tag:blogger.com,1999:blog-365978222779465432024-02-20T00:40:58.848-08:00Pushpa BalajiMaking SensePushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.comBlogger56125tag:blogger.com,1999:blog-36597822277946543.post-38819498771249892362023-12-07T04:25:00.000-08:002023-12-07T04:25:16.596-08:00The war that never ends<p>The war between Israel and Palestine is back started this time, by Hamas when it raided civilians on Oct 7th causing more than a thousand deaths. Unfortunately the crisis has only got worse pushing out peace in the region by few more decades. Unlike other conflicts of the world - which I believe are solvable over time - this one unfortunately cannot. Conflicts between India-Pakistan, Russia-Ukraine - they have historical precedence of being together as one nation. Pre-dominantly - it’s a clash between rulers / governments on either side - there is no big people to people conflict. But only in the Israel-Palestine conflict - historically this has been a people to people conflict. This confirms - the problem has no end in sight. The war would end one day - lot of people would be dead on either side - more on the Palestine part - because of their vulnerable status, only to start all over again a different time with a different reason. Subsequent leadership on either side - lacked the will or the desire to resolve the conflict. It has only got bigger and bigger.<br /><br />We all will live to see a lot more quick wars between them - the hatred has only increased. <br /><br />Israel is supported by Western countries and is genuinely part of the richer nations club. It has access to weapons, technology-progress and might against a smaller refuge state of Palestine. <br /><br />Palestine on the other side, is a weak block. Even though they gain sympathy from a majority of the world population (who are aware of the conflict) - Their lack of progress (economic, social & political) can only be attributed to their own people and its past leaders. In my opinion - its applicable to the entire Muslim-dominated middle eastern countries. It can arguably told - The middle east hasn't generated a single political mass leader in years. Because of radical religious thoughts - the country has not been exposed to alternative thinking - and the weakness has only extended over the years. What the middle east really lacks - a unifier like a Gandhi. In my opinion, that person has to be non-religious (leader of all sections), carries the integrity, honest and vision of a future middle east. This part of the world has always missed that. This is probably because the leaders liked power more than the genuine belief to make things better beyond their own interests. I am not saying - what the Muslim world should do - all I'm saying is - they need to operate as a united block under a commanding leadership of someone (home grown) - who has a vision and has the belief of majority of the people in the region. What we often end up - leaders who are token citizens of a country but really whose family resides somewhere in an affluent western country with business interests everywhere around the world except in their own native countries. These so called leaders - exist in plenty on the west of the Indian subcontinent until the Atlantic Ocean. The lack of unity among the middle eastern nations can be attributed to just the lack of this leadership trait - unauthenticity. Because of that - they are corrupt. The leader has to be from within - someone who is born, grows up and lives through the daily routine of most of his people - a really close to the people leader. <br /><br />India is a diverse land with huge diversity is religion, caste, creed, language - but still she managed to create visionary leaders like Gandhi, Nehru, Indira Gandhi, Abdul Kalam, etc. They represent Indianism in the minds of the Indian people. It is very hard to remember a visionary from say Pakistan - which was part of India for bulk of its existence. That is because the country is based on a religion. Once you go that route - it is very hard to lead otherwise. Religion is good and it controls the chaos - I'm not saying there should not be religions. There can be. It cannot be a way of political life. Because religions has beliefs and not all people in a region conform to the similar beliefs - it fundamentally divides people even though it unites a concentrated section of the people. By definition - if you accept a religion's beliefs, you are against the beliefs of other people - that puts you in conflict right away. So right to practice any religion should be the norm - but it cannot be politically enforced. I'm not advocating for a liberal society. I am just saying - political leaders with the will of the people and with aspirations of the son of the soils without a religious bias can provide better political establishment to a nation. <br /><br />The history of Israel-Palestine conflict - Every time the Palestinians get killed (most of them Civilians), the Arab world would send signals indicating their support and then it goes nowhere. Israel is too bigger power for the Arab nations and exerts its authority which is natural. Historically - the Arab nations have not even be able to reduce the intensity of the damage caused by Israeli military on the Palestine civilians. It breaks my heart to see those horrible visuals on X. Most of them are not combatants. <br /><br />With Elon Musk opening up X- more uncensored information is coming out of the conflict and it has created more awareness on the issue for people around the world. This time - it has increased the sympathy for the Palestinian people and decreased the empathy for the Jewish state. <br /><br />What should be the resolution for this major conflict that can cause a world war? I do not know. But I do know - the resolution has to be from people who live there on either side. They need to determine how it should be resolved amicably with mutual give and takes. There is no alternative. The UN or other powerful nations - may have opinions on how it can be solved - but are useless. Those planted resolutions don't work. A true resolution should come from within. <br /></p>Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-84962971431921449392023-03-25T11:20:00.008-07:002023-03-27T07:45:41.780-07:00Banks of America (again)<p>After the 2008 financial crisis I personally got interested in the markets and started seeing them closely. The first thing that caught my huge interest then was the banks i see around me, failing. My first article in this blog was about "Banks of America". We have come a full circle - as the banks of America are failing again now. For anyone who has followed this thing for years closely - its very clear. The problem then and the problem now are exactly the same. It was just a temporary pause for few years. In 2008 the banks had assets that had its value gone down significantly. It was housing bonds then, now its the low-yielding bonds from the ZIRP decade. The problem is pretty much the same.</p><p>I was talking to someone who owns a home in California few months back. I asked him what is the interest he pays on his home. Every one refinanced at a lower rate, and he did too. He told me, he was able to refinance his old mortgage for 3.05% and was very upset, he couldn't utilize the still lower rate it got to at 2.75%. It immediately occurred to me, if there is a transaction that benefited one side a lot, there must be the other end that heavily lost. That exactly what happened. The person on the other side were the banks. The mortgage was probably 30-years maturity paper and the bank is stuck with it. <br /></p><p>The duration risk on the bonds are cited as the main reason for Silicon Valley Bank to fail. When interest rate rises, the low-yielding bonds will lose value. This caused a huge hole in the bank's balance sheet. I believe, even though it could be one reason, there is something more to it. Regional banks are heavily exposed to the commercial real estate market, which we know is not doing well, because employees are not coming back to the office. Also it is not a surprise that the over leveraged technology companies - that ran only because of cheap money had a big role to play. It's not a coincidence that most of the failed banks are from the state of California. I work in technology and i see first hand, how leveraged the industry operates in. Most of the time, almost in all IT companies - work happens not to make the customer happy but instead to get a new investor. Significant time is spent on, doing prototypes, demos to attract new money as investment. This used to be very common in research institutions. Most of the time of research graduates, are spent on applying for grants than on doing actual research. With the Fed hiking rates up to 5% now - all the cheap money is gone. What is left is the mal-investment and accumulated debt from the boom days.</p><p>Initially when the 2008 housing crisis started., we were told the issue was isolated to subprime. Eventually, we would find out - it was not subprime but the entire mortgage market. The falling assets problem is same now - Not only the banks have the problem, all insurance companies, pension funds, hedge funds, other financial institutions would have the same problem. If banks are losing asset value because of holding low-yielding long term paper - lot of people hold them. Opening a Fed window for the smaller banks alone to exchange their worth-less bond and getting the full dollar - is a moral hazard. The problem is just showing up in the weaker sections of the economy now. History suggests - there is a contagion effect to it. We will soon find the same problem repeating in other forms at different places. </p><p>Fed raising rates, exposed the underlying problem. There is a bank run on the regional banks. People use their mobile phones and transferring money out for 2 reasons. They are afraid they will lose their deposits and more importantly want to move to other money market funds that may yield 5%. The Bank wasn't paying much interest anyways. With fractional reserve banking - No bank can survive this outflow, as we know it. </p><p>Opening a window at the fed to accept the depreciated asset and giving them on-par price - is a fraud. More over the bad assets are being dumped at the fed, because no one would buy it. Exactly the same thing that happened in the 2008 housing crisis. The mortgage backed securities were dumped at the fed and they remain in the Fed's balance sheet even now. The Bernanke promise of selling them back to the market when things improve never happened. It was a lie. These low-yield assets that are being dumped at the Fed by these failing regional banks - will also stay on the Fed's balance sheet until their maturity. The money the fed pays for it, would reach the economy making the inflation problem far worse. <br /></p><p>This can be solved only by the US government (with the Fed) guaranteeing 100% of the bank deposits. Or else the Fed has to lower the interest rates drastically - to add value to the low-yield paper from the last decade. The Fed cannot do the later with CPI hovering around 6%. We will find out in the next couple of weeks on how this unfolds. If they do any one of the above - it would be admission of a financial crisis in-action. Symptoms would be suppressed for a while - but it will show up in a different form say double-digit hyper inflation soon. </p><p>The Fed's balance sheet is already expanding. They were doing a $85 billion in QT every month. They just added $95 billion this week and $400 billion in the last month (the returns from the special window for the smaller & regional banks). So the pivot the market was looking for - has already happened from QT to QE.Jay Powell saying that - its not a QE program because he is not controlling long term yields is a loser's argument. Yesterday in the post-FOMC press conference, he said what happened in SVB and Signature banks were "outliers" and doesn't affect the broad banking sector. After famously using the terms auto-pilot, transitory - outlier might be the next one in that list.</p><p>Europe would have the exact same problem. They had negative interest rates for a long time in the last decade. With multiple countries in the Eurozone with different cultures and countries - it is going to be really hard for the ECB to maintain decorum. We already have seen Credit Suisse fail., and there are reports late this week on Deutsche bank having their credit default swaps prices rising abnormally. </p><p>The Central banks are coming to the rescue again. In fact they have too. After all - they are the ones who kept the interest rate too low for too long. They want to pretend the Central banks are the lender of last resort. Actually they are the lender of only resort. There cannot be a financial system, where no one loses. </p>Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-10478793648194693092022-11-12T03:27:00.006-08:002022-11-21T00:23:06.985-08:00Remote work insanity<p> I am sitting in my office and looking around, I see most of my colleagues instead of being heads-down with work, are spending bulk of their day talking with their colleagues on Microsoft teams, our official communication app. They are interacting with people, who are "working from home". On the other side are people who are "working" but cannot make the physical presence in the office to do that. The conversations take hours, what should ideally be few minutes in-person. It is probably, an over-the-shoulder comment, followed by quick couple of questions & answers. The whole office looks like a BPO call-center. Coding is waiting for the calls, and calls are waiting for the coding to happen. Instead of people running ahead with full speed, they are grinding their way out slowly with high-level of operation lethargy. It makes me painful, this way of software development has become the new normal. <br /><br />Someone told me a long time ago a big truth, that there is absolutely nothing called over-communication in software development. People need to be engaged constantly through the entire implementation phase. Ideas, code details, expectations, requirements, validations, user experience are constantly reinforced amongst the team members, so that the entire team is guided as they make progress. It's like giving a haircut, the team has to be at least in the vicinity. I have seen Projects succeed because that one-person successfully articulated the requirements and got the best out of the team by being with it all the time. This is what works. Now with some people working from office and some working from home, this communication coexistence is clearly broken leading to dilution in the software development models causing unwanted delays and additional stress on team members. <br /><br />Working from home option existed prior to the pandemic as well. Occasionally you hear people, who says they are working from home, particular days of the week or few on all days. It used to be the resources who work from home on most of the days, are way smarter than the rest and provide an unique expertise to the team. They usually grow into that position. Their credibility is unquestionable within the team. They are always available. Bottom line - they sit at home and work lot harder & smarter, literally more than what they would have achieved if they came in to office every day. More importantly - they are available to come into office on short trips. They would fly in or commute to stay in an hotel for a day or two, they have really jam packed productive meetings, bunch of action items to all, have a game plan to execute in weeks and they go back home "to work" with lot of work in their plate. The visits cost the firm lot of money, but it would be worth it. While working my way as developer, I have seen how these people work. They are very industry experienced, usually super smart and are a pleasure to work. They gain respect of the team, even though they are not with the team. One quality they possess - they don't take leaves. They are available online 24x7. You need to be somebody disciplined and dedicated to be offering your service without leaving your home. <br /><br />Then came the pandemic.<br /><br />Once the lockdowns were mandated, everyone were forced to stay indoors. While employees of business who cannot execute their labor remotely, lost their jobs., people in the IT industry were lucky enough to hold on to their job, because they can contribute their labor with no difference sitting at home, what would they have did if they were in office. That was the expectations from the management. That is where it started. The assumption was every employee would sincerely execute his service. May be it was OK to work remotely for a month or two because of compulsions. But definitely it didn’t serve the original purpose and days went by. Employees resisted coming to work - citing genuine covid scare initially. It later turns out to be to avoid relocating to work place, avoid daily commute and more importantly in this part of the world - to save on the expenses. These additional savings in India created a demand for new cars, luxury vacations - those they wouldn't commit to, if they had to expense on the office visit daily. They save on the lunch cost, commute cost overall. Some of them have moved permanently to their native, so that they can save on the rent in the bigger cities. Even though these are good things for the individuals, it not a good deal for the employer (and eventually clients) as more number of people choose to be in their comfort zone rather than try to bring energy to work every single day. Employees with no or little experience were also sitting at home trying to work remotely. First-of-all they don't even have basic skills to work by themselves. The learning curve just got a lot longer. In IT, the start of your career is very important. You need to be in a dynamic, lively, hard-working, interesting work place. That is where you learn a lot. Having a bad start prolongs your learning curve by months. I see lot of them going through that. If you are working in your first job and have never been to an office - it shows up in the quality of the work. <br /><br />Workplace became workhours. Workhours became beacon of boredom. No new ideas, just grinding the existing stuffs. The only reason the employer could afford this change of behavior, was the client was willing to pay. Finally when the clients run out of money themselves or patience in the team not doing anything creative anymore, they opt to reduce the number of people on the team or shelve new thoughts as there is nothing that is value promising. <br /><br />I remember, in one of my product development jobs, I would walk-in to office and spend long hours working late with few dedicated team members. My manager would always ask if he needs to order lunch, dinner for us. We always ordered food to be delivered and ate a different cuisine every time, like Chinese, Italian, Thai. Only after a long time, did I realize is the food was being ordered because my manager wants us all to keep rushing the work and doesn't want us go out for lunch which takes an hour at least. Instead, when food is delivered in office, we just walk in to the cafeteria and have a lunch/dinner in 15 mins and back to the desk for work. That were those days, where we were truly productive as a team. We stayed together every day at work. When there is an urgent deliverable and lot of things to accomplish within a limited time-constrain, it makes sense to avoid the commute time and keep your heads down working long hours sitting at home. But when there is not enough to do for 8 hours for employees, laziness creeps in. They tend to avoid difficult & challenging tasks and get used to giving the regular tasks, which they assume can only be done by them. They go into a fully "manage your job" mode. Their tone in chat/voice calls changes because they need to pretend more than what they are actually doing. They need to show-off little bit to justify their contribution. In the process, they shame themselves more. It causes friction within the team members and a lot of moral hazards. <br /><br />Once they realize they can "manage their pay-check" in their job, people start moonlighting. What used to done in weekends earlier, start to creep in into the weekdays, causing distractions at work. The more and more, they get distracted, the more and more they "manage their jobs". Once their attention on weekdays shifts completely to moonlighting tasks and not their full time jobs anymore, they are fully unmotivated. They navigate to a state, now often referred to as quite quitting. When in this state, they don't treat the job as an obligation. They already gave up on it. They don't want to do more than what they are actually doing now. They are OK, if the employer wants to cut them off. They already have other plans. <br /><br />Let's be frank. Except a very few, most IT workers in India, do not have enough infrastructure at home like what they have at office. That is why we have these huge glassy buildings with air-conditioning that cost lot of money to rent. It's a luxury for most people. They aspire to have jobs in these fine buildings. Most of working population outside the IT fields, have far less convenient work place. A lot of them don't even have an air-conditioned office space. In spite of all these, employees don't want to work from office. Lot of them don't have proper office desks and chairs similar to what they would find in a software office that will put them in a comfortable posture to sit and work long hours. On top of that, half of them don't even have enough skills to operate individually and contribute. What has software become now with most people still working remotely - they just manage. It's nature of work is just "housekeeping" tasks. They do stuff that they always did for years. They don't have to work for 8 hours a day to accomplish what is expected by their manager. They have worked on the project for really long time, they know enough to make a difference daily. This I call - Keeping the lights on, kind of work. Available for work remotely means different things for different people. Able to fix few critical things over a week is one, being available to answer project related questions is another, taking a 15 minute phone call with client late in the night is one-kind, rudely managing few juniors on the phone calls and getting things done is one kind, delegating all work to someone else in the team relaxing yourself, is also another kind, In all these activities, a lot of hot potatoes happen. Things are thrown to others, and holding on to bare minimum tasks for self. One real problem with this "managing" by most employees - you run of money, sympathy & patience from the person who is funding this activity. <br /><br />There is a bad behavior by few people and then there is a mob behavior modeling around the few, by the rest of them. Eventually everyone gets to "know the game" and start playing around their personal agenda. <br /><br />Somewhere during the last decade, for some weird reason, employees became more authoritative than employers. Employees by definition are not smart. If they were, they would run their own places instead of contributing their service to an employer for a pre-agreed fee. As always when less-smart people are in-charge, productivity falls. <br /><br />You wake up every day and show up in office is an attitude setter work-ethic. People prosper because of it. Refusing to show up in office by some of the employees is a raw disrespect to the employees who show up in office daily. To me, if all of them are not in office, then all of them need to be working from home. At least there is no office rent expense or maintenance. That is a better option as the fall-out will happen sooner. <br /><br />The problems gets worse as you go west. In the US, the post-pandemic work culture ethics has hit new lows. We see them in productivity numbers. In year 2022, US has lost full-time jobs and created a lot of part-time jobs. By definition part-time jobs are "manage" jobs. You don't have to be fully involved or dedicated but keep a guard on something until the next part-time guy shows up. It's more about the time-factor rather than the work-factor