Author: Ritesh Jain

The most important comment in this the meeting to discuss Rupee fall came from Omkar Goswami, founder and chairperson of Corporate & Economic Research Group Advisory Pvt Ltd. who said that one matter of concern for India is the addition of 12-13 million people to the work force every year. In a world driven by knowledge, technology and machines, 80% of the extra 12 million workforce are absolutely unprepared for employment in terms of education and training, said Goswami. The other matter of concern is that even if people will be better off with economic growth, income inequality is on the rise.

Sanjeev sanyal who is the principal economic advisor said there is no need to hike rates to defend the currency. Sanyal also said that the RBI is well equipped with a robust foreign exchange reserve of $400 billion, and there is no doubt about the central bank’s ability to step in the market if the rupee weakens too far too soon

(which will be a big mistake).

I believe India needs to run a more restrictive monetary policy at this point of time and also simultaneously  curtail non essential imports which will in turn help to reduce Current Account Deficit.

https://www.livemint.com/Money/A9LoCRvPx9Gw2JKXlMiwOJ/No-immediate-need-for-govt-RBI-to-take-steps-to-influence-r.html

According to the Reserve Bank of India (RBI) data,

In May 2010, the total outstanding personal loan amount with banks stood at Rs 5.89 lakh crore. This amount as on June 2018 was Rs 19.33 lakh crore.

Consumer durable loans’ as on May 2010 was Rs 8,138 crore, and on June 2018 it was Rs 20,300 crore.

Outstanding credit cards’ amount as on May 2010 was Rs 19,579 crore, and on June 2018 it was Rs 74,400 crore.
These are all unsecured loans, i.e., you don’t have to give collateral to borrow.

As on June 2018, the total number of credit cards outstanding were 3.93 crore, and on June 2011 it was 1.76 crore.

Since 2010, a lot of banks have changed their strategies and have started focussing more on retail lending. “The size of their retail loan books has gone up due to this change in strategy. Categories like mortgage and auto loans are not much of a worry because they are collateralized with fixed assets. The miscellaneous category is of interest as it is large in size and needs some degree of monitoring. These are generally unsecured loans that are usually taken for purposes like marriage, festival etc

According to CRISIL a large proportion of customers taking personal loans, consumer durable loans are working class in the age group of 25 – 45 years. In terms of geographic split, metropolitan cities (population greater than 10 lakhs) accounted for 80% of the credit card customer base in FY17. However, the share of metro cities has been continuously declining from close to 99% in FY12 to 80% in FY17,”

This has been the biggest driver of Indian Growth and the above data is only from banking system. NBFC, HFC, P2P and other fintech company related consumer lending is not captured in the data.

The two components in equation of C+I+G+ ( X-M)= GDP, which have worked wonders for India is Govt spending and Consumption . Indian household leverage is low compared to Emerging Economies but needless to say it is rising very fast.

My concern is that rising consumer leverage is met with stagnant salaries/wage (except for govt employees) and we may start to see stress on consumption and consumer balance sheet in next couple of years .

 

 

 

 

Seth Klarman describes 20 lessons from the financial crisis which, he says, “were either never learned or else were immediately forgotten by most market participants.”

The Forgotten Lessons of 2008
One might have expected that the near-death experience of most investors in 2008 would generate valuable lessons for the future. We all know about the “depression mentality” of our parents and grandparents who lived through the Great Depression. Memories of tough times colored their behavior for more than a generation, leading to limited risk taking and a sustainable base for healthy growth. Yet one year after the 2008 collapse, investors have returned to shockingly speculative behavior. One state investment board recently adopted a plan to leverage its portfolio – specifically its government and high-grade bond holdings – in an amount that could grow to 20% of its assets over the next three years. No one who was paying attention in 2008 would possibly think this is a good idea.
Below, we highlight the lessons that we believe could and should have been learned from the turmoil of 2008. Some of them are unique to the 2008 melt- down; others, which could have been drawn from general market observation over the past several decades, were certainly reinforced last year. Shockingly, virtually all of these lessons were either never learned or else were immediately forgotten by most market participants.
Twenty Investment Lessons of 2008
1.Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.
2.When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.
3.Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.
4.Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.
5.Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.
6.Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.
7.The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.
8.A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.
9.You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.
10.Financial innovation can be highly dangerous, though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.
11.Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.
12.Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.
13.At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.
14.Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.
15.Many LBOs are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.
16.Financial stocks are particularly risky. Banking, in particular, is a highly lever- aged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster.
17.Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.
18.When a government official says a problem has been “contained,” pay no attention.
19.The government – the ultimate short- term-oriented player – cannot with- stand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.
20.Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.

