US Consumer Debt : Income 50 cents, expenditure 65 cents

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Since June 2008, the US household debt mountain has shown the seventh consecutive quarterly drop. This should be heartening. However it is not so for two reasons:

1.  The figure is down by a minuscule US$0.37 trillion, out of the US$ 13.9 trillion -- just 2.66% deleveraging in nearly two years. Not fast enough, when you consider that the bigger figure represents 131% of personal disposable incomes. Aamdani atthanni, kharcha 65 paise (Hindi proverb that translates into the second part of the headline of this blog entry) is the condition of the entire US population!
2. Most of this reduction has been achieved by banks writing off mortgage and credit card defaults. If one adds back to the debt figure the amount of write-offs, the bad news is that US household debt has actually gone up slightly, by only US$ 186 Billion! No sign of de-leveraging. The spendthrift habits of two generations are obviously refusing to die away.

 In the meanwhile, Government (Federal) debt has swollen from US$$5.16 trillion to US$ 8.16 trillion. So now, the Government has joined the excessive leveraging game. Not good either, for anyone. A healthy US economy is good for all, but today the US economy's condition is pink -- the pink of high fever, not the pink of good health.
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An ancient parable with modern characters

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A dear friend of mine, Kiran Sreedharan, pointed out a great piece by Aadisht Khanna. AK says that this old  parable of "the weaver and chariot maker is one of the Panchatantra stories that usually doesn't make it to primary school textbooks or Amar Chitra Katha, mostly because it's full of sex, war, and moral hazard".
Like most really great stories, this one is a cutting commentary on recent events in the US financial markets, and rip-roaringly hilarious because it is so true. Only, we are looking at that truth through the goggles of an old parable. 
Aadisht writes a very interesting blog at wokay.in  However, in my view, this ancient parable with modern analogies is something that puts most of his blog entries in the shade. 
PS: 8 Mar, 2011
This page seems to have moved, but I found the same parable here. Obviously, this is an un-attributed lift, because this blog entry is dated after the date of this blog entry of mine. 
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Another Great Feature from Google Labs

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The guys at Google are really something.

Now, it is an app still in the Labs stage (i.e., pre-beta) that I noticed today. It is called Google Public Data explorer. What it does is that it brings Economics and Macro-economic indicators alive.Way, way beyond what any spreadsheet applications have done. This feature currently works on specific datasets that Google has compiled. I am sure that the next step will be to allow you to upload your own datasets and use the same engine to animate the stuff.
Take for example this picture.  It clearly shows how hypocritical the developed countries are, when they refuse to talk about sharp reduction in emissions, and expect countries like India and China to commit to emission reduction. See their per capita profligacy over the last few decades by clicking on button below the graph. The underlying data is from the World Bank.
Take this picture, that shows how the preparation for the Olympics and the huge increase in steel manufacturing in China made for a sudden acceleration of China's absolute CO2 emissions.
Macro-economics and statistics will never be the same again.
I salute Google. This would be a godsend for researchers and for number-crunchers in companies, once it graduates to allowing us to upload and analyse our own datasets. No more huge money to be spent on data mining and analysis software. 


PS: Those of you who read this and some of the other entries on my blog are invited to comment  on the entries they have a thought to share, and to subscribe to the blog feed. I promise interesting posts, and not too many of them. Nice to know that someone is reading all this!

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Residential Property: Time for a Simple Reform

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Recently, I visited an exhibition organised by an builders' confederation (MCHI) in Thane, where I live. I was struck and amazed by the unfairness that the industry has been able to visit upon buyers. The biggest unfairnesss is the increase in the rates. A year ago, apartments were available for Rs. 3,200-3,500 per sq ft in a then newly developing locality west of Ghodbunder Road. At that time, people wisely shook their heads and said that the rates were too high and hence the time was ripe for a "correction".  Now the rates ranged from Rs.4,900 to Rs.5,900 in the same locality, an increase of 53 to 84% in just about a year. What is this because of? There is no word I know which describes the opposite of "correction", except "correction" itself. Be that as it may. Let me now list the "unfairnesses" that the typical home buyer labours under.

1. Most of these rates apply to buildings that have just been "launched" -- which means that not even a hole has been dug. In some cases, even the permission to start construction work (which comes after several clearances) may not have been received. Deliveries are rarely promised before June, 2013 for such apartments. This means that any money paid by a buyer to the developer represents risk capital. If for some reason, the builder does not deliver the apartment, the investor will be left holding the can; and civil rights are notoriously difficult to assert and execute in Indian courts in anything less than a whole generation. 
2. The buyer is "allotted" a cube of space in the air called a proposed flat. He cannot transfer that right to the apartment without  the developer's consent. The typical developer will not allow the transfer, and if he deigns to allow it, he will charge a hefty sum, enough to make the sale much less worthwhile to the hapless buyer.  Or, he will offer to repay the sum paid less a small percentage. If the buyer accepts it, the builder will line up another such buyer at a rate much higher than the "booking rate" paid by the earlier buyer, justified by market conditions and the fact that the building construction has progressed considerably. Push a builder on why he does not allow such transfers before possession, and he will say that he cannot allow them to "spoil the market" thereby giving away that the market is nothing but a cozy cartel or oligopoly.
3. Instalments have to be paid as and when slabs are cast, and with 30 and 40-floor apartment blocks coming up nowadays, 2% to 3% of the agreed total consideration comes up for payment every month or two months, reaching 80% of agreed consideration when all the slabs are cast. This stage is reached faster if the building is not so tall. Non-payment or slightly delayed payment would visit the buyer with an interest burden. Consider this: a typical buyer who funds 20% of the consideration on his own and 80% through a home loan has to pay up 20% immediately (i.e., 100% of his own contribution before initial excavation) as this is a normal rule with lending institutions and another 60% using loan disbursements, whereas the builder has incurred only 20% to 30% of the total cost of construction. While one may make an allowance for some reputed builders, there is nothing to stop builders from diverting the resultant temporary cash surplus into other projects, or land acquisitions. The temptation is very high -- after all, he will be using zero-cost funds and the risk will substantially be borne by the buyers who have no alternatives. 
4. Now look at the builder's position. He has collected 80% of his money but has yet to spend 70% to 80% of the cost of construction. He has already used up the cash -- and will have to generate liquidity to finish the remaining work. What is his incentive to do the remaining work and deliver on the promised date, when it means that he now has to cough up more than he has collectible?  Every delay works to his advantage. Small wonder that most builders fail to deliver as per first promised schedule. 
5. Now look at our typical buyer's position. He is living in a rented house. As soon as loan disbursements begin, he is keen on reducing overall interest costs, so he agrees to start paying his EMI (or pre-EMI) to mitigate borrowing costs. He then (let us say) gets married to a working girl whose earnings also come in handy. The marriage took away whatever financial cushion he still had remaining. And he (and his newly wed wife, too) have to pay (for 18 months to 36 months) a loan instalment in addition to the rent -- which, if they can afford it, leaves them with even less money in hand. Despite education, and despite well-paying stressful jobs, they are living from hand-to-mouth, with too much of month left at the end of their money. And then, after paying all his life's savings and incurring a huge debt burden, when the slabs are fully cast, they both are in the weakest bargaining or negotiating position that they will ever be in -- much worse than at the start. What's more, he does not even know the other people who share his plight, because only the builder knows who else has bought apartments. Add to this mix an implacable builder who does not recognize the concept of fairness, and you have a buyer who is extremely angry, but totally vulnerable and soft-as-putty. He does not have any money left to launch a legal fight, and the agreements are worded totally in favor of the developer, he discovers too late. At this point, it only needs an event like a job loss (which would not have been very stressful if he still had his savings, and was not servicing a home loan) to push him beyond the brink.
6. If property prices are under downward pressure while construction is in progress, the builder is cool: his costs are already covered; and the  buyers are already locked in at the old price. He will have a few flats unsold, but if he does not need the money, he won't sell in a depressed market. His locked in buyers too, cannot sell without his okay. So the market price never really falls, and buyers at lower levels will not find builders willing to sell very easily. 
7. If property prices rise, it is even better. Delaying delivery will make existing buyers desperate. Some will have reached the end of their financial tether, and become willing to sell out at much less than current market prices. The builder only switches the old buyer with a new one, who is willing to pay a much higher price. 