actually. Usually the jobs are repetitive, mundane, uninteresting and will not be done by someone who are more ambitious. For the lack of better word - they are dull jobs done by dull people. I always thought, a family of 4 needs just one person working a full-time job and that should be enough. More than one job in a family - is a sign of weakness and not strength. <br /><br />There is only one place to blame for this entire mal-function in the work force. It is the Western Central Banks, in the US Fed, ECB and BoE. At the time of pandemic, when the supply was less because of lockdowns, instead of reducing the demand proportionately, they stimulated demand by bring down the interest rate back to zero and the government providing welfare stimulus checks to people who are unemployed and provided PPP loans to businesses to make people employed during the pandemic season. In the US, the entire country was in welfare. It was to ensure people do not come out for the sake of money during a global pandemic. With most Americans devoid of savings, and living life, pay-check to pay-check, this was a humane thing to do. But what really precipitated was - the welfare programs ran for months. Nothing is permanent than a temporary government program. Evacuation moratorium was done which guaranteed people can stay in their houses without paying the rents. With the free money coming in - people earned more than what they earned while working in the jobs, didn't have to pay the rent, don't have the expense like gas to go to work, they spent all their money online on amazon while watching Netflix in their couches. It's all OK, except that no country can afford that. The pandemic exposed the hollowness in how the western economies operate. Lack of productivity was inherent over the last decade, the pandemic put a confirmation to it. Even before the pandemic there were more women workers than men in the labor force, underscoring the less-productive aspect of most jobs. <br /><br />Human labor is scarce., like everything else in this finite world. Tying up a few people to do unproductive nature of work for a long time, irrespective of their monetary channels is a fraud on nature. If resources are not productively used., why does it matter if they are paid or not. Doing things in 2 months what ideally takes 2 weeks because of operational lethargy, is a disservice in my opinion, though it might be defined as unproductive labor in the law of economics. <br /><br />The experience of going through this and not able to change anything about it in a meaningful way, is a new low to me personally. I get over this by thinking, after all - It's just a job! Only the market has to fix it. It definitely will. Unfortunately lot of damage would have already happened. </p>Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-13816874085219546452022-06-12T10:22:00.007-07:002022-06-13T07:52:21.736-07:00Looming large layoffs<p>The US inflation data (CPI - consumer price index) for the month of May came out last Friday and the print was 8.6%. Putting to rest the optimism that dominated the financial media since the last receding CPI number - that we have already seen the peak of inflation. The 8.6% was a new high for this cycle. The core inflation also came higher than expected. This would be highest it has been in 40 years. What would make it worse is - if we measured the CPI the way it was measured 40 years ago, the number now, would be well more than 15% already. That number would have taken out the historical high of 13% of the late 1970s. </p><p>Gas prices hitting $5/gallon across all US cities this weekend confirmed the pain at the pump. </p><p>The university of Michigan consumer confidence sentiment number came out and it came in around 50 - the worst in its 70-year history. Consumers think this month is the worse month than anytime in the past including the 1970s peak oil crisis, 1980s inflation, 1987 black Monday event, 2000s dotcom crash, the 2008 great financial crisis and the covid pandemic from last year. </p><p>The S&P 500, the thermometer of the US economy, had its worst start to the year in a 100 years. The bond market arguably had its worst start to the year in 200 years. Inflation possibly at an all time high - things look lot bleaker. Only thing that is going good is the fact that Americans are able to cling to their jobs with unemployment at a low at 3.6%. The jobs market will reflect the economic reality in the 3rd and 4th quarter of 2022. The huge lay-offs are coming. Unemployment is a lagging economic indicator always and the carnage is just ahead of us.</p><p>President Biden, this week had the courage to say - the American people are capable enough to meet the rising prices head-on because the labor market is good. A true admission would be to acknowledge the past mistakes of fiscal & deficit budget policy since the global financial crisis of which he was very much part as Vice-President in the Obama administration. With the job market beginning to show cracks (the initial jobless claims from last week coming in 20% more than expected. We might have seen the bottom there already). </p><p>Inflation - is the most misunderstood concept globally. Milton Friedman said - Inflation is always and everywhere a monetary phenomenon. Expanding money supply causes inflation. Inflation is the expansion of the money supply and price increases, are consequences of it. In other words - if more money is printed and are in circulation, the prices of available products will go high. Printing the money is the easy part, producing the consumer products is the difficult part. </p><p>Price increases affects everyone in the society. When i say price increase - i mean price increase of "everything". In the modern way of financial capitalism, we have been made to think, prices of food/fuel/utilities going up are bad and prices of stocks/homes/wages going up are good. why should that be? When you purchase a home and the price of the home goes high - people feel happy. When you purchase stocks and the price of the stock goes many folds - people feel happy. When the stock market indexes go higher and higher - people and business feel happy about it. What they don't say you - this too is inflation and it is bad for the economy. Only when the price of food, fuel and all consumer prices goes high - it is considered bad which is pretty unfair. </p><p>In reality stocks of good performing companies can go high as they add value. but all stocks going high is a problem. Wages or Salary is just the price of labor. When my salary goes high at work because I'm more productive compared to others - then its a good thing. If everyone's salary goes high in equal percentage amount - what difference does it make? when workers productivity goes up (enhanced skills, mechanization and automation) - cost of production becomes cheaper. In an society with productive labor - prices of commodities fall. </p><p>With the price of stocks/bonds/homes increasing multi folds in the last decade, the inflation was ALWAYS there. It just started to show up in the CPI components. I really think - CPI data must include speculative and risky assets like stocks/bonds/wages as it components. It must also include home prices, not rents (which get manipulated by owners' equivalent rent - which no one pays!). That would be a more accurate of consumer prices. The case-shriller index that measures the price of homes came in last week - home increased in value by a whopping 21% across the top major cities. What would be the CPI print, if they add this? no wonder they don't add this number to the CPI. </p><p>Below is the yield on the US bonds as of this weekend.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhmkqSGYpfnfmhIlu9vFuXw3FmSRb3Orug3Ey1dcmYuMz4ckz5JSgsiypCM1njx3Y5Fkt2bbX2246qAHqNQo40-JTZXLP8brLZYfk52-oMlrqAwEquV-QTWS9vbhoc_hBrv-Cq8J1g2QNEgf-FnPDKEj3wGPWzhCcOvuxgYiDkNUKoKmy5Z63K3HR8" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="99" data-original-width="428" height="74" src="https://blogger.googleusercontent.com/img/a/AVvXsEhmkqSGYpfnfmhIlu9vFuXw3FmSRb3Orug3Ey1dcmYuMz4ckz5JSgsiypCM1njx3Y5Fkt2bbX2246qAHqNQo40-JTZXLP8brLZYfk52-oMlrqAwEquV-QTWS9vbhoc_hBrv-Cq8J1g2QNEgf-FnPDKEj3wGPWzhCcOvuxgYiDkNUKoKmy5Z63K3HR8" width="320" /></a></div><p>Why would anyone buy the US 2 year for a 3.06% coupon, when the official yearly inflation is 8.6%? If you buy the bond today - you are guaranteed to lose money (~5.5%) when you get your principal back in 2 years in lesser valued dollars. Why would anyone (looking to profit) will buy the US 30 year for a 3.2% coupon is beyond human intelligence. The average inflation for 30 years must be around 2% is what the buyer is thinking., so that he can benefit 1% from it. Say if the inflation stays 4% for few years, to average it out - it needs to be sub 0% for few years to maintain the 2% average. The probability of this happening is almost 0. In a real free market, these conditions will not exist. Also on the numbers, you can see the 3Y inverting with the 30Y (called the inversion of yield curve) signalling something is broken already or something is about to break.The fall in the stock market has a long way to go and the odds of a flash crash is very much possible. <br /><br />There is definitely a huge difference between people parking their hard-earned savings in US bonds and the Central banks buying in the open market what was originally theirs anyway. </p><p>With inflation getting hotter and hotter, the US Central bank has to raise rate. They will do a 0.5% this week. What good does a 1.25% rate do to a 8.6% inflation? Nothing! They can't go to 2.5% is what i think (Jim Bianco agrees with me! - see image)</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhVflqsexC9Ns3jDh6_qYc-iFi6EyE-2uwiPIqf-uo14n0K7cytU4jamEzR7hueeQMroqbuKdf6tORBIpgHNz1vFlD6K6PTOymCwzMQwb3ObQNIcF4f8-E2ByY4y6JOOh0ISny-ft3iHSKNtYAbdelAmJDngTpCDB9FBy758KlY8IS906_IoHIl-6w" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="677" data-original-width="545" height="240" src="https://blogger.googleusercontent.com/img/a/AVvXsEhVflqsexC9Ns3jDh6_qYc-iFi6EyE-2uwiPIqf-uo14n0K7cytU4jamEzR7hueeQMroqbuKdf6tORBIpgHNz1vFlD6K6PTOymCwzMQwb3ObQNIcF4f8-E2ByY4y6JOOh0ISny-ft3iHSKNtYAbdelAmJDngTpCDB9FBy758KlY8IS906_IoHIl-6w" width="193" /></a></div><br />What I think, they will end up doing is - they will raise the interest rate high enough to cause the recession (most likely depression), but not high enough to solve the inflation. A higher interest rate than the inflation rate would be the right thing to do - it would just blow up the entire global financial markets within hours. (if doing the right thing causes more pain - then you know its all messed up disproportionately) <p></p><p>The recession will cause the job losses. A lot of them! The looming layoffs on the horizon is not a hurricane but <b>the</b> hurricane. Imagine having a beach ball in hand and holding it above your head. it is hard to convince someone, that you will take the hand out and the ball will not fall. It has to & will fall.</p><p>The tech stocks & the cryptos have taken a hit already. The coming lay-offs are going to be huge and unprecedented. Because the boom from last decade was unprecedented, the bust has to be proportionally bigger. The tech sector will be annihilated similar to the dotcom crash of 2000. What we have there is a massive bubble. The air has already come out of it. It's just a matter of time (weeks), reality catches up. The industry is just unsustainable in its current proportion. It needs to be lot leaner. Tech-oriented Nasdaq chart is below (see image). The circled portion is what was the 2000 dotcom crash. If that kind of fall from 5000 points to 700 caused so much pain, imagine the fall from 16300. You can see from the chart image - the slide has started and its just accelerating. Almost all tech stocks are down 30% or more this year, including the big names like FAANG (Netflix is down 70%, Amazon is down 35% from their highs from November). When valuations are hit this much, the tech employment has to take a hit too. Believe me - this is just getting started and it will get very worse very soon. </p><p></p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEiK02j9QFYhIqvStdzEbh18GBiy7Igpkd-z-ZMeWLfOoUCk4q2oktXQT2nSUprL3JcWHoOy_be_n2L9o7ze2muEwzxx-r4Shpla5kpFFjKZDS7y6qh9JNC0eGvHy1q1eXewTbrwwynPNUE57vswfU4jYter4Ie_szctuRhQW8st_hck_CUoUWriVw0" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="665" data-original-width="1207" height="176" src="https://blogger.googleusercontent.com/img/a/AVvXsEiK02j9QFYhIqvStdzEbh18GBiy7Igpkd-z-ZMeWLfOoUCk4q2oktXQT2nSUprL3JcWHoOy_be_n2L9o7ze2muEwzxx-r4Shpla5kpFFjKZDS7y6qh9JNC0eGvHy1q1eXewTbrwwynPNUE57vswfU4jYter4Ie_szctuRhQW8st_hck_CUoUWriVw0" width="320" /></a></div><p></p><p style="-webkit-text-stroke-width: 0px;">The great financial crisis of 2008 was essentially a US housing problem. I am a living eye-witness to that mess and so are many who owned a house during the spectacular boom and the eventual bursting of home prices in late 2007 and into 2008. Prices of home crashed, in some cases more than 50% and every bank which loans money to home owners failed. The government had to rescue the entire housing market and ALL the banks. The entire episode can repeat again. I think it will repeat in a even more worse way for the following reasons: (unlike last time) People well remember fresh in their mind, the loss on investment on housing in 2008 did. Once they know, the house price is starting to fall, everyone might head to the exit exacerbating the problem further. More houses will be put for sale and no takers. The word of smoke can create a stampede at the doors. If you think the high prices of 2007 caused the housing collapse, its even higher now. The mortgage prices have gone from its low of sub-3% to close to 6% now. Even though the 6% is less than historical normal, with the prices at sky-high, its lot of expense for the new home owner. When people start losing jobs and cannot afford to pay the mortgage or have to relocate to take another job somewhere else - and want to sell their homes, it will cause a housing crisis of at least the same magnitude. If you are not convinced yet the housing crisis is on the horizon - look at the mortgage application data from last month. It was down 22% and this is a 22 year high. And then you realize that this period includes the housing bust of 2007. Let that sink in. </p><p style="-webkit-text-stroke-width: 0px;">Even though it will be unfortunate and painful for people to lose their jobs, in the long term - this is exactly what we want. Particularly in technology, people are over paid and a lot of jobs are not "impact full jobs". Scarce human resources are seriously miss-allocated. Instead of being fearful of the recession, we need to embrace it. The mal-investments of the last decade needs to fixed. The market has to do that. Failure to rectify this at this point, will make it far worse in the future causing even bigger pains.</p>Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-71166859035635880332022-04-18T03:17:00.002-07:002022-04-18T23:45:40.543-07:00It looks very scary! <p>Imagine being on an intercontinental jumbo flight, which is full with passengers, the pilot has just announced the power to all the engines are lost and they are about to crash land into an open space on the earth, nose down. What would be in the minds of the fellow passengers? <br /><br />Anyone who is remotely aware of the US bond market carnage of last month can contemplate this same feeling about the fragile US economy that is about to crash land with assured causalities. It is almost certain there is going to be a crash landing. What is hoped for, there is a some kind of safe landing where only some get affected. It is almost impossible to save all of them or at least majority of them. <br /><br />The bond market has been virulent in the last 4-8 weeks. Yields rising more than 100 bps within a month or so in both short and long-term bonds. There is literal blood-bath. The total return value on the bonds has not lost this much value within this kind of a short time span in recent memory. Jim Bianco says, this is the worst bond market blood bath in our lifetime so far. Unfortunately there isn't a stop on the horizon. There is no bottom coming. As of this morning, the 30-year is knocking on the 3%, trading close to 2.96%. The 10-year, isn't far off at 2.86%.<br /><br />The yields on the bonds move opposite to its price. With rising yields there are no enough takers. Peter Schiff says, It is right, the bond market is pricing in a recession ahead of us. The recent inversion of the yield curve rightly suggests that. What they are not realizing is how high the yields are going and how fast it's going to happen. <br /><br />The carnage in the bond market is not being noticed by the stock market. If the yields on the bonds keep going this way for say another 3-months., the yield on the 30-year may well go past 5%. This obviously is a negative for the stock market because people would opt for risk-free returns than the risky bet on the stock market at current high valuations. The yields going further would cause a bond market crash. Once the yields go past these smaller numbers, existing bonds would lose a lot of value. With the Fed going from a net buyer to a net seller - There wouldn’t be any takers for the bonds. With planned deficit budget and trade deficit for the coming year, the government is only going to borrow more.<br /><br />The vanguard bond portfolio is down more than 8% similar to the stock portfolio YoY. If the so-called, bond safe haven can lose 8% within a quarter, just imagine how much the risky assets possibility of huge falls. The yield on the 30-yr is going to rise further and further. The only thing that can stop this is a stock market crash. If the stock market doesn't crash, the bond market definitely will and that will crash the stock market too. There isn't lot of good possibilities actually. The Fed has promised to raise interested rates by 50 bps, when they meet in first week of May. The Fed is very late already. The bond investors know it. What they don't know now but will eventually know later - is that the Fed will give-up on its inflation fighting goal to save the economy. <br /><br />The inflation picture now in the US is abnormal to this generation of people. The American public has lived in a no to low inflation zone for the past 40 years. Paul Volcker raised interest rates to 20% to tame the high inflation of the late 70s and early 80s. Since then the bonds had been in a bull market. Alan Greenspan introduced the American public to low interest rate regime during his tenure at the Fed. The housing boom was caused by it. Once the interest rates started going up, the housing bubble burst causing the great financial crisis in 2008. As part of the recovery from the financial crisis, the economy was boosted with even more of lower interest rate regime and multiple quantitative easing (QE) also called stimulus - to create multiple bubbles under Ben Bernanke. Everything was OK until the US saw inflation creeping up. The inflation in Feb 2021 was a 2 handle. The YoY is now up to 8.5%. The rapid ascent in inflation is relatively unheard of in recent US history. It has brought jitters all over.<br /><br />Import/export data came in last week. This is probably more accurate than the CPI because it is not manipulated by the method of measurement. It's just plain dollar amount of prices. They run more than 12% YoY. The retail sales up by 0.5% ., and just 0.2% excluding Food & Fuel - confirms the customer is thinning out and isn't spending as usual. The true inflation is really biting the American household. <br /><br />Without a fundamental shift in asset prices, the economy cannot be resolved to its neutral value. For this to take place - interest rates need to go higher and got to go higher faster. In all of this., the Fed has just started. It is moving interest rates by 0.25 is too slow compared to the unfolding price increases across all products and services. Of all industries the tech seems will get hit first. <br /><br />Tech-bubble has already been pricked. After the smaller tech being hit hard, now the darlings of the last decade are getting whacked. We have seen the big-tech (FAANG) now getting hit. Most of them are already in bear market territory or just be there soon. Other non-FAANG darlings like nvidia for example is down more than 35% from its recent highs. The Banks are getting killed too. They are all trading well below their recent highs, some to an extent of even down 40%. With mortgage rates now staying more than 5% - the bottom trend in housing is just round the corner, probably it's in the next slide. <br /><br />We can say the one and the only thing - that is going the Fed's way is that the unemployment figures are lower at 3.6% and the job creation is OK every month. As the stock market and the bond market bleeds in blood., it is just a matter of time - the layoffs starts. Eventually this would happen. Markets keep going down and jobs being created every month don't go together. Also, the worker productivity has gone significantly lower since the pandemic after the "work from home" habit. With workers sitting in their living room couches, innovation (workplace creativity) is not triggered. Direct interactions with team members, discussions, working at arms-length create an innovative work culture.</p><p><br />The Fed will raise interest rates until something breaks. At this moment, it doesn't have any other option to save its face. It wants the market to correct significantly but at the same time doesn't want the economy to enter a new long painful recession that could run for years. If the stock or the bond market crash even before the anticipated rate hike - it would put Fed in a really bad spot. At one point or another - To make the market happy, the Fed has to backtrack and go back to accommodating monetary policy again. That may create all sort of new problems along with history!<br /></p>Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-40260068464617813352022-01-14T05:25:00.002-08:002022-01-14T05:25:39.022-08:00Easy money Hard pains<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> For the past 20
years or so, America has solved its economic problems by doing pretty much just
one thing - printing new money (USD).</p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">Alan Greenspan,
after the burst of the dot com bubble reduced interest rates to 1%, left it
there for longer and thereby causing the housing boom. Without the 1% cheap
money from the FED, the housing prices wouldn't have risen. The housing boom
burst in 2007 causing the financial crisis in 2008, and Ben Bernanke reduced
interest rate to 0%. When growth didn't improve much until 2011 - he did
multiple QE s and interest rate manipulations like operation twist. In simple
English - America printed new money and funded the economy in the last 2
decades. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">To climax that out,
once the pandemic hit, printing new money was so rampant, the American tax
payers just became irrelevant. The usual tax deadline of April 15 was postponed
as it wasn't necessary. Some even suggested, we abolish the IRS and America can
print its way out to any growth levels. Of course - it can't. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">What was surprising
during this time was - None of these new dollars caused inflation - officially.
This is because of changes to the methodology of how the CPI was measured, lot
of dollars ended up being outside the United States rather than within the country
primarily because of import dependent economy. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">With endless money
printing, US seems to have reached the end of the rope now. Out of all the
problems it can solve with money printing, one thing it cannot solve is to fix
the problem of "domestic inflation". </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">Domestic inflation
now in the US is 7% as per the CPI data released this week. The PPI inflation
is more than 9%. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">The Fed has come out
with its reaction - they will trim the monthly Stimulus and stop it by March.
