Talking about Economics, Science and Religion. And then adding humans to the equation.

Posted on December 19, 2017. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , , , |

So what do we know about science, economics and religion ? Well! for starters, science existed since the day Universe came into being, and therefore science has been around long before humans or human civilisation came into existence. Science is as old as the universe itself. There is science on Mars, but no economy. Also there is science all across the cosmos, but till date, the size of the space economy is limited to human activity closer to earth or our solar system, although this may change as humans venture into space on a larger scale. There are vast amount of natural resources spread across various parts of the Universe as well as continents like Antarctic here on Earth, which has resources worth tens of trillions of dollars. But it still has no economy or in other words GDP, and that is down to the fact that, there is no permanent human civilisation based there.

The idea of economics and economy started along side religion, nation state, and culture etc. And therefore, like other human ideas, it was conceived as a subject by humans. So humans will continue to influence it. Human behaviour, human perception and psychology, and their overall sentiment will continue to influence the subject of economics and the idea of economy. The data created by a human society, categorised as economic activity related data, tends to be the metrics widely used, to understand or gauge the overall wellbeing of an economy. And as the human society becomes more complex, so has the economy. It has no doubt continuously evolved and changed reflecting the changes in the human society. But like religion or culture, it has design flaws, and therefore fails to serve the entire human civilisation. The prime example is, the aftermath of the financial crisis. While we can measure the financial cost to an economy, what we cannot accurately measure is, the human costs that is directly and indirectly related to the financial crisis of 07/08. And the same does apply to religion. Although some of may of us continue to argue the case for religion, none of us have tried to accurately assess or measure the human costs of religion on humans, in terms of holding back human’s overall progress etc while the various religious franchise aka religions have gone richer and wealthier over time.

In the US alone, based on various estimates, the society known as the American society tends to give away around $ 82.5 billion a year to religion. And then, there are direct and indirect human costs. Having said that, wars have killed more humans than religion, and they also cost a lot more money than religion. But in historical context, some of the wars were religiously motivated, and humans still tend to fight over their religious and cultural ideology.

The question then is, do we need religion or economy for that matter ? And the answer isn’t that difficult. For many of us religion is still the answer to questions like, why do we exist and what’s our purpose ? And to a very large extent economics and economy has played a very vital role in the evolution of the human society as well as its overall progress. So to take away economics or religion from humans may not work out well. While science has always existed, sometimes, it is the economics that has justified scientific progress. And it is the economics of space that will most likely drive humans exploration of space.

According to space foundation, the space economy is already worth over $ 329 billion, and in the next 50 to 100 years, space industry will become the most dominant among all the sectors of the economy. It will not only create new jobs, but also help take humans as a civilisation to the next frontier. At least that’s what I feel. Imagine an economy that is not only going to measure the economic activities here on Earth, but also from across the Universe. But can it create enough wealth, to help fund the living of the entire human race ? Now this is a rather difficult question to answer, because unless and until, we keep finding ways to make the entire design of the economic system more efficient, it will continue to fall short.

My own assessment is that, economics and economy as an idea and subject is not a complete science, but unlike a religion, it isn’t stagnant, or requires the human society to completely surrender itself, and be at its mercy. It has flaws, but it also does have the capacity to continuously evolve, and so it should. Humans are the key input to the entire equation, and without adding humans, one could say, nothing is relevant. And the human element  will continue to add a level of unpredictability and uncertainty to the field of economics and economy.

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When talking about the Indian economy, are we missing the big picture ?

Posted on September 24, 2017. Filed under: Uncategorized | Tags: , , , , , , , , , , , |

So the new government got into the office on the back of a pitch that was based on a lot of hope and promises, and while I have been personally quite supportive of the need for change. I have never been in any doubt that, the changes will require time and government will have to let down people. In a country like or anywhere else for that matter, a government gets elected mostly on perception built around the hype. Average people are simply unable to breakthrough each policies and make sense of it. A country like India needs a complete overhaul of its existing economic and financial infrastructure , and that requires a lot of re-wiring and also redesigning of the entire system. Any good reforms takes time, and a prudent policy is always, to not overload the system with Big Bang reforms, one after the other, the changes have to be incremental, but constant. A system overhaul takes time, and you can’t expect the system to start firing on all cylinders right away especially when you are creating more capacity in the old system.

But economic policies alone can’t re-wire the system, it also requires better execution. And if we are talking about creating growth then, there should be a realisation that, without the ability of funding, government policies on their own aren’t the magic fix. So I don’t care what economic policies the government can come up with, driving growth in a country like India , where almost 80- 90% financing is sourced from banks simply isn’t going to work, unless and until the banks are back in shape. The fact is, the bad loans problem hasn’t been fixed, and the lenders have been too slow to offload the garbage sitting in their living room, yes there are legislative policy changes and reforms to help the banks, but banks haven’t been proactive enough. And a lot has to do with the existing training as well as mindset of the executives within the current banking system. For example, based on my own experience, I have realised that a sizeable percentage of the senior bank executives in India aren’t willing to make tough decisions, because for them, as I understood it, it’s all about a peaceful retirement and self preservation. And the investigative agencies haven’t helped decision making process either. Also some of the rule changes don’t really help the banks clean up their balance sheet. The asset reconstruction companies or ARC as they are known in India are, like a time bomb waiting to explode . On practicality basis, there is almost zero value in the ARC structure.

Without recycling the rubbish, you can’t get rid of the stinky garbage, and monetise it. Many quality ideas are simply not getting funded in India, and young entrepreneurs who could drive growth are more or less shut out from funding. And the other real issue is that, like European banks, the Indian banks are also now scared to lend. The ex RBI governor did good talking and provided public opinion on almost everything, but failed to provide real solutions, and now he is busy promoting a book.