How can the situation be remedied?  There is a crying need for One Simple Reform: Ban builders/ developers from selling apartments or shops till they are ready to be occupied, and till an occupation certificate certifying that the entire building is fit and ready for occupation, has been received from the Municipal Corporation.  Indeed, they should not be allowed to even issue allotment letters or collecting advances linked to blocking of a specific apartment, shop or office. No document should be recognized as a sale agreement unless it is stamped and registered, and this cannot be back-dated. How will this help?

• Builders/ developers will be keen on completing construction and making the property ready for possession because their own money is locked in till that happens.
• Their traditional source of funding, prospective buyers, will dry up. So will "investors" who get in with the builder and get out with the builder, because they cannot get anything but a stated rate of return, and will be much more uncomfortable without a valid letter of allotment.
• If the project gets "stuck", then the risk is entirely on the builder because he has his own and borrowed money invested, and the longer it takes, the higher the cost of funds.Also, the builder will be under much greater pressure from lending institutions who have (hopefully taken) collateral securities and who have the financial muscle to take control of the project, if needed, and sell the unfinished project to another bidder. Individual flat buyers will never be able to do that.
• Prospective buyers will not become lightning rods for risks of this business because they cannot invest early. They can only buy ready flats, so they won't get "stuck".
• The negotiation balance will be much less lop-sided, because prospective buyers can dangle full immediate payment as a carrot, and can demand better rates because the average builder is under much higher pressure to sell. 
• Builders will be unable to overextend themselves to buy land because cost-free and risk-free funds to create land banks will disappear.
• If property prices fall, some builders who have unsold, ready flats will be unable to bear the financial burden of waiting through the downward cycle of prices, and will be forced to sell at lower prices.

Along with this simple reform, there should be stringent punishment and fines (collected on behalf of those who have funded him) for those breaking this rule, and provisions for handling the interests of buyers who are already stuck" with a particular builder. A real estate regulator should be set up (could be additional powers to SEBI itself).
I know that there will be enough naysayers who will object to this simple reform and dub it simplistic and unrealistic, but in my view, problems resulting from this would be manageable.
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Not a good time for any stock market

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Airline and automobile industry have always been GDP multipliers. That is because of the huge direct and indirect employment they generate, both upstream (component and ancillaries manufacture, assembly, services) and downstream (sales, service/ maintenance, spares, travel and tourism) besides the airline manufacturers and operators themselves. When any of these industries get hit, the economy gets multiple hits.

Of the two, the airline industry is more vulnerable to random hits, because of the global nature of their operations. Not only are they buffeted by almost every risk there is, including terrorism, hijacking, fuel price and availability risk, currency fluctuation/market volatility risks, political and taxation-related risks, etc., but they are also vulnerable to Mother Nature – sudden “clear air turbulence”, volcanic ash, storms, lightning and bird strikes, storms, besides risks arising out of mechanical, electrical, hydraulic and electronic failures, Air Traffic Controllers' errors, pilot error, irate governments who impound planes to score political points, militant cabin crew and pilot unions, irate customers demanding refunds and free accommodation, careless loaders, .... the list is endless. There is no other industry I can think of, that has such a profusion of risks to contend with every single day. Of course, the insurance industry is a close second.

The automobile industry is already doing very badly in all countries save China and India, thanks to the 2008-9 meltdown and recession, and these two markets are becoming hyper-competitive, thinning the margins and making the business environment even more difficult for all players.

When both these industries are doing badly, it is well nigh impossible for any economy to grow, especially in developed countries where markets are already very developed, saturated and competitive. Add to this fiscal profligacy of successive governments and you have a great recipe for financial disaster. This is what Europe and the Euro area is facing today.

With growth rates of all these economies being in the low single digits where positive, and negative in most places, it does not take much to knock an economy, and by extension, due to globalization, an entire region, off-balance. The recent volcanic ash episodes have paralyzed much of Europe, especially the UK for upto a week. Given that a week is almost 2% of a year, loss of such a level of business more than once in a year is a luxury that any European country can ill-afford. We are already into the second bout of airport and airspace closures, and Katla, the bigger next-door volcano, has yet to erupt! Add to it the cost and turmoil of elections (in the UK), fiscal profligacy (Greece, Spain and Portugal) and strikes and unrest (Greece) and it would be a very credulous person who would bet on the European economy growing over the next two years.