Then they would raise interest rates through this year and next year. They say
- we will be just under 2% Fed funds rate by end of 2023. The problem with this
argument is - how come a 7% inflation problem be solved by 2% interest rate 2
years from now. It sounds really dumb. Cruelly no one is questioning that
enough. Fed is clearly behind the curve here. They are trying to play catch-up.
It looks too little, really late. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">Any rolling back of
easy money policy will cause economic crisis. It looks the tech-bubble and the
crypto bubble have already been pricked as a result of the Fed's change of
course. We need to see through 2022 to validate that. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">If you took S&P
500 since the pandemic hit - it's up 30%. If you remove the momentum stocks
FAANG out of that (meaning S&P 495) - The S&P is up 0%. That is the
harsh reality of it. As stock market veteran says - The soldiers get killed
first and then they come for the Generals. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">One other clear sign
of topping - Apple is a 3 trillion company in market cap. It is more than the
Russel 2000 put together (all two thousand companies put together). India is a
roughly 3 trillion economy. Apple, a mere cell phone/laptop making company replacing
an economy of a billion people explains how big the bubble has got. So really
looks the top this time. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">The tech-savvy
NASDAQ hit a correction territory already this week for a dead cat bounce. It
will head down to it again soon. Of course, to go to the bear market, it needs
to go to the correction territory first. Without an assurance of further easy
money - I don't see how the already leveraged tech-industry can go higher
still. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">The crypto also
seems to have topped. Bitcoin and Ethereum - top couples seems to be breaking
down on critical levels. With the bond yields increasing - the backbone seem to
be bending. What out for this one - the market seems to be crumbling down with
no bottom in sight. The total recall (bond price + its remaining yields)
crashed most last week, a level unseen in history. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">Milton Freedman told
inflation is completely and everywhere, a monetary phenomenon. Rising prices
are consequences of monetary expansion. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">What exposed the
underlying sick US economy was the covid pandemic. With no savings in American
families, the US government didn't have an option but to send people
bank-checks, that they can cash in to survive the pandemic period. Without
which people would have ended up in the streets without job prospects during a
pandemic in play in the entire world. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">If easy money pumped
up asset prices, then by definition rolling them back would reduce asset
prices. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">The problem of
inflation cannot be solved by any other means but by sucking out dollars in
circulation. The trick would be to do that without causing a recession. Doing
this is impossible taking into account the current outstanding debt. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">Fast depleting
worker productivity of the US worker is very concerning. No society can keep on
consuming without producing the commodity. The labor productivity crashed, to a
low of 60 years recently. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">What is going to
happen in 2022 is going to be interesting. This would be first year since the
financial crisis - we have a really hawkish Fed with a job on its hand to solve
the inflation mess. It's affecting all people and the ruling Democrats want to minimize
the pain before the mid-term elections in November. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">Doing the right
thing now - is not monthly quarter percent hikes over the next couple of years.
What is needed is interest rate going to a number more than the 7% inflation
number, say 8%. On top of that, roll back all QE programs and Fed has to reduce
its balance sheet meaning instead of being a net buyers of US Treasuries, they
need to be net sellers. The sad fact is - none of this is possible without
crashing the whole economy that would make 2008 great financial crisis look
like a walk in the park. On the other side - what if inflation goes to 10% or
15% or 20% ? That would need a even more bitter medicine to a even sicker
economy. The Fed has really trapped itself to a corner and it doesn’t have a
painless option. More than anything else - the credibility of the Fed is
challenged. They had to go back on the word "inflation is
transitory". It was a big miss when you have 800 PHDs in your payroll. It
was absolutely clear - inflation was persistent and nowhere transitory. To save
a daily insult - the chairman had to go out of the way to "retire"
the term transitory for everyone. Reminds us all about Ben Bernanke - who
infamously told the US Congress, the subprime crisis was tiny and will not
affect the housing prices - only to see the entire mortgage market was toxic to
its core triggering a global financial crisis unseen in generations. </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11.0pt; margin: 0in;">Overall 2022 will be
the year of rampant inflation. The 7% is just the start. The FED has to raise
interest rates very aggressively than they think. Every time this has happened
- something broke causing a crisis. This time is no different.</p>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-9746773631515978492022-01-12T08:43:00.008-08:002022-01-13T06:23:17.304-08:00The desk jobs<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> A fundamental truth in mankind existence - a
thing cannot move from one place to another, unless a human labor is involved.
An object stays in its place forever unless someone acts on it. Also its true
-> an individual cannot do anything by himself <span style="font-weight: bold;">alone,</span> no matter what. Even a genius scientist who finds a
medicine for a deadly sickness, uses a table and chair for his experiments,
things made by someone else. If he wrote his findings - someone made the paper
and someone else made the pen. So the fundamental unit of change is <span style="font-weight: bold;">human labor</span>. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Most of world's
history - individuals worked for themselves only - in the form of finding his
basic necessities like food, clothing and shelter for his own survival. With
his life being threatened by wild animals and other components of nature, he
determined that he has to associate himself with a group of people, like a family or a
working community. The search for needs was discovered to be easier when done
in groups. Group ism created more bounty for the individual effort, with common
wisdom from experiences of all. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Later on as tools
and machinery got invented, the labor moved from being physical to being
less-physical. The nature of jobs moved from agriculture to manufacturing to providing services
eventually.</p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">During this
transition in the last couple of centuries, some individuals within the group became smarter and smarter
compared to the rest - they began to work for others for a "reliable"
income. Employer-employee relation would eventually become an organized mode of
extracting human productivity after the invention of needed tools, that workers
will be trained to operate over time.Eventually the
employers became co-ops, companies & corporations. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Western economies of
the last 2 decades have become <span style="font-weight: bold;">service</span>
economies for the most part, with very little trace of manufacturing (producing products). </p><p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p><p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Gradually the western world
has evolved to basically this - Bulk of the employment is "desk
jobs". It's like people playing some kind of video games from their
chairs. Apparently they are ALL creating value doing that. I wonder in most cases -
they aren't. At least not in its fullest definitely. Are you asking, if all of them are unproductive - no.
Some of them definitely are. But desk jobs cannot be 100% replacement for real
manly jobs that need hard physical activity. Machines have replaced most of
those jobs - which is definitely welcome, but the so called 20th century jobs
are definitely way inferior to what mankind ever knew. </p><p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p><p style="font-family: Calibri; font-size: 11pt; margin: 0in;">How did a superb
performing US economy, which pioneered production manufacturing lines making household products (that improved quality of life for all humans across the globe), reach
this pathetic state. Surprisingly all this happened in spite of a purely capitalistic model - It's all private owned.
Productivity was keen. <br /></p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Human resources as
any other resources available in the world are <b>scarce</b>. It is hard to get people
with specific skills and importantly with the needed attitude. They need to be
utilized right and productively. Labor is precious. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">The services industry
has grossly mis-allocated resources, the way it is practiced. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">It can be said
almost with certainty that a factory unit, producing a product is 100%
productive. They will never manufacture anything that is not needed. Products
produced will be consumed in one form or the other. If they produce something
the market doesn't need - they will change course right away. Workers would be
made to do something else - that will be used by someone else no matter what. A badly made apparel in a Tirupur factory will at least be used as a waste cloth for years. Unfortunately you
cannot say that in your desk jobs. Not all of the things that are produced are
really used somewhere usefully. In desk jobs, it's very common for workers to
do products (documents, reports, software, analysis etc) - that no one uses. They lay on
broken hard disks. What was the cost of money & time to accomplish it? More importantly, who
paid for it?</p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">When I went to the
US in 2005, I would see this on TV often, George W Bush, then US President
would come on prime time and would say that the Americans are getting ready for
the 21st Century jobs. He would say this when asked questions about the
depleting manufacturing base and loss of blue collar jobs across the country.
It was like the average American worker will not participate in producing
day-to-day needed products like - toothbrush, paste, soap, table, chairs,
sofas, beds, pen, pencil, books, fans, washing machines, tv, electric
appliances, etc. These things need resource intensive mode of production - and
thus can be done by people from poorer countries. American workers would do
only cutting edge items like - building airplanes, rockets, military
submarines, R&D, high-end technology and similar jobs that need expertism.
In theory - it would be correct. In practice - it just didn't work that way.
Doing difficult things is being productive. What really happened - most
American workers were not ready for the so called "21st century jobs"
and their standard & quality of life started falling. Bulk of them left the
labor force because they couldn't hold on to their jobs. The labor force
participation rate has been going down for years now & right now, it's
around a pitiable 60%.<span style="mso-spacerun: yes;"> </span></p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">In the US, Women
made the bigger work force than Men in last couple of years. Leaving aside the gender
discrimination aspect of it - a quick dissection that will lead to an arguable
thought -> Women have a different physiology and cannot do lot of things
like men. One obvious thing - A man starts his "working career"
sometime in his 20s and will be in the work force continuously until they
retire in their 60s. But the women - they cannot be in labor force similar to men.
They take career-breaks during pregnancy. They take care of kids after that. By
nature, they raise families. Their role there as a mother & wife is very unique.
This distracts them from focusing fully on their jobs. Because of this,
employers tend to pay them lesser which is understandable. For the society -
more women being in work force compared to men is a sign of falling
productivity and not increasing productivity. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">I was talking the
other day to someone at work. With the covid restrictions kicking-in, they were
getting a count of who will be in office and who would work from home. He just
said - he will be in office. Turned to me and said, when at home, and sitting
before a computer all day - his mother doesn't even consider that as a labor
happening. It is very common for them to ask him - Can you please go and do
this errand for me. I just see you sitting before the computer and unsure, what
you can possibly be doing. It looks there is a whole generation of people who
think -> sitting in a table/desk in front of a computer screen is void of
any labor activity. The productivity is undefined and obviously unnoticeable.
The invent of Social Media (SM) over the internet is a considerable distraction
for desk jobs too. You could spend hours and hours looking at SM pages
scrolling down & down and not benefit anything at all from it all day. For many people - it turns out to be addictive. <br /></p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">The covid pandemic
has come as a huge storm into the existing way of employer-employee
relationship. With things back to falling in place now slowly - the old way of
operation is probably gone. There is going to be a new kind of set-up. One
thing that the pandemic has challenged - there are some jobs that can be
executed remotely. If they can be executed remotely - what difference would it
make to do the remote work from New York City or Nigeria. It doesn't make any
difference as long the "same work" gets accomplished. Also the time
zone in which they operate is not simultaneous but sequential. This ought to bring
more efficiency. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">One word that was
used more frequently and not being in use at-all these days is - globalization.
This term essentially referred to the employer going global leaving out the
employee of the region. If the jobs are essentially desk jobs - what is going to happen is, the employee is going
to go global sitting from his chair. He is no longer tied to his employer in
his geographic region. He can work for anybody. This will play out eventually in the following years. This wave is coming and it's
going to shift the employer-employee set-up we all know. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">The pandemic of the
last 2 years, has redefined many things. We just sent all employees home for 2
years which is quite unheard of. Things are holding up still, if not normal. It
doesn't look like we are going back to 2019 when the pandemic is gone. People's
preferences have changed. There is going to be a lot of give-and-take in the
employer-employee set-up. Ultimately the market is the best judge. Market has
& will always do a good job of allocating resources. This time at the global level. Weaker links get
broken, stronger resources get better. The post-pandemic world has more
surprises waiting for us. It's interesting times. </p>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-43199218015647302542021-11-22T23:17:00.001-08:002022-01-10T01:50:00.294-08:00Crazy Cryptos<p>
</p><p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Any discussion about
economic bubble mania always use the "Tulip Mania" as an example.
What is more astonishing is - the mania happened in Netherlands in the period
of 1630s and we still use the example very vividly even though it happened almost
400 years ago. I am not sure why THIS mania is remembered fondly compared to
thousands of other manias that followed it. But I am sure - the next 400 years,
future generations would talk or ponder the crypto mania we are engulfed here
in our generation as the worst part of human greed and irrational exuberance to
its core. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">During bull markets,
prices of assets grow to new highs and gradually recede during the recession
that follows it. Usually crazy things happen in few specific sectors of the
economy. Unlike water, the "new money" does not balance at all the
same level. It so happens - some sectors of the economy get very hot - really
hot and start operating without logic. Eventually as the recession hits through
- the astronomical prices come down crashing. It was the dotcom crash of 2000
that brought the tech stocks to zero and the 2007-08 housing crisis, bought the
prices of US homes crashing by more than 50% across most of the US cities. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">The current boom we
are in is being rightly described as the "mother of all bubbles".
Definitely the tech stocks are over-priced and the NASDAQ is more than 3 times
what it was in year 2000. Housing prices are now at its peak - well above its 2007
highs just before the crash. It can be easily argued the US bond market is in a
bubble as well. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Unlike earlier
boom/bust cycles - it appears the boom is in danger zone in multiple sectors of
the global economy. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">But out of all
these, nothing is so screwed up like the entire crypto market. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">There are quite a
few things that are bad in the crypto market. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">An asset has to have
an intrinsic value. When you take a home, people live there. It has a utility
value. There is a need for housing. It is a place, people can keep themselves
warm or cold from weather changes. Its where you keep your belongings safe. It
has a use value. Because of its use value, it has a proportional exchange
value. Home owners sell their homes for getting cash and use the proceeds to
buy another asset . Assets such as home will always have value because it has
the fundamental components of productivity - land, labor and capital. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Other assets like
stocks - represent a piece of action in a profit making businesses. They have
an intrinsic value. The business has assets and employees with skills who can
make the shareholder money in the long run. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Every boom period is
defined by something new. The newest girl in the block always gets a lot of
attention. This bull market that is in place since the 2008 financial crisis
has created huge asset price appreciation overall. The causes being the zero
percent interest rate policy of the world central banks and endless
quantitative easing measures the world hasn't seen. With the covid arriving
early in 2020 - Every boom has been re-catapulted with more stimulus. With
"free money" everywhere, investors have no choice but to buy risk
assets all over the world. That would explain the exponential growth of the
crypto market. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Cryptos have all
increased in value during this phase of the boom. For example Bitcoin has went
from few dollars into its all-time high of $68000. For anyone who made the
journey they have profited exponentially. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">No asset go up in
price for ever. For those investors who missed the bitcoin ride regret not
being able to get in to the ride when the price was really in double digits or
even triple digits or few thousands. For those investor who got in and burnt
themselves in volatility know the high price of losing the money on the way up.
But for me - the best investor are the ones who will make the sane decisions
and stay normal during crazy times. I have been watching bitcoin when it was as
low three figures. When it reached $4000, I thought it was way expensive then.
Today its $68000 - of course it's way expensive now. Can it go higher and
higher still - Of course yet. Can it go to $100,000 - Yes, it can. Can it go to
a $1M - possible but not probably. With each coin costing a million, it would
seriously undermine other monetary parameters. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">The cryptos are
digital meaning you need to go online to view or see it. Its virtual - which is
it is not fungible (felt or touched). Peter Lynch in his "Beating the
Markets" says - the investments you make on businesses must be explainable
with crayons. There are many things that can be explained - but not the
cryptos. People who have no idea about cryptos - don't invest in them, and the
people who do -> think it's very valuable. Only way out for someone who is
holding his bitcoin is to sell it to someone who is willing to give more money
than what the seller paid for it. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Crypto currencies by
itself are transmissible tokens via the internet. It can be exchanged between
the crypto valets of users. That's all it is. Their value is only exchange
value. There is no use values. Meaning people will not buy it because there
isn't any use to it, they will only buy under the belief that someone else will
be willing to pay more for it in the future. It doesn’t solve any problems. It
takes a lot of electricity to "mine" the cryptos. The cryptos are end
product of the mining operation. If it's not useful by itself - what is the
purpose of "mining" them. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">One of the big
drawbacks of the cryptos is its lack of simplicity. The medium of exchanges is
not physical. It is online. With a large population of the world outside the
internet, it is not sellable to any larger public. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">If you have a
checking account in the bank and you are able to digitally transfer funds to
your friends and family 24x7 and to any part of the world - That is a
reasonable mode of exchange that we know works well. It solves all problems
that bitcoin tries to solve. When you are without an internet or a power
supply, you will not be able to do a fund transfer in your bank account mobile
app. It’s the same there too. If an bank account can facilitate exchange of
currencies online - separate channel of mechanism is redundant. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Because they are not
useful by itself - when the confidence is lost, the price of the cryptos will
go to its minimum of zero. There is a precedent to it for us. The dotcom
companies who made spectacular stock market debuts in the 1990s - eventually
went to zero when reality caught up with it. The same is true for today's
cryptos. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">One of the big
talking points of bitcoin enthusiast is its scarcity. They say there can be
only 22M odd number of bitcoins ever. Even though there may not be enough
bitcoins, there are enough crypto currencies, actually 13000 of them that are
being traded. Even within bitcoin there is a "bitcoin cash" which
operates along with bitcoin. It’s a separate crypto that operates outside the
22M limit. So the whole things is very unconvincing and we hard to explain even
by the so called "crypto experts". </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Centrals banks
printing money has dramatically increased since the great recession of 2008.
Bitcoin enthusiasts point to this obvious problem with the fractional reserve
banking the world economy follows quite rightly. They advocate cryptos as
financial instruments that is outside world governments. They often site it as
free from government regulations and its uncontrollable independence from any
entity. The individual countries stand behind their currencies. Even though we
do agree with the problems world Central banks have created - crypto is not an
effective alternative for it as it lacks a lot of other qualities of sound
money. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Internet is a life
changing invention. Most of its value derives from its experience of being
mostly free. It doesn't cost much to be using the internet. Say If popular
social media sites like FB are made payable site. The traffic would come down
to single digits overnight. For most people, its optional meaning they would
want to use it only if free. If its chargeable - they will choose to ignore or
choose an alternative site, that is less sophisticated but doesn't cost any.
