Thursday, July 15, 2010

Who Wants to be a Gideon Gono

Dear Readers

These days there are talks about KBC, a game show on Indian TV based on famous "Who Wants to be a Millionaire". I thought we should think on bigger line and create a game "Who Wants to be a Gideon Gono". Don't ask me who is Gono, I can't tolerate ignorance of one of my favourite great characters that ever happened in human history. Here is a brief introduction first, anyways.

When it comes to managing economy the best of the best tend to do worst of their worst as the more one tries to control economy and natural market forces, the more it gets complex and out of control. However, despite being fully aware of this knowledge, there are people and institutions that do try their 'best' and end up in a mess. One such great in contemporary period is Gideon Gono - current Governor of the Reserve Bank of Zimbabwe (RBZ). He may not be in headlines for some time but he deserves at least a real Nobel Prize in Economics and National Money Management (in fact, they should add National Money Management as a new and separate category in Nobel) although he did manage to get Ig Nobel. I sincerely think he should at least (or we should, the followers and fans of Gideon) register a protest to Nobel Prize Committee and even accuse them of partiality for awarding the prize to Paul Krugman who is only a theorist and ignoring the real man - the man who practised more than what Krugman preached!

Gideon Gono's accomplishments are not small in any way. Some of his achievements include following:

  • increasing money supply by 20 MILLION TIMES! That's something! He managed to increase money supply in Zimbabwe from $45 billion to more than $900 QUADRILLION. That's no typo! And for those who never heard about quadrillion, one quadrillion equals 1000 trillion! so, 100 more quadrillions and it is QUINTILLION Dollars of money supply!
  • printing currency notes of $100 trillion!
Apart from Economics, he should be considered for a Nobel in Mathematics as well, for his contribution to the subject by making every Zimbabwe citizen learn to calculate astronomical figures on finger-tips. And kindly don't forget an important trait he possesses - he is God fearing and extremely religious person. Following piece from wikipedia describes my point - "Critics have noted that most of Gono's monetary policy statements in the past have had biblical references. Notably, he usually ends in policy statements to the Parliament of Zimbabwe thus: "In the Lord's hands, I commit this Monetary Policy Framework for our economic turnaround."   I apologize dear readers but I can't help. I am a die-hard fan of this great person.

Now, let us begin the game. All central bank heads of the world are potential participants but in terms of significance there remain only five - Ben Bernake of US, Jean-Claude Trichet of European Union, Mervyn King - man of the "Old Lady" of UK, Masaaki Shirakava of Nichigin of Japan and team Pranab Mukherji - Subbarao of India. Actually 'team India' is confused and playing this game as if it were "How to Become Prosperous with Inflationary policies" as they pretend to be 'worried' about inflation! The game is on and here is a running merit list for the time being:

He is also known as "Helicopter Ben" for the disclosure of his intention to throw money from helicopter to fight deflation. However, despite his enormous efforts he is so far unable to push up any inflation. He is actually worried about the Japanese Disease and has even tried monetizing, euphemism for printing dollars, not to mention zero-interest-rate policy. But, pundits like Mark Faber are sure he is the most likely candidate to win this game and one day make even Gideon Gono blush.

He is head of an entity that does not have much reliability as EU is more a political outfit than financial one. It was proved when last month Trichet took a U-turn in less than a week after pressure from strong EU members. He was against buying govt debt of countries like Greece by ECB and then when pressured reversed his stance. So, he is in this game but like a toothless tiger he can't do much on his own. 

He is one of the likely candidates to win this game. He is trying to push up inflation the 'best possible way' and does not seem to be worried too much. His advantage is the currency he deals in - Pound Sterling. His efforts to devalue pound are on and there is added advantage of a devalued pound - better numbers in their exports. At least that's what he and his political masters plan there.

He is doing the most efforts and his predecessors have been doing those efforts for about 20 years! If past 20 years record of failure in bringing up inflation is any guide then he is most likely to loose this game. However, if he may have some surprises up his sleeves, then he can be the dark horse.

