prison term, both will testify against one another and the result is maximum sentence for both. If they help each other, taking others interest also into account, they will get only one month each, as police don’t have the evidence. In the game, if the sole worry of the prisoners seems to be increasing his own reward (i.e. selfish/egoistic), then they would get one year each. The interesting aspect of this problem is that the logical decision leads both to betray the other resulting in maximum prison terms. While illogical decision not to pursue own interest (of going free) would result in maximum common benefit (both gets just one month prison term) and hence the best choice for both

Applying the above situation to the Eurozone, France and Germany has following options:

Option 1 – Both Germany and France agree to implement some austerity and ECB involvement.

Option 2 – France is forced to go in with German policy

Option 3 – Germany is forced to toe French policy

Option 4 – No agreement between France and Germany. At the time of writing of this article, (21 Nov 2011), both has adopted Option 4.

Using the basics of game theory, the pain of both France and Germany and Eurozone at large will be solved by following the Option 1. All other options involve maximum prison sentences! i.e. Eurozone recession, unemployment, losses for companies and hence to banks, lack of business confidence, lower tax revenues, etc. would be some of the symptoms of this punishment.

Foolish Rate Hike (Part II)

On 26 Nov 2006, a few terrorists landed in a boat in Mumbai and began to attack the economic centres with an aim to bring havoc to Indian economy. They shot down business leaders and foreigners in historical Taj Hotel of Mumbai and a few other five star hotels, besides running amok in the City shooting and killing. They hoped that this will do damage to Indian economy, reduce its growth by scaring away foreign investors and dreamt about loss making Indian companies and a disillusioned population, amongst others.

India brushed aside this incident and marched ahead.

However, what terrorists could not accomplish RBI has achieved!

India once became tantalizingly close to 10% growth p.a. However, RBI beat Don Quixote (who found wind mills extremely dangerous fighters!) in seeing a monstrous threat in single digit inflation level and began to adopt such drastic measures that appeased those who were envious of India’s growth. The leadership of RBI must be able to think independently like Mr. Reddy did when he said no to the aggressive lobbying to allow funny credit derivatives in India.

Why was RBI in a hurry to raise interest rates to beat inflation, when the inflation was mostly caused by oil price hikes? It was evident that blindly copying text books don’t help. As Financial Thoughts highlighted last month, India needs more supplies – just by choking demand, the RBI kills the economy. And it seems that it is almost happening.

The recent economic data shows that the industry production is the lowest in the recent past. Who will go for expansion when the interest rates are uneconomically high and no feasible business transactions is possible? The result is that as expansions are curtailed, there are lots of signals of CAPEX declining. Capital goods production number within the recent IIP was negative 6.8%. As investments in the economy drop, the accelerator and multiplier effect works against the economy. Economic activities drop or dry up. Result is the sharp drop in turnover and profits while interest burden increases. No wonder many companies reported losses in the last quarter (Terrorists who hate India must sent a Thank You note to RBI).

Many say by next quarter, the banks will have higher NPA and the banks shares could drop. Not only that the banks will get scared and reduce lending. That could send the economy into another downward spiral (Well, Terrorists who hate India must sent another Thank You note to RBI)

Add to RBI’s fight against some imaginary hyperinflation, we have one of the most inefficient and corrupt government at the Centre. (When Vajpayee Govt. came to power, for the first time they identified the need for modern roads in India. If you drive at 100km p/h in three or four lane roads in North India, you must remember gratefully Mr. Vajpayee for his vision of linking the corridors through highways. This unleashed lot of investments, CAPEX and filled the pockets of millions of Indians resulting in an economic jump start that catapulted India into high growth from the so called low Hindu growth rate).

All governments that ruled India for more than 64 years (post- British Raj) are answerable to this - their record is just slightly better than British Raj. The Raj also brought in railways, telecommunications, electricity, etc. However, they governed India for their benefit and their Indian associates. Similarly, the post-independence rulers governed India for their benefit and their associates. That is what evident in the corruption and the corrupt politicians have enough connections to walk away with the ill-gotten wealth. British Raj shifted the most of the Indian wealth back to their country, while a bulk of the post-independent India’s wealth is being shifted to Swiss banks and other secret accounts. Although there is cry in India to bring back the wealth, it won’t happen because the ‘fox is the watchman over the pen (i.e. hen house)’.

One of the chief reasons for inflation and declining growth is the Government inertia. Plenty of of projects are being stalled by government departments or denied environment clearance or land acquisition issues and so forth. It saps the energy of Indian entrepreneurs and it impacts the economy.

What no one speaks is the Indian unemployment (already it is more than 20%-25%). The slowdown in the growth results in lesser opportunities. Frustrated youth will get more frustrated! But most of them will blame it on their unknown crimes of the past birth for this life’s troubles!. That is the Indian philosophy. They usually blame their previous birth for the troubles. That is, by the way, a good escape mechanism.

Financial thoughts believe, risking a little inflation and environment is nothing but a calculated risk for India’s growth, well-being of its population by having employment creation, more job opportunities, better price realization for agriculture produce that augur well for its farmers & farm labourers and overall wealth creation.

This means taking the risk of taking some criticism and blame in the foreign media and so called foreign ‘experts’, but Financial Thoughts it is worth taking this risk.

Overall, the situation is not out of totally out of control yet. By initiating steps to reduce the financing costs on borrowers and boosting the economic activity by favourable RBI policies (including immediate slashing of rates) and speedier action by Govt., Indian can still retain its 7.7% growth for current fiscal and ensure growth rates above 8% going forward.

Let us hope for the best!