Because of the very interconnected nature of markets, it takes seconds, not years, for any contagion, whether of optimism or pessimism, to travel across the globe. So brace yourself for stock market failures. This contagion will definitely travel to India, for no mistake of it own, except Indian markets' connectedness with world markets and contagiousness of investor sentiment. 

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The Cost of Higher Education

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In the last 4 years, the tuition fees and other costs associated with institutions of higher learning have started shooting through the roof. For example, fees at IIM-Ahmedabad are now reportedly Rs.13.5 Lakhs for two years. I am not commenting about whether the fees charged today by IIM-A reflect the worth of the education or not (that is a separate point for another day). My intent here is to create consciousness of  the indirect, secondary impact of the fee-rise. The primary effect is on the students hoping to get or getting admission at IIM-A. The secondary effect affects the entire sector it operates in.

Fees charged by such iconic institutions are a little like the "Bank Rate" announced by the RBI: while nobody uses that as a benchmark, generally, fees charged by other institutions with lesser reputations tend to cluster around this figure, and use it as a justification. Some charge more (like the ISB) and most charge less, but not much less. Since the IIM-A has raised fees roughly three-fold (I stand to be corrected) in less than 5 years, institutions of much, much lesser repute (ranging from good, low profile institutions to fly-by-night operators with monstrous advertising budgets) have, in the same period, at least doubled their fees without in any way delivering anything substantially better to the student body. It would be fine if the earlier fees were so low that profitability was an issue. They never were. Higher education has become a business in which politicians have dabbled and entered in a big way. This itself is a sure sign  of how lucrative the business was. Now, they are rubbing their hands in glee: Along with a huge increase in the fees, there has most likely been a significant fall experienced in the cost of "managing the environment", what with the regulatore, the AICTE standing totally discredited today.

What's more, the other forces that could have drummed sense into this sector, like the raters, have themselves over the years, opened themselves to charges of being very pliable, though some of them are in all probability pillars of rectitude. Besides, in any case, rating methodology is itself open to question, with its predominant reliance on physical indicators like infrastructure, which is very easy to create and set up in sectors like Management Education -- no equipment, hospitals or labs are needed. Also,.many institutions have learnt many tricks to "game" these ratings. As a result, there is no way for the lay person to figure out which rater is the most honest, or which institution is the best value for money, or even which institution is exceptionally good. B-Schools, especially, have become marketing institutions at two ends -- to attract applicants and students at one end, and to attract employers and push their students into lucrative jobs at the other (which is already becoming too difficult for most institutions to guarantee, so they talk of maximum and average packages, while downplaying the percentage of placement.

Every student must today conduct a RoI exercise for whether it is worth doing an MBA or not. An important element in this RoI calculation has to be opportunity cost -- what you would earn if you were not to do your MBA. The purpose of this exercise is to recognize clearly that for the below-average or average student, today, even doing an MBA from a 50th or 100th rank B-School in most ranking lists, or worse, an unranked B-School, it will never be worthwhile in financial terms. Once this clarity is achieved, one can take a decision about whether it is worth ding an MBA for all the non-financial reasons, like status, prestige, etc.
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Portfolio Living: A Personal Experience

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This is my first "autobiographical" blog entry. So, Dear Reader, you are forewarned!

About a year ago, I gave up what was my fourth job in 7 years, to resume my life as an independent professional.  Each job was radically different from the other. First, I was Director of a KPO/ BPO company with responsibilities mainly restricted to the D in R&D. I dumbed down processes so that both, scale and quality could be managed with lesser experienced or skilled people. I could almost call myself a software professional then. The next job was that of a full-time Professor in a B-School in Mumbai. The third was with the training unit of a large conglomerate, organising and delivering high quality, expensive training programmes in Finance for all levels of finance managers upto the CFO level. The last was as Dean of a B-School, with the job consisting mainly of mentoring and lecturing. My first job came at the end of a long 16-year innings as a practising Chartered Accountant. Here too, I did several things besides the bread-and-butter work of tax advisory and filings. I was, at various times, author, visiting faculty at B-Schools, editor, banker, software product developer, and (on rare occasions) public speaker. 

When I started my second innings as an independent professional, I have not kept myself bound by the shackles of a Certificate of Practice as a Chartered Accountant, as I don't audit, attest or represent anybody before any authority. I landed a near-full-time assignment with an old mentor, and decided to pursue studies in the field of Intellectual Property Rights. I also organised my life such that I spent almost no time on commuting. I therefore get 4 hours extra everyday compare to people who commute to the other end of Mumbai city, all the better to pursue varied interests outside of work, and more intellectual stimulation too.

In scarcely a year, I found myself getting involved in several small as well as long-range assignments or projects, all using spare time outside of a normal working day. Many of these projects have little earning or financial potential, like making mind-maps of various theoretical topics in the CA syllabus for aiding my son's learning, building a family tree, helping create and raise funds for a school alumni network, etc.. They were satisfying, nevertheless. I also did (and still do, whenever I get an opportunity) several small "promotional" or "concept-selling" appearances at various fora, selling the concept of greater awareness of IPR among the community of corporate managers. I am also working simultaneously on two distinct research projects in the field of IPR. As a result, my work content on any day is refreshingly varied though all the variation is during the "after-hours".

Recently, I met a dear friend (and former colleague) who has equally eclectic interests as mine, but has scholastic credentials much better than mine, (Fulbright scholar and all that). In fact, I have such a high opinion of his capabilities that I once told him in all seriousness that he could be the next Vir Sanghvi or Karan Thapar in the world of television news, if only he allowed himself the luxury of a career change. When he asked what I was upto, and I told him all the small and big things that I am engaging in nowadays, he remarked that I had transitioned to a portfolio life. I asked him what he meant by it, and then he told me about a book called The Elephant and the Flea by Charles Handy. The next day, I googled "Portfolio Living Handy" and got this and this. And discovered that my new way of life indeed had a name: Portfolio Living. Apparently, there are many, many people living this way (I am not a freak!) and their tribe is increasing everyday. Have been sleeping well since.:-)
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More on ULIPs - esp NAV Guarantee

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In this entry, I had done a round-up on the ULIP SBI vs IRDA controversy, quoting a few experts. One of those experts, Jayant Thakur, commented on one aspect of my entry on which entity takes up the downside of the NAV guarantee, and what is its capital adequacy. He pointed out this article to me.  Inter alia, this article points out that the way the guarantee is managed is that if the NAV spikes on any day, enough of the portfolio is transferred to debt to cover the guaranteed NAV on maturity. This struck me as very unfair to the investor.