Unlike the internet - the cryptos are not something people cannot live with. </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">The astronomical
valuations of certain cryptos confirm the big asset bubble the world has ever
seen. It is very hard to believe - it will gradually smoothen itself to a new
normal. There is going to be adjustment and when it happens it will be more
painful than before as the monster bubble is massive this time.<span style="mso-spacerun: yes;"> </span></p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;"> </p>
<p style="font-family: Calibri; font-size: 11pt; margin: 0in;">Eventually all
cryptos including bitcoin will go to zero as that is where it belongs. </p>
<p><br /></p>Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-54165391884773475292020-11-29T08:06:00.002-08:002020-12-01T06:31:27.686-08:00Why this world needs a Gold Standard!<p>Gold has been an investment for hundreds of years and at this point of time in history, its relatively under owned. </p><p>To put it in perspective, there are some myths about our understanding of certain financial terms. </p><p>"Money" is something that has intrinsic value. Additionally it should also be a store of value. There should be a natural demand for it. Gold is money. It is possible any commodity can be money. For example - oil can be money. It has a intrinsic value and store value. We can run automobiles after scientifically processing them. There is a natural demand for it. It is however not portable, fungible or easily exchangeable. The precious metals - mostly gold and silver have always been used as money since mankind evolved. Their availability is limited and people have a natural desire for it. </p><p>The US constitution mandates only gold and silver as money. No where it talks about dollars. Dollar bills were mere paper bills or IOU, that represented the gold it was backed on. It was used for convenience and never by itself a money for most of American history. </p><p>The US Dollar or the Euro or the Pound or the Indian Rupee is NOT money. They are currencies. By itself - they do not have any value. The government prints it on paper and mandates the collection of taxes and commerce on it. It controls the supply of it by controlling the flow of it - often referred as liquidity in financial terms. These paper currencies are fiat currencies and should not be called money. They are currencies. The demonetization that happened in India few years before - made most of the existing paper notes invalid. Overnight they lost its value. It was substituted with new paper notes. It is a recent example of a fiat money losing value overnight, if the government that controls it wants to do it. </p><p>Usually there is lot of argument - if gold is an investment. Gold is not an investment. It is a store of value. let's see what this is.</p><p>Say you have a capital amount of say, Rs. 50 Lakhs to invest. You have three choices</p><p>1. Keep the currency in a safe</p><p>2. Buy physical gold with that money say 1 KG and keep it in a safe somewhere</p><p>Also note, we can buy a luxury car today, that cost Rs. 50 Lakhs.</p><p>Sometime in the future, that can be say between 2 years to 100 years, you come back to this "investment". This is what you realize</p><p>1. The currency in the safe is as is. But the currency buys lot less than it used to be. It might become completely worthless over time. </p><p>2. When selling the gold in the safe, it gives me the exact value, as of in today's currency value that helps me to buy the the exact SAME thing I wanted - in our case the luxury car. </p><p>It should be obvious with this example that gold never acts as investment. It just stores your purchasing power over any number of years. The other way to say is - if you are young and energetic and happen to have a job and make x amount of money over n amount of months. If you end up investing everything in gold at the current market price every month, then what you are assuring yourself is - at any point of time in the future for any given month, you can see the x amount of money and live your life with the same life style for the month. As an example - if you saved for five years of your monthly salary amount in gold now., you are guaranteeing yourself that you can use that money for "any five years" down the future and you will be able to do the exact same thing you can do it with now. </p><p>Governments control money and as always they are not good at anything and this one is not an exception. They have convinced the world that little inflation is always good. The price of everything going higher is always a good thing. It is not. It helps those people who have heavily borrowed money. It does not help the savers who have dutifully saved. In other words - the risk taker is rewarded at the expense of the conservative saver. This has caused the economic malfunctions the world is facing now. Had there been a fixed money supply - it would guarantee stable prices. The industrial and technological inventions would cause prices of everything to go down because of increased productivity. The world the way it operates now is - completely backwards. The government along with its special interest group (who benefit from this set-up) - keep this game going for their own convenience. What is very sparkling in history - This always happen and people force governments to go back to the gold standard. This is often economic failures or revolutions that throw out dishonest governments and their quasi entities that benefit from it, who promise economic prosperity without human productivity. </p><p>Now we look around, in the post covid-19 world, the major channel of investment - pretty much boils down to equities. Equities are all at an all time high, primarily facilitated by easy currency policy of world central banks. Buying the US Treasury 10 year bond for a yield of 0.7% interest is well below the government statistics of 1.5% of consumer price inflation. It clearly says that any buyer of a 10-year bond, is guaranteed to lose money if he holds it to maturity. This is a bad investment and no profit-oriented buyer will buy it. Because the central banks are in the bond market buying bonds - the entire market is phony. The only option is to sell the bonds to the Central Bank for a profit. The Bank doesn't care - as it just prints currency bills to buy the bonds. There is neither an investment or productivity involved in this transaction. Bank of Japan has been following this for years and literally days goes by where not even a single government bond is bought or sold. </p><p>Bottom line - With all Centrals Banks printing currency bills like crazy - the general inflation is only going higher. Gold is the only hedge to this rising inflation.</p><p>Whenever you are upset with the current governments and their lavish spending spree's, throwing and wasting money (currency actually) in the name of people's welfare - what you do, is you take your savings and head towards a precious metal seller and buy yourself gold and silver. That is the only way to be prudent. </p><p>Right now - all economies of the world are socialist economies. All governments are propping up private companies that should be allowed to fail. We are all Marxist now. Capitalism cannot be good when things are good and cannot be seen as evil when things are bad. If capitalistic economies cannot stick to free-market principles during bad times, the collapse of the system has already began. In the US for example - the amount of new currencies printed in the last 3 months exceeds the amount of currencies ever printed in the history of United States. This won't have bad after effects is not believable. Even if things come back to normal - what is the plan on re-introducing capitalistic principles again? The federal budget deficit is alarmingly high. It is expected to remain high for the foreseeable years. </p><p>If governments can print this much currencies in this short time, and it does not create any problems - then why even do taxation? We can repeat this every year and it should make a difference. </p><p>The whole indebted western economies are more and more cornered. The only thing that people should hedge against is the future inflation. Gold and Silver offer that. </p><p>People say, we cannot go back to the old standard. We are not going back to the old standard. We are going back to the good standard. </p>Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-42513739575646936962020-04-11T00:18:00.000-07:002020-04-11T08:34:58.613-07:00It's the economy, stupid. <div dir="ltr" style="text-align: left;" trbidi="on">
When a large house party is going on, and the guests were getting their beers from the fridge and finally one person opens up the fridge and finds out that, there are no more beers left, It cannot be concluded - he drank all the beers. Similarly the economic recession that is creeping in the world now, is triggered by the Coronavirus pandemic but it is not the only cause. The virus will be gone in a few months. But the economic recession would prevail not just months but for many years to come.<br />
<br />
Before the virus ever came into the picture, the economy was so weak. The signs were obvious for the people who looked at it. The rosy picture the mainstream media and the government gave about the economic growth that was completely out-of-place was so obviously misleading. For those people who looked at the right metrics, the data never improved in-spite of all the positive rhetoric peddled by the financial media.<br />
<br />
The primary reason, why the western economies look more vulnerable to a crisis like a pandemic is that - they economic breathes on consumer spending. Unlike the Asian economies, the western nations run on credit cards. Even a bottle of water is purchased with credit cards. With some people using credit cards for convenience, the vast majority of the people use it as a means to delay the payment to future income. The saving economy has the supreme savings as a cushion and can recover from the pandemic sooner. With all business establishments closed and almost no economic activity happening on the ground, the western consumer who is already overburdened with debt has come to the final square. The last thing that was holding him is the job paycheck. With the paycheck now in question, and with no savings from the past, the future looks grim. There is no other way for him to get out of situation unless the government throws him some lifeline money.<br />
<br />
This consumer spending on credit has been the major driver of growth. 80% of the American economy is consumer spending. This spending was exacerbated by the artificial low cost of borrowing. Interest rate is the "price" of the money. This is very important for any market economy. Post-2008, interest rates never could go back to normal. We started off with the Fed's funds rate in 2006 that stood at 5.5. It was reduced to 0 in 2008 under George Bush's Presidency and never moved from there until the last year of the Obama Presidency. It went back to 2.5% post-Trump election optimism. <span style="background-color: white; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">The EU's bank-to-bank lending rate never when above zero after they got there in years. </span>Every time they try to make it normal but conveying their intentions to normalize monetary policy - the stock market would slump. Finally the Fed/ECB got boxed in. Overtime it became pretty clear that the low-interest is the only reason there is any growth in western economies. For all those people who looked at it right - It was obvious that the western economies were being propped up by low interest rate and QEs. These easy money polices were not the training wheels to kick-start the economy but it were the only wheels. This created mal-investments across the economy during this boom years. The western government and the Central Bankers knew - that withdrawing the easy money policy will definitely create a recession. So they were just locked.<br />
<br />
The economic numbers that came out during this boom time, were to be taken with caution. For example in the US, because a person is unable to get a good paying full-time job, he ends up doing 3 part-time jobs. This makes the jobs count for the month to go up by three. When he loses couple of those jobs, they don't add him to those number of people who lost jobs that month, because he still manages to hold on to that one part-time job. It was just a numbers game. They refined the methodology of counting to make it appear better than what it was. They also do publish the numbers calculated by old methodology, but they don't get enough media attention. The headline number was the most important number for the financial channels and the media. Every time you dig through the numbers, it was apparent the jobs being created were phony. There is always a slide in the count of manufacturing jobs and they get compensated by increase in leisure jobs - like restaurants, bars, hospitality, etc. The surprising part is - how long they managed to do that without a recession. In the end - we had the longest bull market (without a correction/recession) for a decade. The economy growth was touted to be the best in the history of the world. Even the GDP as measured by the government, did not hit the annual 4% mark. Until February of this month - It was hailed the greatest economy ever. Warren Buffet very famously told - when the tide recedes, we will know who was swimming naked. Unfortunately as the virus arrived on the stage, the whole of US economy was exposed naked.<br />
<br />
The jobs created during the boom years, were low-paying, service sector part-time jobs. It was always suppose to be gone even at the slightest sign of trouble. 17 million people filing for initial jobless claims is the last 3 weeks explains the quality of jobs that prevailed.<br />
<br />
The boom was so big, it has only come down the first leg. The market is at the same level now, when Trump was a candidate. Remember, he called these numbers - the big fat ugly bubble. So market is still over valued.<br />
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Filling people's account with free money is not the solution to the problem. That will create more problems that it really solves. The right thing to do is to allow companies who cannot sustain the economic shock now to fail gracefully now itself. Things might get bad. There will be consequences to that actions. People might lose jobs, plants will be shut. Within sometime very soon - things will recover.<br />
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The Fed is buying all the bonds it can. This is not limited to the US treasury or the mortgage backed securities any more. It includes pure private sector bonds like corporate bonds. It is buying municipal bonds with an unlimited bag. Fed is the only buyer of these bonds. No one in the market will buy it - because its toxic. Most of them will go to zero. That is the reason it doesn't have a natural demand. The 2T Fed program announced 9th April will buy all bonds including junk bonds. With the Fed buying it all for any price, the whole bond market is phony. There is no longer normal price discovery which the market always does well.<br />
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This situation mirrors the start of the economic depression in the west that started in 1929 and did not go away until the second world war was over. The post-second world war was the real economic boom for the many decades to come. What we are starting at, is a long, prolonged period of negative growth that will fundamentally question the American way of financial capitalism that is practiced by the west.<br />
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While everything is blamed on the virus now, what will eventually happen is - over the next few months the virus would gradually subside and cease to exist. Lot of people would even forget the name of it and find it difficult to remember its name covid-19. The economic pain created by the unprecedented bubble in the last decade and the reactions by Fed to boost it further citing the covid-19 reason will be enormous and will mirror the great depression. The overdose of fiscal and monetary stimulus practiced will erode the value of the US dollar and eventually kill it.<br />
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With a multi-ethnic society like the USA and UK, to an extent EU, financial prosperity is almost the only reason the rule of law is enforceable. Without the economic prosperity, the culture of capitalism (the way it is practiced) cannot be sustained. The richness is what unites the people. The more poorer they become - racial discriminations start to come to the open. The 1929-style economic recession where bulk of the people were white-Europeans did not create social problems in big scale. But now with all western countries heavily populated with multi-ethnic population, particularly Asians - who happen to have more job skills than their white citizens., social issues will prop-up. So the challenge for the governments in the west is not only to quell the economic effects of the slowdown but also the social effects. This can be done only with stringent laws, but only if the government cooperates by enforcing them. With right-wing governments in place, there is a possibility of cohesion based on religious and racial superiority which will have a cascading effect on how societies operate. You see around this world - people who look alike stay together. There are historical reasons for it. The liberal western capitalistic societies in the last 3-4 decades benefited from arriving work forces (immigration) from all around the world and they tolerated it because of the economic prosperity they brought to the nation. With their nations gradually becoming welfare nations - the sharing of limited welfare is no longer sellable to the white majority population. Also the fact that the coronavirus originated in China may lead to a general dislike of Asian people who are already integrated in the western societies causing racial hatred and general dislike for years to come.<br />
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Sustaining the economic prosperity is vital for multi-ethnic western societies to thrive. With a long, deeper economic recession in the horizon, things look bleak in social perspective as well.<br />
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Whenever things go wrong at the nation level, two things happen. One is - Everybody knows something is terribly wrong. The second one is more important - Everyone knows that Everybody knows something is terribly wrong. The western world may just be getting there, if not there already. </div>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-2040281765626832892020-03-29T00:46:00.000-07:002020-04-10T23:18:41.347-07:00Survival of Financial Capitalism<div dir="ltr" style="text-align: left;" trbidi="on">
When I wrote my earlier article last week, the US Fed funds rate was 1% and I accurately predicted they are going to 0 sooner than we think. Even I didn't expect that to happen within the next 6 hours. The Fed jumped in and reduced the rates to zero in one go (Hasn't happened in history) and relaunched QE. Not only that - 1.5 trillion stimulus program and a daily 1 trillion repo. The stock market completely ignored this. In fact the fall in that week was the biggest fall for a week since 2008 - when the financial crisis was at its peak. It managed to recover more than 20% this week.<br />
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The COVID-19 pandemic is sweeping the world big-time. Human tragedy is beyond the definition of sadness. The threat from COVID-19 really looks like a lifetime event for many of us. <span style="background-color: white; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">Natural calamities like these are unavoidable as nature dictates them. </span>Looking at the economical angle - it looks lot bleaker.We will focus on the economic aspects alone here.<br />
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The world economy was so vulnerable in the build up to this crisis, it just happened to be the coronavirus that exposed the underlying mal-investments of the last decade. </div>
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The layoffs have started in the US. The initial job less claims was more than 3.2 million. The All time high of that number is 660,000. The million number - is unheard of in history. Once the pandemic fear recedes, these jobs will definitely return but not all of them would. That is the worry. The GDP is also set to contract because of the virus. There are dire predictions floating around like negative 24%. We just have to wait as it unfolds. Singapore initial estimates on first quarter GDP is a negative 10% which is little more than what was witnessed during the financial crisis of 08.<br />
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The world has seen this many times - public property being privatized and private property being nationalized. This happens when existing economic models get transitioned. Mikhail Gorbachev in 1984, privatized what were government managed industries for decades. Private player rushed to buy it. However It did not stop the collapse of the Soviet Union. It was just a transition from one form of economic model that was failing to an alternative model which is perceived to be "working". Bottom line - It is just a transition from one form of society to another form of society because of the obvious signs of lack of productivity in existing human labor. What is happening in the US today of nationalization of loss-making private entities, is no different from what Gorbachev did in 1984 for USSR except that it is exact reversal.<br />
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Many things were common<br />
<ol style="text-align: left;">
<li>Heavily indebted Federal government</li>
<li>Decreased labor productivity - service sector industry focused economic model finally ran out of steam, proved by the fact that more women in labor force than men and a LOT of part-time jobs and not enough full time jobs</li>
<li>Majority of the population with no savings</li>
<li>Lack of confidence in government entities </li>
</ol>
When the Soviet union failed economically in the 80s and 90s, it had a warhead of 10,000 nuclear arsenal. Always a proof that military might is not a replacement for mass labor productivity of the country.<br />
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The US government does not want the stock market to go down. It is well aware, if the stock market goes down, private companies would fail. With all the pension funds, global investment money into the US market - it will send all the fund values spiraling down. This will lead to mass exit of capital from the US market. Ben Bernanke very famously told during the 2008 economic crisis - the reason for ZIRP and QEs was to create the "wealth effect". When the markets go down in confidence and sells off - this wealth effect is lost causing a downward spiral.<br />
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The truth is no matter what they do, they cannot alter the trend of the market in anyway. If it goes higher - they can make it go little over., if it goes lower - they can slow it down. That is all they can do. Trend cannot be reversed.<br />
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The last thing that is holding the US economy together is the VALUE of the US dollar. The dollar index (DXY) is floating around the 100 mark. It was around the 95 handle just couple of weeks ago. The sell-off in the market has triggered a liquidation, and there is a natural need for the dollar as most financials are denominated in dollars. With the "Cash is King" mentality setting in, that money is going to look for alternative investments. If the US stock market continues to go down - the cash will not go there. With the Covid-19 situation getting worse by the day across the globe including the US, the cash is not going into risky assets. Eventually it needs to chase an investment - this could possibly be gold. When that ride happens - it would signal the demise of the dollar. When dollar loses confidence and goes to say the 70 handle (we were there in 2011 post financial crisis) - we are going to see a sea change in the movement of big money across the globe. With the currency risk not hedged by investment from Europe, Japan and Asian investment firms in the last decade there is going to be serious losses for them as their local currency gain value against the dollar. For example, Switzerland Sovereign fund is one of the top 10 investors in apple shares. Apple shares have tanked 25% in the last month. The fund has gone down by a quarter. If the dollar falls and the local currency (<span style="background-color: white; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">Swiss Francs)</span> appreciates against dollar, the loss accelerates because of the currency exchange. With a stable or appreciating dollar the investment is better off and it is beneficial. But the fund cannot withstand a dollar depreciation scenario. Ideally huge investment funds, hedge their investment against currency risks, but the last decade of easy money policy has left them too complacent to follow it. When these loses happening, the global rush outside of the dollar will happen causing more problems for the US markets.<br />
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Even though the political establishments can blame the coronavirus for the current state., people who were aware of the bad economic policies of the past decade can easily see, that the virus is just a trigger. The Covid-19 situation will be gone 4-5 months from now. We are seeing Wuhan already returning to normal. As the virus situation recedes what is left is - the huge debt and the economy in its terminal state. The 1.2 Trillion stimulus programs will try to keep the economy afloat, but what happens if they don't work. Inflation will go beyond 3%. Once that is consistently higher, the existing bonds that yield less than 3% are going to be clobbered. Fed will buy it to create a market - but it won't work.<br />
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The rest of the world particularly the Asian economies will recover sooner as they are in a better place than the US.<br />