Or let us emulate French Gunners (French Artillery was best in Europe those days) at Waterloo battle when Napoleon’s stupid decisions ensured that the battle was slipping away from them. Unable to do anything else, history records that that the French Gunners wept!!

Nasty Experiment Called Euro (Part III)

Financial thoughts have been warning about the fundamental weaknesses of Euro creation and the problems it causes to Eurozone and rest of the world. It seems that after Napoleonic Continental System introduced in Europe in early 1800s, Euro is the most unstable, inconsistent and unsustainable proposition Europe has seen.

Under the burden on unbearable terms of Continental System, Russia broke away from  the system in 1810, triggering a massive war that has not seen by the world till then. The war achieved a reverse result. Russia seemed weak and was about to get defeated by Napoleon's aggressiveness, instead the passive strategy of Russia paid off in the end.

In the new gamble of Euro, the Russia's role is taken by Greece, who - just like Russia in 1810- cannot bear the terms of agreement of Euro. Like Russia it has no other option but to break the agreement. In 1810 it brought about the wrath of Napoleon on Russia.

From 2010 onwards, Greece is playing Russia’s role of 1810. Recently in late October 2011, Germany and France led a marathon meeting once again that last about 11 hours. One of the results was the announcement of a package for Greece. Instead of agreeing to it, the Greek prime minister put it for referendum, attracting the wrath of France & Germany. This time, Europe does not have a single, mighty, powerful genius like Napoleon, but has several midgets making it for him. They are turning the anger on Greece!

Two hundred years back, it would have been seen by the world that a meek Russia is about to baulk down at the pressure of mighty Napoleon. However by early 1813, it was evident that the glory and mighty days of Napoleon was over as the white winter licked him while Russia stood battered but intact! In the same manner, it may appear now that meek Greece would bow down and the Eurozone powers will bask in glory. But as the currency unsettling battle is emerging in the Eurozone with major European powers try to kick Greece into economic humiliation , little do they realise that it could be the tame end of another 'Continental (currency) System' much like Napoleon’s grand inconsistent and unstable Continental System.

Inconsistencies of Euro are many and well written – i.e. (1) monetary union without political union does not provide any cohesiveness, but a nightmare (2) it is just ludicrous that Eurozone has one currency but different states have to borrow at different rates. Whilst Germany borrows at low rates, Spain and Italy have to pay high interest rates. (Just imagine what it would be like if Delhi state of India borrow at low rates while West Bengal is forced to pay high interest rates). (3) Eurozone has one single currency but has several states with different credit ratings. So, how do you decide currency rating level – someone told me that Euro has mainly replaced Duetshe Mark and hence, one need to look at Germany. Is that true? (4) Why does Germany and France take major role in talking about Euro, what about the rest of the 20-odd states that is supposed to be part of Euro. Is there a class system in action?

Well some of the inconsistencies may not appear immaterial, however no one can deny that there some strong inconsistencies do persist!!

Hold your breath – as the financial markets of the world will go for a tailspin as modern “Continental System’ is preparing itself to break up. Do take a hard-look at your portfolios and decide - this black swan may decide to appear sometime in the near to not so distant future!

Another Foolish Rate Hike?

For the 14th time, since Mar 2010, Reserve Bank of India (RBI) is likely to raise interest rates again on Tuesday.

That could be a record on rate hikes!!

The purpose of all these rate hikes is to curtail inflation, especially food inflation. However, the recent inflation figures show that the overall inflation, especially the food inflation remains high at 10% or slightly higher.

Evidently, the rate hikes are not working. But it seems that RBI is bent upon doing the same thing again and again to reduce inflation (Someone told sometime back that one of the symptoms of lunacy is doing the same thing again and again and expect a different outcome!)

Financial Thoughts view India's inflationary scenario differently as follows:

1) Interest rate hikes + Petroleum product (diesel, etc.) prices will ultimately drive up the cost of production at farm level.

2) The food prices in India are lowest among the world. That means the farm profitability in India ought to be among the worst in the world. No wonder many farmers in Andhra Pradesh decided recently to leave their farm uncultivated. If you travel through the picturesque Kuttanad region of Kerala state you can see hectares after hectares of agriculture land uncultivated, just because it is no longer profitable.

3) A recent article on rice exports has shown that the rice from India is the cheapest in the world. (http://gulfnews.com/business/economy/indian-rice-exports-will-rise-as-floods-cut-thai-supplies-1.903088). This implies two issues (i) there is potential to charge more (ii) if the profitability of the uncultivated farm lands are ensured, the supply would increase, partly contributing to the Supply in the Indian economy which would ease inflationary pressures

4) Those who support further indiscriminate rate hikes must go back to US in 2006 when US Fed was blindly hiking the rates in pursuit of a mirage, which achieved nothing but a fantastic economic collapse in 2008

5) The solution for the inflation in India is increase the Supply side. A booming India has insatiable demand for more vehicles, better food, better & new road networks, travel facilities, more air ports, better ports, more metro railways, and other infrastructure facilities. But the mind boggling corruption at the high places is stifling the Supply side. Billions worth of infrastructure projects are not yet approved or actioned by several government (both central / state) levels either fearful of intrusive media/investigation agencies by honest officials or just because the dishonest ones negotiate better bribes as there seems to a rapid inflation in bribe rates as well.

As Infosys Chairman Mr Moorthy mentioned, after all it may be better to legalise corruption in one way or other - as some of the western countries legalised prostitution!

6) Let the food prices increase and let it stabilise at a higher level (than current levels) so that the farming becomes a highly profitable venture so that the teeming millions of India can turn to farming, instead of turning away from it and migrate to cities, which in turn chokes them and create infrastructure nightmares.

