Author: Ritesh Jain

Bill Gross Writes ….Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman. High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era.

This one is by Jeremy Grantham of  GMO who has been bleeding assets for not changing their tune with rising markets(i.e., clients are defecting) as they did in the late ‘90s and also in 2007. Putting out a chart of projected future returns, such as the one below GMO recently published, isn’t great for either business development or client retention—certainly not in a relentless bull market, at any rate.Look at the following chart closely

A recent analysis by the highly respected Mark Yusko found that there has been a 97% correlation between what GMO has projected and how things like US stocks, emerging market debt, et al, have actually performed in the fullness of time. Ergo, investors should definitely pay heed to what GMO is saying presently, despite their recent “out-of-syncness”.Although there are no specific targets for India but GMO expects Emerging markets equity to return approx 4% over next 7 years.

https://www.janus.com/insights/bill-gross-investment-outlook/

India’s might be fastest growing economy in world beating china by whisker but the population growth is 2 times that of china. As the 12th Five Year Plan (2012-2017) document pointed out: “One hundred and eighty-three million additional income seekers ( 18.3 crores) are expected to join the workforce over the next 15 years.” This essentially means that a little over 12 million individuals will keep joining the workforce every year, in the years to come. This works out to around one million a month. And at this rate, the Indian workforce is expected to be larger than that of China by 2030. India urgently needs promised demographic dividend

India’s govt debt to GDP is low as compared to rest of the g-20 countries and that means in absence of corporate capex , either Govt creates conditions for Foreign money to invest in India or GOVT will have to expand its balancesheet ( which will lead to higher inflation)  if it wants employment for its people and raise their standard of living.As per Andrew Stotz India could expand per capita GDP for decades if helped by Govt policy .

This is as per Mckinsey …….which states that India’s domestic capital-goods sector is under-developed, weighed down by low investment in technology and talent. That may be changing and it will help both employment generation and increase in per capita GDP

As India has emerged as the world’s fastest-growing large economy, it’s no surprise that demand for capital goods has more than doubled in the past decade. Yet one-third of this demand has been met by imports: India imported machinery worth more than $30 billion in 2015, making it the fourth-largest import category after crude oil, electronics, and gold. For a $2 trillion economy, the country’s capital-goods sector remains relatively underdeveloped, offering a significant business opportunity for both Indian and foreign original-equipment manufacturers (OEMs).
India’s domestic capital-goods industry is weighed down by low investment in technology and talent. Most companies focus on low-value-add fabrication and assembly work, unable to move up the chain with their designs or technology. Value addition represents only about 22 percent of total output, or $13 billion, and the capital-goods sector as a whole accounts for just 0.6 percent of India’s GDP, compared with 4.1 percent for China, 3.4 percent for Germany, and 2.8 percent for South Korea (exhibit). The output of domestic capital-goods players grew by an average of 2 percent annually from 2010 to 2015, trailing the overall average of 7 percent annual economic growth.

Mckinsey report further states that If the capital-goods sector develops as we envision, it could deliver annual earnings of about $3 billion to $4 billion and create up to five million jobs.

Full report below

http://www.mckinsey.com/global-themes/india/seizing-indias-capital-goods-opportunity?cid=soc-app

Martin Armstrong writes a very interesting phenomenon happening in west where govt are looking at reasons to increase Taxes because they are bankrupt and what better assets to tax than real estate because it is easy to tax immovable property.

India has also seen a residential boom which contributed significantly to tax revenues of state government. Already high value property registrations have come down significantly across states and this will lead to higher deficits for the state govt budgets. This in turn will lead to rising property taxes as it is easier to tax something which is immovable.

Martin concludes “This is why I rank property in the last category for investment. It should NEVER be everything. The population of Rome collapsed from 180AD because taxes kept rising and people were just forced to walk away. History does repeat so caution is advisable with real estate. We need a place to call home. It should not be 100% of your assets. It should be limited to a portion of your portfolio that you can afford to walk away from and survive.”

https://www.armstrongeconomics.com/markets-by-sector/real_estate/why-real-estate-should-never-be-the-majority-of-your-portfolio/

Manish Bhandari at Vallum Capital writes some very interesting points on equity investing in his annual Letter

“I must bring an interesting observation I have been having for some time to your notice. India is likely to witness shortage of quality investable companies in the future. The seeds were sown few years back with the scrapping of press note, allowance of 100% FDI in most of the sectors, buy back by listed MNCs and regulatory arbitrage available to do buy back rather than paying dividend. Moreover, in many cases Initial Public Offers are from companies that have been, private equity funded leaving less room for upside for secondary market players. All these factors are compounding the valuation for high quality companies to stratospheric height, leaving less room for error, if forecasted earnings are not met. Moreover, my observation is that in many areas, MNC with technological edge, global relationship, brand, superior business processes have an edge, emerging as leaders or have gained dominant markets share in respective field. Many such, not represented in the listed equity universe of India.

This also reminds me of sharing with you how fast the sources of alpha generation are waning away with each passing decade in our markets, and how we are challenged to find newer sources. The first decade of evolution of market Year 1992-2002 were dominated by insiders, assets managers flashing management access and making a living out of it. With no material detail available in Annual report to dissect for analysis by ordinary soul, and make an informed judgment on the business. This waned in the decade starting Year 2004-2014, with improving regulatory supervision, publishing of quarterly earnings coupled with superior disclosures in the annual reports. We should call this phase democratization of information. To stay afloat and succeed in investing, one is required to have a finer framework of business evaluation and solid framework of valuation.

The coming decade will demand deeper understanding of global macroeconomics coupled with superior skill of business evaluation due to disruption dots impacting literally every industry.