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Merely printing money for economic boom never works. If that was the case - every country in the world that can print its own money and can avoid economic set backs. US dollar being a global currency does not give the nation a right to print their way out. Money is just a medium of exchange for productive goods and productive labor. Without the underlying productive entity - the money itself is of no use. Sending $1200 check to all its citizens cannot work. At the peak of the financial crisis, Bush sent these stimulus checks. That did not stop the collapse of Lehman Brothers in September of 08 and the subsequent financial crisis. Similarly this check would also vanish in memory. Believe me - every country wants to send its citizen a check, but there is a small problem with that - no country can afford that.<br />
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US government is the biggest debtor in the history of this world. It's plan to bail out other smaller players would have worked in 2008., and will not work this time. The bottom might come out of the US dollar causing general currency issues. With all fiat money in play - all currencies of the world will lose confidence. We are going back to the gold standard.<br />
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Lenin very famously told - The best way to destroy the capitalist system is to debauch the currency. The capitalistic west will eventually realize that and it just might be too late. </div>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-28388775827202016892020-03-15T09:38:00.001-07:002020-03-15T10:02:11.495-07:00The start of the end<div dir="ltr" style="text-align: left;" trbidi="on">
In February all US stock market indexes were at an all time high. The time was right for President Trump to go to Congress for the State of the Union speech and declare victory over the economy. He would once again justify how awesome the economy is and why the prosperity of the people in the last three years of his Presidency was the best ever in US History. He glorified the rise of the stock market and took full credit for it. Little did he knew then, that the very market he glorified will tank into the bear market in record time. In fact, all indexes hit the bear market territory in the first two weeks of March. Market going to bear market was nothing new but the pace at which it got down from the peak into the bear market is unprecedented. The fear of Coronavirus (Covid-19) becoming a pandemic and dangerously spreading across the world swiftly, triggered the collapse of the markets.<br />
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As of today 15-March, We are seeing wide swings on daily trading swinging between + or - 4% on any day. In the process we have almost 10% down and up days within a week. The major indexes haven't seen this kind of swings unless you want to go back to the 1929 era of the great depression.<br />
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President Trump's reelection is almost 100% dependent on a good economy in build up to the elections in November. If the economy is in recession, it is almost certain that he will end up as one-term President. To avoid that - Trump would be ready to do extreme intermediate steps to postpone the crisis. The mere idea of payroll tax cut or a tax holiday is a direct reflection of that.<br />
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The US Federal reserve has kept the economy on cheap money post financial crisis of 2008, and it never managed to get back to normal interest rate in the last 12 years. They couldn't do it, because they were well aware doing that would cause a recession. Chairman Powell however did manage to get to 2.5% mark - almost half of historic average. Once the late rate rise was too much for the economy to manage, he had to pull it back to 1.5%. As stocks began to tank in the first week of March, the yield on the longer term treasuries began to tank. As the 10-year was dangling around the less than 1% mark, he really didn't have a choice but to make a unplanned 50 bps of emergency cut and bring the Fed funds rate to 1%. <span style="background-color: white; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">What scared chairman Powell the most was there were 7 days market freeze for the investment grade corporate bond. There were no buyers and hence no sellers. </span>Within a week, the yield has further dropped down to 0.3% and back up to the 1% mark. The bond market is still pricing in a 50 bps points on the March 18th Fed meeting. They will cut it further I think. Sooner than we think, they are going back to zero percent. As stocks tanked the bond market crated with yields rising for non-government bonds. The spread looks lot scarier. The Fed has also promised to jump in to buy everything with its $1.5 Trillion QE program announced last week. The TARP in 2008 was $700 billion and it was very famously rejected by Congress initially. The bailout fund this week is almost double of that. This essentially is an admission that the problems are bigger than 2008. What is really interesting is - Can the Fed play its card this time. The last time it worked was because - Bernanke, the Fed Chairman then told Congress - the QE was not debt monetization but was TEMPORARY. But from past experience the QE programs always is repeating and every program dwarfs any previous programs in dollar value. The recent announcement of $1.5 Trillion QE programs is all previous QE program combined in dollar terms. They plan to bail out every industry possible. What needs to be observed is - the dollars don't make business viable but the productivity of the labor makes a business useful, viable and hence profitable. <br />
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President Trump is unleashing a "Bailout nation" in the guise of National Emergency because of the Covid-19 pandemic. The bond market went up in smoke last week. Trump really didn't have a choice. He had to come and put a floor to the fall. With fiat currency system in place, these government bond yields don't make sense. In fact these government papers trading at the lower yield is not an issue. The pressing issue is the opposite trade. The yield on the junk bonds are rising more than the fall in the US treasuries. That is the worrying part. The corporate bond market is so leveraged that it cannot handle rising rates. Corporate bonds that have junk status and have ratings just above junk are doomed to fail big time. With this trade "We will buy anything out there in the bond market" is the Fed's new rhetoric. They will go on to say, that it is temporary and they will sell it out during the good time. They couldn't do it fully last time, they will never be able to do it next time as well. Will the market buy it, is the $1.5Trillion question.<br />
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In the build up to the 2008 financial crisis - falling house prices was the pin that pricked the debt bubble. The bursting of the bubble exposed the over-leveraged debt market primarily mortgage debt. The mortgage debt market exploded initially in the subprime sector and then it spread to the entire mortgage market. The financial companies - that were part of the industry got burnt first like countrywide and then it spread to Fanie mae and Freddie mac - the quasi government enterprises., finally targeting the banking hierarchy from local & regional banks to international banks like Citi. This will solved by government bailouts to the financial sector.<br />
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The bailouts from the last great recession and the subsequent building up of national, corporate and household debt has created a far bigger crisis now than in 2008.<br />
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The plot that is playing now, is the Coronavirus is the pin that pricked the debt market, which is many fold bigger than what it was in 2008. First it would hit the easy targets and then finally the full scope of the economy. People ask that FANG stocks are doing ok, in spite of the big market correction. My answer to them is - first the soldiers get killed and then the generals. They are all highly leveraged and substantially over-valued. They will go down significantly as well.<br />
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The irrational exuberance on steroids of the last decade finally seems to have started to end.<br />
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What to look for? What will confirm this? Looks at the weekly jobless claims numbers. It has to go beyond the 255K number. The jobs number for April and May are getting important. With the economic activity almost coming to a standstill on the fear of contracting the virus., that number should go up. If you seen the job reports numbers from the last 10 years, bulk of the jobs were created in the hospital and leisure sector of the economy. With this sector annihilated - there should be thousands and thousands of job losses. With US job market dominated by women workforce (non-labor intensive) that men, the jobs would disappear sooner.<br />
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Bailouts would work, if a part of the economy is struggling and the other part is doing good. With the entire stand-still happening, bailouts won't work. Open ended bailout commitment is a sign of weakness and not strength. Moreover the US government is the biggest debtor in the planet. It offering to bailout other smaller debtors just insults rational intelligence.<br />
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Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-37860780920747621332020-02-23T20:49:00.001-08:002020-02-23T22:50:46.339-08:00Reality check 2020<div dir="ltr" style="text-align: left;" trbidi="on">
The 30-year Treasury yield this week dropped to its all-time low of 1.89%. The Bond market is sounding alarm bells of a recession. Turns out investors are Ok to settle for 1.89% on their investment for the next 30 years. This is in-spite of the government annual inflation number being 2.3%. What this essentially means is - the investor who buys the 30-year and decides to hold it for next 30 years is guaranteed to lose money. In bonds the price and the yields move in opposite direction. So the lucrative offer is yields fall further and the price of the bonds surge more and then our investor can dump the 1.89% yielding Treasury to a new investor. One day or the other, you really run of fools. Because of government mandating banks to buy the long-term securities as investments - this forced buying creates a market. But with exploding US debt - again at historic highs, there is never short of these papers in future. US Government has already borrowed close to $23T and there is no sign from Washington DC that the spending is going to slow anytime soon. President Trump doesn't give any importance to national debt and so are the democratic nominees who will challenge him in November. We are in a phase historically where this is a complacent notion - Debts doesn't matter. Greece's debt didn't matter until they mattered. The debt market is a lender's market. Under consumption creates savings. Savings create lenders. Buyers would always be there. The existence of lenders is a pre-requisite for a debt market.<br />
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Banks buy Treasury as long term securities. They are mandated to do that. Without the mandatory rule to buy it, there is no natural want for it. Foreigners are also piling into the US treasuries. They are looking for yields outside their currencies. With interest rate either being zero or less, the 1.89% is more lucrative to say a Japanese investor or a European investor. Unlike before, these trading are happening without a hedge and poses a dangerous pattern. With their local currency (Yen or Euro) gaining against the Dollar will wipe out this thin wafer of < 2% interest and this essentially has become a necessary requisite for the boom to continue.<br />
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Switzerland Sovereign being amongst the top 10 investors in Apple is the same story but they choose the more risky route in Stocks.<br />
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The Fed has been buying short term securities from the overnight repo market. There are 2 things that are distinctly noticeable here. First, the Fed does not want to call these purchases QE. It continues to maintain a stand that these purchases do not amount to a QE program where they bought long-term bonds for $85B every month, Secondly they are unable to hide the balance sheet accumulation of nearly $500B since September of 2019. This is the same effect as the previous three QE programs except that the accumulation is without any upper limit. Any QE(n) program needs more money than QE(n-1) - this has always been the case. It is no different this time and hence it QE for sure. Banks like JP Morgan and Bank of NY Mellon - who have tremendous advantage being primary brokers benefit disproportionately from these overnight repos. They peddle money for the Fed basically, and it shouldn't be a surprise that JP Morgan reported its best ever profit during this time.<br />
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With all indexes - Dow, S&P and Nasdaq all hitting all time highs everyday, the stock market keeps going higher and higher. Just as trees do not grow to the sky., this will have to stop at some point.<br />
Tesla stocks vaulting to $900 is the new mania around. It is the heavily shorted stock in American history. The excess flow of liquidity is chasing these speculative stocks. It has not only overtaken the market share of a car-major like Volkswagen in a few trading days, but is in a striking distance from going ahead of Toyoto. Usually when bubbles are at its peak., we see mania companies going this way signaling its climax. Tesla story really looks one. The tech IPOs drying up is also notable after the weWork fiasco. From $90B valuation to being bailed out by its bigger investor just within few weeks. Even in 2000 bubble, the dotcoms failed first and the Nasdaq crashing was after a while. With Nasdaq about to hit the 10K mark - it looks it has ran out of steam.<br />
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The rise in price of gold this year is more than 8%. It is probably the best performing asset class of 2020. Gold has hit an all-time high against pretty much every currency except for the US dollar. An ounce of gold is at $1662 which is almost $300 less than its all time peak. The recent surge of gold may not be surprising for some people like me, but the surge of the DXY along with it to 100 is very interesting. Usually they trade opposite to each other because gold is traded in US dollars and they tend to go in opposite directions. One has to finally cave in. The Argument to gold is - if it can rise at this pace with the dollar getting strong., it should rise a lot faster on a sliding dollar which may happen soon. So looks gold finally is coming out as inflation hedge.<br />
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Coronavirus is still in its early stages and its impact may be longer and harder looks like. Car sales in China has plunged by 92% since the new year. This looks a pandemic that might have economic impact. As of now, even though it looks serious enough., to me I think, that market has used this reason to rectify an over-bought, genuine sell-off. Coronavirus looks very nastier than initially thought. It definitely can put China's economic order out of place temporarily and this obviously will have an impact on the rest of the world.<br />
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It is very possible that the US fed might intervene and reduce rates citing Coronavirus. When that happens, we will all know that the Fed has not only economic cures but also medical cures. Let's wait and see on this. It is possible that the Fed may reduce rates and keep inflating the bubble. Whether investors will buy it this time also is a serious doubt.<br />
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><br />
<span style="-webkit-text-stroke-width: 0px; background-color: white; color: black; display: inline !important; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; orphans: 2; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">The US market has not priced in anything yet, on a Bernie Sanders Presidency which increasing looks very possible. Republicans who think Sanders is the easiest democratic candidate to beat for Trump should be really cautious what they wish for. This is exactly what the democrats thought of Trump in 2016 and we all know what happen after that. Bernie has been a life long socialist. If he wins, it would be an admission that 29 years since the collapse of the Soviet Union in December of 1991, finally Socialism has made it to the shores of the United State of America. Bernie is not hiding the fact that he is a socialist. He has been a socialist all his life and is on record all his life saying He doesn't believe in capitalism and believes in cooperation instead. If Bernie's appeal resonates with ordinary US citizens and they vote for him, it should be admission of failing capitalism in the US. Unlike candidates who promise socialism and govern from the center., Bernie is very different I suspect. He will govern from the left. Any democratic system leads to a socialistic society eventually. This is because there are more employees who vote that employers. That is one reason, the US constitution notably doesn't have a word called democracy. It was founded as an republic. Somewhere in the last half-a-century, the democratic political system in the US has lead to socialistic leaders. </span><b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><br />
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An economic slowdown is long overdue in the US. Market is just looking for an excuse to sell. The excuses can be - Coronavirus impact in China and rest of the world, Dollar index sliding by 10-20% on sign of a US slow down, Opinion polls that indicate Trump losing Presidency in November of 2020, Earnings shock and bursting of the junk bond/corporate bond market. One of them might happen sooner than you think. There is no rule they don't happen all at the same time.<br />
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Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-14660943206742586142019-06-25T23:14:00.000-07:002019-06-25T23:16:18.105-07:00The Fed trap<div dir="ltr" style="text-align: left;" trbidi="on">
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The Fed stepped-in to assure the market this week by saying, it will do what it takes to support the present economic expansion. It looks pretty much a July cut is on the horizon and more likely more cuts this year and again next year. Markets exactly wanted to hear that, and started rallying. The S&P hit an all- time high the same day. What is different this time is, in the past - when the S&P and the broader indexes hit historic highs, the Fed would increase the interest rate to cool down the economy. On contrary - the Fed is promising to decrease it, to keep the economic expansion going. Ever expanding expansion of the economy ie., prolong current boom. Particularly with the way the world economy operates these days where there is constant boom and bust cycle - it is a given that the boom market will always lead to a proportional bust market. If we go with that theory - the longest ever bull market that we are in, should definitely create a longest bear market. The longest bear market can only be preceded by a crisis scenario.<br />
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The US stock market is roughly 140% of GDP. Historically, it has always been 30-60%. The great crash of 1987 - often referred to as black Monday, stocks crashed 20% on a single day. Even though the crash wiped out the share value by a fifth, it did not affect the real economy in a big way, because the stock market merely reflected less than 30% of GDP. After easy money for more than 10 years, we have an economy were asset prices are GDP. Financial assets are biggest chunk of it. Any stock market correction, is deemed to reflect an economic correction. The fed has the numbers and knows it. Fed Chairman Powell really got a first glimpse of the economic scare in the last quarter of 2018. There were no takers of the junk market bonds for 41 days, after the Fed insisted on its policy of auto-pilot. The economy was spilling over, with all indexes (dow, nasdaq, s&p and russel 2000) all going down 20% essentially starting the bear market. Once Powell raised the rates in December, it was the last rate hike of the cycle.<br />
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The last time, the Fed promised to cut interest rate (after a series of rate hikes) was in 2007. The funds rate at that time was little more than 5%. The Fed had the luxury of reducing the interest rate by 500 basis points to provide a boost to the economy - and still could not avoid a financial crisis in 2008. The Fed brought the interest rate to 0% in 2008. Even that wasn't sufficient to recover the economy from its historic slump. The Fed introduced QE not once but thrice in the next four years. What is interesting is - every QE-n was bigger that its QE-(n-1). From what has happened with those monetary experiments - we can clearly derive that with the current rate of 2.25-2.5% of Fed funds rate, the Fed doesn’t have enough room like last time. It only has just half the ammunition. Going to zero alone is not sufficient. QE has to come sooner rather than later. Also - the economy should have its head above water during this whole period. Any lapse in liquidity or promise to liquidity will choke the economy. It’s a really tricky spot to be in, for Fed chairman Powell. He just can't afford a mis-step. A slowdown will expose all the mal-investments of the last decade., fueled by the fed itself.</div>
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As I have already mentioned in my earlier blogs, Ben Bernanke and Janet Yellen are primarily responsible for having persisted with easy money policy for too long. When testifying to the Congress when introducing the US economy to QE., the then Fed chairman Ben Bernanke told the congress that he is not monetizing the debt. He told QE and ZIRP are temporary. Balance sheet accumulation is temporary. Also promised that as economy starts to recover, he will somehow wind down the 4 trillion debt and restore it to its pre-crisis levels. None of them are true. The Fed's balance sheet is just below 3.85 trillion and with fed about to reduce the interest rates, we can safely assume that the debt on fed's balance sheet is not going to go lower than that. Ben Bernanke initiated the mess, Janet Yellen continued with that mess, and it fell on Powell to do the clean-up act, which was way overdue and impossible. Just say the Fed doesn't raise interest rates in July as expected by the market - the stocks are going to plunge. In fact the market wants a 50 bps cut rather than the usual 25 bps. The market is holding a knife at the Fed's throat.<br />
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On the political side, President Trump cannot afford is allow the recession to set in. It affects his reelection campaign of 2020 and in general the scope of the economy. No one knows that better than President Trump. As candidate Trump in 2015 he told correctly that the whole economy is one big fat ugly bubble based on ZIRP and QE. He promised to act on the rising US trade deficit with all its trading partners and is taking some action on it (which may or may not be right). Candidate Trump also acknowledged that the shrinking of the work force participation percentage which has dropped significantly since the financial crisis of 2008. The government released unemployment rate doesn't capture this variant and its published to be lower than what it actually is. Trump during his campaign repeated multiple times, that the real unemployment rate is lot higher than what is officially reported and he even says it is as high as 20% or more. He was so right on that and it resonated with the US electorate. After coming to office though, Trump began to endorse the very same bubble economy as economic prosperity and even took credit for doing it. In fact - He calls it the Best economy in the history of the United States. The numbers do not support it whatsoever. Because he owned the boom, unfortunately he will have to own the bust too.<br />
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The 10-year treasury yield which is used as reference rate for many long-term bonds, notably the US mortgage rates is trading at 2%. The Bond market is right - they are predicting that a 2% interest on a 10-year bond is more lucrative than the annual percentage growth that is going to happen in the next decade. But what it doesn't price in - is the inflation effect. The inflation rate is hitting the 2% level already. It will most likely make its ascend north. The Fed has already indicated that the inflation effect is "transitory of 2%" - which translates to - the inflation is going beyond the 2% mark very soon. With that happening around the corner, there is absolutely no reason for the longer term securities to have a coupon rate of less than that. In general - the longer dated treasury's interest rate are heading higher. It started to happen in last quarter of 2018 and that is where the stock market panicked. Any interest rate hike on long term bonds directly affects the leverage on corporate borrowing. With rising interest rates - rolling over existing debt is not an option anymore and the earnings will have to go down.<br />
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The slowing US economy usually takes the dollar with it. The dollar index has broken key levels since the Fed's meeting and is drifting downwards. Gold on the other hand, is breaking the $1400 an ounce and marching higher. To retrace its historic high, it needs to go to $1930 an ounce. It is definitely going there. It has made the price of gold for Asian economies higher. For example, In Indian currency, with the current exchange rate tied to the dollar index, the price of gold has already hit a historic high of Rs. 3580/- for a gram of gold. If we project it proportionally, if the price of gold hits the $1930 dollar mark, the corresponding rupee price for a gram of gold is Rs. 5000/-. This is politically not acceptable and panic would set in for a gold-rush or mania in the Indian gold market. So the only way to avoid this is to allow the Indian Rupee to appreciate against the falling dollar. It is possible then that the price of Indian rupee can move from its current Rs. 70/- rupee mark to say something around Rs. 50/-. That would be logical. The other asset class that is responding better to a falling dollar is bitcoin. As it stands now, it is already over 11K. When bitcoin as an asset class loses confidence and investors are jumping out, the trade is going to the traditional safe haven asset like gold, which is only going to accelerate the price higher in dollar terms.<br />
