Two Worlds Apart

The world is clearly split today. With one half looking forward to a bright future and with big aspirations in their hearts and the other half of the world looking behind, still picking up rags from the remains of the last bust and trying to rebuild their economies. One half of the world is flush with liquidity and raising money is just a blink away. Whereas the other half is still carrying heavy debt burdens on their shoulders and has no idea how to lessen it. One half of the world is witnessing rapid economic progress and expectations of growth, even better than before the recession. Meanwhile, the other half is still finding it hard to recover and repair, with its problems ranging from looming inflation to mounting unemployment.

The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge. Okay enough of euphemism, let’s make it more simple! What I mean is the rebalancing of global economy is taking place more quickly than anticipated, with the current recession being just a catalyst. According to my understanding, the change was always happening, but not noticeable.

The world that was once ‘emerging’ has now arrived and the world that was once long arrived, is now trying to re-emerge.

The welfare states of the West were gradually piling up debts and unproductive government spending was further exacerbating this debt. The 2 ‘lost decades’ of the Japanese economy clearly highlight the implications of an economy saddled with expensive welfare programmes. However, not many have taken notice. For instance in America, healthcare as a percentage of GDP was just 5% in 1962. It has grown to 15% in 2010 and even after the present Obamacare reform; estimates are poised at 20% in 2017 and 25% in 2025.

Difficult fiscal outlooks are not the only problems the West faces today. Other depressants are heavy national debts, aging workforce, slowdown in consumption, expensive factors of production and the growing social and cultural discontent, especially towards immigrants and minorities.

On the other hand the East is brimming with optimism and consumption is rising at a frantic pace. Emerging economies are filled with opportunities. Innovation is growing with leaps and bounds. They successfully decoupled themselves from the collapse in the West, which was a surprise to many pundits. But again many had learnt their lesson from the Asian crisis in the 90s, and their adjustments in policy making were gradual, but not that impactful or noticeable. Strong domestic consumption accompanied with prudent foreign exchange controls built over the last decade or two have helped them recover from the crisis and in general brought in public glare their economic might. Even politically they stand taller than before. The extension from G-8 to G-20 is a significant reflection of today’s time.

Cooperation or Isolation?
What the West needs is not to grow discontent against their growth but, to learn and partner in their success. The West still holds the cards on many fronts. Ranging from intellectual asset base and technical prowess to existing influential shareholding in global institutions like IMF or UNSC. But now starts the real challenge to build partnerships, rather than blocs and give the world a better tomorrow.

Why Germany Lost To Spain And Continues To Lose In Finance

Part 1-

On the onset I would like to start by saying that, it was a fantastic match, which surely lived up to the expectations of a World Cup Semi-final match. For keen observers of the game, it was a real treatise; quality of the highest order. The blackboard strategies and planning were implemented well by the players on the pitch, and it took the match to another level. Nevertheless, Spain proved to be a better side, with their fine passing and skill. For me, the Spanish flair and game-play had more of a Barcelona character than the traditional Spanish style of play. (7 out of Spain’s 10 outfield players were Barcelona players.)

It was heartbreak again for Germany, and the prominent thought on everyone’s mind was ‘Not again!.. when will they?’. The next day, the match had a better hangover on me then any vodka-rum mix has had. Thus, in one of my erratic moods, I started to think about last night’s thought. How Germany often falls, just before reaching the zenith. I tried to correlate it with the recent Euro debt crisis and the role Germany has played in it.

Yes I think, Germany truly deserves the blame for exacerbating the Debt crisis, by holding on to bailout kitty until the last moment, and then the surprise and uncalled ban on short selling and CDS. If you look deeper into the German economy and their socio-political structure, you will find them to be very different to their fellow Europeans. Germans are more thrifty and prudent, but yet still pertinacious and very conservative in their opinions and preferences.

The Germans have always held pride over their seemingly impregnable defence, which has been their legacy for the last five decades. They have invariably been a defence focussed team, but what we saw in the beginning of the world cup was a radical shift in strategy. The Germans were bursting with energy and youth, and so an aggressive and attacking approach came naturally to them. Thus, they performed exceptionally well in every match except the last, beating some good opponents by 3 goal margins. (I said ‘good’, so please lessen by one if you included England.)

But I was really surprised to see their strategy in the Semi-final. They left their wining for their old defensive strategy. From what I understood they planned to soak up all the pressure and to release only on the counter-attack. But, what really transpired on the pitch was the frustration of German players of not getting the ball enough, and eventually then not holding the ball in possession long enough.