 Most ULIP brochures (here is an example) include words to this effect:

There will be an additional charge for the cost of investment guarantee of 0.10% per annum. These will be made by adjustment to the NAV.

This actually is the opposite of what advertisements make out implicitly -- that the risk and cost of the guarantee is being borne by the insurance company, whereas they are charging the investor every year. This sentence was what made me think in the first place that perhaps there would be a third party backing up or taking the downside for the guarantee, in return for a fixed charge, similar to bond insurance premia charged by monoline insurers in the US. Till I saw this sentence in the above-referred example ULIP brochure:

If the NAV of Pinnacle Fund falls below allowable limits, assets will be completely reallocated to debt.

If the guarantee is to be implemented by shifting from equity to debt as the article suggests, (and also what the above example brochure suggests) then it is insult added to injury added to dishonesty. Why so?
(a) It means they are charging the investor for what the fund managers already have the right to do, viz. invest any part of the portfolio in debt. That is Insult.
(b) It means that when the going gets tough, switching to debt to contain the fallout of the guarantee is a "poison pill" that the fund manager forcibly makes the investor swallow, because it lowers the expected rate of return dramatically and reduces NAV fluctuation dramatically too. It also means that the fund managers have virtually abdicated their fund management function. That is Injury.
(c) Switching to debt predominantly to de-risk and cap NAV guarantee liability means hardly any equity exposure left. Why should the investor pay a higher fund management charge on the now specious argument that investing in equity being riskier justifies a higher risk management charge? Worse, the fund reserves the right to increase the fund management charge to 2.5% per annum [being almost double of what they are charging today (1.35% in the example)]. All this when the investment risk is borne by the investor! That is Dishonesty. It is also Unfairness.
If, on the other hand, the guarantee is being implemented by passing on most or all of the guarantee cost to a third party, then the questions raised in my earlier blog entry remain relevant.
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More on the Iceland Volcano

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This updates my blog entry on Saturday, 17 April.

From the initial announcement of airport closures for 2 days, now the closure has been extended to 21 April -- a full 7 days after the volcano erupted for the second time since March. The real point no one dare ask aloud is, how do they know? The last time the volcano erupted, it continuously erupted for 14 months.  Besides, the neighbouring Katla volcano, being bigger, remains a big threat. It has erupted shortly after the current volcano in both its earlier eruptions in the past 1100 years. The odds are, that it could explode too. Understandably, nobody wants to talk much about this possibility, because the impact is too mind-boggling to consider seriously.

Now, after 5 days of ash spewing, the New York Times is tentatively speculating about how the economic fallout could hurt Greece really bad if the disruption extends into the holiday season, which could affect tourism there. A full three days after I said something similar on my blog, and four days after I actually acted on by apprehensions.

Now people have begun talking about other secondary effects -- on airline profitability, on overnight parcel delivery firms, on floriculture and horticulture product exporters to Europe, on overall productivity because people cannot get to work, and on overall health because of possible rise in respiratory illnesses. People profiting are rail, road, taxi businesses, and the hotel and hospitality industry. However, this is still being seen as a regional issue (Euro region) but it will not be long before analysts and journalists start considering it a global issue, not just because of the global warming potential with so much more CO2 in the atmosphere, but also because of the secondary and tertiary economic fallout that can be felt all over the globe, and in unlikely places. Like the fallout of 9/11 on someone living peacefully in Kirkuk in Northern Iraq.

In one of my earlier posts, I had said that I am an incorrigible optimist, but talking like this could make me sound like a perennial pessimist. This is a risk I am glad to run, for taking a long hard look at what could happen, and taking the only fail-safe option open today to a small investor with limited risk appetite.

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The Icelandic Volcano and its possible fallout

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The unpronounceable and unspellable volcano in Iceland has been spewing ash for 3 days, from 5 different plumes, straight into the stratosphere.  The wind is blowing the ash, containing microscopic shards of glass, into the cruising height of all jetliners -- upto 30,000 feet. The airline schedules all over the world have been disrupted already. What are the likely secondary effects?


The closure of airports for 4 days post 9/11 offers a precedent. It created a downward spiral, catalysed US's entry into two wars in two faraway countries, knocking the economy on steroids that the US was, and still is, into a recession that lasted 2 years, and is arguably still in it.


While there are no more wars likely in a world already tired of wars, there are dangers, real ones, for economies on the brink of bankruptcy. Economies like Greece, Spain, the UK -- they are all very fragile today. The UK is going into an election with uncertainty about political outcomes.


If the airline industry reel for over 2 weeks, we might just see a couple of economies in Europe slipping back into a recession that will probably last quite a bit longer than the ash plume from the volcano.  If that happens, count on Europe as a whole being dragged into a recession, with knock-on effects on the currency rates, that will filter across all stock markets in the world.


I am very worried -- if the perception as above is shared by enough persons operating in capital markets worldwide, rcession and stock market crashes will become a self-fulfilling prophecy. I have covered myself -- yesterday I sold all the shares I held. Will wait for a month for the downward spiral to happen -- if it does not, I will re-enter the markets.
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What is Russia up to?

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I am not an expert observer of international politics, but I have a theory: countries behave exactly like individuals, especially when it concerns defence and threat responses. I therefore apply this theorem to today's Russia under Medvedev-Putin.
 Methinks Russia is hungering to get back to its pre-CIS (USSR) size and glory. Witness what it has been up to in the past few years.