Team India
Although India is not significant enough to be considered in this game as participant, the fact that India is a bigggg country population wise, gives team India a wild card entry to the game.
Pranab babu, the politician and Subbarao, the bureaucrat, are working hard but are confused. They are worried about inflation in India but at the same time their policies of higher taxes and lower interest rates / low CRR are leading to the other direction. Pranab babu even opened the pandora box of fuel-price deregulation and subsidy cuts at a time when food price inflation was already shooting up. Subbarao, though shouting a lot against inflation, is actually doing nothing, perhaps fearing a 'slowdown' in economy if he tightens too much. Or, it may also be possible he is under pressure from industry and ruling politicians. Whatever, one thing is clear - Team India is so far the leader in this game as inflation in India is running in two digits already and if they continue their 'efforts' they are going to win this game by a good margin. 

The Chinese refused to participate for unknown reasons. They hinted they would  better manage (read manipulate) the 'numbers' rather than participate in a silly game. 

The game is still on and it will be interesting to see who turns out to be the winner. Long live dear Gono.

Friday, July 2, 2010

Indian Reform Story - Oil in Storm

Dear Readers,

The govt of India decided last week to partially deregulate fuel prices as a step toward financial reforms which started widespread dissent among opposition parties as well as common people . India is a net importer of Crude Oil and it burns up a big hole in Indian budget every year. Govt of India subsidizes refined petroleum products like kerosene, LPG, petrol and diesel in the name of serving the poor and middle class people. Fuel is retailed mainly by PSU (Public Sector Undertaking) firms and these firms are compelled to take losses owing to this subsidy (there are measures taken like 'oil bonds' from time to time to offset some of the losses though). This is an important issue and I felt compelled to post my views on it.

Some Facts

let me start my analysis with some interesting facts about Indian Oil Story.

  • Petrol, Diesel, LPG and Kerosene are main fuels. Except petrol, the other three are considered 'fuel for common man' by political class. 
  • Govt of India controlled fuel prices till 2002 through Administered Price Mechanism (APM) and then after abolishing APM, it continued subsidizing 'sensitive' fuels. Today, losses incurred due to subsidy by PSU Oil Marketing Companies (OMC) is partially offset by upstream PSUs (ONGC, Gail etc) which is not sufficient enough though.
  • Taxes on fuel are very high but still well below European Developed Countries. These taxes, most of which are imposed by state governments, make a fuel cost about double its actual price.
  • India is one of the largest buyers of crude oil in the world (In 2009, India imported 2.56 million barrels of oil per day!).
  • Fuel subsidy costs about USD 40 to 50 million per DAY losses to just three major OMCs - IOC, BPCL and HPCL ! (this figure depends on USDINR exchange rate and so is changing all the time)
The Debate

After these facts its clear that crude oil import cost is a big drag on Indian budget. All this subsidy is in the name of poor and middle class citizens and so becomes politically tough issue. All parties when in opposition protest any subsidy cut, although if they were in power, they may well themselves find this subsidy a burden. Bajpai led NDA and I K gujral led JF have shown their intent to do away with subsidies when they were in power. So, all this protest is nothing more than cheap game of politics. Talking about common people, why would they like anything costly? They don't care about budget deficit or oil pool deficit, all a person wants is freebies - as much as can be taken.

Then it comes to taxes on fuel. Yes, its quite puzzling why does a govt subsidize something and then taxes it heavily. The petrol that costs about a dollar a liter to consumers, costs only about half a dollar before taxes! Why this nonsense? Well, whatever be the reason, fuel prices remain costly for Indian people despite subsidies.

Now, let us think about how these subsidies actually help the poor and at what cost. Subsidy is never a good idea as any item that is subsidized gets misused instead of getting to the 'poor'. Its an open secret that heavily subsidized kerosene is used first as an 'industrial adulterant' with diesel and then 'export item' for smuggling into Bangladesh which has higher price of kerosene. The poor hardly use it and the ration dealers who are authorized to sell kerosene only fill their ledger with fake sales(no wonder there is always a shortage of quantity). 

Similar is the case for diesel - the fuel of transport in India. Because diesel is subsidized, more and more people want to buy diesel powered cars and SUVs - net result? misuse. Also, it is used in power generators as there are frequent and long power cuts in most of India. 

Another heavily subsidized item is LPG and its also misused 'efficiently' by 'innocent' Indians. Commercial LPG users (restaurants etc) are required by law to use a non-subsidized version of LPG cylinder but they somehow manage to get the domestic version which costs almost half of what a commercial cylinder costs. Then, there are 'smart' car owners, who get their cars fitted with cheap LPG kits and use subsidized LPG cylinders for 'better fuel economy'. All in all, govt subsidies are helping all walks of life! (though that is not what it is intended to do).