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In the month of May, the US government spent more than any month in its history. The debt accumulated every month is astronomical and has no historical precinct. The debt accumulated in 2018 (budget deficit and unfunded liabilities) is more than the nominal GDP (GDP not adjusted to inflation). This means that, if hadn’t for the rise in national debt (zero borrowing), US economic expansion would have recorded a negative growth for the year.<br />
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If it can go wrong, it will. When it does, it will do so in spectacular fashion: breathtaking collapses, ghastly whitewashes and complete annihilation of confidence. Even though it was always on the cards, it appears more imminent that ever before. As Peter Schiff rightly puts it - Having the economy on ZIRP and QE are addictive in nature. Even though it feels good, they cause more harm than good. Withdrawal symptoms after heavy addiction are always painful. A recession is the absolute cure. Re-introducing ZIRP and QE again to make it work, may not work anymore!</div>
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Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-3043290692737244692019-05-12T00:39:00.002-07:002019-05-14T05:58:05.832-07:00Tech bubble 2.0 and the IPO Pins<div dir="ltr" style="text-align: left;" trbidi="on">
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I use the ride-hailing apps frequently. I pay them every time I close the meter. It is nominally priced and the driver also gets a significant profit too, for every ride. It is a win-win composition for both. It is very hard to imagine an awesome business idea like Uber cannot generate a profit so far in its multiple years of existence. <span style="background-color: transparent; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">It is also sad that a revenue generation model of ride-hailing apps, where every customer pays before getting off a ride - can be this screwed up. If you don't own any of the cars and any of the drivers - but just a mobile app that facilitate business between the demand and supply of a always waiting customer and a person with a car - Its just mediocre company performance. on any standards </span><br />
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Before Uber hit the IPO this week, it was Lyft that hit the IPO market couple of months ago. It debut around the $78 mark and is now trading around $50 a share. Lyft lost $900 million dollars last year. The last earnings it reported after going public is yet another historic loss. Uber which wanted to hit the IPO with $120 billion valuation - started to see the week reception for Lyft and decided to rush to the market itself soon. The valuation went down every week and finally when the time came - it was $82 billion valuation. It was lot below the initial estimates. If they waited longer, the valuation of the company would go down even more and possibly the door would be shut completely even, if it decides to wait. <span style="background-color: transparent; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">Uber loses more money than lyft - they say its $900 million a quarter. </span>Uber hit the IPO market at $45 and immediately traded down below $3. This really means the investor who bought it at the IPO were stung by public investors who got it for less. How Uber stocks performs needs to be watched.<br />
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When you buy a stock of the company, you are buying into the future revenue stream of the company. These new tech companies, in their IPO disclosure have explicitly mentioned that they may never be profitable. Pre-IPO investors have an exit strategy in the IPO usually. Founders and initial investors cash-in on the incoming public investors' money. Why would anyone buy a share of a company that doesn't foresee a profit is beyond human rationalism. Only incentive is the demand for the share amongst the public - the belief that you can sell it to a bigger fool. As it turns-out - one day or the other, you run out of fools and then realize your were the last fool. </div>
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Microsoft, Google and Facebook - other biggies went into the IPO market when they were profitable. However Amazon did not disclose a profit even after six years after going public. All these new tech companies planning its life as publicly traded entities - want their luck to work out similar to Amazon. They may not be as lucky. </div>
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This is tech bubble 2.0<br />
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Paul Krugman, Nobel Laureate and Keynesian economist who has been strong advocate of Barack Obama's easy money economic policy and the Fed's approach with ZIRP and QEs after the 2008 financial crisis even admits there is a tech-bubble in silicon valley. The last time it happened in the late 90s, we all know it didn't end well. Investors lost money investing in new dotcom companies, that not only did not have profits, but did not even have sales. Many companies who went to IPOs lost all their money eventually and went out of business.<br />
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The recent tech-boom in the industry promises to be no different. We have the same set of companies coming to the IPO market with tall promises for the future but never made a profit in the company's lifetime so far. Pintrest IPO debuted this week. The company has been around for ten years. Never once, it made a profit. Talking about PINS (its stock ticker) - that breaks bubbles, it could very well be one.<br />
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If well-known companies like Uber, Lyft can fail miserably in their IPO debut, what is the motivation for other tech-startups that came into existence in the last few years? What is the mind set of the investors who are already behind those ventures? If I was an investor who has invested in multiple start-ups and see productive business model companies like Uber hit the dust in the IPO market - I will be really scared. I would like to exit my current investments and book my returns before things come biting. When all the investors rush to the exit - the whole start-up mania would starve for the funds. One thing we know very well in bust times is - when it goes bad, it goes horribly bad for everyone. If these highly hyped IPOs fail, it might act as a trigger for a genuinely anticipated slow-down that is already long overdue.<br />
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The bursting of the tech bubble will definitely be contagious. It will make the other asset bubbles burst including the housing, bonds (both sovereign and corporate). The corporate bubble in particular is almost 3 times what subprime was in 2008. A recession or slow-down would put the US economy into a long period of economic darkness. Trump and the Fed will do everything they possibly can, to avoid it until the markets hit a point - where whatever they do isn't relevant anymore. At the point, the public would know that the reality has finally set-in to the markets. </div>
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Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-11850422254832410332019-03-26T04:09:00.002-07:002019-03-27T04:14:47.118-07:00NaMo - Wrong person in the wrong party<div dir="ltr" style="text-align: left;" trbidi="on">
India would be performing socially, politically, economically and humanely far better without the current set of rulers.<br />
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Generally in the recent years, India as a country is so divided. The credit goes to the current government of India. In this fast changing world of Social media, sensation is the new child on the block. A person who can sensationalize certain political happenings grab attention of the people. They gain publicity out of the act. In the ever competitive world of political leaders - every one is trying weird things which they might not do at the personal front.<br />
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Mahatma Gandhi very famously told - India lives in its villages. Even seventy years after Independence, it is very toweringly true. Instead of making a difference on the ground in villages - the ruling establishments are taming the people through the media. With every passing day - there is huge one-page Ads on every newspaper highlighting the so called achievements of Narendra Modi. On the ground here - nothing has changed. The political class has only become more crooked and selfish. Publicity as a policy strategy is bad. Ideal way - the schemes and programs of the government percolate enough into the lives of people and there is a natural inclination of masses. This appreciation leads to accumulation of votes during elections. It has reached a point where controlling all sections of the media and constantly propagating a narrative will get them votes. Whether to see if it works remains to be seen in this election.<br />
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The political topics that are being discussed in the so called mainstream media is mostly about trivial items. Real issues like lack of infrastructure (electricity, water, roads) and corruption still being daily problems for common man., they do not get prominently debated and solutions sought. In fact lynching a man for beef-eating or attacking a Kashmiri shop owner in streets of UP is the news of the day. It is a law and order issue. Both the state and the central government are responsible to save the lives of all its citizens. No one can disagree with it. But the twist is - the people who are responsible to deal with this - would comply with the crime. First they speak for it or tacitly support it. A prominent person from the ruling party would pass unjustifiable (often not legal) opinions on them. This creates a sensation and division of the society. There is this new set of population that rebels against the mainstream thought and take a relative radical stand. This fuels discussion on social media and in live television for the day. The rulers get some publicity for their deviance from established norm. New comers to politics tend to navigate this way to make an accent on the political ladder in their party. Ideally people in saffron dresses need to be liked upon and trustable by every other living life. But nowadays, you see people in saffron behaving violently and having a sharp tongue particularly against people of other faith and vulnerable sections of the society. <br />
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Not a single day goes by, with the PM Narendra Modi blaming the previous Congress governments for everything that is bad in the country. He even blames Nehru. It is ok, if you do that for a year or two when you have a full majority government. If you do it in your 5th year - you are just being non-performing.The performance of the government is not up to the mark in general. The publicity is to cover them all. If there is real performance - there wouldn't be a real need for publicity. The ruling establishment believes they could manipulate the signals and get away, without underlying actions.<br />
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Narendra Modi as PM will be remembered for a long time for demonetization - making 85% of high denomination currency notes invalid overnight. The justification provided for that was to eliminate black money and punish the corrupt hoarders. At that time - it sounded logical and timely. Later on - it would turn out that most of the printed money where returned back to the RBI and it didn't make a big impact. To be clear - it was a bold step and the intention cannot be questioned. I believe it was done with right intentions. Where it miserably failed was - not being able to capitalize on that. The PM should have stick to lower denominations only. Now we have more 2000 rupee note in the market which didn't exist before the demonetization. There is more currency in circulation now than prior to demonetization. It would have been awesome chance to restrict the ATM withdrawal to 10K only. (No one stops you from going to a bank and withdrawing anything more than that). This would have put severe restrictions on cash operations. The big failure of demonetization by the BJP government - was not allowing that "crisis" to benefit the people in the "subsequent years".<br />
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The current government prides itself in calling Narendra Modi, a powerful Prime minister. If this was really the case - the GST would have been just a one tier structure say 8-10%, leaving all complexities out. A right move would have been to have a "NO GST" and "With GST of 10%" - that's it. Trying to have multiple tiers and adding few/removing few over these years was a reflection of poor implementations. A clean, simple procedure would have definitely helped in the roll out, and the PM could not even enforce that. With global oil prices being down for almost all the five years, the government coffers were very lavish to take bold financial measures. The public perception has changed from the "Government has no money" to "Government has all the money" and just couldn't do anything meaningful.<br />
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The PM should also be pinned down for the failure to change the system significantly on any domain that relates to common man. That is why they are not able to say - the next five years would be as glorious as the last five years. None of what they did has not affected the common man positively and more importantly significantly. A bold PM would have automated the grievance address system on Law and Order in the country by now. India would have a 911-equivalent phone number to call anything that is related to Law and Order / Police calls. Those would have made enormous difference to ordinary people's life. With almost everyone having access to a cell phone, all would have felt - they are just one phone call away to safety in case of a threat or an emergency.<br />
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The current government has been seriously undermining various institutions in the country like the RBI, Judiciary, CBI - the investigative agency and Election commission. The RBI governor resigned before his term could end because of too much political pressure from the PMO and its appointment of its own people as members of the board. The recent fight between the top brass of the CBI was pretty wide open. It is obvious the PMO put their people in the investigative agency and used them to target political opponents. There is always a CBI raid on the opposition, and some sensation news related to it. CBI raids on relatives of EPS, the Tamil Nadu CM was done just before the no confidence motion in parliament against the Central Government. They also clearly manipulate the Judiciary and how the cases come for hearing. When Jayalalitha was the Chief Minister of the state, the pending case against her in Supreme Court, for which she was initially convicted by a lower court and exonerated in high court (with some mathematical mistakes in calculation) did not see the light when she was in power or when she was seriously ill in the Apollo hospital. After her Death, O.Paneerselvam was made the CM and when he revolted against the inner circles of the party - Sasikala and her family. Sasikala was projected to be the CM herself and MLAs were moved to Koovathur resort for them to get the numbers in the floor of the assembly. The Central government then from nowhere woke up, took the case for hearing right away and convicted her before she could prove her number in the assembly. Their puppet state Governor was involved in delaying the process and played obediently in favor of the central government and against democratic rules of the state. It was pretty evident they control when the judicial case against the opponents are brought and used as political tool. Unfortunately the way judiciary operates in this country is like that.<br />
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The BJP government has been tacitly controlling the election commission to suit their agenda. When in school, we were all taught the by-election to constituencies happen within 6 months of either the MLA/MP is dead or suspended from operating as a representative of the people. In our state in Tamil Nadu, in the last 3 years, we have seen multiple seats that are lying vacant without a elected member for more than 6 months. Just imagine about the people who are in those constituencies. Without a member representing them, it creates lot of ground difficulties. Election Commission not ordering by-elections in vacant constituency is a big crime because it is their only job. The only reason they do that was in favor of the state and central governments. The people of Tamil Nadu should have realized this already.<br />
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These kind of institutional management for political gains are always done by ruling parties. But never in the history of our country it has been done to this scale.<br />
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One thing that is both funny and makes me angry is - The court this week pronounced a verdict on a by-election in Tirupurankundram assembly constituency in Tamil Nadu. The verdict was - the election of the ruling MLA from that constituency has been declared invalid. This is because of Jayalalithaa's thumb impression was used instead of her signature in approving the party candidate who eventually won. And that thumb impression was found to be not valid. The sad truth is - Jayalalithaa is dead already and the MLA is also dead. Its basically a classic case of "Operation Success but Patient Dead". It is sadly Judiciary succeeded and Democracy failed. What Angers me about this joke is - The Joke is on us, the people.<br />
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Making the institutions play for their tune has gone one step further. Now the BJP wants everyone to think they alone are synonymous with the military - if you are against them, then you are against the military. This is wicked thing. This is what happens when crooks are running the country.<br />
The recent Pulwama attack - where an Indian Citizen became a suicide bomber to kill our own military personal is something really everyone in our country should think about. Blaming it 100% on Pakistan is propaganda and not intelligence. This is unlike the Mumbai attacks where everyone came from Pakistan. It was imported terror. We don't have control over it. But in this case, if one of our own citizen gets radicalized and bombs our army men - we need to find our why would this happen and make steps so that its not repeated. If training and explosives came from across the border in Pakistan - it really means - our border is porous. Make steps to tighten that. We have enough home work on our side to do on top of blaming Pakistan. The ruling party conveniently capitalized on the tragedy and it made it worse by surgical strike misadventure to convey to the people of India, their strong character. In the end, gave an opportunity to the Pakistan PM to become a noble statesman.<br />
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What is upsetting, lately the military is being used as a propaganda tool for their own political agenda. <br />
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The armed forces of India belong to the country. They represent the people of the country and not its current rulers. The democratic government merely have an impact on them when in power. They tend to give a perception that if you support the Army, then you support the ruling party is absurd. What is amazing is the current BJP government is pretty successful in propagating this idea so far. When emotions run high, the ploy may work. When reality catches up, people will figure out the difference. In the US, when the Iraq war happened and George Bush was President - They tried to do a similar propaganda where, if you hated the war, then you are against the troops. This made a big impact in mobilization of the people in support of the war for multiple years and also played a bigger role in his re-election to his second term as President. Only after the endless war effort and losing multiple US military personal, did the people of the country realize - war and support for military are unrelated. When the common good is lost - the trust is lost as well. Never before in our country was this kind of campaign done. The military was and is supreme entity in India - people valued it. It is just a armed group to save this country for people's common good - mostly dominated by poor sons of our soil. Using them as political weapon to segregate society and impose political ideological is mischievous. It is possible - they might go to war to prolong their political ideology and continue with their ruling power. <br />
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The way they have been operating so far, giving another five years to Narendra Modi, Amit Shah and its gang - is very scary. They don't even seem to be "Good People". </div>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-20372108991018688882019-03-24T10:48:00.003-07:002019-03-24T10:48:55.889-07:00The E- Commerce CRAP <div dir="ltr" style="text-align: left;" trbidi="on">
The Indian government has stepped in more to regulate the ecommerce Industry. They are formulating procedures that would trim the ecommerce business. The intention they say is to protect the brick and mortar stores spread all over the country. However the whole thing is absurd.<br />
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This is one classic example of how the government usually behaves with complete lack of common sense. First they allowed foreign companies to run ecommerce ventures in the country. With more than a billion consumers and a improving middle-class, foreign and local investors have poured in tonnes of money as investment. With a high-inbound of cash into the business, the firm just doesn't know where to spend the money on. Because its all online - there is not even stores/parking expenses. All they need is warehouses and shipment centers. With competition also increasingly growing and with the intention of market dominance, these ecommerce firms use investor's money to offer irrational discounts on the products they sell in their platforms. So a product that has a cost price of Rs. 70/- and a selling price of Rs. 80/- in a outside shop, is being sold for say Rs. 50/- Who pays for the difference - its the investors money.<br />
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Every ecommerce firm tries to replicate Amazon.<br />
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Amazon has been a leader in the ecommerce space globally. With unlimited investor money <span style="background-color: transparent; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">looking for returns</span>, mainly sourced from low-cost borrowing rates in developed countries - it became a ideal target. Business of Amazon has been expanding for a decade now exponentially and it is always considered the phoenix bird of the dotcom boom-bust era. The way the business model works - Amazon has reported loses every quarter for most of its lifetime. The shareholders did not gain much from their investment because of the lack of profit. All earnings were re-invested to grow the business. Jeff Bezos mindset is that, grow the business wide and high, the company will eventually be profitable. In late 2015/2016 is where Amazon reported a significant quarterly profit in a quarter since their inception. As soon this happened, investors started piling into the stocks and the share has risen from low double-digits to over $2000/- since then. Recently it has corrected to somewhere around 1500 bugs. On the business side, their ecommerce business has never yielded a significant profit in spite of their long life-span in the business. The reason is this - they do not sell the products for a "profit" in their platform. They sell a lot for a loss. The loss is compensated by the new investor money.<br />
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Internally within Amazon, these products are called C.R.A.P - acronym for "Cannot Realize A Profit".<br />
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To maintain the market dominance and rival the competitors in number of purchases/revenue, not a single day goes by without a strikingly discount-sale, that no other for-profit business would do. They would ship a 30-40 pound heavy dog-food bag to your house every week that costs $40. They would sell TVs to your house, the price would be lot less than what you would find in the nearest store and on top of that, they offer the shipping to be free. On top of that, if the TV is broken en-route, they would send a replacement. The cost the consumer pays is way less than all these that make it happen.<br />
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Consumer is god damn-happy he is getting the best deal and also it is all being door delivered. He saves on the effort and cost that takes him to go to the nearest store and do a pick-up himself. They deliver to the remotest of remote part of the country. All the consumer has to do - is stand-up from his sofa and open the door when Amazon delivery guy knocks in your door. <span style="background-color: transparent; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">This is absolutely good thing for the consumer. </span>No question about that.<br />
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However for Amazon and its investors its a horrible deal.<br />
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What is amazing and mind-blowing, is the ecommerce firms are able to do this for so long and making Amazon's Jeff Bezos the richest person in the world.<br />
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One sad truth - Amazon has amazingly proved that such an illogical business model can work and prosper. Any company that does this will fail. Amazon will definitely fail as well.<br />