I would prefer a wholesale reform of the financial infrastructure of the Indian economy, where capital market becomes the largest source of capital and not the banks. The regulators also need to support the government by unburdening the system from socialistic era policies. Also the government needs to do more work and talk less, there is too much distraction. A lot of announcement, but not much is getting done. Media channels have an endless lineup of experts, who probably wake up everyday, ready to provide new round of expert opinion. And the quality of journalism is rubbish, where is a decent discussion on, what reforms need to be brought in, to help the nation grow? The issue is everyone is drinking from the same source, whether you are the federal or state government, central or state government owned companies, or the private sector. And unless there is new liquidity going into the banks, it’s going to be tough to fund growth.

Various state governments across India are struggling with a very bloated fiscal situation, and they also own companies that have not made money for a long period of time, so it doesn’t make any good business sense for these states, to continue to own unprofitable companies. And in most cases, these companies are competing with other unprofitable or distressed state owned companies across India. These companies were set up in various states across the country, to provide services to the citizens, and by design they were probably never pushed to make a profit. But the time has come for states across the country to find an exit, by either privatising the companies or merging them together with similar companies in other states, and then exiting it. This will also reduce the debt burden on the states.

Also to fund growth, I will encourage the government of India to put in $ 3 billion in equity and then raise additional $ 7 billion from local banks as well as international investors/ banks, to create a growth and investment fund. This fund could also be made tax exempt from withholding taxes for foreign investors, and let this fund buy new loans from the banks, the fund could then repackage the loans in an asset backed security ( ABS) as a way to refinance itself. The fund could also provide working capital loan indirectly to the SMEs through the banks, and let the originator banks hold just 10% of the new loan on their books. RBI could also buy some of these securities from the secondary market to improve the liquidity and pricing. Also Emerging market focused fixed income investors could buy into these securities, and will be exempt from any withholding taxes. I am not a great fan of using pure debt to finance infrastructure, I would rather first raise equity to fund the infrastructure, and then give equity investors an exit by issuing the debt. If you look at it from pure risk perspective, the equity investors are in fact protected from the completion of the underlying asset, and that’s why you need a strong construction company to provide completion and construction risk coverage. So once the asset is built, equity investors will have their value protected, and the return will come from issuing the debt at a premium. There is a natural cycle, and any insurance cover to protect your investment in infrastructure asset will not work, if you simply buy a credit protection. I prefer a equity – debt- equity – exit cycle , which is based on water cycle of cloud – liquid water- ice – water – cloud. That’s the best value preservation model.

The idea that you can protect your asset for its entire life cycle carrying just debt is completely absurd, and it simply doesn’t work, any debt, if not managed well tends to have the natural tendency to end up spiralling into an unsustainable burden. And, if there was no refinancing then, most debt will not be repaid. You can repay debt from cash flow, but refinancing still remains the most frequently used tool. So we need to link the cycle especially for infrastructure assets. The issue with an infrastructure asset also is the permanent loss of value, and this is when the asset becomes redundant for a number of reasons, but if as an investor, you haven’t recovered money during the cash flow generation lifespan or lifecycle of the asset then, you are looking at a permanent loss of capital.

 

 

 

 

 

 

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Talking about globalisation, productivity and Universal Pay

Posted on January 20, 2017. Filed under: Uncategorized | Tags: , , , , , , , , , |

For starters, what is globalisation ? And is there a metrics that can help us measure the level of globalisation ?

The standard acceptable definition of Globalisation is that, it is a process that has enabled interconnectivity, thereby increasing trade and exchange of ideas as well as cultural experience among other things. Globalisation, as a process spread over 100 plus years has made the world richer, in terms of GDP. The process has also enabled the local champions, to become international bigwigs. And these international bigwigs have then, gone on to influence the change, or in other words, the process that, we have learnt to call ” Globalisation “.

To understand the affect of globalisation, we could look at how our main cities and societies living within those cities, have today become truly global, and therefore globalised in their views. So starting with New York City, which has an estimated GDP of around US$ 1.5 trillion, followed by Tokyo with an overall GDP of approximately US$ 1.4 trillion, and then London with an estimated GDP of approximately US$ 700 billion, followed by Paris with an overall GDP of around US$ 625 billion. And the other emerging global cities including of Delhi, which has an estimated GDP of around US $ 368 billion, are all bigger than some countries, in terms of their economic size. These city economies have reaped the benefits of the relatively freer flow of people as well as ideas supported by flow of capital from around the world. And it is quite safe to assume that, majority of the people living in this global cities, will have a favourable view of globalisation and the interconnected world.

Capital and ideas do not have geographical boundaries. Any attempt to limit or restrict the flow of capital along with ideas will only stifle progress, and it also goes against the natural evolutionary process. Over a 100 year period, human productivity, which is generally measured as a ratio of total output versus total Input, has benefited tremendously from innovation. And we are slowly reaching a point, where in certain sectors of the economy especially manufacturing, humans productivity as well as efficiency is no longer able to compete with the automation process driven by robotisation. Also, there will be increasing pressure on human as a labour force, to continuously reskill themselves. We may work longer, but on a lesser pay ( in terms of overall living standard ) than the previous generation. Technology may have made our lives easier, but it hasn’t increased the overall disposable income of people in general. So, a sizeable percentage of the population within our society will continue to feel under constant pressure. And this pressure and feeling of being slowly eroded isn’t all due to globalisation. The answer and the underlying reasons are more complex than some of us would like to suggest or believe.

The society that, we live in and along with it, our economies changes over time. And that’s part of the natural evolutionary process. Our body changes as we age, that’s how the biological process is designed. We aren’t physically capable of doing things that, we could do as a 16 year old, at the age of 60. So, we learn to adapt accordingly. Humans and humanity’s ability to adapt to change has been at the forefront of our evolutionary advancement. And the next generation of humans will have to be much better equipped than us, to stay relevant. Genetically speaking, humans are 99.99% the same, but we are still different in many ways including in our overall level of individual productivity. Not all the work force doing the same job, will have the exact level of productivity.

A human life is, more of a marathon than a quick sprint, and in the end, how we run the race decides where we end up. And the idea that, governments and political leaders can somehow help us stay in the race by changing the rules of the race in our favour, isn’t a permanent solution. We may get tempted to vote for those who identify with our problems, but the solution to the problems won’t come from pushing back against the natural evolutionary process. To facilitate a change, we must be prepared to change. And to change, one has to be ready to adapt to the changes.