There are three groups of people when there is a debate on fuel subsidy in India. First are those who think all fuel should be subsidized so that it remains cheap. Second are those who would not mind non-subsidized fuel provided govt reduce taxes on it so that in the end there is cheap fuel available. Third are the ones who dislike subsidies and actually want even more taxes on all petroleum (read fossil fuel) products. NOT SURPRISINGLY, I fall into third category.

Why We Don't Need Cheap Fuel

I understand many of my readers think I must be crazy, but I have my reasons. Let us first discuss the economics of fuel cost. Fuel is one of the most important ingredients in an economy and its price does affect overall production and consumption and thus economy as whole. If fuel is costly then industry has higher manufacturing cost for goods and higher running cost for services which makes goods and services costlier for consumers. This cost appreciation results in lesser consumption of goods and services which in turn affects bottom-line of businesses negatively. When businesses earn less, they employ lesser number of people which in turn means even fewer consumption of their goods and services. A vicious cycle starts and overall economy suffers. So, is that all about it? NO. Let me elaborate why its not exactly that way. 

First, if there is costlier fuel, people and businesses start consuming less of it and if it is left to market then reduced demand of fuel should result in lower cost. This is simple - law of demand and supply. Some people don't accept this logic as they say a lone attempt by a small country like India can not affect fuel prices as international demand for crude oil is much larger than that of India alone. These people are partially right but given the size of import of crude oil by India, I find there should be at least some pressure on international crude price. 

Second, and more important, I am an environmentalist and have openly expressed my feelings about greenhouse gases and anthropogenic global warming. India is FIFTH LARGEST CO2 producer in the world and most of this is generated by burning petroleum products. When govt of India subsidizes diesel and other petroleum products, it indirectly encourages global warming. This is a moral crime. There is no point in paying people to produce excess CO2. If these products are costlier than there are good chances people would use them judiciously. Also, higher cost of energy through fossil fuels means there will be more attention towards alternative fuels like solar energy and hydrogen fuel cells which are comparatively costlier today. What govt of India does to promote alternative energy? It subsidizes them too! This is ridiculous at best. A better solution is to keep high taxes on petroleum products and low taxes on alternative energy products.

Does this mean I want govt intervention? NO. I am never in favor of govt poking its nose in business affairs and economy and that's why I am against subsidies. However, if it has to be 'something' (and this is the case, govt will always want to do something) then let it be only a policy framework at the heart of which is discouraging fossil fuels and encouraging alternative energy. The best way is to let people decide for themselves and let market do its work independently and freely.

Friday, June 25, 2010

Carry Trade, Inflation and Market Forces

Dear Readers,

So we have this news - US Fed chairman Bernake 'softened' his tone and 'vowed' exceptionally low interest rates for extended period owing particularly to the situation in Europe. This is quite opposite to what I thought some time back when several Fed members opened their mouth against low interest regime. I thought that was the start of changed stance by 'Fed Group' and would lead to unwinding of carry trade world over. So, do I change my views? NO. Bernake said what he was compelled to say and markets somehow do understand that this 'renewed dovish stance' is just a camouflage and interest rates are poised to go up sooner than later. Let me make myself clear hear - Fed DOES NOT DECIDE RATES, IT JUST DOES WHAT IT IS FORCED TO DO BY MARKETS. Fed guys are also helpless when facing actual market forces. However, I guess Bernake is right in his thinking that it is deflation that is going to be near term threat than inflation.

When it comes to investing and markets, small guys look toward news and policy decisions by govt. My neighbor told me yesterday why Indian markets will go up now. He said it was inflation and esp food price inflation that was worrying govt. According to him, this coming year India is going to have one of the best agriculture production thanks to good monsoon and that will drive down food prices which will eventually result in high stock prices. He was so convinced about this that he refused to hear anything against this 'sound' logic. I asked him anyway - what will happen to the rural people who are directly dependent on agriculture? Won't they be in a better state and have more disposable income? Won't they buy a lot more goods and services with the extra income they would have as a result of good harvest? This is where common people stop thinking. A good monsoon is good for Indian economy and then it actually drives up inflation. RBI (Indian Central Bank) is uncomfortable and governor Subbarao has already expressed his feelings. I guess a good monsoon is going to create more troubles for Indian govt as well as RBI.