Based on the news and information, it appears that the rate hike is highly likely. That could trigger a stock market correction. Hence, I am going to take protection for my portfolio through some cheap puts and preparing to buy selectively as the market crash could possibly offer some good stocks at deep discounts.

Happy investing! 

Another proof that Warren Buffet is the Most Intelligent investor !!

In 1934, Ben Graham has written one of the best investment books “Intelligent Investor” and a very wise and intelligent investor read it at the age of 19. The reader of the book (who till then tried his luck with charts and technical analysis) understood the value of the book and complied with the principles religiously. And he became the most intelligent investor in today’s world and currently enjoys position as the second richest person in the world.

Almost every investor ought to know this person - None other than investing genius Warren E Buffett.

Now he asks American rich to give back some of their wealth to the government so that it can balance itself while walking on the tight rope of fiscal balance. US deficits are so high that it can topple the fiscal balance and drive its economy deep into recession and stagnation over the next decade.

Warren Buffett supports taxing the rich and knows a lot about becoming wealthy.

BUT most of the American rich class refuses to do this. The stupid rich who refuses to help their own Nation at this moment of crisis lacks the intelligence of Warren Buffet due to the following reasons:

1. Rich can become richer only in a growing economy. Hence, by paying more taxes and saving the US economy, the rich is helping themselves. A decade of recession doesn’t benefit anyone, including the Rich. Whatever tax they pay now, can be recouped easily through higher profits from their businesses and increasing asset values. Warren Buffet knows this.

2. China growth during the last decade averaged about 9%-10% and even if it slows down (as desired by some myopic western economists), it will easily clock a growth rate of 8% while US economy will face recession. This will accelerate the takeover of No1 slot by China as the wealthiest (& largest) economy in the world. The humiliation of China overtaking the American pride as the No 1 economy will add salt to the injury. Let rich US American be greedy and stingy and cling on to their wealth as their own Nation’s pride goes down the drain.

3. Some writers speak about Warren Buffet being stingy and miserly. I don’t think so. (His middle class attitude gave him robust health and balanced approach to life that helps him to think on his feet. This attitude is comparable to Ben Franklin). On the other hand the rich class of the US who doesn’t want to help the US Govt by agreeing to more tax to reduce the debt burden of the Nation is the real miserly and misery lot.

4. Well, if the statistics provided in the recent press is correct, the poor class in the US is the fastest growing in the world. With the next possible recession in the US, the poor class in the US would rapidly rise and you can see sorrowful souls in soup kitchens burgeoning. Don’t know how the rich class in the US with see this – possibly the villain character (i.e. Scrooge) in Charles Dickens novel 'Christmas Carol', would look a gentleman compared to them.

By refusing to go by the most intelligent investor Warren Buffet’s advice, the rich class of the US is helping China, torpedoes their own future wealth and proves Mr. Scrooge is better than them.

US Economic sluggishess = 1990 Japan. World economy will grow, as in 1990s

Recently, Fed came out with the most funny statement that meant there is 'significant risk' to global economy. Are they still think too much of themselves?!. Of course, US could follow Japan of 1990s thanks to the stupidity of US Fed leadership, but the world won't follow the recession of US.

World will brush aside US just as the economic sluggishness of Japan - then the 2nd largest economy - was ignored by the world. Nikkei Index crashed during 1990s from 20000 to 8000. But during this period US Dow and SPY recorded sharp increase. So did the European indices. So, going forward, you will see corrections in stock indices of US, but Emerging Markets - especially China and India - will march ahead. And of course, those US companies with global reach and focus on these markets could also do well.

Soon US will become the SECOND largest economy in the world as China claims No 1 slot. Already they are ahead of US in many fronts. e.g the largest car market is in China now, the largest number of new millionaires. There are many who wants to see China to go down economic recession route along with US just because they export to US. But China is moving into their untapped potential of huge population with increasing wealth. China will never enter the recession zone! on the other hand it will continue to grow

On the heels is India, which will topple Japan as the third largest economy during this year or early next year. India's growth momentum is unstoppable and they do not have any significant exposure to US except IT. Hence, they are very safe in today's global economic environment.

Both China and India will benefit from reducing commodity prices.

Hence, even if US hits recession zone, these two giant economies will act as the counter balance.

Don't worry , be happy and enjoy the Discount Season in the stock markets!

Clash of Financial Titans

It is almost two months since this blog has been updated. The reason is that I was on vacation and had several other issues to be tackled including a possible shift in career. However, financial thoughts never left me because the last two months were really crazy. Major financial events were:


1. Fear of USA defaulting on its debt as the President and Congress quarreled on debt ceiling. Once again, after the disputed election of George Bush, it proven again that USA is not far from becoming a 'banana' republic.

2. Downgrade of USA by S&P and its consequences. Whilst the person who showed the courage to downgrade USA (which I believe is apt given their debt burden) has lost his position (of course USA does not use coercion!) the world financial markets went for a topspin. I made the opportunity to make some long term investments in affordable quantities of some good companies. Warren Buffet makes jokes of folks pursuing diversification as an investment strategy and states that diversification is required by ignorant investors. Well I have to admit that I am one of those ignorant ones and given the kind of corporate governance these days, I have no courage to make concentrated investments. In fact, I revisited my investment portfolio and reduced the certain investments, which I felt suffered from concentration risk.