Universal pay guarantee for those living below a specified and tested poverty line, could serve as the spring board, to help support those who may start to fall behind in the race. The fact is, not all of us will win the race, but we could try to finish it, without worrying about our individual ranking. We join the race, the day we are born, so we don’t really get to choose. But we can learn, how to run the race better. This is where, the society and governments could help, and they should.

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Unlocking Value – Exploring The Shanghai Global Exchange Idea

Posted on September 23, 2014. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , , , |

The latest economic data out of China clearly suggests that the overall economic growth rate has most likely peaked, and the economy is now going through a transition period, in other words, a shift in gear. And this transition period needs to be managed well through policy changes and other measures. The policy makers will need to be proactive, and it is probably one of the reasons why the central bank of the country ( PBOC ) decided to extend RMB 100 bn worth of liquidity to the largest banks in China. But any monetary policy tool has its limitations, and the transition will require the leadership to push through essential reforms and adjustment in the economy.

Going forward, the pressure on the leadership and the policymakers to take additional measures to shore up growth will remain somewhat high especially considering the growth target level set by the leadership, but it will be important for the decision makers in China to look at the bigger picture while having a long term perspective in mind. Also considering the overall macro picture, it is quite likely that China based companies may find overseas markets a bit more attractive so it is quite plausible that China’s overall overseas investment might exceed the incoming FDI in the country going forward.

The construction and property sector of the economy has made significant contribution to China’s overall growth rate over a considerable period of time, but there are clear and visible signs that the sector is now entering an oversupply phase. And in the long run, new stimulus measure for the sector may in fact do more harm than good to the overall economy. So the focus should be on consolidation, and managing transition period well while working on unlocking value from other sectors of the economy.

So it is important for Beijing to look at ways to facilitate sustainable growth by exploiting potential value from other sectors of the economy as a way of diversification. And with the creation of BRICS development bank that is to be based in Shanghai, the city and the leadership in China should take the opportunity to lay down the foundation of a future global financial centre, and also start the process of unlocking  value from the financial sector.

The new financial centre should not be modelled or based on any of the existing global financial centres, and the aim should be to look ahead in the future, by creating a financial services infrastructure that can stand the test of time, with open access, and created for the world while creating jobs and growth for the Chinese economy. Also through the financial centre, the policy makers in China could explore ways to better utilise a substantially large shadow banking system with an estimated worth of over US 6 trillion.

And by having the new BRICS development bank based in the proposed financial centre, the government could kick start the process. This is why the bank should not be modelled as a rival to IMF or World Bank, because then it runs the risk of becoming another multilateral agency too slow to change the way the global economy works, but instead, it should aim to take the world and Chinese economy to the next level. The BRICS bank based in the new global financial centre could  plug right into the existing financial infrastructure of the central banks of BRICS nations,and create an integrated platform to facilitate local currency trade settlements among the members, and also develop the ability to finance projects in local currency of the member countries. The other counter parties including of the players from the shadows banking system could also plug into the proposed global financial centre, and make good of various new opportunities by deploying  their capital better.

Most emerging market economies require a buffering or protection against currency exchange risks in the time of extreme volatility, and going forward, the players in the financial centre along with the BRICS development bank could play an important and significant role  in absorbing some of these risks by facilitating trade settlements in local currencies or non physical  trading currency Unit that can be converted into local currency of the vendors. All this could be facilitated by the financial centre with support from BRICS development bank acting as a facilitator, and as an independent counter-party connected to the central banks of the BRICS nations as well as other emerging economies. The conversion and exchange mechanism of the non physical trading currency unit into local currency could be worked out easily between the central banks and the BRICS development bank, and offered to regular clients by intermediaries based in the proposed financial centre. So the volume of overall transactions done through the financial centre could easily reach over trillion dollars mark making the centre an important financial HUB.

And the Government could position Shanghai as the natural financial hub / centre for global emerging economies, where the emerging economies and the companies based in the EM could come to trade and also raise money. And this could help create a first Global Exchange focused on emerging markets. An exchange that will facilitate trading of loans,debts, equities, commodities, funds among other things. The local companies based in China will also benefit immensely from the pool of liquidity provided by the exchange, and by their exposure to the world without having to leave their own backyard. And as suggested before, the existing shadow banking system in China could also play an important role in the whole scheme of things.

The importance of diversification cannot be understated, it is worth noting that although the overall growth rate of the Chinese economy has most likely peaked, still by most projections, the Chinese economy is projected to become larger than the US economy by the year 2020, but its per capita income is estimated to be less than US$ 17,000. Also, the cost of manufacturing is estimated to rise by over 105% making the economy less competitive, so quite clearly the economy is entering a transition period. This is why the policy makers and the leadership of the country will need to work hard on navigating the road ahead by exploring all the under utilised economic potentials of the country. So creating a global financial HUB should fit quite well in the overall plan, and is an idea worth exploring.

There are also significant geopolitical benefits of having the world come to you, and trade with you, also in most likelihood the leadership in China should be able to use this as a soft power approach to promote China. But for this to work, the market participants will have to feel confident and comfortable with the regulations, the governance structure, and the overall jurisdiction related issues among other things. So the government of the day will have to be willing to create a special legislative framework that will allow the financial centre to run at arm’s length from Beijing. This could be a challenging task, but the opportunity is huge. And there is already an existing precedent. After the creation of Shanghai Free trade Zone, some Asian banks including of Singapore based banks have seen their yuan based business grow significantly in size.

The approach will have to be collaborative, and not solely aimed at competing with existing financial centres of the world including of London or New York. Also by design, the new global financial centre should be able to serve and support other major financial centres of the world as an additional and important engine keeping the world economy flying.

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The statistical data and the design of the modern economy

Posted on July 6, 2014. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , , , , , , , |

Our modern economic system is overload with all sorts of statistical data, all aimed at helping us better understand and interpret, the overall health and condition of the economy. And one of the top leading economic indicator to measure the health of an economy is the Gross Domestic Product (GDP), used by central bankers around the world to adjust their monetary policies, by the governments to create economic policies and by the markets to make economic assessment in order to make investment decisions.