Milton Friedman said inflation is always and everywhere a monetary phenomenon and I agree partially. Inflation is indeed a monetary phenomenon but not always. We can see it today - even zero interest rates and 'monetizing debt' haven't been able to lift Japan's inflation and the same is happening in US as well. Bernake can't stop market forces, he can only do what he is told by market forces to do. And, despite deflation being the actual threat, interest rates will have to rise in coming days. In India its a little different - monetary inflation and its threat will force RBI to raise interest rates which will eventually result in deflation.

Friday, June 11, 2010

Funny - The Mainstream Media

Dear Readers,

When it comes to investing and markets, there are so many available media - electronic media, financial newspapers, websites, newsletters and blogs to name a few. The most popular of these are electronic media, websites and newspapers. Almost all of us who have interest in stock markets and access to internet are well aware of Yahoo Finance, Bloomberg etc and look at these websites for market quotes as well as what's happening around. The question is not how good or bad the content there is, it is how funny one portal is than others are.

Usually there are quotes of most important of US Indexes - Dow Jones, Nasdaq and S&P 500 and also that of Crude Oil, Gold and 10 Year Bond Yield (Yahoo Finance example). Then, there are news items led by 'headline news'. I almost always find these 'news' funny - not because there is some inherent humorous content, but because the 'explanation' along with these 'news' items. For example, a headline or listed news looks like this - "Stocks jump as investors are cheered with *xyz* data". Notice there are two important clauses in that sentence, the 'news' clause ("Stocks jump" in this example) and then 'cause behind it' clause usually following "as". It is this judgement of cause that makes them funny. Now look at this screenshot :

Look at the indexes - Dow and S&P are about a third of a percent down and Nasdaq is slightly up in green. Now, read the "TOP STORIES" and particularly the 'headline' - "Stocks pare losses as consumer sentiment jumps most in 2.5 years - AP". So this means AP reports WHY stocks 'pare' losses after an initial drop after opening. That reason happens to be a 'jump in consumer confidence'. Then we go ahead and read first listed news below the headline - "retail sales drop by most in 8 months". So, this is what that caused that initial 'drop' and if you had looked at this portal just two hours back, then indeed it was the headline, not as 'news', but as the CAUSE of that 'drop'!

Now whats happening here! First there is this 'drop in retail sales' and then there is a 'jump in consumer sentiment' ! How come these two things coexist at the same time? If retail sales are dropping then it can't be 'high consumer sentiment'.

Well, dear readers, I did not attempt to criticize either the portal or the news providers, I simply put forward the funny thing that emerges out and confuses common readers. I guess the associated reporters feel compelled to associate 'causes' behind market movements, but, mostly what that ends up doing is make us laugh. Let me be clear here, this is not exclusive to websites, this is actually a norm and electronic media (particularly CNBC) is way ahead sometimes on the 'fun meter'.

I found it most interesting to post the changed screenshot just after about half an hour. Dear readers, look at it, read it and then compare to above post and find out even funnier one.

Friday, June 4, 2010

Bell Rings For Carry Trade Unwinding

Dear Readers,

The carry trade currency used to be Japanese Yen just two years back but now its been replaced by USD, thanks to US Fed Reserve. Mr. Bernake and Co. lowered interest rates to near zero last year and the effect was clearly visible on all assets all over the world. So far every Fed statement was more about keeping interest rates low ostensibly to support 'weak' economy and now they are 'hawkish' despite continuing high unemployment rate.

In my post on 23 March, I warned that 'the beginning' of new era of deflation has started and one of my reasons was fear of higher interest rates. Although we have been getting hints of 'voices' demanding an end to near zero interest rates, today there is this news from Reuters and I guess this is going to be the beginning of unwinding of US Dollar based carry trade. If my fears prove right then there may be a bigger crisis kind of situation for all assets including precious metals and 'resilient' emerging markets. US Dollar should get stronger as well, continuing its rally against most currencies as speculators unwind their 'carry trades'.

Tuesday, May 11, 2010

Steroid Works Only for 24 Hours

Dear Readers,

When markets closed this Friday, European leaders sat down and decided to show their muscles (read my last post). Their statements were suggesting they are only next to God and can control markets, particularly that of Mr. Sarkozy. They speedily drafted a 'bailout' package to not only 'cure' Greek Debt Crisis but also their language suggested how angry they were on Euro sellers. What more, the Iron Man Mr Trichet (ECB) also had an about turn on his recent statement of not buying Greek Debt which shows how 'independent' is European Central Bank! Indeed! the 'announcement' of a massive rescue fund did have its effect but for how long? 24 Hours or even less! Euro is back to the territories (in fact below) where it was before the announcement. No wonder I had my doubt on the 'effect' of this 'package'. Also, I read this interesting piece on Bloomberg by John Glover who terms it as "Ponzi Game at the Highest Level". Here is a link to that article which I recommend highly.

