Population Growth Dynamics

Recently, my daughter, studying in Class VI asked me a question- is India overpopulated? She learns that India’s population is around 124 crores or 1240 million. Suddenly, I recollected when I was studying in Class VI about 30 years back in early 1980s, India’s population was just above 60 crores or 600 million.

Doubling of population in 30 years! Wow – what will be India’s population 30 years from now– will it be 240 crores or 2400 million! Whatever the India’s population growth supporters say, that is huge number and the challenges will be enormous. The population dividend come with a huge bill to the government in terms of infrastructure, improving standards of living, education, utilities, etc. Even now about 30% of the population of the country is living without electricity and it is almost impossible to believe that will soon change. (Positive thinking persuades me to state that it means 70% of the population have electricity - which is twice the population of USA). A huge percentage of the population will be destined to be poor with low standards of living. Many may have to survive with just one meal per day. Criminal activity will increase, terrorist organisations will get more recruits and social problems will escalate.

Mumbai may be the best sample of India’s population. The City boasts several billionaires of the world, who find place among the top 50 richest persons in the world. There are millions of upper middle class in the City who swallows up luxury products and criss-cross the world. At the same time there are teeming millions of poor who eke out a day’s life. Criminal activity and underworld is active in the city. This social inequality is hard to change if the population continues to zoom. Often the middle/upper class don’t have more children; it seems that the lower middle/poor class tend to have larger families. A few miles outside the city, you get the best of the nature with lush greenery and scenic beauty. Similarly, India is blessed with natural wonders and thousands of years of history and monuments. But increasing population is a challenge –recently the reports of encounters with men and wildlife (e.g. leopards) are on the increase.Well, only the poor class suffer in this manner– the better off segment of the population is in safer places.

One of the reasons for the growth in population is also traceable to religious factors. Pakistan also faces a more severe problem. The fanatic religious leaders encourage more population for strange reasons (Jihad?) and the country is already suffering. Although there is illegal migration from Bangladesh to India, which adds to the growth in population, India continues to manage and accommodate. Pakistan also has got legal immigrants from Afghanistan and Taliban - who deny music, films and education to girls. India’s Mumbai equivalent city in Pakistan is Karachi which is a den of different relegious/political/underworld factions who kills almost one another every day. Recently, I had interviewed a bright candidate from Karachi who advised the sole reason for coming to UAE is the security reasons. He said his family is financially very rich and well off- but security is lacking in the City.

Coming back to India, the population growth in the country has huge disparities. Whilst the experts warn that Kerala state will face a situation akin to Japan within next 15-20 years with huge proportion of elderly population, most of the northern states continue to have large families contributing to the population explosion. This has led to a flow of migrant labourers into the Kerala state from distant regions such as Bengal, Bihar, Orissa, etc.

Overall, whilst the population growth may have its dividends, it comes with huge social costs as well. All responsible governments must be aware of the population growth has a diminishing marginal utility but increasing social costs. And the governments must take appropriate steps when the diminishing marginal utility (of population growth) curve meets the increasing social cost line.

Anti-India move by Trinamool

Financial thoughts had applauded Manmohan Singh when FDI was announced one year back. http://www.financialviewsonline.com/2011/11/indias-next-it-boom-fdi-in-retail.html . But got disappointed when Trinamool congress & other political quarters pressurized him to pull it back.

Last year when FDI was announced, it was the right time. Rupee was around USD=Rs 47/- Indian GDP around 7%. Drop to 6% was unthinkable. If anyone said then Indian GDP will drop to 5.3%, he would have been laughed at. Oil price in Indian rupee terms was much favourable and petrol, diesel and gas cylinders costed much less – thanks to Indian Rupee at Rs.45-47 range in first three quarters of 2011.

After one year, Indian Rupee touched USD =Rs.57/- Oil companies suffering losses, indian subsidies rising fast, fiscal imbalances increasing, cost of oil imports in rupee terms shooting up hurting the increasing consumers of petrol, diesel and gas cylinders in India. Above all, India's growth rate dropped to 5%, falling behind Saudi Arabia (6.2%), Turkey (8%), Indonesia and Philippines. No wonder FIIs and FDI have touched recent historical lows during the last one year.