So how is our world doing ? well, based on the international comparison program ( ICP ) data for the year ending 2011, the PPP- based world GDP is over US$ 90 trillion. And around 32.4% of this GDP comes from the six Middle income countries including of China, India, Brazil, Indonesia and Mexico, while the six high income countries including of US, Japan, Germany, France, UK and Italy make up around 32.9% of this PPP-based world GDP. The average per capita income of Qatar, Macau, Luxembourg, Kuwait and Brunei of around US$ 100,000 is much higher than the six high income countries, and the US being the cheapest in terms of living cost among the high income countries. And EGYPT, Pakistan, Myanmar, Ethiopia and Lao rank among the cheapest economies in the world.

In terms of investment expenditure, China now has the largest share of the world’s expenditure for investment in other words gross fixed capital formation, and roughly 80% of Asia’s ( including the pacific region ) investment expenditure comes from China and India while Brazil makes up 61% of South America ‘s overall investment expenditure.

But for many, all this is might not only be quite boring statistical data but also somewhat irrelevant as they may not be able to relate to it or interpret it. On the other hand, many would find and consider these vital statistical data extremely important as it confirms ( their interpretation ) that our world is getting a bit richer than it was over a decade ago but then some may disagree especially those who are still struggling to keep their head above water after the financial crisis of 07/08, and would rightly argue that rich are getting richer and the income gap is expanding.

Whatever may be the case, these statistical data are nothing but a rough estimate prone to error. So far we have not managed to design an efficient economic reporting system that is able to account for all (100% ) of the economic activities of the world.

So whichever way, we decide to measure or calculate, how rich our nations economy or the world is getting, there will always be an element of misrepresentation of the actual fact. And I believe Simon Kuznets, who developed the idea of using GDP matrix to measure the size of a country’s economy knew about its limitation. This is why Kuznets extensively wrote about its use and abuse. And one of his statement in 1962 more or less sums up the issue. He said,  ” Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what “

Antarctica has trillions of dollars worth of natural resources but zero GDP because it is the people and their economic activities that is what a GDP calculation is tying to measure. So it is the people who make the economy as well as the GDP number, and without people, there is no economy so quite clearly, a economy should be built around people and not the other way round.

The economic literacy of the world population is extremely low, and people on the street today couldn’t be more connected to the financial world than ever before, as evident from the immediate after of the financial crisis. And increasingly more people are starting to talk and pay attention to economic issues that has already affected them directly or indirectly or may affect them going forward as consumers, investors, citizens and what not.

So the design of the modern economy should also incorporate providing basic and essential economic literacy to all the participants and users of the system. A higher rate of basic and essential economic literacy will help people around the world better understand the complex economic system. Economics and overall health of an economy affects people in different ways, and its influence on people’s life is ever increasing so there is strong case for the system to be upgraded, and designed around people, to make it work better.

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Talking About The All Scary Emerging Market, Market Perception and Investing in General

Posted on January 26, 2014. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , , , , , , , , , |

The markets are once again busy with chatter about Emerging Market ( EM ) and the sound of CHOAS seems to be re-emerging and many in the market are starting to wonder, what’s next ? A number of analysts have gone on record suggesting in their daily market commentary that emerging markets could now be a danger to global financial stability. No doubt, these are strong statements so it begs the obvious question, are we looking at another financial crisis, this time coming from the emerging markets ? And I do wonder if the fundamentals of EM have changed so dramatically leading some commentators to believe that a crisis is somehow imminent as evident from the way markets have reacted last week? Well, unlike our friends in the financial world, we ( I am referring to our group ) like many others who operate on a daily basis in the real economy can see and feel that the global economy is shaping up nicely and the IMF’s latest revised up global growth projection of 3.7% for 2014 and it’s growth expectation of around 5.1% for emerging markets from an earlier 4.7% GDP growth rate guidance, more or less reflects the ground the reality of the day.  So the obvious question, why this panic and uncertainty ?

Now one could rightly argue that the revised up guidance are just projections and the risks both known and unknown still remains. Also the recent volatility in the markets to a large extent has been driven by downward pressure on the Turkish LIRA as well as Argentine PESOS devaluation and the South African RAND, which is also come under a bit of pressure. And then there are obvious chatters around how good or bad China is doing and how will the leadership manage the US 4.8 trillion dollar worth ( estimated ) shadow banking system along with a relatively high local government debts, and then there are concerns about India as well as Brazil’s fundamentals. These are real and genuine concerns but having said that, I can’t help but wonder, how is all this a SURPRISE to anyone in the market ? For example most of us are aware of the ongoing political uncertainty in Turkey and based on our own common sense, we could safely conclude that if the political turmoil drags on then there will be consequences to the economy.

And also assuming the worst case scenario, one needs to ask and know, did the previous crises in Turkish and Argentine economy kill the overall emerging markets across the board ? the clear answer is NO, so in short it will be unwise to assume that Turkey will some how bring down the emerging markets of Asia, Africa or Latin America, the reality is a potential crisis in Turkey may be more damaging to developed European economies then China or India for that matter. Also it is important to emphasise that there is a crisis of leadership in Turkey today which is weighing down on the economy and a positive resolution could very easily change the overall dynamics of the economy. Now with regards to China, a US 9.4 trillion dollar economy growing at around 7.7% isn’t just going to fall off the cliff under the weight of its shadow banking system and the local government debt. Yes, there are real concerns about how the government may go about handling the whole situation but it will be unwise to assume that somehow the economy will implode bringing down the global economy. There are simply too many opinions on China both bearish and bullish but understanding the structure and behaviour of the overall Chinese economy is an extremely complex task and betting against the government’s ability to deliver on its set forth agenda never really works and this may be one of the reasons why foreign investors tend to struggle in China. And with regards to India, the Indian economy today is in a much better shape fundamentally than last year also the overall investors sentiment around India has improved significantly, the country’s real problem today is a lack of decisive leadership which will hopefully get resolved after the upcoming general election and also most CEOs representing both local and overseas companies are quite upbeat about India’s medium and long term growth prospect. The current government has also made a series of reform announcements aimed at opening up various parts of the economy to overseas investors.