From then onwards it was a downward spiral, till they finally suffered a goal and so they were forced to go all out and attack. If you remember closely they had more chances in the last 20 mins than before. So what really did them in? In one word- Hubris. The Germans felt that they could rely on their archaic style of play and because they have always been so good in the past, then why not depend on it as always. It is truly said, that when you walk with your head in the clouds, you either flying or dead. Either ways you lose touch with reality. So did Germany and they paid the price for shunning the modern for the old.

But why finance?? Follow up in sometime.

On India’s 63rd Birthday

“Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.”  - Jawaharlal Nehru

Nehru himself would be ashamed to see his “free India” ruled by his own family for a majority of years and possibly even the years to come. If that wasn’t enough, just to see his dynasty, not using his own name, but rather that of a man, whose only dream was to empower every Indian to rule himself, would send Nehru back to the dead. But unlike Nehru, we have lived with the quotidian lies and false promises, and have become immune to the pain of seeing our values being floundered and our patience been mistaken for innocence. So I stand up today and differ from the contented and biased editorials, to assess ourselves critically on our 63^rd birthday.

On our 63^rd birthday, the Commonwealth Games preparations have exposed how the Indian bureaucracy is still corrupt, unproductive and a drain on the economy. The Games were supposed to be a symbol of national pride, but have become source of disgust and embarrassment. They are a perfect example of what is wrong in the present system, where the intermediaries eat away most of the benefits of the beneficiaries. Today, being an average and lazy engineer in the government department is better than being a hardworking and disciplined gold medalist for your country.

On our 63^rd birthday, our black economy is growing at double the rate that our economy is growing. The government has no idea how to curtail the inexorable rise in prices. The Finance Minister is perennially pointing to our persistent fiscal deficit. There is more than what meets the eye. In a Planning Commission Report dated June 2010, it has been reported that of every 1 rupee the government spends on the PDS, only 27 paise reaches the poor! (Source: http://planningcommission.nic.in/reports/peoreport/peo/peo_tpds.pdf)

The government has not shown any inclination in removing the corruption and rot inherent within the Public Distribution System (PDS). Today, it is a well known fact that politicians along with bureaucrats have formed a tight nexus with illegal hoarders and speculators. Such things are never written in newspapers and never said in the policy review meetings of the RBI.

Manmohan Singh has shown us all in the last 6 years how economists are good yet hypocritical planners and pathetic yet popular implementers.

On our 63^rd birthday, the rich urban India is a minority amongst the majority poor rural India. The average urban voter is disillusioned with the polity, for he feels that there is no point in voting. So much so, that there were serious discussions on “None of the above” option to be given as a choice. Urban India feels realizes that it is not within their control to stop the uneducated and criminal politicians from coming to power. Populist measures are used to appeal to the rural majority and the government is able to manipulate them in such a way that they feel that the government is acting on their behalf.

Like many other people of my age, I feel like a minority within another minority. The minority of being a ‘General’ citizen of the country is the quiescence of the social trends existing in the country. Students are being taught the benefits of violence, strikes and political appeasement rather than merit. There maybe a time a few generations down the line, that children born to general category mothers in general category wards in general category hospitals will blame God for not being born in a govt. approved caste.

On our 63^rd birthday, we will today hear from our Prime Minister after weeks of silence, even as the country has witnessed major problems from honour killings, derailment of trains, growing protests in Kashmir, exponential increase in the spread of the violent Naxalites and the permanent menace of inflation. Many of us had forgotten that we even have a Prime Minister.

Manmohan Singh has shown us all in the last 6 years how economists are good yet hypocritical planners and pathetic yet popular implementers. Probably it is because they all believe that in the long run; all conditions (or equilibriums) adjust on their own to the policy planned (or ideal state). Classic textbook stuff will teach you that in the long run, market players adjust to the changes. Unfortunately today, my fellow country countrymen are the ‘market players’. The ‘adjustment’ is in reality an inurnment. The changes are often shocking, malfeasant and pervasive. I think probably Manmohan Singh forgot to read Keynes best critique at his time in Cambridge, or like we say in college “It was out of syllabus”. Keynes said and I shall repeat with great enthusiasm,” In the long run my dear, we are all dead!!”

So those of you, who are hoping to see the violence in Kashmir cease, forget it. The renegade Naxalites cornered up and taken care off, don’t expect it. The complacent, corrupt and inefficient bureaucracy cleaned up, get a life. And the inflation coming down “in the next six months”, don’t fall for it. All in all, we are here in for a long journey, driven by a group of people who are only keen to get off at the next stop available and ask for a refill from the passengers. My advice to fellow passengers: fasten your seatbelt, wear your helmets and be sure to carry a parachute large enough for you and your family, because you never know how low the road might stoop or how high you will drop from.