• It has invaded South Osssetia, till then a part of Georgia where Russia had always retained significant influence on the politics of. After scaring the Georgian government by advancing till the very doorstep of its capital, Tbilisi, in disregard of international noises, it retreated, but not before recognising South Ossetia as a country. Europe and US could do nothing but grin and bear it, because they had done the very same thing in Kosovo by having NATO forces "liberate it" over the head of significant international opposition, including Russia, just a few years earlier.This has given it valuable access to the Black Sea.
• For the past few years, just before the onset of Europe's biting winter, Russia picks up and escalates a fight about gas supply to Ukraine. Ostensibly, the fight is with Ukraine, but it immediately hurts several countries in Europe who are 60-100% dependent on Russian natural gas coming through the same pipeline. Cutting off supplies to Ukraine also cuts off supplies to Europe, and all these countries then exert pressure on Ukraine to compromise with Russia as otherwise, they would have to brave biting cold wintry weather.
• Most recently, over the last week, I think Russia has virtually "taken over" Kyrgyzstan, a landlocked CIS country that does not even share a border with it. Ostensibly, the President got overthrown by a violent "popular uprising", and a new "popular" interim government took over. Kyrgyzstan is currently in a state of lawless chaos, according to BBC. This transition to the interim government, however, has happened too quickly and smoothly to have been purely spontaneous as is being projected, and I think it was  pre-planned, with Russian involvement. Kyrgyzstan is a poor and resource-poor country, mostly grasslands and a mountain range (Tien Shan) that divides Central Asia from China and South Asia. The strategic importance is that it is mostly highlands, with the fertile, populated Fergana valley being part of South-East Kazakhstan and most of Tajikistan. From one side, the mountains look down on Uzbekistan, from another on Tajikistan, and from a third side, it looks down on China's Uighur province (where recently, Al Qaeda has reportedly made inroads. Thus, Russia's control of Kyrgystan gives them the power to make these three countries uneasy. Especially the huge country, Kazakhstan, whose capital Almaty is just 120 miles from the capital of Kyrgystan's capital, Bishkek. Expect trouble brewing in the next three years in Kazakhstan, covertly fomented by Russia. Further, another key strategic consideration: The US has a Manas air base in Kyrgyzstan that is a supply line to Afghanistan. With Russia in the saddle (albeit covertly), the future of this air base suddenly looks uncertain.

Why is Russia doing what it is doing? As I said at the beginning of this post, Imagine that Russia is a person, with pesky neighbours who earlier used to live in what was its own house. Then (pre-1989-91), it had mostly defendable borders -- which were either mountains, seas, lakes or rivers. Now, after the "partition" of the Soviet "family", they are left with several large sections of vulnerable borders that are flat grasslands. Further, several of the "black sheep" today are sympathetic to the Euro Zone, and are being actively assisted by NATO, controlled by its earlier arch-foe, the United States. This (according to a commonly held Russian belief) is the reason why the fires in Chechnya and Dagestan (both being parts of Russia) refuse to die down. Many of these countries are Muslim, and Russia is afraid of the expanding influence of the Taliban and Al Qaeda in these countries and provinces. It is therefore keen on expanding till it gets access to a natural bulwark against invasion, in the form of sea, river, lake or mountain range. This naturally means annexing rooms of its former house, which are other CIS countries.

This is also the reason it has retained Kaliningrad, a province that is separated by at least two countries' borders, that gives it access to the Baltic Sea, and a border shared with Poland and Lithuania, both part of its former influence base. That its access to Kaliningrad goes through Poland, Latvia, Lithuania and Belarus gives Russia the ability to make these four countries uneasy.
While I do not say the above is the real explanation, events happening around and in Russia seem to be broadly explained by this explanation.
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Regulatory Turf Wars: SEBI v IRDA

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Generally, turf wars are a bad thing. However, in this case, I am totally on SEBI's side. 

See the SEBI order here.

I have examined ULIP scheme after ULIP scheme, only to find in the fine print that the fees and charges levied by the insurance companies are so high as to be unconscionable. For example, at the end of a three-year lock-in period, even if I assume an average return of 20% per annum on money invested, I find that the NAV of the units the investor is entitled to will be barely equal to what the investor has paid in. In other words, for 3 years, the insurance company effectively confiscates all returns on investments to the extent of the first 20% per annum at least. If the return is lower than that, the investor swallows the loss, even though he has parted with a fat fund management charge every year.  

I was also sure that the commissions paid on these schemes must be very high, because none of the agents I contacted offered me a tax-saving MF scheme (ELSS) instead (mostly, insurance agents also double up as agents for MF schemes) when I expressed my dissatisfaction. Hence, I eventually preferred a bank deposit with a 5-year lock-in at 7.25% per annum compounded assured return, that also gave me the tax benefit I sought. The hook in the ULIPs is that the highest NAV over 7 years is guaranteed. The fine print here is that you have to be locked in for that whole period (at least 7 years) and the premium paid every year to insure the risk of paying out amounts exceeding the NAV on the redemption date are paid for by the investor. No skin off the fund manager's or insurance company's nose! I would like to be enlightened on which entity insures this risk., and what their capital adequacy to cover this risk is.

If MFs can make do with much lower asset management fees, with a better governed (chinese walls between AMC and Trust, separate Boards for both, etc) investment management structure, with more sensible incentive structures (no front-end commission, agency commission paid over the life of the MF deposit) I cannot see why insurance companies should be an exception to this. Especially because the insurance risk is kept to a very low figure -- for example, the insured sum does not exceed, in single payment schemes, twice the premium. In other schemes where premia are paid over several years, the insured sum cannot exceed 5 times the annual premium. In any case, linking it to the premium paid is mere semantics -- because what is being paid is nothing but an instalment of an SIP, with a minuscule proportion of the payment being diverted for insurance cost, the fig-leaf that enabled insurance companies to market ULIPs on flagrantly different terms than an MF is allowed to do. 

The biggest factor helping the insurance companies is the huge size of the market, and the sheer number of investors who would lose money if the ULIPs were banned with immediate effect -- a lot of what they have paid would just disappear, having been paid to cover sales and marketing costs, various upfront and recurring fees and charges, and the costs of unwinding if it becomes necessary. The unfairness of this would have to be balanced against allowing continuance of such hopelessly one-sided schemes. Fait accompli should not be allowed to be a defence or a consideration in the decision arrived at.

Several experts have lauded this order from SEBI. 