So why then the market is projecting a risk of contagion and giving a sense that somehow an imminent crisis is brewing up in the Emerging market ? I must say, I do wonder if by holding an emerging market stock or bonds or taking up speculative positions in local currency an overseas investor is ever able to get the full picture and flavour of the overall economy ? And the answer is, most likely not because in reality most emerging markets are layered and quite different to each other and also it must be said that there is a reason why they come under the category of being classified as ” emerging markets ” but this is not to say that developed markets are somehow immune to crisis as evident from the financial crisis of 07/08.

In the big picture scenario understanding a market or an asset class isn’t just about reading opinions from various experts of the subject and one must not forget that even in good times people and companies do fail so yes some emerging markets may struggle but today the global economy is in a much better shape than it was few years ago and it is quite unlikely that from here on we are looking at an imminent collapse. However, the inherent risk in the global economic system as well as the financial markets by design still remains so the system isn’t CRISIS proof and never was. Also opinions and projections are part and parcel of how a markets operate but people do need to be rationale and honest because clearly there are those in the market who may prefer a free ride and to keep making  money on the back of easy money printed by the central bankers. This is not to suggest that the global economy has now reached a stage when all the loose monetary policy stimulus should be withdrawn right away, the tapering and tightening of traditional monetary policy tools will most likely be gradual.

But having said that the market will continue to make tapering related bets. Vanguard, PIMCO and BLACKROCK  lost roughly over 35% in value on their investment  in the last 6 months of 2013 by getting their inflation bet wrong on Treasury Inflation Protection Securities (TIPS ). These firms made bets on the assumption that Quantitative easing (QE ) will deliver inflation down the road and although it is quite evident that they got their bet wrong but we mustn’t  forget the fact that QE did in fact create Inflation in ASSET PRICING and also across various Emerging Markets, but obviously not where it was expected so clearly those who held a view that QE will create inflationary mayhem in the economy killing  the dollar down road most likely didn’t incorporate the fact that the economy of today works and behaves a bit differently. There  needs to be a realisation that too much money in the system and ultra lose monetary policy will not necessarily create an immediate spectacular growth trajectory especially when the economy is coming out of a MASSIVE HEART ATTACK. And there are clear evidence that QE has created ASSET pricing inflation through misallocation of capital and this may be what is eating up growth ( growth rate below market expectation ). Also while some managers did get their inflationary bet wrong they should also realise that central bank’s ability to create or control inflation in a 2014 world isn’t always guaranteed or straight forward but having said that inflation will slowly but surely show up in the real economy but most probably not tomorrow.

Investment is about taking risk by relying your own assessment of a specific risk and then taking a decision based on your own judgement. MARKETS OR COMPANIES are all run by Human ideas and thought process so the market or a company is only as good as people behind them. And without being philosophical, we all know that life comes with no guarantee so what do we do? well, we learn to take risks and the same goes for creating a business and how we invest. There are no guarantees and the guarantees you may have or seek could easily become worthless when the circumstances change. And whatever investment decision you make or take will always come with an inherent RISK so there is always a chance that it may or may not work out as planned. You can only make a decision based on what you can see and know today but there are always many unknowns that you may not be able to factor in and going forward  these unknowns may very well influence the outcome.

So investing in general isn’t all about following a trend or analysts reports or getting overwhelmed by the sound bites coming from various corners of the market or committing yourself to a fancy model. In most cases, a good investment is generally about following your own intuition or in other words your own inner radar just like many decisions we make or take in our lives and you can always use the information available in the market to make up your own mind in a similar way as you would seek advice from friends or family when taking an important decision in your life but always remember you will have to live with outcome and blaming others for an undesired outcome never helps although it might be quite tempting to play the game but if you do then you are denying yourself an IMPORTANT OPPORTUNITY TO LEARN and there is nothing scary about learning. So the all scary emerging market as projected by some in the market today in fact may not be that scary after all and remember a perception doesn’t always equal reality.

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The Tax Debate: There is a lot more to an economy than taxes

Posted on July 26, 2013. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , |

The OECD recently launched a scheme to combat tax avoidance and evasion related issues from both major multinational corporations and individuals. The initiative called base erosion and profit shifting ( BEPS )  plan was presented to G 20 finance ministers on the 20th of July this year on their request.

In short, the BEPS report confirms OECD’s findings that the existing international tax system is failing the rich as well as poor countries. This is more or less stating the obvious. Taking the initiative further during a recent announcement the OECD has also identified 15 policy action points that it hopes will restore trust and fairness in the system. In principle, the scheme does seem to hit the right notes especially with law and policy makers and hence it was fully endorsed by the G 20 finance ministers this month.

The OECD’s action plan on base erosion and profit shifting (BEPS) will most likely be considered by many as a step in the right direction but it does seem to be loaded with complicated ideas to help nations find ways to collect more tax revenues from major international corporations as well as individuals. And while it rightly focuses on tax treaties, tax compliance, overall tax policies among other things to fix the inefficient global tax system, parts of the scheme may not be fair for all and also falls short on addressing the real issues. For example under the planned proposal OECD recommends a multinational treaty aimed at tax avoidance but this treaty could also potentially hurt smaller countries that are using low corporate income rates to attract investments from across the world.

Also after looking at the bigger picture it will be unwise to conclude that the downward trend in tax income revenues is all simply down to deliberate tax avoidance and evasion by major corporations and individuals. But here is something interesting, according to the US government agency data for the financial year ending 2011, the US corporate tax collection was roughly around 2.4% of its GDP. And the historical data suggests that the overall corporate tax contribution  has shrunk dramatically since 1950s but its not just a US problem as most OECD economies collect between 2% to 3% of their GDP in corporate income tax revenues. However, there are no clear evidence to suggest that this downward trend is all cause of corporates tax avoidance and evasion. There are serious existing policy issues related to taxation thats need to resolved and unless the lawmakers take radical measures to reform the existing tax systems even if OECD’s scheme was to be fully implemented it’s hard to project a significant rise in the overall corporate tax income revenues in terms of percentage of the GDP but we will have to wait and see.