Why Germany Lost To Spain And Continues To Lose In Finance II

Part 2-

Drawing parallels, this is exactly how they behaved with financial markets. Their surprise ban on short selling and CDS was indeed odious, and still it was prolonged. The Germans, it seems, still feel that they live in a dystopian world, and they are the ones who have to set it right, with their traditionalist rules. Some German editorials on the web are talking of an Anglo- Saxon conspiracy to destabilize Germany through the Greek crisis!

German politicians abhor financial innovation of the 21st century and still believe in the archaic policies of the past. A time when laws were biased and an average investor had no real protection from defaults and frauds. Calling new innovative models like CDS “speculative” might be partially correct but blaming it completely for the mess is blatant hypocrisy.

Germany needs to learn from its world cup semi-final opponents Spain, how to embrace others and their diverse characteristics. And blend them into your own system. It said that Barcelona’s current flair and flamboyant style of play was brought to the football club in the 80’s by its Dutch coaches. From thereon, after years of adjustment and adaptations Spain borrowed the same game-play and has been successful in using it in the last 6 years.

Germans must come out of their conservative shell, and embrace the modern world and its free markets better. The way their engineering industry has grown leaps and bounds in the new era of alternate energy, policies too should open up more. Germany is conspicuous by its absence on the world stage, despite being de facto Europe’s powerhouse. It often remains quiescent on serious international issues and when it does speak out (rarely that is), it is rather disappointing.

The German starting XI reflects its diverse multi-cultural background and the new attacking flair innate within the young team. However, it seems the coach did not identify with this and imposed the “old German way”, which cost Germany the match and eventually the cup.

As I see it, Germany will continue to lose football finals and in finance, until wakes up like the rest of Europe and accepts the changing times.

Evaluating Crisis Management Options

Now as we know in a recession, typically the economy slows down, credit becomes expensive and exclusive, industrial output is negative or roundabout zilch, consumer confidence takes a toll and route to other cyclic gloomy events. In financial terms to sum it up; the investment dries up as private participants register heavy losses and stay bearish for a while.

Thus it is obvious that the emptiness in economy and even the financial markets have to be filled in by someone. That someone has to pump blood (that is money in this case) into the economy, in order to maintain life. That someone has to mend the loopholes, revise regulations and show sympathy to regain both public and private confidence in the system it governs. That someone has to wait for businesses to digest the losses, consumers to get more optimistic and investors to feel safe again. I hope you have realised by now that our ‘someone’ is none other than the government itself.

So now we know that it is the government only which is the final responsibility and authority to step in. The next thing to question is what all options it has to choose from:

1)      Spending large amounts of money or reducing taxes to increase money supply.

2)      Using central bank reserve and lending rates to boost money supply.

3)      Or do nothing and let the market and economy correct itself; as the classicalists suggested a century ago.

What is usually seen, is a combination of both the fiscal policy (first) and monetary policy (second). Moreover, what constraints the government to go the whole mile is the presence of the third option. Invariably it exists in the back of the mind of policy makers. It is brought to public domain in business journals and newspapers by some economists who remind about the benefits of perfect competition and warn about crowding out private investment. Sociologists will hark back to the founding principles of capitalism. In addition we are also alarmed by opposition political parties, who suddenly become more concerned about the tax payer’s “hard earned money”, raising slogans about their management (probably motivated as their own pockets get thinner too).

Thus a balance is maintained wherein prudent policy makers are stopped from overspending and crowding out private investment. So the government has to be very careful in order to not fuel a bubble in the economy which bursts as soon as it exits. Thus another major aspect is the timing of withdrawal of economic relief policy in both monetary and fiscal fronts. I will discus this in detail in my later posts.

It is also of course implied that a fiscal or monetary policy cannot be implemented in isolation. They both are interdependent on each other. The leakages in a policy can be countered by the other. For instance the concept of Quantitative Easing which is being adopted by central banks all over the world involves the central bank buying government securities in order to facilitate the fiscal expenditure. However if this was not done, the excess supply of treasuries would have pushed up interest rates and choked off investor confidence and credit flow in the economy.

Thus, we have seen what are the alternatives to be considered, which are evaluated on the basis of market and economic conditions. Now let us see what has really happened this time.