• Jayant Thakur, for example, asks why the ban should not be extended to endowment schemes too, because obviously nearly 90% of the premium paid goes towards the investment corpus, if we compare it with term insurance schemes.  
• Sandeep Parekh expresses a similar sentiment as I have expressed in an earlier paragraph.  
• Ajay Shah has acclaimed SEBI's order for breaking the silo-like thinking of regulatory verticals -- where the IRDA regulates insurance companies, though ULIPs are predominantly investment products, and not insurance products. He also writes in today's Financial Express, exposing 3 common fallacious arguments against SEBI's intervention.
• Vivek Kaul writing in DNA, exposes how less the proportion of insurance really is in different ULIP schemes -- approximately 1.1% of multiple premium schemes, and 0.6% of single premium schemes, if equivalent term insurance policy rates were applied to the amount of insurance cover extended.
• Suniti Ahuja Kohli, writing in the Indian Express, points out that whatever the decision maybe, at the end of the day, it is the policyholder who stands to gain the most. She also goes on to trace the chequered history of ULIPs.

Keep your eyes peeled on this turf war. While we should regret regulatory turf wars, this kind of a war is far preferable to the kind of war seen a few years back in the US -- where both, the SEC and the CFTC eagerly disowned jurisdiction over derivative instruments like CMOs and CDOs, and the nvestment bankers made merry till the economy and the risk bubble they built up imploded.

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Some Scary Statistics: Comparison with india

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This has reference to my post yesterday. One reader commented that it would be educative to know comparative statistics of India and the United States to make out the difference. I thought that was a fair request. Hence, I did some quick research from the CIA Factbook and got quite a few comparisons between India and the US. The results are given below. Note especially the Foreign Exchange and Gold Reserves position and the Gini Index that shows income inequality to be more pronounced in the US than in India. Moreover, in India, there is no statistic equivalent to the mountain of $649 Trillion of currency derivatives exposure in the US, because such derivatives are not allowed in India. This is the reason India got off lightly in the credit meltdown, and the US is still struggling to cope with the impact of unwinding of this mountain of exposure.

Parameter	USA	India
GDP per capita (PPP) (2009 est)	$46,400	$3,100
GDP Real Growth Rate (2009 est)	-2.40%	6.50%
Unemployment Rate (2009 est)	9.40%	10.70%
External Debt (US – 30 Jun 2009; India – 31 Dec 2009 est)	$13.45 Trillion	$223.9 Billion
Public Debt as % of GDP (US: Mar 2010@; India: 2009 est)	89.10%	59.60%
Distribution of Family Income (Gini Index: 0=no inequality; lower = less unequal) (US – 2007; India – 2004)	45.0	36.4
Stock of Money (M1) (US: Dec 2008; India: Dec 2009)	$1,436 Billion	$279 Billion
Stock of Quasi-Money (M2) (US: Dec 2008; India: Dec 2009)	$10,990 Billion	$853 Billion
Stock of Domestic Credit  (US: Dec 2008; India: Dec 2009)	$15,060 Billion	$1,000 Billion
Reserves of Foreign Exchange and Gold # (India - 31 Oct 2009: India’s World Rank: 4th behind China, Russia and Taiwan)	-$3,588 Billion	$287.5 Billion

# Calculated from www.usdebtclock.org as sum of US External Debt and US Gold Reserves. 
@ Taken from www.usdebtclock.org   
All other data taken from the CIA Factbook.
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Some Scary Financial Statistics about the US

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Some scary statistics about the US Government’s financial condition:

US National Debt to GDP (%):                       89.12

US National Debt per citizen ($):                  41,381

US GDP per citizen ($):                               46,381

US Total Debt per citizen ($):                      180,484

US Personal Debt per citizen ($):                 53,787

US Interest Burden per citizen ($):               $1,493

US Total Assets per citizen ($):                    234,181

US Total Liabilities per citizen ($):               350,054

US Personal Savings per citizen ($):             1,558

US Median Income per family ($):                62,013

US Gross Domestic Product ($):                    14.333 Trillion

Currency in circulation within the US ($):      1.993 Trillion

US Debt held by Foreign Countries ($):         3.875 Trillion

US Government Bailout ($):                         6.387 Trillion

Currency and Credit Derivatives ($):       648.975 Trillion

When Lana Turner, famous filmstar of yesteryear was asked her age, she had diplomatically replied:

I really don’t know, because it keeps changing from second to second.

All these figures similarly keep changing from millisecond to millisecond. I had extracted these figures between 6:45 pm and 7 pm today, Indian Standard time, from here. Check out for yourself what these figures are at this very moment. 

Now, think like a banker would: If the US Government was a loan applicant, how much of additional loan would would you trust the man to service? 

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Informed Critique of the Right to Education Act

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Here's an informed critique of the Right to Education Act. Anyone who wants to comment on it must read this. The author has obviously read all the fine print before writing this piece.

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India: A Remarkable Country!

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I recently got an email write-up (which I later googled and found was sourced from the blog authored by Sean Paul Kelley, who calls Austin, Texas his home -- here's the link).

I thought I'd write a response to it on my blog. Please do read Kelley's write-up before you read this entry.
I am an incorrigible optimist. I have a few comments that form a counterpoint to Mr Kelley's comments, that are given below. 
In addition, there has been a rabid, anti-Indian article written by Joel Stein in the once venerated TIME magazine. Here is my riposte to that article.

• India has, in the last 15 years, pulled more people out of absolute poverty than any other country in the world. This is an amazing achievement, considering that we are a noisy democracy with millions of opinionated people who have to be heard before any decision is taken.
• The traffic here is different - each driver has to be constantly alert and practice defensive driving, instead of blindly following traffic rules. That is the reason why we have more minor accidents, but less major accidents. Ironically, the major pileups with maximum casualties tend to be on modern expressways, where traffic follows American patterns more closely than in the cities.
  
• I know that today, Mumbai is far, far cleaner than it was when I was in college -- about 25 years back. Slums are now few and concentrated in certain pockets. Even there, there are many more toilets, and sanitation facilities than before. We see far less people defecating beside railway tracks and arterial roads than two decades back, in spite of the population pressure having become much worse. 
• Besides Calicut and Trivandrum, Mysore is probably India's most livable town -- and a town that takes pride in its heritage. It has over 300 buildings that are protected and maintained, being anything from 80 to 400 years old. I have been fortunate to have spent over 2 years there.
  