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The latest entry to this kind of business model is swiggy and Zomato. It is very hard to miss them on the Indian city streets these days. They have hired thousands of people who deliver food to customers who order using their mobile app. The prices are significantly low - sometimes its obvious it doesn't even add up for the expense on the food and the cost it takes to deliver it to the customer. Rs. 15/- breakfast for early users is common. For comparison - this same breakfast would cost at least Rs 50/- on the floor of the restaurant. These companies also lavishly shower money on their delivery boys. Apparently they earn more than Rs. 25,000/- a month. They operate like Amazon actually - first they offer unrealistic discount to get more people on the platform, buyout the competition, take a leader role in the industry - and it so turns up - they end up never raising prices to actual cost prices. They very well know as well its customers that customers will only be in the platform only until the discounts last. In a real-price structure the business would cease to exist. Once the prices are nominal or above nominal, the customers have no incentive to stick to the platform - either they would walk to restaurants themselves or would start cooking at home, which is lot cheaper. The biggest loser in this game when it gets over finally, is unfortunately the delivery boys. They have been delivering food for years. There is nothing to show for. They didn't acquire any skills or knowledge. Finally they don't have the lavish income too.<br />
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What is very amazing about Amazon, Swiggy, Zomato kind of companies is how long they survive? A early failure is good thing. They can be good ordinary companies that are serving customers well. They can't be these extra-ordinary companies which drives competition out. </div>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-15855498925142177262018-09-13T12:15:00.000-07:002018-09-13T12:15:52.535-07:00Decade of BOOOOM<div dir="ltr" style="text-align: left;" trbidi="on">
One thing that the media in general does good is to celebrate anniversaries. The 10th anniversary of the 2008 financial crisis is no exception. Continuous coverage of what happened then and how it was all solved. CNBC basically did a reality show with so called saviors. They called in Henry Paulson, Tim Geithner and Ben Bernanke to give them a pat themselves, each other and how they understood the gravity of the problem and provided the right cure to the ailing economy. They faithfully paid respect to their respective spouses and made some biblical references - which made them look credible than what they actually are. In reality instead of solving a smaller crisis with real medicine, they sowed the seed for a bigger crisis and what they essentially did - was to take the economy back to its artificial highs.<br />
<br />
Arguably the bigger culprit of the three was Ben "helicopter" Bernanke. The future would judge him as that one person who would take a nasty hit for his decision to bring the fed funds rate to zero percent and then additionally coming up with monetary experiments like QE. Actually what he did was the easiest of all - print some money and mask the problem instead of solving it. Janet Ellen was never able to raise the interest rate to pre-crisis level even after 8 years since the crisis. The current Fed chairman has raised it significantly but is still low at 2%. He may never be able to raise it the 4.5% that Ben brought it down from. So bottom line - The troubles Ben Bernanke created would never be solved until a bigger crisis hits. Instead of solving the smaller crisis - he blew up the scale of the crisis exponentially and let someone else in-charge to handle that.<br />
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Bring down the interest rate was the easiest thing. You don't have to be really smart person to do that. It is a universal truth that you lower the "cost" of money - the business is going to boom. The business would boom so long as the interest rates remains low. Interest rates have been low for 10 years. Even with the 2% now - it is still historic low. Raising interest rate is the hardest part. Usually the interest rates rise because the inflation is rising or to cool the economy from over-heating. With 10-years of low interest rates - the boom is everywhere. In the first decade of the 21st century the boom period were confined to dotcom (3% range) and then to housing (1%). However after the 2008 financial crisis - the boom is no longer confined to specific industries but in multiple industries. Forbes magazine recently called it the "Everything boom". We definitely know the tech-savvy Nasdaq is in 8000 range (5000 range in year 2000 caused the dotcom crash) is most likely in bubble. The housing prices getting back to well above the prices during the housing boom is probably in a bubble too.<br />
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Probably the newest bubble in the bond market is the biggest of all and would put the very government that had the authority to fix the last crisis, putting everything in jeopardy. Bond market would include student-load debt, auto-loan debt and credit card debt - all historically high in trillions.<br />
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The interest rate on the 10-yr US treasury is around the 2.96 mark now. With the fed going to raise interest in the last week of September - it is almost certain to hit 3% and probably going north after it. Just for an example, let's say you buy the 10-yr bond today for $100,000. The US treasury guarantees you an coupon payment of $3000 dollars every year. At the end of the 10-year term, you get your $100,000 back. With the government's its own CPI number stating that the year-over-year inflation is 2.6%, it is hard to understand why would anyone buy the 10-year bond that yield just 3%. On top of that - you pay tax on your capital gains on the $3000 earned in interest. The CPI is probably on an upward journey. So your coupon rate is not going to change. The inflation rate could rise to 4 or 5 percent or more during this 10-year term. Because of rising interest rates, the principal amount of $100,000 is going to fall in value in the ten-year period. It makes absolutely no financial sense to buy the US bond market whatsoever. There is never going to be shortages of US treasury that is coming to the market in the years to come - as the government is running and will continue to run trillion-dollar deficit budget. The Fed has promised Quantitative tightening - where it will sell the bonds it accumulated in the last 10 years. Bottom line there is going to be a sea of bonds coming to the market. Who is buying it now - Only the person who wants to lose money would buy the 10-year paper. If not - the buyer is propping up the bond market to favor the US treasury. <br />
<br />
Ben Bernanke was referred to "Helicopter" Ben for his reference of throwing money from a helicopter to the economy. He is going to be identified as this person - who took the economy in a helicopter to the sky easily with QE and 0% interest rates - but never knew how to land it safely. There by - crashing the helicopter vis-a-vis the entire US economy. (<span style="background-color: transparent; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">He ejected with a parachute though</span>)<br />
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After the financial crisis in September of 2008, Initially George Bush and then Obama - convinced the rest of the world that the crisis was universal and there needs to be coordinated effort from all Central Banks across the world to respond with easy money policy. This month, Subba Rao, the former RBI governor from 2008 to 2012 rightly pointed out that artificial prop up post-crisis, is the primary reason for the Inflation caused in run to the general elections which Congress lost miserably and the NPA problems which Indian banks, particularly public sector banks are facing now. Just as the hot water in the shower - the heat is not when you move the knob to red. It is usually after sometime - there is a lag effect.<br />
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The crisis in Turkey - is also distinctly similar. The Central Bank of turkey has raised interest rate to a whopping 24% today. When they try to analyze the reason for its current economic state - they pinpoint to the good old times - when the economy was booming. It is also almost always - unprecedented booms in country's lead to unprecedented corrections. If there isn't a correction - rulers of the country should only blame themselves. <br />
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The US market is in so big bubble, the investors are contemplating a scenario where there is never going to be a bear market. It is all going to be rosy from now on. With the longest bull market in history, it cannot be blamed on them - their memory has faded. <br />
It is clear example of misallocation of resources at the time of boom. In that scale the boom in the western world is bigger and longest. The bust is where people realize what all went horribly wrong in the boom. That day will eventually hit the western world soon - and that would make the 2008 financial crisis look like a walk in the park - which Hank, Tim and Ben are now taking credit for solving.<br />
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There are some talks that - when the next crisis happens, the US government would continue to the prop up the stock market by buying stocks. For the record - Japan is already buying corporate bonds and stocks. If that happens on America - it will go on to be the day, USA disassociated itself from market economy because it is just broke. It would be no different from fascist or socialism where governments control companies and industries. To overcome a crisis - they will do whatever they can to mitigate the crisis in short-term. Stimulus checks and Quantitative easing in western capitalistic society were very unexpected until they happened. But I really doubt, if it will all work. Would they buy Apple or buy Amazon? Why not Blue Apron? Probably they will buy the Dow or may be Russel 2k only. Those would be desperate times. <br />
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I talk to people who started their working career post 2008 and are unaware of the nature of recessions. They keep asking me - how does a slowdown or a crisis look like. As has been always, financial crisis is like a beautiful women. It is very hard to describe to others on how it looks like. But when it comes, pretty much everyone recognize it. </div>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-10170580127772101542018-03-25T20:27:00.000-07:002018-03-25T20:38:43.662-07:00Trade deficits and why it matters<div dir="ltr" style="text-align: left;" trbidi="on">
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Recently was
shopping in one of the famous retail stores in California. There were these
group of teens. The conversation was to this effect. Why should all the
products in the store have to come from China? Why isn’t there anything that is
made in the USA. Immediate came the reply from one of his friend that - it is
child labour. I wondered what a stereotyped answer it was. It was a typical
answer for a classic youngster growing up in the western countries. That is
what the media and the thought process do it to you. America has an enormous
trade deficit with the rest of the world - It is to its advantage whatsoever.
Rather than a bad thing for the western world - in fact they should be thanking
China and other Asian economies for sending them goods all through the year. It
is a result of hard labour from their part. The western countries readily
consume its fruits. </div>
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As said by one
famous economist - America gives a bad name to capitalism while China gives
good name to communism. Whatever may be the underlying economic principle of a
country in operation - whether its capitalism, communism, fascism, monarchism,
feudalism - everything revolves around one big parameter - there is a
significant portion of the society that is "very productive". Usually
in theory all systems work. Everything tries to achieve the maximum productive
nature of the society. None of them are designed for failures. But the way it
is preached and practiced (over a period of time) is what makes it fail. If
communism can fail in Russia - capitalism can fail in western world , provided
the spirit of the ideology is not followed. Communism did not fail Russia - the
way it was practised made it fail. </div>
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There is an enormous
trade deficit the western countries in general, and USA in particular have
against developing Asian and some European economies. It is the difference
between the import and export a nation has. More import than exports would
increase the trade deficits. It adversely affects the long-term prospective
nature of the country. It is not logical for a high importing country to be
successful economically for a long time. The current US President Trump -
acknowledges this anomaly unlike his predecessors. However the way to solve it
by introducing tariffs is probably not the right way. USA has a trade deficit of $800 billion dollars a year. It is roughly a quarter of its annual budget. </div>
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The way it all
started - nations don't export for the sake of exporting. They export more of
what they have and import of what, they don't have enough. That is the primary principle of
exports. Ideally the export is not to send goods to other countries without the
local economy not utilizing it but instead it is the surplus resource generated
by the "productive" population - that is privileged to send it over
to other nations that need it - so that we can import those we don't have or
insufficient nature of it. Every exports results in a monetary advantage. No
one would send products to a consumer without being paid for it. Unfortunately
the payment made are usually the "new money". It is just like any
other private sector employment. Employers hire workers for what they can
"export" out of their daily work - so that at the end of the pay
cycle they "import" salary. Exports has to be higher than the import
for a productive employer/employee relation and hence productive employment.
Any distortion in the set-up leads to a break-up of this relationship. The same
principle applies to nations. It cannot be different. </div>
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The last couple of
decades has seen clear malfunction in the trade deficit patterns of the world.
The consuming nation like the western world - keeps consuming for ever. The
exporting nations do the hard work for the rich nations. Because countries like
the USA don't have anything much to offer to the world as goods and services -
the exporting nation is unable to import sufficient amount of goods. There by
resulting in the accumulation of reserves by the exporting nation. Even though USA spearheads in certain areas like internet and other technologies - the exports of that is not enough w.r.t the imports of other products resulting in trade deficits every year. On the other side - exporting nations have trade surplus. This
accumulated reserves - usually called the forex reserves keep going higher and
higher. This money is often visualized to be for the "rainy day" -
when money flows outwards of poor & exporting<span style="mso-spacerun: yes;"> </span>countries. But in fact - they end up owning
more reserves than they actually need. With this reserves fast accumulating and
sitting idle in the coffers of the exporting nation - is swindled back as
investment money - again to those same nations that don't export enough.
Recently we have seen trends where sale of critical pieces are being blocked in
the US for fear of run over by foreign governments. Countries like China, which
has enormous savings and very high forex reserves of multi-trillions would
easily buy-out star companies like google, Microsoft with a fraction of the
money. The US would definitely wouldn't like that to happen and put regulation
so that they absolute take overs don't happen. In one sense - it might make
sense, but it is a bad deal for those nations which has consumed less - and
saved/exported enough over may years. They are not able to import enough nor
make smart investments. </div>
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Going back to the
child labour being in question - If it is true - the western countries and all
exporting countries from China should feel them so privileged that Chinese
children are doing them this great service, while their children are having
cushy life with video games and recreation being bulk of the day-to-day
activity. Let us not under estimate the hard work of the people who make
products that the world needs. There shouldn't be any complains until we give
export to serve these hard working kids. Savings come from hard work and
under-consumption. Every investment made with the savings - are someone's
hard-earned money. Taking advantage of that is both economically and morally
bad. So instead of younger generation in the US blaming countries like China
for their trade-deficit - they have to think about how to reverse that change.
Having a truly free market capitalistic society would be the answer to it.
Unfortunately western countries are not that anymore. </div>
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Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-71693798084919229532017-09-05T03:03:00.001-07:002017-09-05T03:03:20.049-07:00Contrast Capitalists<div dir="ltr" style="text-align: left;" trbidi="on">
I recently visited a jewelry shop in my native town. Even though I have been there quite a few times - i observed some interesting thing. The shop was more than 100 years old. Its larger than most of its neighbors. I have heard about the quality products (gold and silver obviously) they offer. They have loyal customers who extend for generations. You see the cashier's place in the front - there is a person who is easily in his sixties - and you can guess he is the owner. The politeness and attention to details on everything happening around him cannot miss anyone's attention. Behind his chair is photos of this great grandfathers - at least six generation photos. A simple glance at them would reflect they 100 years they were in this business. Their traditional commitment to business and track record is impeccable. There is jewels all over the place. I am sure they pack everything everyday end of business, put it in an iron locker and next morning come again and put them all on display. There has to be some procedure like that to ensure the assets are all safe every single day. A careless mistake on a day, might ruin the whole business in one day.In India - it is very common to see family businesses like this that have been run for centuries. It is not only big entities - even small eateries are run over generations. Even though they had the might and intelligence to spread the business to other parts of the country - it was not a norm to do that. They often restricted themselves to their own cities and towns. They services their community with their needs. It is also very true that they employ people from successive generations. They provide livelihood to families. There is no corporate ascending ladder that you jump fast - it is a stable, slow, efficiently run businesses.<br />
<br />
I was in a corporate meeting in my office today. There was a business proposal for a start-up company and someone was explaining the sales pitch to get some investors in. The way it works - you have some idea typically using the internet. You explain the idea to people with money. Make them invest some of their money into your firm. You use that as your seed funding and take your idea to the next level. During the presentations, I just saw something that caught my eye and left me completely mind boggling. Trying to show-case the new start-up in good limelight - they have introduced a notable silicon valley investor as a board member. The intention is to communicate that he is part of the board and his past qualification - it goes on to say investor who has made "successful exits". It left me wondering - why would someone exit his successful business? He should continue to run it, expand it and satisfy his customers. instead why would someone exit (sells) that too multiple times? Can someone be so good at so many businesses. As it turned out - he is just an investor who throws in money at prospective companies only to sell it to someone who can afford to pay more than you had invested. The investor cashes out of that business. In corporate financial sense - this is perfectly rational. The investor provides capital, flips it on a profit when things are good. Wonder - when things are good, why not stick to it and make it bigger? Probably the answer to it is - why take risks when you could sell it and take a handsome return. The whole mentality of buying / selling stocks in the open market has taken a step forward and crept into buying/selling "service" companies. People just do the flips - wonder if they are real businesses that help the society.<br />
<br />
In the above two examples - we have seen both edges of capitalism in play. In corporate America - the usual rule is to start a business, take it to the next level where it can be sold. Move on to the next big idea. This is very prevalent in service based companies rather than manufacturing firms. The concept of customer loyalty is organization based. It is the corporate mentality of doing business. In western countries - it is also very common to keep expanding your business. You read business newspapers - every CEO would say they want to multiply the business by 10 times by next year or something similar. Needless to say - you need to talk like this to be a CEO.<br />
<br />
It just turns out the whole mindset of an Indian business is completely different from their western counter parts. Ethics and culture are embedded into their business models. </div>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-4812967778900786282017-08-21T00:01:00.001-07:002017-08-21T00:01:16.424-07:00The biggest con - Bitcoin<div dir="ltr" style="text-align: left;" trbidi="on">
As I write this post, its Aug 16th, 2017 the US market is open and trading mid-day and one bitcoin is trading around $4300. What a run it has had so far. The market share of bitcoin is around $70 billion USD. With the Dow and S&P hitting all time highs - giving handsome returns, wonder why investors would ride the bitcoin speculative wave, as everyone knows - it might be very risky. So far - the investor have been handsomely rewarded. How long could this last? Frankly no one knows!<br />
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There was a time long long ago - carts were pulled by horses or bulls. Some people contemplated the idea of operating a cart without an animal tied to it. The idea was stupid, it was thought then. The common sense was the cart wouldn't run without an animal in front of it, given what was reality at that time. History turned a new page, with the invention of mechanical motors that would operate a wheel rolling over again and again to cause forward motion. The automobile replaced carts/animals. Even though it was considered dumb at one point of time - humans then conceived that it could happen.<br />
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Is Bitcoin such a revolutionary idea that would change the world we live in on how people use money as medium of exchange?<br />
<br />
Before we get into what it is going to be, lets see what it is now. Bitcoin as they say it is a "Digital currency". There are thousands of digital currencies on the internet.Not sure if bitcoin is any superior or inferior compared to others. There is also no guarantee this bitcoin is the best digital currency for next few years. They are being traded actively though. Bitcoin stands-out from the rest as most popular of the crypto-currencies. Even after you read multiple articles on digital currencies - it is very hard to get your head around it. Lot of things are more confusing. It is complex to the core. Something like currency should be lot simpler than that.<br />
<br />
The biggest characteristics of bitcoin (or any digital currency for that matter) is its finite availability. It could rival to any fiat currency - that the government can print at will.<br />
<br />
If there is an unlimited supply of bitcoin - there wouldn't be a market for it. Even though it sounds promising with respect to that fact - there is infinite number of digital currencies available over the same medium. With market forces determining the value or worth of each of them, its quite unstable.<br />
<br />
Bitcoin is not used in day-to-day trade. Smart people would call it a financial asset rather than a currency. For now even people who own bitcoin do not consider/think them as as store of value that they plan to keep for their retirement. They think it just like any stock. They want to hold it until they think its a right price to sell. Unlike companies that have factories and machinery- bitcoin has nothing to back itself except the confidence of the bitcoin buyer. It is really a risky speculative trade. People are speculating the price of bitcoin and pushing it higher as more buyers step in than sellers.<br />
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Digital currencies would go down in history as the most successful marketing campaign that created lot of hype that would only result in an eventual and complete collapse.<br />
<br />
In the 2000 dotcom bubble - many companies that were valued very heavily went to zero. In my opinion - bitcoin and other digital currency are no different. They will and have to go to zero. Investors would lose every bit in this speculative bubble. Of course some would make money. But the concept of digital money is fundamentally flawed.<br />
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The bitcoin endorsers use the word "Mining" that is intentionally distracting. I just checked the dictionary meaning of mining. It is digging up the earth for coal or other minerals like gold. Mining of minerals has always been an occupation since human beings first arrived on this earth. Some people took the effort to get some thing out the ground that was rare and attractive, sold it to someone who is willing to pay the price of it. This has happened generations after generations for centuries. Since the bitcoin community wants to equate the process of creating a new bitcoin - they smartly enough, borrowed a word from the real money - gold. Put in a word mining - to get the feeling to the public as though this is being "mined". They apparently "mine" bitcoins from multiple computers and by solving difficult mathematical problems - that is what they say. This is no replacement for mining something that is tangible like precious metals. Using the word mining is completely illogical for crypto assets.</div>