Trinamool supremo just needs limelight and goes to any extent even thrwating India’s growth and common man's future. If FDI is rolled back again now, 2013 Oct will witness USD = Rs 70/- india’s growth rate below 4%, imported cost of oil shooting up, petrol, diesel and gas cylinders costing much more than what Govt. of India is offering now   and mark the words by Financial Thoughts – MARKET WILL MAKE INDIAN CONSUMERS PAY MORE WITHIN ONE YEAR. All FDI and FII will have migrated to Indonesia and Turkey which is growing by more than 8%. India is no longer attractive compared to Philippines etc.

FII knows how to make money from India whether it goes up or goes down. If India goes down, they will short Indian Rupee and equities and make money. Entire Indian retail investors are long on equity, who will be losers. Common man will suffer heavily in all fronts.

Hope the efforts of Manmohan Singh and Chidambaram will get the support from Indian politicans who have capacity to think in broader terms. A little suffering now will bring in lot of future benefits. Any attempts for little benefit now, will bring in lot more future worries.

Had FDI decision in Nov 2011 not rolled back at the behest of Trinamool, Indian situation now would have been much better – there would have been no increase in gas cylinder and diesel prices now.

PS: an article on poor distribution in India, which highlights need for modern technology and techniques thru retail FDI
 http://www.ndtv.com/article/india/foodgrain-worth-rs-250-crore-rots-in-maharashtra-godown-state-government-blames-the-centre-253898?fb_action_ids=10152024799815584&fb_action_types=og.recommends&fb_source=aggregation&fb_aggregation_id=246965925417366

THE SECRET FORMULA

Edward Thorp is a successful investor, a contemporary of Warren Buffet. He is of almost the same age of Warren Buffet and has been beating the Dow and S&P over several decades since 1960s through his own hedge fund. The brilliance of Warren Buffet is evident as he scaled up his activities from a hedge fund into a listed company and relied on insurance premiums instead of hedge fund limited partners.

 

Edward Thorp is a mathematician by profession and hence relied on mathematical approach to risk and ran a well sought after hedge fund. When Warren Buffet liquidated his hedge fund in 1968/69, he had recommended Thorp to the limited partners who didn’t opt for the shares of Berkshire.  

Edward Thorp’s contribution to the investment area is great and we can learn a lot from his track record and insights.

 
He is an avid follower of Kelly formula for taking positions in the market. By the way, Charles Munger  (Warren Buffet investment partner) also expressed support to this formula.

What is Kelly formula?
 
Let us go back little bit in history.

John Kelly, who came out with the formula in 1956, was Bell Labs scientist. The formula is a corollary to a Bell Lab  application for information theory’s ideas which were developed to facilitate higher information rate for a given channel capacity (of Bell Lab projects). The genius of Kelly understood that the insight of the application is good to solve uncertainty element of gambling or risk taking.

If you have an edge in a probabilistic outcome, Kelly formula would show the exact amount to invest/ risk in order to maximize your capital over the long term.

When applied to stock market, it means the maximum rate of return comes when you know something the market doesn’t or ignores or you can structure a trade or investment where your gains will be more.

The formula is as follows:

Capital to be committed = Pw- (Pl / edge)

Where Pw     = probability of winning

           Pl          = probability of losing

           Edge  = the win ratio i.e. winning amount/ losing amount

For example, if the investment outcome shows a gain of 2000 vs. a loss of 1000, you have an edge in the ratio of 2:1. You assign a 60: 40 probability. The capital you have to invest is 100,000/- . How much you may invest in this deal? Is it full capital? Let us try Kelly’s formula.

= 0.60 – (0.40/2)

= 0.40 or 40% of the capital can be invested

Suppose, after observing some latest developments on the market, you are less confident and revise the probability to 35:65. How much you should invest?