3. Fear of Greece default and its consequences on French and German banks. British, as has been consistent with their historical record, is adept in keeping distance from the continents problems until dragged on to it, is proudly claiming that their banks are immune from the catastrophe that will hit the banks in the continent. However, this confidence may be misplaced as the 'liquidity winter and freeze' that will hit the European Banking & Financial Sector should Greece default (= 2xLehman?). It will blow cold chills winds into the British Isles as well, which will force them to act. Although not in financial front, this happened during Napoleonic times, First World War and Second World War. (During my recent visit to UK, the woes of economic crisis were visible almost everywhere, which recently culminated in riots. It is a wonder how this Small Island commands respectable position in the world. It seems that the nations prayer "God Save the Queen/King' is being answered through generations)

During my vacation, as I focused the thoughts on the financial safety of my investments, the near future outlook offers no comfort. Threats of double dip in US, weak Eurozone, possible collapse of Euro, slowing Indian & Chinese growth, are major challenges. All started with the fall of US real estate market in 2007, which is caused by Ben Bernanke’s "Himalayan Blunder" of fast interest rate hikes. Allan Greenspan open the doors of Real Estate boom with low interest rates and Ben crashed it with higher rates. A handful, mainly hedge funds, FIs, HNWIs,etc made tons of money (but many and the most of the retail investors lost) when the real estate crashed. Whilst banks and institutions who lost money were supported by Govt (bail outs) whose senior management continue to enjoys bonuses, the middle class is now being pushed in poor class.. see the latest news of increasing poverty in the US.

I believe there is two schools of thoughts caused this crisis – a clash of Financial Titans ( Thoughts). Allan believed in credit, somewhere I read that he has stated that a person can be born in credit and die on credit if the welfare state looks after his needs like hospital, education, old age, etc. He believed in credit and it is stated that this reflects in the book he authored after retirement from Fed Governor position.

Ben on the other hand is a traditionalist and doesn't like too much credit and hence tried to de-leverage the US economy too soon too fast, resulting in a spectacular crash and made mess of everything. After Lehman crash, confused Ben hurriedly slash the interest rates to all time lows. (May some one ask Ben, why he hiked the interest rates in 2007 in the first place, if only he had to slash it lowest levels in just one year? No wonder there are many who believe US and World would be better if Ben is replaced!!). Remember Ben and his team could even know how the interest rates could impact the economy and wide social fabric- economic mismanagement is evident by all US admin and they are making predictions!!

Some economists say it will take a decade to clear the things up. If so, the stock market may remain sluggish. Hence, I have also decided to give equal emphasis to equity derivatives to make some gains out of it, possibly through some option condors.

Oh! US Politics

USA is now competing against Greece - US Debt level is approaching 90% of its GDP while Greece Debt level is 120% of its GDP. Some studies have pointed out any debt burden exceeding 90% GDP is a long term growth deflator in view of the interest burden and repayment commitments.

Well Greece is accused of being spending too much and taken to task in international forums. It may be noted that the ultimate burden of the debt is felt on common people who lose jobs and face other economic hardships.

Let us see how US has built up this much debt

1) During Bush era, the costly Iraq and Afgan war commenced. Both cost about 2-3 trillion dollars and still bleeding. It is true that some of the American (oil) companies made big money in Iraq, but very little has been given to the US Govt in the form of taxes.

2) 2008 Financial Folly of "great American financial innovators' mixing toxic assets with good ones created one of the spectacular financial fireworks (crashes) in the human history. US Govt had to intervene, after the initial hesitation (that resulted in Lehman bankruptcy) which cost more than 2 trillion dollars.

3) Obama Administration's idea of extending social benefits of free health care etc also added a few trillions more.

4) Then there is the financial stimulus to kick start the economy also resulted in a few trillions to the US Debt

Overall it looks US policies were as good as Greece's! Hope US won't come work with 'financial innovation' or 'financial engineering" similar to the one that brought about the 2008 Credit Crisis.

There is no doubt that the US should cut its debt. The common sense says that it can be achieved by raising taxes and reducing expenses. But Republicans do not want to raise tax while Democrat (&US President) do not want to cut expenses.

Now there is every effort to increase the debt level with minimum tax increase and little cut in expenses. Such actions are meaningless. Without an effort to bring it down (which won't be easy) means the problem just gets postponed! US must take negative growth and unemployment for a few years rather than risking a 'debt crisis' in the future. The way it goes now, a future US debt crisis is a 'white swan'.

Will US debt crisis become a global crisis? Well, there are many who say that it could be a global problem. However there are a few who says it need not be. But it will accelerate the predictions (UN and IMF has already published papers) about the unavoidable move from US dollar as the world trade reference currency in global trade. A debt crisis by US will erode confidence in US$. Then China and India will buy oil from middle east and minerals from Africa in rupee and Yuan which will find acceptance from the exporting countries. Or they may prefer Euro. USD decline - which is their own making - is now not unavoidable, if any only if, US stop acting like a banana republic.

It is pertinent to note that Sterling was the global currency till 1950s. About 87% of the global reserves were in Sterling in 1947. After India got decolonized, the US dollar started its journey to become the reserve currency replacing Sterling. One of the reasons for this was the preference of former colonies to have non-Sterling currency as the reserve currency. Moreover US role in the global arena increased as they had great leaders like Roosevelt, which seems to be extinct in the current generation of US.

Well for investors, these are tumultuous times. It is better to trim down the exposure to the USD denominated assets.

Nasty Experiment called EURO (Part II) & Other Issues

On 27 Nov 2010, the topic by this blog was Euro and the imbalances it causes. The article was concluded saying that as long as Euro exists, there could be troubles. We stand vindicated. Greece issue has re-emerged with vengeance. All those who are involved are in state of confusion. Whilst French banks take a realistic view of part write offs, Moodys and S&P says it will be a default - first sovereign default in Europe since the second world war. (During June 2011,both Moodys and S&P have downgraded Greece to almost default status, is causing upheavals in markets, world over.) A default will have serious issues for Euro.