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The mere fact that its not being accepted to buy any significant purchase of merchandise like grocery, furniture or a hair-cut proves that its not a currency - at least yet. People exchange the bitcoins for dollar or Euro. Rather than the bitcoin itself - the dollar value behind the currency is what makes it attractive. There might be some one who is selling drugs online and would want to accept bitcoin for the convenience of being anonymous - that would at this stage be an exception and not an example. So far, the universal acceptance is not there. None of the central bankers have really backed this so far. With a large population in Africa, Asia and Latin America completely unaware of technology - a platform that offers digital currency is no where in the picture.<br />
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Gold has been a commodity all along human history. It has been elevated to money for centuries for its unique properties unlike any other metal on the periodic table. During the last bull run - it touched a high of $ 1900 for an ounce. If bitcoin can go until $4300 and possibly even more - When this bubble finally burst spectacularly- this money would flow back to the ultimate safe haven asset which is gold. It bitcoin can hit the numbers what it is now - there isn't an upper limit for gold. It could go up multiple times with ease from its current level of $1300/ounce.<br />
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Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-62208480495940014022017-02-28T23:32:00.001-08:002017-03-06T02:48:50.932-08:00What a mess?<div dir="ltr" style="text-align: left;" trbidi="on">
Alan Greenspan, very famously told this about quantitative easing and zero percentage interest rate that - It was like urinating in the bed in the night. Until you wake up in the morning you don't realize what a mess you have created.<br />
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After the 2008 financial crisis - the US Fed announced to the world of the extra-ordinary measures needed to save the global economy from a 1930s style great depression by bringing down the federal funds rate to zero and buying back trillions in treasuries and mortgage bonds to support an ailing economy. We are almost nine years since and have not reached the 1% mark yet. The other Central banks of the world were no different and followed the US Fed with its quantitative easing programs.<br />
<br />
If you can recollect what happened in 2007 - this is just before the bursting of the US housing bubble - everything seems to be going great until one thing happened. The Fed started rising the funds rate aggressively.<br />
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It is no different now. <br />
<br />
Its like an ailing patient on a ventilator. The patient is just fine until he is on the ventilator. The moment it is taken away - the patient is going to have complications. In medical terms - its called weaning. The patient is taken off the ventilator and the hope is he can live without it. But as soon as there is a complication - which includes unable to breathe and possibility of instant death, the patient is hooked back to the ventilator. That would be a apt description of how the US economic state is now. The 0.25% federal funds rate increase in December of 2015 and then again in December of 2016 were just token increases for the Fed to save its faces rather than for economic tightening. The patient being on ventilator for too long had become the biggest ailment than the initial disease.<br />
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With the employment numbers well under the Fed's target and inflation now creeping well above the 2% mark - also with the Dow Jones index hitting 21K - with historic consecutive winning sessions - an act not seen in last 30 years, it can be agreed that the economy is heating enough and warrants a rate hike. <br />
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If the Fed reacts, it will burst the monster bubble it created. <br />
<br />
If the Fed doesn't react - the bubble would only get bigger and bigger, to cause a 1930 style great depression - which exactly the Fed is taking credit for saving the world from. <br />
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The bubble in the silicon valley is very obvious. If the Nasdaq 5k was a bubble in year 2000 - it is a bubble now too with Nasdaq lingering around the 6k mark. The fundamentals have not changed. The start-up environment in the silicon valley is so much heated up - it just doesn't make monetary sense. Recently Snapchat published what it thinks was its valuation of 24 billion dollars - and admitted that it may never be profitable. Any investor that is in sound mental health knows - not to throw a penny to it. If this is not a bubble what else is? Why would you want to invest money on a company which themselves say - it will only take in more money than giving it back. Who would take the loses from those transactions? <br />
<br />
Company valuations, particularly start-up companies are simply ridiculous. There is no way - they are worth what they say they are. Investors are going to rush out of the silicon valley and no one will be spared. The party might just be over. <br />
<br />
It is very striking that the Snapchat IPO and Dow hitting 21K on the same day - would be recollected in history as the peak moment for the whole big bubble. <br />
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For anyone who has lived through the 2003-2008, can easily re-collect the pain from the crash in the US housing prices. Proxy-government entities like Fannie Mae and Freddie Mac had loaded toxic mortgage backed securities with AAA ratings on unsure investors. It was the biggest piece of odourless crap ever assembled as investment material. When everything started collapsing the US government and treasury had to step in to save the market by buying these mortgage bonds - that no one would buy. In the process - the government only managed to increase its own debt. What wasn't good for the investor - was not good for the government. Except that it was left out in the open as the only buyer in the market. The house prices have retraced their path to the top now, thanks to the low lending rates. Now there are lot of hedge funds that have bought in to the real-estate hype and the result would be no different than what happened in 2007/2008. The mere scale of it might be much larger than 2008.<br />
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With the government and global Central banks stepping in to the bond market - the whole market is artificially priced. With all the risks mitigated by the policy makers, there isn't a free market for bonds. Why do you want to hold bonds when you could make a lot of money on a stock market running on steroids? In that case - the yields on the bonds fall dramatically and as is the case - the price of bond increases. Sovereign debt funds are squashed with bonds. What is really not priced in is the serious consequence of inflation that could have a lasting effect on bonds sold already. Just imagine the inflation reaches a 4% mark - why would you want to hold to a 10-year US treasury bond that yields 2.5 % or less. Already the spread between the CPI and yield on the 10-year is bad. So whatever bursts the bubble - one market that is sure to get ruined is the bond market. With the patient in a ventilator for a decade- the bond market was never in fair play. <br />
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For the US Fed - It is damn if you and damned if you don't moment finally. <br />
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If the recessions in 2000 and again in 2008 were painful - the one that is getting formed in the horizon is bigger than both combined. The bigger the bubble, the bigger the consequences. <br />
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This cannot end well. Buckle up folks, it just may be dawn!<br />
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Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com1tag:blogger.com,1999:blog-36597822277946543.post-8579131968563995752015-12-29T20:42:00.000-08:002015-12-29T20:42:12.246-08:00Economic Facts that just doesn't make sense!<div dir="ltr" style="text-align: left;" trbidi="on">
<strong>If everyone pays taxes, India will be a developed country.</strong><br />
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You still in this myth? What a con. The government needs a percentage of your salary every month. They take this money and do some goodies for you - Roads, Water, electricity, law & order. Everyone knows how each one of them is working out now in our country. Not to mention we pay for it individually (as electric bill, water bill) from what is left from our salary. The political establishment in the country gets this taxes and squanders it at will. It is only to ensure their political survival. The more you give them, the more they squander. Just imagine - everyone in India pays taxes. They will happily get it and shower it with their friends and family. Did you ever imagine if you are sick and you don't get paid for a month - the government doesn't get you any help that month. But it still needs a big chunk of your next month's salary. What a disgrace. <br />
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Money is best used by the person who earns it.<br />
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India will be a super power if there are "no taxes"<br />
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<strong>Indian Re is losing value because of "something"</strong><br />
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You can see news article every other week to justify the reasons of why the Indian Rupee is going down against the other global currencies this week. Sometimes its the current account deficit, sometimes its the fiscal deficit, sometimes its FII outflows and many times - its the global investor sentiment. No one knows who that guy really is. Experts get away by saying its my pension fund. What you usually don't see is - When current account deficit or the fiscal deficit are well below global standards (meaning good) - the rupee does not appreciate either. Usually you hear that FIIs are withdrawing money and hence rupee is losing value. I would think - the opposite should be true. But what puzzles me, is when the FIIs pumped in those money - the rupee didn't perform any better - it still went down.<br />
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A normal Indian would get into a depression state of mind, if he watched how Rupee always goes down - no matter what. At least they can stop saying the various reasons to help this patient. <br />
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<strong>Bringing back all the black money would make India prosperous</strong><br />
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With Narendra Modi government in-place for more than a year now, we as Indians should admit - the black money isn't coming back. Black money is a private person's money. No one would surrender that money - because it was accumulated 'with hard work' in his point of view. This is not the "tax money" - which the government would have used to lift "poor people". Even if the money was "paid in taxes" during those times - it wouldn't make any difference to our poverty level .<br />
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Even if its brought in - it wouldn't help others. Distribution of that huge new "uncirculated" currency notes will only increase inflation. The person who worked hard to get it should be allowed to decide on what he wants to do with it. At least his spending would create some new jobs. The government trying to distribute that money would only increase poverty.<br />
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<strong>Indian Passenger with excess gold is a smuggler</strong><br />
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You see this news often. Do you? Someone is "caught" in the airport with more than the allowed quantity of gold is a national criminal. Lets step back a minute and dissect this. Just say, a Indian citizen makes money in a foreign country. He pays his tax due there and has the rest in his pocket. It is his freedom of choice to buy anything with it. He can buy gold or just tissue papers, if he wishes. He can then decide to take it to India because he might need it there. So now this officer in the airport - so called customs is refusing to allow the person to enter with such a quantity of gold. It is unlawful and they demean the traveler in the next day newspaper. Remember, if he brought in the same worth of tissue papers - the customs officer is just fine. It doesn't make a difference if its tissue paper or gold or cow dung. Anyone can buy whatever he wants and can bring it to his permanent place of residence to fund his future consumptions. <br />
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Stopping the person from bringing gold is not economics. It is called stealing by the government. If the passenger makes a cut to the government (as taxes), the country is just fine economically.<br />
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<strong>Oil prices in India are market driven</strong><br />
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I just checked the global Brent crude oil price. It is somewhere around $38 USD. Until sometime back a barrel cost more than $120 USD. It is almost a 2/3rd fall in recent prices. So it would be logical for me to assume that the price I pay at the pump has gone down 2/3rd. But actually no. It has only come down from say around Rs. 80/- to Rs. 60/-, a quarter percentage reduction. Anyone with a reasonably sound mind can figure out the part - that the prices of petrol / diesel has not been decontrolled as publicized by the government. In reality what happens is, when the price of oil goes up, the government subsidizes it. When it goes down, the government cashes-in (like now).<br />
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A real decontrol would be to leave it alone. Heavy taxation is heavily affecting productivity. An oil a liter is probably around Rs. 30/-. Just imagine how much stimulus that would give to our slowing economy.<br />
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Petroleum products are heavily taxed in our country. This is where it gets bulk of its money. India has a vast population that doesn't pay taxes on salaries or income. So the government is left with no option but to heavily tax a commonly used commodity - that is where oil perfectly fits in. For me, I do not want the government to subsidize when prices go up and at the same time, want the complete advantage when the prices go down. <br />
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One thing that always happen in India : Prices of a commodity go up significantly in a hype. but NEVER comes down to the same levels ever again.<br />
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Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-90537252180582839802015-10-01T05:53:00.001-07:002015-10-21T04:20:08.446-07:00PM Modi - India's frequent flyer<div dir="ltr" style="text-align: left;" trbidi="on">
The Indian Prime minister has been going around the world quite a lot since he took over. In general, the Indian media portray him positively. There is an illusion that the country cannot prosper without the foreign investments, and they can come in only if the PM reaches out to them in their country and shook their hands, convince them to invest in India. <br />
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The recent one is Prime Minister Narendra Modi's US visit particularly to the bay area. Rubbing shoulders with the top silicon valley CEOs. and maintaining huge optimism for the future. This also highlights how far the country has moved on from a socialist democracy to a corporate democracy. Few years back - an Indian politician wouldn't like to be pictured with really rich corporate CEOs. Not sure, if things has changed recently. May be the people are just watching out without a voice. In classic CEO style, the PM was optimistic. Have you ever heard a CEO being pessimistic ? Dick Fuld was optimistic about Lehman brothers until the last day, it went belly-up. Optimism about the future is particularly not a bad thing. But being publicly very optimistic just before a big crisis would be naïve on a world leader. Probably if its just a bad timing. Only time will say, if its a PR flop for the Prime minister's himself. <br />
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With the cheap money flowing in all directions around the world, thanks to the Fed which maintains zero percent interest rate and the ECB that is doing QEs. Things are really hot than what it ought to be. Almost seven years of ultra loose monetary policy with at least 3 QEs has created huge bubbles not only in the western world but also in Emerging markets. Market are addicted to this easy money right now. The Fed confirmed its fear by not raising the interest rate to 0.25 basis points this month - which most market watchers expected. This raises the question - Do they know something that the rest doesn't?<br />
The whole so called recovery would come down crashing when interest rates start to rise. The Fed knows it. It is impossible to believe - the US economy is not in a bubble. The most obvious indicators<br />
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<li>Tech-centric NASDAQ hovering around the 5000 mark</li>
<li>Housing prices at historic highs even though home ownership is at its multi-decade lows</li>
<li>Stock Market - Dow and the broader S&P at its historic highs.</li>
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Previously the NASDAQ was at the 5000 mark just before the dotcom burst in 2000. <br />
Housing prices hit the peak in the US, in late 2006 before the house prices crashed that created the great recession in 2008. <br />
Stock Market highs has historically been signs of downturn. The more it rose, the bigger the fall. <br />
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There is ample evidence the air might come out of the bubble anytime. <br />
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India is no exception to this crisis. Valuations of start-ups are mind boggling. Recent example is OLA running into few thousands of crores. You really have to be a fool to believe OLA is worth that much. All they have is a mobile App and a network of drivers. It is not hard for anyone to compete with them. I am sure the taxi service industry would be diluted. Do they add value to the society? Of course they do. Are they really worth so much money. Definitely not. <br />
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The cheap western money is flooding markets in India. The start-up valuations are just a reflection of that. When the easy money tap is closed, the flow dries out gradually. The reality would set-in, and bad business ideas would be very hurt. Businesses cannot be run on valuations. They always have run on value addition for customers and their resulting profits.<br />
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With these gloom and doom hanging over the world economy, the PM probably choose a bad time to go with the silicon valley crowd. It looks he himself is probably in a bubble. Real growth comes from within. Foreign money should flow in based on growth and confidence in our country. Not by pep talks. What matters is the nuts and bolts of what is happening in the country and how to improve that. The audience in San Jose - is probably the persons with different aspirations who will not get us there. <br />
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We see in the news today, that a man is killed in a mob attack for storing beef meat at home. This has happened few miles from Delhi, and this is exactly what the PM should be fixing. Some people of his own affiliations are involved in this presumably. This is a criminal act and it needs punishment for murder. With ridiculous things like this happening in our backyard - wonder what is the PM doing in San Jose entertaining a crowd with intangible talks. I am not sure how his party or himself can sell this to the ordinary Indian out there who is yet to get sufficient drinking water, electricity in his home that sits on a bad, dusty road.<br />
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It is possible, the Modi bubble would burst before the monetary bubble the world central banks has created. With this time in history - the PM has to be articulate and clear hurdles in how India works. Only those will make this country prosperous. All he needs to do is deliver on his promises here. I really wish he succeeds., but the performances so far since June 14' is just simply pathetic. Just like in a bubble - there is more hot air than real substance in governance.</div>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0tag:blogger.com,1999:blog-36597822277946543.post-37647123401782406512015-04-29T05:08:00.000-07:002015-04-29T05:40:57.904-07:00The political alliance of the Executive and Judiciary<div dir="ltr" style="text-align: left;" trbidi="on">
A lot of things annoys us about India. The close nexus between the politicians in power and the court systems are one such. I just read a news, saying the Mumbai high court has ruled that the decision by the Maharashtra government to ban beef is valid. I am pretty sure, the litigation will be moved to higher courts and would be struck down. <br />
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Bottom line, it makes no sense for the government to dictate what its citizens have to eat. It would be individual liberty. If there is a market for it - so be it. Passing a legislation to ban a particular kind of meat doesn't sound a rational decision. The government has no role to play in this, with sufficient other things to do, on its plate. Would it ban a particular vegetable next? How to enforce that? The police in the vicinity should go around the city to make sure - there is no one out there slaughtering cows? And make sure, the place that slaughters goats is not slaughtering cows ? Can this be done daily, 24 x 7 for the rest of the foreseeable future? Cops have to go around looking for beef-eaters? There are many states in our country that sells alcohol. Lately we don't hear bans on them. <br />
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This is a classic example of government trying to do needless things. Why do they pass legislation like this, if it cannot be enforced. This is to please a section of the party or its followers. Just that. In reality - nothing would change. There will definitely be a black market for beef. Local heavy weights and unlawful but powerful big-shots make a dishonest living of this. Only in our country people make a 30-40 year career doing "unlawful" petty stuffs. The mere existence of insane laws help them. The corrupt policemen and government officials exploit the situation. <br />
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Law - is a serious doctrine that people of a country or a region should abide by. They are gospel like. Making such "unenforceable" laws make the rest of the laws look bad too. Why would you abide by some of it and not abide by some of it. There is no "weightage" of any kind around them. They all should be "equally enforced" in real world.<br />
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When a particular party is in power, the courts and the government seem to be in the same page. Cases against ruling party men suddenly go cold. There is no word of it in the media. But cases against its political rivals speed up. We read this in newspapers daily. This is very confusing. We were all taught in schools, that judiciary and executive are two separate pillars in democracy. In reality, both the government and the courts are in same line at any given time. An independent and authoritative court system is what India needs. If they are hand-in-glove with the current government - the reason they exists do not hold good. What is funny - people just cope with it. They are willing to wait for another five years, to see the other side. When the congress is in power, lot of BJP MPs/MLAs are dealing with courts. When the BJP comes to power, all congress leaders are involved in fighting cases against them. Naveen Jindal is charge sheeted for his role in obtaining coal blocks in Jharkhand. Why is he being charge sheeted now? Why not when Manmohan Singh was the Prime minister? Where were the courts then? We don't hear an explanation about that ever.<br />
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This is very obvious in the southern state of Tamil Nadu. The DMK and the AIADMK have rotated being in power alternatively for 25-years. As soon as the DMK comes to power - all cases against AIADMK politicians come to the forefront. Media pages are filled with this entertainment. When the AIADMK is voted to power after 5-years, you don't hear about those cases anymore. Instead it will be about the court cases against the DMK politicians. Media pages are filled with this entertainment now. All along this entertainment creates a false feeling among the people that - the judiciary is working and doing its job. But it isn't for anyone - who can think!<br />
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Foisting cases on political rivals after coming to power - is a ritual in our country. It makes sense, court cases are initiated when a new government comes to power. However what doesn't make sense is, when these people come back to power again - the cases go cold from there. The notion of independent judiciary is just imaginative. Instead of trying to fix the rule book better - it would be wise to throw it out and write a small rule book - that is clear and unambiguous. There has to be clear distinction between bailable and non-bailable offences. Right now - everything is at the discretion of the judge. Lets get that word out from the rule book. Some people are stuck in jail for a murder, but some are out there on bail for the same kind of offense. It just doesn't add up. <br />
Make the rule book simple - so that the common man can understand. Do not make it such that only the lawyers can interpret. </div>
Pushpa Balajihttp://www.blogger.com/profile/15550740609969328588noreply@blogger.com0