Macquaire  writes on an important issue which is not only leading to creation of oligopolies but listed companies also going private

He writes ………
Corporates are confronting a rising tide of regulatory and political activism It is driven by durable factors. Public sector, technology & social media rule.  Corporates are adjusting. Replacing CEOs, getting-out of the limelight, faster
technology deployment and going private to be the main strategies.Most small and medium corporates do not have sufficient bandwidth in their executive ranks to understand and adapt to these changes. Hence pricing power and revenues are consolidating at the top of the pyramid than flowing down as should happen in normal economic recovery.

While for economists, ‘a job is a job’, people correctly feel that they are losing marginal utility and pricing power. The same is occurring on the corporate side, with the erosion of corporate pricing power forcing an ever-vigilant focus on cost control, while pushing hard for technology based solutions. And we must continue to financialize by creating more capital than needed, which aggravates wealth inequalities, keeps excesses and further accelerates the deployment of disruptive technologies. In equities, investors argue that EPSg rates are still good as are ROEs, as if the market ever discounted EPS recessions. Perhaps more importantly, investors do not inhabit a fundamental world driven by private market signals, rather it is the world determined by social media and public sector responses. We also have by now integrated technology so deeply that in most developed markets, 75-85% of trading is done via AI, computer trading & ETFs, which amply explains rapid asset re-pricings that quickly turn into avalanches.

Victor sees four key trends and explains that corporates should deploy following strategies

(a) ‘localization’ (‘global’ is to have a target on your back)– (globalization is over guys)

(b) more rapid technological deployment to offset inefficiencies- (large corporates are on stronger footing)

(c) rotation of CEOs from business to political managers; and

(d) corporates going private (as public markets become less efficient and more regulated). (sadly this will happen to reduce constant public scrutiny and will also bring down the investible universe)

The question is whether this is a recipe for higher productivity? The answer is no, but it is a process not an abrupt shift. While we maintain that nothing is safe and there is no longer any predictable sector rotation, as disorientation grows, staying with secular themes should remain the best strategy.

Invest; do not trade volatility.

Nicolai Kondratiev was 46 when he was executed. Nikolai(sometimes written Kondratieff) died in 1938 in the Russian gulag. So who was he and why would he even be thought about today?

Kondratiev was a Russian agriculture economist who, while working on a five-year plan for the development of Soviet agriculture, published his first book, The Major Economic Cycles, in 1925. Over the following years he carried out more research during visits to Britain, Germany, Canada and the United States.

In his book and in a series of other publications he outlined what later became known as “Kondratiev Waves”. These were observations of a series of supercycles, long surges, K-Waves or long economic cycles of alternating booms and depressions or of periods of strong growth offset by periods of slow growth in capitalist societies. These waves or cycles were at the time calculated to last from 50 to 60 years, or roughly a human lifetime in those days.Kondratiev applied his theories to capitalist societies, most notably to the US from the time of the American Revolution. His undoing came in 1928 when he published his Study of Business Activity in the Soviet Union that came to much the same cycle conclusions for the Soviet economy that he had noted for capitalist societies. He fell out of favour with Josef Stalin, who saw his treatise as criticism. Kondratiev was arrested and following a series of trials he was banished to the gulag, where he died.

The four stages are of Kondratiev winter represented in the chart below

The fourth part “WINTER” reminds me of ILFS default. https://www.business-standard.com/article/economy-policy/il-fs-tells-staff-financial-mess-due-to-rs16-000cr-stuck-funds-118091201070_1.html.

Like four seasons and four stages of Life which happens on clockwork , “WINTER” is the part of Kondatriev cycle which every economy goes through. Years of easy global liquidity by central bankers did not allow the debts to be purged, on the contrary more debt is taken for unviable investment creating systemic risks and when one part of this credit chain is broken it spills over to entire financial system.