Third time during the last 20 months (Apr 2010, Nov 2010 & June 2011) the world's markets were rattled by Euro problems.

Europe is likely to be hit the hardest among major economies by a potential global slowdown in 2012. Europe faces the most bleak future among major economies, in part because the sovereign debt crisis in some euro zone countries (say Greece, Ireland, Portugal, etc) is unlikely to end soon, casting a shadow over the euro's future.

The domestic market in Europe is not recovering very fast, so most likely Europe's economy is driven by external demand (but exports are also increasingly difficult - ask China). Strong economies in Europe like Germany is also facing shrinking population resulting in lower economic activities and overall Europe is not a growth story at all, even in long term.

Moreover, the global economy is slowing led by the largest economy in the world. Definitely US is not recovering fast as predicted - if not going back into recession. Many economies (including USA) will have to stop stimulus and others tighten policy. The recent squabble among US politicians on raising debt levels show that US does not much options left.

As to the challenges facing the emerging economies , many has changed their pro-growth policies (due to concerns on inflation), hurting economic performance. India and China have been constantly increasing the interest rates during 2011. More hikes are expected. Overall, emerging markets is expected to continue to raise interest rates and allow their currencies to strengthen, causing a slowdown in economic growth in those countries.

In addition, oil supplies will likely be interrupted by the unrest in North Africa and the Middle East, resulting in high oil prices, which will further dampen the economic recovery of the world.

Be ready for more problems for Euro & rest of the world, which could adversely impact the world's financial markets.

Let us hope for the best; but prepare for the worst.

Future Blackswans & Possible Solutions

Once I was watching a programme in Discovery channel on chimpanzees. Like many animals (and humans?) chimpanzees also live in communities. They hunt together, gather food together and warn each other of any dangers. Each community is led by a leader. Any perceived challenge to the leadership is met with brutal attack till the challenger shows the body language of submissiveness. However, one day the incumbent will lose power to a challenger.

Humans are no exception. Human history is full of stories of brutality for the sake of power. Many human societies (called countries) even in the so called modern times of today - recent examples include Libya, Syria, Bahrain - attempt changes to leadership (or preserve leadership positions) through brutality.

But in certain human societies mainly Europe, North America and some parts of Asia, the community leadership changes no longer occur based on brutality. Challengers are given more peaceful means of 'election' to challenge the existing leaders. But we need to remember that not so long ago; Europe also followed the path of brutality to enforce change in leadership.

Interestingly, there are other common elements in the animals living in communities and humans, other than leadership. Interested readers may wish to explore more on this topic. However, the human societies are much more complex and have two distinct elements which animal kingdoms can never boast of - religion and money.

Various religions dominate different regions of the world. In certain communities (or countries) religious leadership takes the role of community leadership. If religion is strictly enforced, the society faces a big problem. Almost all religions do not tolerate challenge against their religious laws. In countries where religion is strictly enforced, the kids are trained only in religious laws. So the community is always forced and brainwashed to think 'within the box' stifling creativity and progress. If the religion is separated from community (state or country) leadership, then at least a few will dare to think 'outside the box' unleashing invention, creativity and progress. That is why countries such as Japan, Korea and West comes out with innovation after innovation. Let us hope the current MENA revolution will do what French Revolution had done for Europeans. However, at this point, when I write this blog, it seems that Egypt (equivalent to French during their revolutionary period) leadership will be taken over by the dominant religion (Muslim Brotherhood) who will force the community to think and act 'within the box' with predictable results & with no hope of creativity or innovation. Egyptians, who want to enjoy the flagrance of freedom, will continue to try to escape to the West. Let us hope Egypt will become a role model for the rest of MENA by electing a non-religious leadership to guide the Egyptian community who may re-create the times of Great Pharaoh's, whose technology (e.g. construction techniques used in Pyramids, preservation of mummies, etc) still amazes the scientific world.

Another distinct element of human society is the use of 'money' as a medium of exchange, which replaced barter system (some studies have pointed out that some animal communities also follow a kind of crude barter system to exchange favours!). It is interesting to note that Russia was able to do survive its economic crisis in 1998 and brush aside any offer of help from IMF as they focused more on barter system. (http://www.richardccook.com/2010/01/10/in-time-of-crisis-barter-works-and-may-have-saved-russia-in-1998/).

However, modern human societies, irrespective of religion and race, hold on to money. Money is a common factor defining purchasing power, status, wealth and it is something all communities tell their kids to aim for. Whilst individual nations have their own currency (money)to facilitate exchange of goods & services within its borders, there is only one global currency -the mighty dollar. But it is heading towards a collapse. China and other nations who stock the paper money called dollar is already nervous and it is a matter of time that they turn against US dollar and seek other medium to store value. Americans are not producing any goods and services to exchange with the rest of the world. But they buy as much as they can and settle them in paper. Once the world stops accepting the valueless paper, American economy is doomed, which will impact the rest of the world too. A dollar collapse will bring in 10x misery to Americans than they experienced with Subprime collapse. Let us hope USA gets its act together and start exporting something really worth, other than its paper currency.

These two features of human society - religion and money - have the potential of unleash future blackswans in the medium term. If MENA region slips into further religious and political leadership turmoil, then oil price could go through roof, unsettling many economies in the world. If the dollar collapses, then only history can tell us what will happen to the US economy and all economies linked to it. Many economies are significantly dependent upon on USA as it is their major consumer market - e.g. Chinese products, Indian IT and Arabian Gulf Oil. Given the impact of dwindling population of many western economies, they also look to US markets for exports.