= 0.35 – (0.65/2)

= 0.0250 or 2.5% of the capital can be invested.

Before trying in real life situation, you have to master the formula and understand its limitations as well. If interested, the original 1956 article, “A New Interpretation of Information Rate” by John Kelly is available. Although there are critics to the above formula-  Edward Thorp is a strong supporter. He has penned an article in support “The Kelly Criterion in Blackjack, Sports Betting, and the Stock market’. Edward Thorp is also the author of two successful books related to investment and risk taking.

If interested to know more on the topic/ articles mentioned above, you may please email me at ciby@financialviewsonline.com

CAG REPORT ON COAL ALLOCATION MAY BE IGNORED

Everyone tries to bring in sensationalism! Indian movies, TV serials, Politicians, Media entertain the public with sensationalism and breaking news!

CAG Reports (of India) seem to be no different. As they investigate each accounts, they bring out with more sensationalised scams. Telecom was the biggest scam so far.

Now the purported Coal scam is even higher! Rs. 1.86 lac crore (or USD 35 billion) That is lot of money!
Are you wondering where all this money has gone? Well this is a notional loss!
Are these numbers true and fair?
Are there willing buyers/ bidders at the price levels CAG Report is assuming?

Assumptions are dangerous stuff - as many financial analysts in banks and FIs can confirm. In my previous life, I was a financial analyst and had headed a team of financial analysts in a MNC bank.

During the boom time of 2008, the assumptions made presumed the continuation of the boom times of 2008 into the future. Then the great crash (global financial crisis) came which made many a fantastic projections, IRR, DSCR, PLCR, etc look like a mirage.

CAG assumes that had the coal blocks allocated between 2004 and 2009 were done at a particular price, then there would have been loss to Govt. 

What if there were no bidders at these levels? Even if there are bidders, what is the probability that they have the capability to execute?

As is well known in tender process, the contract is not awarded to the lowest/highest bidder, but to the one who has the capability to deliver on time.

India's future growth will be driven by private sector, which is incentivized by profit motive. Private sector (and even the public sector) is not motivated by charity.  Efficiency & productivity of resources (incl. capital) in private sector is much better than in public sector. Ignore the concerns of private sector of India at the peril of the economic growth, new job opportunities and prosperity.

Hope these kind of allegations don't pull down India's growth.

Standard Chartered Woes

Standard Chartered was basking in glory these days when most of their counterparts were fighting a battle against economic slowdown and other issues in Europe and USA. It had good reserves, low exposure to euro zone and wasn’t guilty of LIBOR manipulations.

But - out of the blue-moon came the thunder that upset and injured Standard Chartered‘s stock price and its top management. Financial Thoughts believe that the style of New York State’s Department of Financial Services accusations of Standard Chartered is a surprise for everyone.

Standard Chartered has the right to defend and they are doing that by even spreading the news that they may ‘Fight the Fed’. Let us wait and see.

It is interesting to note that on 30 July 2012, UK's Financial Times (FT) carried an article (http://www.ft.com/cms/s/0/2ae72322-da45-11e1-b03b-00144feab49a.html#ixzz237nCKZSB) that mentioned about a company that attracted sanctions from US for Iran deals.

FT states that the US secretary of state had said that this company had …..

”….. provided more than $70m in refined petroleum to Iran in multiple shipments in late 2010. The company has tended to work with local banks, and with international banks including Standard Chartered.” 

Read the last sentence again! Other international banks are also involved with Iranian shipments mentioned above. So why singling out Standard Chartered alone? 

A few of my business clients are quick to point out that even US based companies (incl. oil field services co.) have business interests in Iran.

The media carries a lot of news / rumours on Standard Chartered’s possible defence against the allegations it broke US sanctions on Iran that could complicate things further – more counter lawsuits, fines and the loss of business, besides reputational damage . Some of the rating institutions are itching to downgrade Stan C's 'AA-' credit rating - this could impact its cost of refinancing.

For some investors, this may be a good news! After the dust settles, if Standard Chartered bank’s stock price goes down further, it may worth to have a look at it as an investment alternative.