Over the past few decades there has been a significant shift in the overall distribution of the tax burden. For example from Oct 1, 2010 to Sep 30, 2011 the US government collected $2.30 trillion in tax revenues of which 47% was individual income taxes, 36% social insurance taxes and just 8% in corporate income taxes along with 3% in excise taxes, 1% custom duties, 0.3% estate and gift taxes, and 4% in other taxes. So clearly from the overall tax distribution stand point it is evident that the US households are bearing the brunt of the tax burden. But again this is not just a US issue for example Europeans overall tax burden is estimated to be over 15% higher than Americans or Asians for that matter. And this shift in tax distribution burden has happened over decades so its not a new phenomenon and while the law and policy makers may find it easier to criticise the corporations, it is not the corporations who make or create tax policies.

The focus of the law and policymakers of G20 countries should be around finding ways to harmonise and simplify taxes across the board as most tax systems are extremely complicated and also work with major corporations to create incentives for them to make sure they pay a fair share in corporate income tax. The world has changed and will continue to change and going forward a good tax system will need to be constantly updated and forwarding looking. Any system that is seen as Tax grab and simply aimed at taking more cash out of the private economy will most likely struggle in the long run. The system needs to be redesigned to look and feel fair and this should clearly be the focus and aim of law and policy makers involved in the ongoing tax debate.

However,the recent steps taken by various governments around the world especially the European as well as the US government has been more or less front loaded with measures to increase the tax burden on the existing tax payers. And the temptation to find ways to collect more tax revenues is understandable as most governments are under severe pressure to find ways to fix their stretched fiscal position but the law and policymakers should also realise that there are already too many hidden and indirect taxes that really affect people’s standard of living. 

And also while higher taxes or finding new ways to increase tax revenues from the existing pool of tax payers in order to pay down the debt may seem as an easier option there needs to be a realisation that the current deficits weren’t caused by corporate and individual tax evasion and avoidance. The law and policymakers do need to realise that there is a lot more to an economy than taxes, and there are no perfect economic or tax systems and probably never will be but without growth most countries will continue to struggle. Also continuing to tap more from the existing pool without enlarging it or cutting down on the overall expenses to a sustainable level is a high risk  plan so the G 20 finance ministers will do well to keep their focus on finding ways to take collective measures to boost the global growth in order to generate more income.

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GREECE – Discovering The Road To Prosperity In a Difficult Debt Terrain

Posted on October 15, 2012. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , |

The gruesome reality of the ongoing European Crisis is that some countries in the EU including of Greece were living way beyond their means and in the last decade benefitted the most from the European Union idea without realizing that all the rise in the living standard and good times hasn’t been paid for. For example after Greece adopted Euro the public sector wages rose by over 50% during the 8 years period ( 1999 to 2007), which is by far the fastest rise in the Euro Zone.

As evident from the unfolding events of the past few years. There is no doubt that Greece was ill-prepared to cope with the global financial CRISIS and has thus seen its real GDP growth decline year-on-year since 2008. According to Eurostat, the real GDP Growth for Greece in 09 was -3.3%, for the financial year (FY) ending 10 was -3.5% and the projection for 2011 is -6.9% and for the year  2012 its around 3.8 – 4.4% . The human cost has been enormous. And the pain and sufferings of millions has gone from bad to worse.

Although people on the streets across Greece have vented their frustrations and anger continuously by rejecting the status quo. A large percentage of the population still wants to be in the European Union. The onus is on the politicians as well as the population to fully understand and appreciate the gravity of the situation. Greece should take this once in a life time opportunity to reconfigure its economy.

The rebalancing and reconfiguration of the economy is a process that will take time and will require all the parties with vested interest to work together without losing sight of the BIG PICTURE. The solution will come from an open and honest collaboration and each party delivering their side of the bargain.

Getting GREEK debt on a sustainable downward trajectory is KEY. And this will require the lenders as well the policy makers in Greece to agree on a clear road map outlining the debt reduction plan.

Based on various media reports the troika consisting of the IMF, the European Central Bank and the European Commission is believed to be working on a Greek debt sustainability analysis and the officials are trying to figuring out ways to bring down the huge debt burden on the country. It is estimated that under the current scenario Greece’s debt to GDP ratio target set by the troika of 120% (of GDP) by 2020 is beyond reach. The median forecast for the economy is to shrink by 3.8 % in the financial year 2013, which will obviously be its sixth consecutive year of declining growth putting the overall debt to GDP ratio to around 180%. This falls way short of the initial goal and is clearly unsustainable going forward.

The need of the hour is to work out a plan incorporating the ground realities that has a real chance of SUCCESS. And creating a sustainable debt reduction strategy will require exploring all the feasible OPTIONS.

Here are some IDEAS worth considering. The suggestions below covers the debt held by troika including of the bonds held by European Central Bank (ECB), the bilateral loans as well as the IMF loans.

  • Consider recapitalising the GREEK banks through European Stability Mechanism (ESM) as planned for Spain.
  • Look at converting a portion (around 25-30%) of the agreed Euro 48 billion loan from European Financial Stability Fund ( EFSF ) marked for the recapitalisation of the banks into equity. This could be managed through the Central Bank of Greece.
  • Consider extending the overall maturity of the loan facility by additional 2 – 3 years  with a grace period on the interest payment.
  • The European Central bank (ECB) should consider taking a hair cut on the bonds it bought from the secondary market as investors or agree on a debt swap extending the overall maturity of the bonds by at least 2 years. Rules defining ECB’s role are vague and unclear but the central bank should take the initiatives here.
  • The policy makers in the EU should consider extending the bilateral state loan to Greece in the amount of euro 53 billion (already provided) by another 2-3 years with a reasonable grace period.
  • Greek government should fast track the planned privatisation process expected to bring in euro 40-45 billion and use part of the proceeds to buy-back the existing debts especially the post restructured PSI bonds that are currently trading at around 22-28% of the par value.