Do or Di(v)e for Euro

The response to the trillion dollar support package announced by EU for Greece has mostly been negative. The investors feel that it is still not enough to save the sinking European pride. The pride and unwavering faith in the euro was mistaken to be the absolute truth. With pacts and regulatory bodies in place, the Europeans thought their model was unique in economics and finance; just as their political clout was.

The Eurozone countries' average fiscal deficit as a percentage of GDP is a around 7 % which is well over the limit of 3% as per the above pact.

However, today for most, including me, the Euro has failed in this present set up and so has the European Union. It is quite shocking to see that none of the Eurozone countries are within the fiscal deficit limit set by the Growth and Stability Pact. Their average fiscal deficit as a percentage of GDP is a around 7 % which is well over the limit of 3% as per the above pact.

The reason for this as mentioned by me before (http://finmadeasy.blogspot.com/2010/02/euro-has-its-inherent-risks.html) rests in the clash between the two roles played by Euro member nations. Firstly, all members maintain sovereignty in their political, economic and foreign affairs which in many ways lead to many voices and adversely makes Europe sound like one noisy and divided entity. The EU in simple terms was designed to make their voices coherent as one and a collective European opinion which the world would respect. Sadly, today the collective consensus reached in Brussels is not respected by fellow member states themselves. So what we have seen till date is that member states have put national issues before their European obligations.

Their second role is to work together as a united region and uphold the European legacy, to command respect in a multi-polar world of today. Often egos are bruised, like Angela Merkel’s in the run-up to the stimulus decision, and often issues are dealt with a strong hand in unison. But rest (or most) of the times, members go around trying to show their might, trying to not let the EU take the stage lights off them.

Held at ransom

The message markets have sent is clear. The market is no longer going to be fooled by smart talking and insubstantial measures. They want to see the real deal. Some legally bound promises and structural changes to the Euro system are essential to placate market sentiments. After the Greek catastrophe, Euro bonds are already on a thin line.

Eurozone member states need to come up with concrete plans to limit their fiscal negligence and until then no sums of money promised will be adequate enough to win back confidence. They have to act fast or otherwise, a second dip is not far away.

Reforming The Reporter

The reform season is in the air and reason is clear, as people look for loopholes to cover and introspect the mistakes of the past to shield the future against a possible re-run of the crisis. Leading the charge and clarion of change is the media. But the media itself has blood on its hands. For long it has been shifting the blame on to the financial system but it has overlooked it own role in the crisis.

I am of the firm belief that it is the bias, profit making and gutless news reporting of today’s media firms is responsible for the various cycles of boom and depression we see in the economy. Like a columnist in the Financial Times put it in his blog, 

“If the banks make the soap water, the media blows the air into the bubble.”

The media and the industry share a symbiotic relationship, with both feeding of each others produce. What is startling is how the average investor watching TV is kept out of this relationship. This shows how the model is fundamentally skewed and biased. For the products and brand image, companies use the media. On the same hand, for bulking up their shows and references, sneaks, previews and hot news the media uses the companies.

Playing with emotions

Financial historians have often claimed human behaviour to be exemplified in the history of finance and more visibly on financial markets. Growing volumes of research in the field of behavioral finance show how investors and markets are being driven more by instincts and emotions, and less by calculative investing techniques. Booms and busts are products, at roots, of our emotional volatility

And the perfect medium to play with the markets via which to play with emotions and judgments of investors is the medium itself.

Let me give an example, say the DOW fell 300 pts in one day. One way to report; “The DOW has fallen 300 pts…these were the companies…these were the figures…blah blah”. And the other way of reporting is; “BLACK FRIDAY has just come...the DOW is very low…show stories of people losing lifetime savings…and ten honchos with big company name banners behind them, talking about their own evaluations and opinions of the gloomy day” (what irritates me is that those 10 honchos would have still earned money and would prospect to earn more after influencing the audience and in a way the market as well.)

It is important to keep in mind that large chunk of investors are not professionals or portfolio managers. So they have a huge dependence on the media for advice and suggestion, but like they say little knowledge is dangerous; so is the case with financial advisory. What the average Joe does not understand is that recommendations on investments are subject to personal circumstances and cannot be taken or applied on just watching a half an hour programme on TV.

Hiding it under the rug

Although my argument of reforming the reporter comes at a time when columnists and editorials are critically reviewing each and every jigsaw to this puzzle, but are shy to see their own mistakes. There very few writers who saw this coming in one form or the other, but were discouraged and disdained by peers.

Even today very few articles can be found in the newspapers and internet on how media has played its part. Thus I have tried to identify the issues and flawed processes and if there is any solution possible.

Stay tuned in for more on this…