Ludicrous Earnings of JPM

When JPM announced its first 1Q2012 results in April 2012, the investors were happy. It made good profits for the first quarter!  The CEO Jamie Dimon brushed off the questions about the potential CDS linked losses of its London office - he stated the trade is just a 'tempest in a teapot'!

However, during the conference call yesterday, JPM put the CDS trade losses at $5.8 billion, with the potential to grow another $1.6 billion (totaling $7.4 billion) in a worst-case scenario.

It definitely questions either the (i) integrity of top management at JPM or (ii) managerial capacity. In other words, when the CEO misled the investors in April 2012, either he knew it and had hidden the information from shareholders or he was kept in dark by his staff!

The beauty of the entire episode is that despite the loss, the second quarter results are better and profitable! Where have the losses gone? Well, the company simply restated its first-quarter results to reflect $1.4 billion in related CDS losses. What an accounting!! Let us see who signs the audited accounts of JPM!  

But for the state protection, both JPM and Goldman Sachs would have licked the dust in 2008 crisis. Well after all, there is not much difference in Communism and Capitalism at times. (Karl Marx had predicted in mid 1800s that the capitalist banks will have to be salvaged by the state after narrating incidents more or less in line with the 2008 crisis)

And the stock rallied because the 1Q2012 earnings were marked down to losses so that 2Q2012 can show some profits. If this continues, during the next conference call in Sept 2012, they may re-state 2Q2012 figures downwards to show profits in 3Q2012! and the stock may rally! Just wondering who is fooling who? Does it suggest a massive cover-up & isn’t it obvious that a critical examination required?

Across the Atlantic, another Anglo-Saxon banking model also shows loopholes. Barclays Chairman Marcus Agius and CEO Robert Diamond had resigned in the wake of that firm's LIBOR-rigging scandal. But is amazing that Dimon continues to be the CEO despite scandals after scandals – the power brokers are keeping him up there as he is an expert in mis-leading investors and public?  I like the British way of handling the situation - as they know how to treat erring CEOs or the CEOs that either lacks integrity or capability.

Driving the Indian entrepreneurs abroad!

Thank God, Finally Pranab Mukherjee left the Finance Ministry

When Pranab took the reins of financial affairs of India, the country was growing at about 8%, FIIs and FDIs always considered India as a desirable destination and Indian entrepreneurs were enthusiastic to start new ventures. After all, Chidambaram, who hailed from a reputed business family in South India, conducted the financial affairs in business-like fashion. Of course, India’s foreign currency rate hovered around healthy 1USD= Rs 45/- . Even when international oil prices peaked at US$148/- p/b in July 2008, petrol prices in India was around Rs 50-55/- per litre.

Now, as Pranab leaves the finance ministry, the country’s growth rate has fallen to 5% levels, FIIs and FDIs have dropped to a trickle, currency stability has become a joke, petrol prices increase to the north of Rs.70 p/l (although international crude oil price is around USD 90 p/b only). All of the above is nothing compared to the main achievement ‘driving the Indian entrepreneurs’ abroad!

Recently, I got a few Clients from India, who came to the UAE enquiring how to set up factory in this country. The reason is the changes in Indian income tax. They have informed that the export income which was hitherto tax free in India is now made taxable through MAT (Minimum Alternate Tax). So, the entrepreneurs are planning to shift the production base to business friendly UAE in such a manner that the production for exports will be done in the UAE. Whilst this is good for UAE Economy as the economic multiplier and accelerator works in its favour, Indian economy will suffer in terms of lost jobs, lost government revenue and negative multiplier effect.  Wealth creation in the country will be affected.

This is over and above other myopic policies pursued by the government in tax front that will scare away BPO outsourcing, FII and FDI. We have covered this in an earlier blog see http://www.financialviewsonline.com/2012/04/income-tax-department-is-taking-lessons.html

‘Penny wise and Pound foolish’ seem to the dictum of Indian tax bureaucracy now!