Now, it seems all the euphoria that made almost all stock markets around the world  and Euro to rally like no tomorrow was in fact an expected short squeeze and now it looks like all that is going to reverse. Interesting times we have! Let us wait and see how and what these leaders decide as their next step(s).

Saturday, May 8, 2010

Once Again Governments and Interventions

Dear Readers,

In my last post of March 23 I shared my view of how bearish I felt then and called that time as 'the beginning' of new deflation era. Things really got bad in the meantime and stock and commodity markets around the world have fallen sharply. The ostensible reason is Greek crisis but I do not understand the logic at all! If the markets are falling in panic because of Greek crisis then why were they going up like no tomorrow just a month or so back? Situation in Greece and fear of a crisis there is not a news anymore! For at least few months mainstream media is full of Greek debt problems and I did not see many analysts optimistic about some painless solution. So, if it had to be this Greek Crisis as actual cause behind current market meltdown then we should have seen at least six months of bearish trend. No, its NOT the Greek Gods that are responsible, in my opinion, its what had to happen and Greece is just an excuse.

However, my point today in this post is yet another foolish attempt by governments across Europe to 'stabilize' the system. European leaders gathered in an 'emergency' meeting today and decided to take 'measures' that will 'contain' this crisis from spreading over and save Euro, reports Bloomberg. How they do it? They have decided to set up an 'emergency fund' to 'halt the spread of Greece's fiscal woes' ! OMG! Where were they and doing what for so long? Mistakes after mistakes is what politicians do to 'show' their 'abilities' of 'preventing' problems and they mostly end up being problems themselves. Markets will do what they will do no matter what these leaders do.

However, I don't criticize their 'efforts' for one reason. These leaders have to show they are 'at least' doing something even though they know the outcome. They just can not sit down and wait for things to happen as majority of general population want their leaders to take steps. This is more a political compulsion than need of the hour. Let us see how things turn out. 

Tuesday, March 23, 2010

The Beginning is Here.....

Dear Readers,

The Global Depression that started in late 2007 had its effect in stock markets during 2008 and then a spectacular rally occurred in 2009. Now it is 2010 and the optimistic analysts who had bet on a recovery and so far proved right are even more optimistic. I defer. I am convinced that all this bear market rally is over and next deluge is on its way. 2010 may be worse than 2008 for almost all asset prices and once again we may see people running toward safe haven - USD. Even gold bugs may find insecticides all over the place!

After a deflating 2008 we had inflation returning at least in developing world which I think has had its run over and will give way to deflation again. We are already seeing so many central banks cutting on excess liquidity and a rise in interest rates is going to be new norm for some time which can reverse only after this new deflation period sets in.

When US imposed stiff tariff on Chinese tyres (Americans spell it tire) I saw that as beginning of new protectionist cult and now respected Paul Krugman advocates 25 percent across the board tariff on all Chinese goods! Looks like Mr. Obama, who is celebrating the success of his coveted Healthcare Bill, will follow his advice sooner. If that happens then all this pseudo recovery that was shown in 2009 will disappear. Protectionism will beat all dancing optimists.

Emerging Markets like India and China will also suffer as still we are in a world where everything is related to each other and no place is immune to global hurricane. Those who talk about decoupling etc will change their tone and words and again look like comedians (as they did during late 2007, when CNBC was full of those analysts speaking about decoupling of India from US)

So far, after the start of Global Depression in late 2007, there was a bear market rally in late 2008 and this has been a dramatic period which once again has reignited that old psychology of 'stocks are always a buy on decline'. This is dangerous. This kind of thinking will only help bears gathering prey for entire summer (bears were in hibernation for one year) and retailers are going to get hurt with wounds that will linger on for a long time.

Sunday, February 14, 2010

A New Chapter

Dear Readers,

I did not post here for quite some time and the reason is one of the happiest things in a person's life - I had my first child - a SWEET baby girl!!!! (Yes, this is her photo)

I feel how you have wondered about markets doing some roller coaster fun in this period and I will definitely update this blog with my views. Till then, have a good time........

For my dear readers who want more photographs of my dear sweetheart, please click here.

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