The above measures should reduce the overall debt burden on the Greek economy which is just over euro 330 billion but it won’t be sufficient especially if there are no clear strategy to GROW the economy and fill the fiscal hole from the revenue side. This will require a close cooperation between the Greek Government and Brussels. The politicians in Athens will have to set and drive the AGENDA forward at war footing.

The Government will have to start implementing the structural reforms including of reforming the complicated tax laws, increase competitiveness and productivity by  identifying champion sectors that will drive growth forward providing employment and support them with right legislation and tax incentives, use part of the  privatisation proceeds to support SMEs funding requirement, encourage investment in the real estate and other struggling sectors by inviting the Non- EU nationals to invest in the Economy through various programs that may include providing tax incentives and resident permits, provide flat tax rate to new foreign companies especially the GREEK Diaspora living overseas and explore all the other feasible options.

The next 6 to 9 months will be critical for Greece and the country should use this   CRISIS as an opportunity to come together with a strong resolve and  mindset that it will get over the line. And there is a road that leads to PROSPERITY but discovering it in this difficult DEBT terrain will require patience, perseverance and a right strategy.

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The CHINDIANS – Reshaping the future of the global economy

Posted on April 22, 2011. Filed under: Uncategorized | Tags: , , , , , , , , , , , |

Indo-China Trade has been growing at over five times the rate of world trade growth. Going forward their increasing economic strength and bilateral trade will create a super growth corridor where the world could plug in.

China and India are now leading economic stories on the world stage and this story may very well last through most of our life time.  And while some in the market regard the two countries as competitors in the years to come collaboration and not competition will take the centre stage. India and China’s trade relationship is historic going back 2,000 years under the thriving Silk Road trade. Relationship between the two countries has been thorny in the past and they did go to war over a border issue in the Himalayan region in 1962 which affected the trade and bilateral relationship negatively.

However from the 2002 onwards when the two countries agreed to work on normalising the relationship and spurring commerce, the bilateral trade between the two has steadily grown from a mere US$ 7.3 billion in 2003 to around US $ 62 billion in 2010 growing by more than 8.4 times in just 7 years at an annual growth rate of over 120% making China the leading trading partner of India, and India jumping 11 places from 20th top trading partners of China in 2003 to be ranked 9th among China’s leading partners in 2010. The two countries have already agreed to push the bilateral trade to USD 100 billion mark by 2015. Although China’s bilateral trade volume with ASEAN, Japan and South Korea is higher the annual growth rate of the INDO-CHINA bilateral trade is far greater and is set to continue as business to business contacts grow. Also the size of the economy, population and the geographic closeness of the two countries provide abundant opportunities for growth in bilateral trade.

Today a significant portion of the world trade growth is coming from China and India. And this trend is set to continue going forward. Intra – Asian trade has clearly been one of the biggest beneficiaries of the growth. According to IMF the interregional trade flows within Asia has grown at the rate of over 13.4% from 2000 to 2009 and is estimated to be valued at just over US 1 trillion. So far China has been the major driving force behind the interregional trade growth. And a noticeable change in pattern has been the increase in imports from Asia to meet the domestic demand coming from Chinese consumers whereas previously a bulk of the imports from parts of Asia were assembled in China and re-exported to the developed markets. The pickup in domestic demand is line with the government’s attempt to rebalance the Chinese economy. In its recent 12th five-year plan Beijing has set out a clear plan and set of measures to rebalance the economy and drive up domestic consumption.

The Government in China has realized that a vibrant domestic market is the only guarantee of a sustainable growth and long term success and relying heavily on foreign demand makes the country vulnerable to external shocks . So expanding domestic consumption is clearly a favoured long-term strategy for Beijing especially when its export based manufacturing seems to be slowing down and gradually may lose competitiveness mostly driven by rapidly rising high wages, higher input cost, shortage of low-skilled workers among others. Various projections suggest that the working age population in China will peak around 2015, so the labor supply is going to gradually decline and push up the wages even higher.

Historically wage growth and household income in China have not matched the overall GDP growth and some research suggests that in fact wages have actually fallen from 53.2% of gross domestic product between 1992 and 1999 to 49.7% between 2000 and 2008. So in its efforts to rebalance the economy the government has taken measures to allow significant rise in wages across the board. In line with government policy the municipalities across China have raised the minimum wage on average by over 20%.

Rising wage pressure, appreciating currency and high input cost driven by inflation may be enough to shut down a significant number of export houses in China especially in the low manufacturing sector where exporters’ average margin is around 3% or less.

Going forward the government in China will have to look at creating policies that will allow private sector to play a bigger role and drive the domestic demand. Having that said it is worth noting that since 1999, the share of State owned Enterprise (SOEs) has declined from 37 percent to less than 5 percent in terms of numbers, and from 68 percent to 44 percent in terms of assets as a result of the SOE reforms carried out in the past under “grasping the big, letting go of the small” strategy. That said still a huge portion of the Chinese economy ( in terms of GDP ) is under government control and it has been the major driving force behind the overall GDP growth whereas the private sector has been driving India’s growth.

 It is estimated that over 80% of the Indian economy is now in private hands and the private sectors is driving the investments story in the country. Private sector in India has benefitted hugely from the Indian growth and has accumulated significant wealth. It is estimated that the combined total assets of India’s wealthy is set to reach around US $ 6.4 trillion( the highest in Asia ) over the next 4-5 years.

India’s demographic profile is very attractive with a strong pool of young population adding to the workforce every year but it must be said that a good percentage of them may not be employable. So the government needs to reform its education sector and also increase the number of good universities and colleges across the country. One way to do it will be to encourage established foreign education institutions to set up campuses in India alongside or in partnership with the local universities and colleges.

As the Indian economy grows it is estimated that around 200-250 million people may be added to the consuming class in the next 7 to 10 years. This presents a huge opportunity to both domestic and foreign companies within Asia and other parts of the world.