Given the possibility of a black swan lurking around, you may wish to protect your portfolio against a disaster scenario. Well, I think stock options may be one of the answers. For those who are not familiar with stock options, broadly it can be defined as a form of insurance, especially Put options. It may be worth to expense off cost of options while waiting for the black swan, which could in fact unleash a profitable opportunity, which actuarially could repay the cost of options many times over. Or you may explore a combination of options, wherein you place a structure by selling and buying call and put options.

Let us hope for the best, but prepare for the worst.

PS. A Word of Caution/warning: The risks involved with trading stocks, options and other securities may not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. Also See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf).

Confusing Times of 2011

Like many other investors, I too sometimes worry about the prospects of 2011. Well 2010 was reasonable for many emerging markets with double digit returns. Even matured markets fared relatively better.

How will 2011 perform? Will it dip impacting my portfolio? Should I hedge? What are the derivative strategies to follow? The dark clouds at the horizon are many i.e.
1. Oil prices above USD 120 p/b.
2. Inflation is a threat in many economies, partly thanks to high oil prices
3. Interest rates go up, partly due to inflation
4. Lesser credit off take, thanks to higher interest rates
5. All of the above can lead to lower economic activity
6. Many people criticize massive US deficits and China surpluses

A calmness of a Zen monk descended on me when I read Financial Times (FT) on 12Apr2011. In the page 3, it carried an article titled "IMF sees steady economic recovery'. IMF in its recent report stated that world GDP will grow by 4.4% in 2011 and 4.5% in 2012 and optimism was expressed on advanced economies. IMF did not ignore the sovereign debt problems of Europe or the Middle East unrest. Despite such instances, they said that it was now more certain about its forecast than in Oct2010. They said that double dip threat is receded with more sustainable global economic activity. Of course, at last good news!. Respectable FT carries a news article that says things are looking better despite all troubles. I felt calm and happy.

But it did not last long. The page 11 of FT of the same date (12Apr2011) had another article title "Tighten seatbelts; 2011 could be worse than 2010". It said that the macro economic risks are now higher because of Arab Spring (Middle East political changes), Japan's earthquakes, slippage in US growth estimates, tightening of US fiscal policies, etc. It says that if the oil price increase continues, it will impact the growth. Well some of my worries returned with vengeance.

In New Testament, Roman Governer (of Palestine) Pontius Pilate asks a question to Jesus "What is truth?” The apt religious answer to this question is also given in New Testament. (Those who want to know this truth may read the New Testament or seek the help of a biblical scholar). However the truth I seek now is more of financial in nature. Which of the above two views expressed in a respected financial newspaper is the truth?

Do you think FT is sending out a confused message? FT is not alone. Even the chairmen of reputed supra-national mutual funds are also confused. One of them recently remarked that despite all the issues, emerging economies like India will attract investments and said that India is a growing market of around 8% growth in real terms. This should translate into corporate earnings growth of 14%-18%. Hence there is no way that anyone investing can ignore India.

After a few days, the same person said that high crude prices (which possibly could hit USD 200 p/b), lacklustre industry data, scams, interest rates etc are not good for Indian economic growth.

As I write this today, Indian market sharply shot up on its last trading day by 2.2%. A paradox?

It is clear that FT is confused. Same is the case with MNC Mutual Fund gurus. Among these troubles, Warren Buffet seems unconfused or probabily not worried about the current investment climate. No doubt half a century of experience and skills would help him. Recently he acquired Lubrizol and was in India seeking investing opportunities.

Let us turn to the master investor for some clue how to handle situations like this. He is basically a long term player, although he has his own type of short term bets. His long term focus proved to be a very powerful approach to manage a portfolio, which helped through market ups and downs. His company has seen several crisis – 1973 Oil crisis, 1987 stock market crash, 1991 Gulf war, Dot com crash of early 2000 and recently 2008 Global crisis. The portfolio of investments, comprising listed and unlisted companies, performed satisfactorily, despite all these troubles.

If you are convinced that the stock market would do well over the long term, you can win by limiting the downside of the portfolio during bear markets. This is one of the important guidelines of Warren Buffet (often mentioned in his letters) as his focus seems to be on limiting the downside to his portfolio. For him a performance of (–)10% of the portfolio vs. (-)20 % of an Index (say Dow or FTSE or Nifty or Nikkei) is better than a +20% portfolio performance vs. +10% of an Index.

Black Swans

MENA region was taken for granted. Whilst some countries had namesake elections for presidents, others were ruled by monarchs. Some of the monarchs are better than acclaimed democracies in the world. The best example is UAE where the governance is much better and where both nationals and expatriates live side by side and enjoy living standards better than in the western world.

However, not all of the MENA is like that. Many are poor and corrupt with exploding population due to large families with five or more kids, who fought from childhood for chances of betterment of life against intense competition for limited opportunities available.

Overall comparable to the situation in France in 1789. Such frustrated population, if enlightened by non-religious thinkers speaking fearlessly about ‘Equality, Liberty and Fraternity’ is capable of making a radical change. French revolution was aided by the technology of that day, i.e. printing machines. Once the French decided to revolt, Europe was never the same again. The revolutionary ideas resulted in the separation of state from the religion, which enabled the free thinkers to explore ideas with new inventions and theories, without fearing the backlash of ‘traditionalists or religious extremists’ who dwindled away as the new thoughts and ideas took root in the minds of population and new generations.

I don't know about any such non religious thinkers in MENA region; however a revolution did take place in Tunis late last year. It is reported a poor frustrated fruit vendor when his fruit cart, which was his only livelihood, was confiscated by the police, in the moment of desperation, he set himself on fire. The rage of frustration that gripped the population was unleashed and spread like wild fire across the region, of course partly technology – i.e. social media. Like in French revolution the army sided with the people and turned against 'monarchs'. It was repeated in Egypt. It looks like it may repeat in Libya and who knows who is next. Let us hope this revolution will bring in 'Equality, Liberty and Fraternity’ into MENA region. Also hope that MENA region will produce free thinkers, new inventions and theories, without fearing the backlash of ‘traditionalists or religious extremists’.