• We may have more particulate matter in the air in our cities, but then that is to be expected  -- India's Top 20 cities are home to over 10% of the massive population of India. that means nearly a quarter of the population of the US is squeezed into India's Top 20 cities. If the US were so densely populated, I don't think things would be much better there. A decongestion and improvement of Tier II city infrastructure through schemes like JNNURM will hopefully change things for the better and make urbanisation less lop-sided.
  
• The US mines and burns very little of the world's coal, but consumes more of the refined energy products than the next 6 countries combined, more than all the countries of the EU combined, and as much as the bottom 186 countries (out of 207 countries) put together.  No wonder they have so less SPM in the air. The US also consumes more electricity (in kwh) than the bottom 196 countries (out of 215) consume, and more natural gas (in cu m) than the bottom 187 countries (out of 211) consume. They can easily afford to do it -- they have a currency that they can keep printing and not experience inflation at home, simply because the US Dollar is still the reserve currency of the whole world. Even with this luxury, they are now at the limit of how much extra money they can print, without affecting price levels at home or the external value of the currency. 
• Getting train and air tickets to 80% of destinations is a breeze -- with online bookings taking minutes. The exception is for foreigners -- to whom slightly different rules apply. So what? Isn't that the same in the US, where different rules apply if you are not an American or a European passport holder? Shah Rukh Khan will second this, surely. Besides, what Sean is describing is his frustration because of ignorance of something every Indian who has booked a train ticket knows -- his train number. If he does not know it, he knows where to find it --this is put up prominently near every booking counter. Or, you simply ask someone else in the queue, and they would be glad to help.
• Demeaning India's low cost airlines is gratuitously malicious. Anyone who has experienced Indigo, for example,  will vouch for cleanest aircraft, best on-time performance, given choked airports and better service that would give even Southwest a run for their money in all these departments, if they were to operate in India.
  
• My childrens' generation will find it very difficult to have domesitc servants to help them -- because the children of today's domestic help are aiming much higher, and will succeed, thanks to education and opportunities.
  
• In a land where money is scarce, corruption is admittedly rampant, and is the biggest scourge currently. However, with the world-leading biometric UID project underway, once it is in place, corruption levels and leakages in public spending are likely to fall massively. When the intended beneficiaries start to more fully benefit from the spending in their name, India will experience an effect akin to releasing the handbrake while driving. Give this 4-5 years.
• In the same 4-5 years, I have a relatively poor prognosis for the First World. They will struggle with stubborn unemployment and rising crime rates and sluggish economic growth rates.
• In India, we do not discard a thing that works, simply because it is old. We extract all the juice, and more, out of every asset. That explains the old buses still in use. They may not be safe to run at 80kmph, but are quite safe, albeit noisy, at 30 kmph which is nearly the highest speed that they touch on Indian roads 
• In India, almost nothing is wasted. Not your discarded clothes, nor the junk you threw out. Someone will extract some use or the other. Outdoor flex posters serve as waterproofing or as sleeping bags or blankets for the homeless. We wear warm clothes instead of heating our homes, and very few Indians ever leave water heaters or air-conditioners on throughout the day. A vast majority use two-wheelers and bicycles (for both of which India is the largest market in the world) which leaves minimal carbon footprint, and very, very few gas guzzling SUVs and 4WDs. Planned load shedding is a sign of grid discipline in the light of less supply of electricity than demand for it, and not a sign of failure of the system. Electricity losses due to pilferage are on the wane throughout India, and huge power capacities are being set up that should alleviate power outages in most of the country within the next 5 years. Grid infrastructure is also being upgraded simultaneously.
• I am now seeing far more non-resident Indians coming back to India and far less Indians dreaming of migrating to the US or Europe than ever before. Of course, some of the recent such returns are with the intention of waiting out the recession in a weaker currency country, so their money goes further. But when they get used to a good life in India, few will have the stomach to return to the First World.
• India has implemented electronic voting and counting of votes, for free and fair elections time and again, which even the US has been unable to do. Recall the Florida vote recounting shame in which Bush became President, effectively by a single vote after multiple recounts? The US should consider outsourcing the management of their elections to India!
• Indian companies have gone multinational aggressively in the last 15 years, and today there are as many Indian MNCs operating in the US and Europe, for example, as foreign MNCs operating in India. Many foreign MNCs are operating in India out of strategic necessity -- they risked becoming irrelevant in many markets if they did not set up shop in India. Thus, they need India more than India needs them. Examples: IBM, Intel, Adobe, Accenture.
  
• Today, in their handling of the economy, the US and Europe are doing everything that they told India (through their mouthpieces, the IMF and World Bank) not to do. Like bailing out sick companies, instead of letting them die. We now have the hilarious spectacle of European countries like Greece being scared of going to the IMF (HQ in US, headed by a European) as if it is the worst thing that can happen to them. They prefer begging from their neighbours, Germany and France, instead. Whereas, India is now a net lender to the IMF and the World Bank. The US's last two years' fiscal deficits exceed the fiscal deficits of over 125 countries in the world over the same period in nominal terms.
• In international multilateral fora, the US and to some extent, the UK, is increasingly getting isolated. A vast majority of countries, and a vast majority of people in the countries that went to war with Iraq, did not support the unilateral pre-emptive strike on Iraq which has since been proven to be on basis of lies told to the UN. We haven't heard of any apologies or reparation for such blatant lies and disregard of world opinion that has eventually made Iraq the most dangerous place to live in, on Earth.
• In the WTO, Brazil has been permitted to retaliate against the US's stubborn refusal to give way on agricultural subsidies by infringing patents of US companies on pharmaceutical products. In successive WTO negotiations, India has emerged as the credible spokesperson for over 120 countries while the US and a few European countries like France and UK continue to stonewall progress by their cussed refusal to remove market-distorting agricultural subsidies. 
• As a result, almost every Arab or non-Arab Muslim in any part of the world today has no love or sympathy for the US.
  
• India has pioneered the science of "frugal engineering", with cars being sold at under $3,000 profitably, whereas American companies cannot sell a car at $10,000 profitably. 

I am proud of living in India, a part of this remarkable country. I pity the Americans, who are burdened with a 2 generations-old habit of profligacy that they need to learn in a hurry to curb. 