The democratization of information will pose a serious challenge to money management business. Recently, my team brought to my notice that in the Dec 2016 quarter, there were more than 450 conference calls held by corporate bodies discussing quarterly results, with discussion note available while I remember less than 50 per quarter a decade ago. Institutional Investors with their superior management access will not offer any distinction in investment performance though may suffer from their herd behavior.  The sorry state of mutual fund industry in the US is a prime example in front of us.

Full letter below

https://connectvallum.wordpress.com/2017/04/11/vallum-capital-annual-letter-2016-17/

Tesla shares rose to $313.38 this morning, giving the company a market capitalization of about $51 billion, surpassing GM for a moment as the most valuable American automaker. This left some industry insiders wondering about tulip bulbs.

“It’s either one of the great Ponzi schemes of all time, or it’s all going to work out,” mused Mike Jackson, CEO of AutoNation, the largest dealer group in the US. He was speaking at a conference hosted by the National Automobile Dealers Association and J.D. Power. “It’s totally inexplicable, as far as its valuation,” he said.

As the chart chart illustrates, Tesla’s numbers don’t really match its valuation yet. The company produces a fraction of the number of vehicles that GM and Ford produce; it trails in revenue and has yet to become profitable. Tesla’s current valuation is driven by the belief that the future of mobility is electric and that the company has enough of a headstart to eventually dominate that future.

Wolf Richter writes that Tesla is ludicrously overvalued. But it’s not “inexplicable.” It’s perfectly explicable by the wondrously Fed-engineered stock market that has long ago abandoned any pretext of valuing companies on a rational basis. And it’s explicable by the hype – the “research” – issued by Wall Street investment banks that hope to get fat fees from Tesla’s next offerings of shares or convertible debt.

The amounts are huge, going back ten years: Last month, Tesla raised another $1.2 billion, after having raised $1.5 billion in May 2016. There will be more. Tesla is burning a lot of cash. Investment banks get rich on these deals. The bonuses are huge. So it’s OK to hype Tesla’s stock and sell it to their clients. Everybody wins in this scenario – except for a few despised short sellers who’re hung up on their silly notion of reality.

As long as shares continue to rise, the whole equation is perfectly validated: Let the doubters and short sellers stew in their own juices. Shares will rise because stock jockeys expect them to rise, and with that expectation, they buy them and drive up their price. Buy-buy-buy turns into a self-fulfilling prophecy. It won’t last forever. But until then, market share, profits, or anything else vaguely linked to reality simply don’t matter.

Tesla’s stock is the perfect thermometer of a stock market that has become such a bubble that even the Fed is getting antsy. But if history is the guide, you’re on your own.

This is from IMF

“Large denomination banknotes pose institutional risks. First, they are an important vehicle for money laundering. The larger value of the banknote makes it easier to transport larger amounts of money. As an example, US $1 million in currency in $100 bills weighs 22 pounds, where as one million dollars in €500 notes would weigh less than 3 pounds. Second, large denomination banknotes are more often forged. The U.S. Treasury considered re-issuing a US$500 banknote when the Euro 500 banknotes began circulating.However, after the recognition that such a banknote would fuel worldwide criminals, it was decided not to pursue this option. Third, high denomination banknotes are most likely used for overseas circulation with no supervision from the respective central bank. One estimate for the United States suggests that about 65 percent ($580 billion) of all banknotes are in circulation outside of the U.S. There are a number of countries which are officially dollarized, which could in part explain this high percentage”

This is what WSJ writes in an editorial “cash is dead long live cash ”

The most likely reason for the cash paradox, analysts say: a thriving global underground economy of tax evasion, organized crime and terrorism financing. Digital payments may be faster and more efficient, but cash cloaks transactions in privacy.In a 2015 report titled “Why Is Cash Still King?” Europe’s police agency, Europol, concluded that “while cash is slowly falling out of favor with consumers, it remains the criminals’ instrument of choice.”

And this one from Vivek Kaul ……Since January 2017, the currency in circulation has been increasing every week. This has been happening with the printing presses of the Reserve Bank of India and the government, printing and pumping money into the financial system through banks. Take a look at Figure 1.

As can be seen form Figure 1, the currency under circulation has been going up from January 6, 2017, as the RBI and the government have printed and pumped money into the financial system.

Take a look at Figure 2. It plots the rate at which currency circulation has been increasing week on week since January 6, 2017.

Figure 2 makes for a very interesting reading. The highest increase in the rate of increase in currency circulation came in the period of one week ending January 13, 2017, at 5.9 per cent. Since then the overall trend has been down, with jumps in between. Having said that, the rate of increase in currency circulation has seen a downward trend between March 10 and March 31, 2017.

The rate of increase in currency in circulation for the week ending March 31, 2017, was at the lowest level since January 2017, at 1.7 per cent. What does this mean? It means that the RBI is not releasing currency to the banks at the same pace as it was in the past ( not that cashless transactions have suddenly gone up). The rate of currency release at RBI’s level has come down. And that basically means banks don’t have enough currency/cash to load into ATMs as they had in the past.

This explains why there has been shortage of currency at ATMs. It could also mean that the RBI and the government printing presses are not printing as much currency as they were doing in the past. Why is this happening is something only the central bank and the government can explain.

We know cashless economy has not taken off in the way our government envisaged but by restricting the supply of currency,govt is not going to achieve cashless economy. On the contrary business actitvity could slow down further. The IMF paper makes a case against large denomination notes and that is why I am still not clear of the rationale for issuing high denomination (2000 rupee) note in India ,but I am getting increasingly convinced that the authorities might restrict the printing and use of 2000 rupee note in near future.

Following chart depicts the literal meaning of Indian States

Source: @onlmaps, @josephncohen

80% of Indians consider religion as most important (for rest it is cricket and bollywood)

The changing global religious landscape