If you talked about such events will take place 6 months ago, no one will believe you. Such events have all features of 'black swan' theory developed by Nassim Nicholas Taleb. The theory ridicules the belief that today’s 'normalcy' will continue into the future and hence predictions are possible. It says that the high-impact, hard to predict, rare events shape the history, science, finance and possibly anything human. Nassim goes on to say that once such rare and unaware events happen, the human nature find explanations for its occurrence, and wonder how they missed it i.e. makes it explainable and predictable.

Well, based on the events in MENA the prediction gurus are out there forecasting possible oil prices beyond USD 250 p/b and the problems and opportunities it could bring in. Whilst every one agree that the normalcy of MENA is upset with 'outlier' events, the financial markets in the world more or less still behaves in 'normalcy standards'. Although the oil prices have moved up significantly, which will impact automobile manufacturers to transportation to energy based manufacturing companies and almost all players in the oil based global economy, the world economy tries to behave as if 'normalcy' continues.

The recent past when the oil price touched USD100 p/b was in the early 2008 (due to demand > supply?) and peaked in July 2008 at USD 147 p/b. However, when world of finance crashed along with Lehman, oil price also crashed. Now the oil prices are back at USD 100/- plus due to entirely different reasons.

Many investors are now worried about their investments, which is quite right. What should be the risk appetite? Should they sell now and place them in fixed deposits? Or since many markets are down in double digits already during this year, is it not the time to buy? Best example is India. Again should not we buy into the possible rally of economies coming out of recession in style with several positive indicators on the horizon? The best example is USA.

What will be the oil prices after one year? Answer to this question will solve the concerns about the future performance of many stock markets in the world and hence consequently several portfolios. Of course you can try to predict the oil prices and can have an investment or portfolio strategy depending upon your views.

But be aware of the 'black swan' that could be lurking somewhere out there.

India's Industrial Production during first 9 months of FY2010-11 is 8.6%, which is very good

The cumulative growth for the period April- December, 2010-11 stands at 8.6% over the corresponding period of the previous year. Month on Month growth is 1.6% higher as compared to the level in the month of December 2009.

The December industrial output was always expected to show growth but at a moderate level as the Dec 2009 output was extremely strong.(i.e. calculation of the index from a higher base of Dec 2009)

Overall Indian growth story is intact and continues to be Strong

India's Growth

India is a great nation. No doubt about it. Even its enemies acknowledge it. If you go back to history, you can always see that India was the magnetic attraction of the world. Alexander the Great had only one dream, reach India and he did. He defeated one of the Indian Kings, Porus in a battle, however returned his kingdom and established friendship and went back. That was the respect he had for the king and kingdom.

Romans, Chinese, Arabs and a host of other nations vied to come to India for trade and make money. Migration to India was like the migration to west these days. Parsis, Middle East Christians and Muslims all migrated to India in the past. If you visit Kerala state still you can see the evidence of thriving Jewish culture for thousands of centuries, till Israel is formed, however the way things are going at Middle East, it is possible that some Jews may return. Chinese fishing net popular in Kochi shows the historical connections to the China.

Then the west was desperate to come to India, which they did through Vasco Da Gama, which changed the fortunes of the west for ever. A plague ravaged poor nation of Britain came the mighty nation of the world due to the trade with India. No doubt India has tremendous potential.

Even now, if you go to USA it is acknowledged that the most thriving immigrant community is the Indians. They top the list of non-westerners as the CEOs of Fortune companies and in similarly in all spheres of life,

There is no need to elaborate further, it is beyond any doubt that India has great potential and Indians abroad have established their hall mark.

Indian growth story was strong till Oct 2010 and almost all economists told that India will grow at 10% p.a very soon, possibly in FY2011. Everything changed all of a sudden as we started 2011, now many are busy cutting the Indian growth rate. We don't hear anyone even stating even 10% now. WHY?

This is because Indians are capable screwing up good things. It seems that they dislike good things. As the growth was zooming, the CBI suddenly decided some of the top banks have made 'corruption' in lending huge sums of money to the business world of India. They put the top bankers behind jail. Well I don't justify their action, but has a question. It is well known that there are many corrupt politicians in India. How many of them are humiliated the way the top bankers have been humiliated?

Bear in mind that Indian Bankers are top class and comparable to the best in world. Although they are as talented or even more talented than the rest of the world, their salaries are pittance compared to the rest of the world. A junior associate in Goldman Sachs may be drawing more salary than the CEO of SBI, which is among the Fortune 500 of the world!

What did CBI achieved with this raid? Has the corruption been routed out? No. But many bankers became now afraid to lend after the raid. This has impacted the businesses across India. Somewhere in India, an expansion plan is on hold. Some businessmen are unable to fulfill their growth forecasts and bank officials are gripped with fear. The cumulative effect of several such instances means that growth of India gets affected!

Then came CAG report that an astronomical amount was subjected to corruption in 2G scam. Then some minister came out and said that the assumptions by CAG may not be appropriate. There was a huge argument in the press, diverting attention from the new economic activities that should have been focused by Govt. Even the parliament did not meet peacefully to discuss the country's affairs. Negative publicity is an inevitable consequence.

After this incident many government departments are reluctant to approve projects as the fear grips them. The result is that several Infrastructure projects (road construction, etc) by government departments are put off. Again, the slowdown in such big projects may make a dent in the growth of India!!