India is also remarkable because its Prime Minister is a Sikh; till recently, its President was a Muslim and was succeeded by a Hindu lady; and the leader of the largest political party is a lady of Christian descent, with Italian parentage, married to a person born of a Hindu mother and a Zoroastrian father. Its most populous state has a Dalit lady Chief Minister. Can you imagine such religious and economic tolerance, diversity and respect anywhere in the world? This beats hands down the boast of the average American that its current President is of African-American descent.
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Is SBI's foray into general Insurance wise?

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A few days back, I criticised LIC's intention to get into banking.

Now comes a report that, to top its foray into Life Insurance, SBI intends to enter General Insurance business before end of April, 2010. They have already been recruiting managers for this venture for the last 10 months, and are almost ready to launch.

The same logic and criticism applies to SBI's joint venture with Insurance Australia Group too. It is bad enough that they have ventured into Life Insurance. This makes it worse, in my view. Why?

Banking and Insurance are the two most risky businesses worldwide, and involve two completely different challenges. Insurance companies have to deal wisely with a surfeit of liquidity (usually) and banks have to constantly manage threat of liquidity shortfalls. Combining both reduces the strength of the combination to overcome threats and severe demands on liquidity that affect both industries. The recent global recession is an example of a threat to both industries simultaneously. Enough financial pundits (Nouriel Roubini, Nassim Taleb, et al) have predicted that this could happen again, and in our lifetimes.

We in India escaped the impact of the global crash because of three major factors: 

1. Our financial institutions were just not allowed to invest in derivative securities and there was consequently hardly any significant secondary market trading in debt securities;
2. Our banks had a very significant liquidity padding (SLR/CRR) that was nearly absent in the first world; and 
3. Our banks were not major players in any part of the banking business, and our insurance players were similarly almost absent in the banking sector.

Now the situation is set to change -- in the name of development and liberalisation. 

Banks are getting into insurance, and insurance companies are getting into banking. This in my view magnifies the riskiness of both businesses, and does not diminish it. I am not even talking of conflict of interest here, which can also rise considerably.

There is constant clamour for reduction in SLR/CRR, which, in my view is nothing but an operating profit cushion against the banking industry's inability to extract risk-adjusted returns on their lending and assurance intermediation (L/Cs, Bank Guarantees, etc) businesses, which the RBI has, in its wisdom, resolutely resisted, and I really hope they continue to do so..

In addition, our stock exchange margining system and transaction settlement system worked even better than in the US in containing huge negative exposures of individual players, mainly because algorithmic trading (which can very rapidly put through transactions involving mind-boggling amounts) was not permitted in India. Now algorithmic trading is permitted, and probably accounts for about 20% of all trades today. This percentage is set to zoom, giving traders with access to this technology a huge edge, and reducing retail investors to mere peripheral price takers. Given that our markets still do not have depth comparable to the first world exchanges, a runaway rogue trading program has the potential of putting almost the entire exchange settlement and margining system at risk, leading to a possible rapid stock market crash or boom. 

I hope I am wrong.  

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LIC to set up bank: Nothing more foolhardy!

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The recent news item to the effect that LIC wants to set up a bank flies in the face of basic financial prudence and wisdom that has been reinforced by recent events in the world.Let's briefly see why this is so.

A bank lends illiquid (its loans are invested in illiquid assets like property, stocks and receivables of its borrowers) and borrows liquid (its deposits have to be repaid anytime the depositor asks for it). Hence, the major raison d'etre of a bank is managing mismatched liquidity. This is impossible in times of financial uncertainty, and if the bank loses depositors' trust. At such time, the liquidity gap forces the bank into bankruptcy unless it is rescued by the central bank. 

An insurance company is very liquid in good times, indeed, awash in liquidity. When catastrophe strikes, this liquidity is drawn on suddenly. An insurance company manages this huge risk primarily by dissipating the risk over a large number of lives or properties as the case may be, in its areas of operation; and distributing the residual risk globally through reinsurance. Hence, the raison d'etre of an insurance company is to be liquid when nobody else is. 

We have seen that extreme financial risks do not conform to the normal distribution, and that the distribution they conform to have "fat tails". Hence, we now know that banks are more vulnerable to financial crises than believed before Bear Stearns' demise in 2007.  

We have also seen that natural catastrophes of all kinds have increased significantly (maybe because of climate change effect). For example, the two deadliest earthquakes in recorded history have happened in the last two years itself (Sumatra, Chile). If we go back 10 years, a blip on the cosmic clock, we find many more unusual natural disasters like flash floods in Oman (a desert!), raging forest fires in Indonesia, Australia and the US, and many others. Further, a major earthquake is overdue in California. Hence, we can say that there is a heightened expectation of exposure to catastrophes and claims for the insurance industry worldwide.

Today, banking and insurance are unarguably the riskiest businesses globally. We have seen the wisdom of RBI's not allowing banks to become exposed to toxic derivative securities.  We have also seen the foolhardiness (it seems in hindsight)  of AIG taking on unmeasured risks of the banking industry by insuring bonds. 

It simply is foolhardy to potentially commit the liquidity of India's most liquid entity in the riskiest industry by allowing it to diversify into an industry that has been shown to be almost as risky as the insurance business.
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Bizarre Bank

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Have you ever known a bank 

• whose Chairman and Executive Directors never attended any Board Meeting, yet signed its minutes?
• whose Chief Executive's authorisation of transactions was done from another country by someone else, using "pcAnywhere" software?
• whose Chairman apparently signed the Annual Report when he was in the ICU in a different continent?
• whose borrowers denied having ever applied for, or having been given, loans though the books showed loans made exceeding $2Bn?

If you haven't, this story in The Economist will describe one such bank which has just recently gone into administration. Bizarre is the only word to describe this fraud.

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How brave American women on the battlefront are treated

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I had blogged in October, 2009 that it was shocking that American women who allege rape or harassment while serving in Iraq or Afghanistan have been denied recourse to courts. Studies that I had not been aware of when I blogged in October show the extent of this offence.  For example, this story from May, 2009 shows another form of wink-wink-nod-nod behaviour of the Government when it comes to dealing with this issue. This story on BBC's website datelined 17 April, 2009  reviews a book on the subject. Importantly, it alleges that the US Department of Defense knew about this state of affairs and chose to do nothing.
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