 In the short to medium term China will still be at the centre stage like the sun in the solar system driving the interregional growth in Asia and parts of emerging markets. Having said that India’s share is gradually increasing and so is its annual growth rate. It is worth noting that India’s annual GDP growth rate for 2010 was slightly above China according to the recent IMF publications. This does not mean that India will anytime soon match China’s economy in terms of the overall GDP ranking. But both the countries are expected to be major driver of growth for the region and other emerging market economies. Based on this assessment the Intra-Asian trade flow is estimated to grow at an average rate of over 12% year-on-year until 2020 (according to HSBC and Asian Development Bank ) and the series of bilateral free-trade agreements signed recently by both China and India with others Asian countries will significantly boost the regional trade flows. 

However it must be said that said both the countries do face significant challenges going forward. There are some concerns that the Chinese economy is overheating and the increased investments in fixed assets especially infrastructure and real estate which shows no visible signs of slowing down in spite of the tightening measures will hinder the real and required rebalancing of the economy.  The latest Q1 GDP print for 2011 show the economy grew at 9.7% year-on-year which exceeds market expectation and also defy concerns about any slowdown in growth.

Some commentators have also suggested that China’s growth story resembles Japan in the 1980’s and ultimately like Japan the bubble will burst and the country will hit a wall. It is worth pointing out that most of the bold forecasts about China have turned out to be wrong. The funny thing about forecasting and making predictions is if you make enough of them on a regular basis there is a good probability that you may get some right eventually. And with the right marketing skills and a bit of luck you could turn yourself into a market GURU.

Due to its growing economic influence China does attract a lot of attention and there are many economic theories around China. It is worth noting that although China is the world’s second largest economy it still has a very high income disparity and a low per capita income. And unlike Japan in 1980’s the country is still a developing economy and has a decade or more of growth left in the tank. Chinese growth story today resonate more with the U.S. story in the early 1900s when the U.S. went through numerous boom and bust but each time the economy recovered and got bigger.

The market expects the government in Beijing to fast track the implementation of policies that drives up the house hold income in real terms; increase the role played by private sector, and incentivise domestic consumptions among others. Also currency appreciation and a collaborative approach to guard against commodity and oil & gas price volatility may be a useful method to fight against inflation driven by external factors.

The previous strategy under which Beijing encouraged its State owned Enterprise ( SOEs ) to acquire mineral & mining resource assets including Oil & Gas overseas to secure price stability and supply didn’t really deliver the desired result. While state owned enterprise (SOEs) profited from the government’s “equity oil “ strategy  the Chinese consumers and the policy makers didn’t see any real reward. And in the current political turmoil in the middle-east Beijing may have to re-visit the existing strategy and look at ways to increase global co-operation with other resources (including Oil & Gas) dependant countries to create a collective game plan for guarding against supply disruption and greater price stability.

Having said that commodities and oil & gas prices will remain vulnerable to speculation and a significant percentage of the pricing input and price movement of commodities including of OIL & GAS is based on speculation. It is worth noting that the world is not constant but changing where a useless commodity can become relevant overnight driven by innovation and technology. For example Crude Oil was once a useless commodity that became valuable overnight.  Also Bolivia’s Lithium reserves – Lithium is used for the production of batteries and was once considered useless but it is extremely valuable these days and with the explosive growth in hybrid and electric cars the demand is outstripping the supply on a daily basis. So all of a sudden Bolivia is becoming very important in the whole scheme of things. It must be said that evolution, innovation and technological advances are key to sustainability and survival. The saying “Necessity is the MOTHER OF INVENTION “clearly holds TRUE.

India and China together is home to over 2.5 billion people so food and energy security will always be at the forefront of government’s policy. And in line with this policy both India and China have allowed home grown companies to expand capacity by acquiring assets in other emerging markets. Indian Agro companies have acquired and leased various agricultural assets including of farming lands in Argentina, Brazil, Mexico and parts of Africa. India’s agriculture sector is need of serious investments and structural reform including improving farming methods in order to increase its productivity.

China has 10% less arable land than India yet its agricultural production is 25% higher. Also China implemented land reforms in the early fifties which resulted in enhanced agricultural output, establishment of agro industries whereas with the exception of some states land reforms were mostly half measures in India. Bad policies decisions further deepened the crisis and as a result thousands of farmers are committing suicides every year across the country. Having said that private sector in India is making serious investment in the agro based industry and some of them bearing fruits. Going forward the government and the private sector in India will need to work together to boost investments in agro infrastructure as well as upgrading of existing distribution system, irrigation, farming methods and technology.  New Delhi will have to look at liberalizing R&D in agriculture sector, create policies to encourage investments in the agro sector of the economy and this will have to include the much needed land reforms.

China’s ambitious development goals are an official target of reaching a 95 percent grain self-sufficiency rate. This policy is a pillar to establishing the country’s food security, and result in an increase in domestic fertilizer consumption. According to the governments figures China’s national grain consumption will reach 572.5 million tons around 2020, requiring an increase of around 50 million tons in domestic fertilizer production over the next 10 years.  In order to achieve these targets, the government has made clear that it plans to boost investment in agro infrastructure also upgrade existing technologies in irrigation systems as well as seedlings, while improving farming methods and increasing the level mechanisation in the sector.

While both India and China search for a more competent, healthier and sustainable way to develop their economy. They do face similar challenges and one of them is to find a growth model that is inclusive and able to deal with growing income inequality which could potentially create social unrest going forward.

The two great civilizations of the past are finding their way back to the world centre stage as economic powers and in the process reshaping the future of the global economy. Both countries can learn a lot from each other and through collaboration create limitless growth opportunities.

A combined population of 2.5 billion presents a huge market full of abundant opportunities that has a potential of creating a super- highway for growth. And linking to a super growth corridor will allow other countries especially the emerging economies to increase their growth speed limits significantly.  So there is a strong case for companies and economies to have a China- India strategy (aka CHINDIA ) rather than a strategy that focuses only on China or India.

 

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