India's environment minister seem to enjoy the lime light of the media. Several Projects are denied or made costlier for the promoters by him. The best example is the Lavansa Project, which covered about 20000 acres and would have created truly modern facilities. Imagine the amount of investments flowed into the economy and its multiplier effect and accelerator effect. Remember USA's rejection of certain environmental treaties if it hurts their economic growth. Earth, during its existence, tracable back to millions of years, has already gone through several ice-ages and hot-ages and will continue to do so going forward. Whilst we should care for the environment, it should not be at the cost of economic growth. (With the demand factor high in India, the annual growth rate of 10% is a low hanging fruit).

Now it is the turn of prime minister and finance minister. Recently, the prime minister said that the inflation will affect the growth because interest rates may go up. The rates are already high in Brazil and it grows. Moreover, the rates will not remain high for long. India is planning to import food stuff to curtail the food inflation. These positives were not mentioned! Whilst all agree that Indian prime minister is among the best in the world and highly intelligent and knows how to take India’s growth to 10% or above, he need to be careful when tackling media

Need to learn from Obama and Warren Buffet. When they speaks about the US economy, they are optimistic, however bad the economic numbers may look like. They know that these numbers are temporary. The duty of the commander or a team leader is to be positive and motive the team, not otherwise. When the nation’s leaders are optimistic, the business confidence grows. This encourages more investments, capex, expansion plans, etc which will benefit the economy and brings in the growth.

The truth is that India is growing faster than most economies in the world (except may be China, but whose numbers are accused to be fudged) and there is no reduction in its pace. India will continue to grow at even faster rates than at present. If the stock market drops in India, lick your lips and barge in like a kid in a candy store.

Will Third Generation BASEL make any difference?

Recently, a reputed training institute based in Europe sent me details of training program for Basel III. They said that their training course provides helpful details of Basel III that will be rolled out soon across financial sector of various nations across the world and will strengthen the various players in the financial sector, mainly banks.

Let us see what the first and second generations of Basel has done for the global economy. The declared aim of these systems is to bring in stability in financial system and minimize banking problems and banking collapse.

Basel 1 -first generation- was rolled out soon after the collapse of Baring Banks by the aggressive risk taking by Nick Leeson. After selling straddles on Japanese Nikkei index successful over some years, Nick Leeson licked dust the day when an earthquake hit the city of Kobe in Japan in 1992. The straddles Nick Leeson shorted in derivatives market went against Baring Bank, which witnessed massive losses. Unable to meet the obligations, the bank went bankrupt and Nick Leeson went to jail.

Then they rolled out Basel 1, which I met during my early part of the career and remember doing the Risk Weighted Asset calculation and applying the appropriate capital adequacy ratio and finding out the risk/reward pattern for each asset and portfolio in general. Several accounting firms, consulting companies and IT firms had a field day as they delivered beautiful and elegant systems that captured various risks under Basel 1 in comprehensive manner but in an incomprehensible way.

However, soon criticisms were paraded against this system and intellectuals and academicians began to devote time for an improved version. The new systems gave undue importance to risk models and opinions of rating agencies. As the new system was being formed, another near disaster hit the global economy in the form of Long-Term Capital Management or LTCM.

The collapse of LTCM in 1998 showed the weakness of the risk models which was the basis for advanced IRB models in Basel II. It is interesting to note that two co-founders of LTCM (Myron Scholes and Robert Merton) won Nobel Prize in 1997 just one year before LTCM went bankrupt. Their convergence strategy and long/short strategy that delivered excellent returns (even up to c.45% p.a) for a few years turned against the firm when Russians decided not pay its sovereign debt in 1998. Entire capital of LTCM -one of the financial giants in the Wall Street - was wiped out resulting in a financial panic. Default by LTCM loomed large giving sleepless nights to various lending banks/FIs. A default would have caused a chain reaction of defaults across US banking system and possibly in other countries which were linked to US. The fear who else is insolvent froze the financial system. Thankfully, Allan Greenspan brought together the creditor banks of LTCM who bought into the equity of LTCM and took control and avoided the crisis. Despite all the mudslinging against Allan Greenspan in the recent times, we need to praise his steadfastedness to salvage US banking system and hence the economy, without tapping into Govt support.

Despite defusing a massive financial nuclear bomb well in time, the lessons learnt in LTCM was forgotten quickly. One of the chief culprits of LTCM collapse was its reliance on financial models, especially Var (Value at Risk) which assumed normal distribution in financial markets. In fact financial and credit markets are anything but normal and there were several evidence and academic criticisms against Var and similar models. Among the leading critics was Nassim Taleb while the die-hard supporters included the Quants in JP Morgan who originally brought out this beast into the financial markets.

During the later part of career again I had to get in touch with second generation Basel and its modelling systems. I often wondered alongwith some of my colleagues that the second generation was an excellent example of making simple concepts into beautifully carved complex and complicated systems of dubious quality. Again a bunch of accounting firms, consultants and IT firms won lot of business.

As the second generation was rolled out with its heavy reliance on models, Lehman crashed spectacularly in 2008, ten years after LTCM. No one was around to save Lehman or most of its creditors and its collapse exactly did opposite what Basel-1 and Basel II was originally rolled out for. They were supposed to protect banking and financial sectors or the nations. They did everything but that. Hundreds of banks have shutdown across the world or merged with others to avoid collapse. Many banks are still alive on Govt support.

Hold your breath. Now they are rolling out the third generation!! See you in 2018 or 2019, when another spectacular financial fireworks is possible, based on the track record we just discussed.

Someone told me that Einstein had said that 'there is nothing like simplicity'. It seems that sometimes he is right!!.