Is China a currency manipulator?

Once upon a time, there were two countries, one named the US of A and the other named China. US of A bought Chinese goods cheaply for several years, by simply printing more of their money. China scrounged and worked hard, to be able to provide acceptable quality at very, very cheap dollar prices. US of A benefited hugely from a low priced yuan - it gave them more goods and value per dollar of spending. In the meanwhile, China saved, and saved, and saved. In US of A's dollars. So the US of A was the grasshopper that danced all summer, and China was the ant that saved up for the winter, from Aesop's fable.

China's thriftiness allowed the US of A to spend in excess of their incomes, and not bear the consequences, because, by buying up US of A's treasury bonds, China in effect sequestered the extra dollars printed in the US of A that could have led to inflation at home.

Now, US of A finds that they have reached the limit of deficit financing, and its cupboards are as empty as Old Mother Hubbard's was. They have suddenly realised that they have to repay all the Treasury Bonds that China has accumulated. They want to pay back the debts after China has appreciated the yuan, so that they will pay less dollars to pay off their debts. So they decide that China has to allow the yuan to appreciate against the dollar.

But China now has new-found confidence - the confidence of the rich ant, with a granary replete and bulging on all sides with dollar debts issued by the US of A. So it looks the US of A in the eye and says, "Please manage your own currency, we will manage ours." When pressed, the Chinese will point out that they have never lectured the US of A on what to do with their currency even when they were buying Chinese manufactured goods at a small fraction of what it would cost them to manufacture and sell, so why should China listen to lectures now?

So now, the US of A is doing the equivalent of the grasshopper in W Somerset Maugham's version - marry a rich widow and escape the consequences of past profligacy, by alleging that China is a currency manipulator, and forcing China to value its currency upwards. If China gives in, then they have been hit twice - once by being forced to sell goods cheaply with an undervalued currency; and once again when it is time for them to reap the benefits of investing their savings in US of A's Treasury bonds.  

Which version of "The Ant and the Grasshopper" will triumph - Aesop's, or Maugham's? The jury is out. I certainly hope that Maugham's cynical and dishonest grasshopper does not triumph. In this case, currently, it is worse: China's currency has risen, and yet they are being branded currency manipulators. 

Lessons in integrity from Bharat Ratna Sir M Visvesvaraya

Please read on till the end! 
Bharat Ratna Sir M. Visvesvaraya (15 Sep 1860- 14 April, 1962) was one of India's finest sons. The breadth of his achievements mark him out as the Leonardo Da Vinci of India.
He was a Civil Engineer par excellence. He devised innovative techniques that were well ahead of his time. Among them,

• The Block System of Irrigation – to optimize, control and evenly distribute water supply to agricultural lands over many villages. The supply was rotated within “blocks” in each village to curtail misuse and water-logging. This system, devised in 1899, is still used in Deccan Canals.
• The "collector well” in Sukkur in Sindh province (Pakistan). The area was hot and arid, and they had to pump water from River Sndhu to a hill nearby, filter it and supply water to the town through pipes.They did not have enough money for filters. Visveswaraya solved this ingeniously by digging wells in the river bed itself close to the river bank to obtain spring water through percolation. Thus filtering was achieved without installing filters. To increase supply of water, a tunnel was driven from the bottom of the well under the flowing river. This is now standard civil engineering textbook content under the Heading, “Collector Wells”.
• He designed and patented Automated Floodgates, which permit flood water to enter a reservoir without water level exceeding full reservoir level, thereby reducing risk of submerging surrounding land. The gates are automatic because they open and close at the rise and fall of water in the reservoir for flood control. He designed water supply schemes for many towns in Bombay Presidency, Hyderabad and later as Chief Engineer of Mysore State.

As Dewan of Mysore State, he established many rural industries and set up basic education for small shop owners in the fields of book-keeping and commerce. Agricultural schools were opened to help with modern agricultural practices that reduced farmers’ overdependence on rain and good luck. Many industrial workshops and training institutes were set up. Public libraries were established. The Kannada Sahitya Parishat was formed. Many books on science were published in Kannada. The University College of Engineering (now known as University Visvesvaraya College of Engineering) and Maharani’s College for Women came into being. He established the Mysore University, as until then, all colleges in Mysore State were under Madras University. He established the Bhadravati Iron and Steel Works, The Mysore Sandal Oil Factory, the Mysore Sandal Soap Factory, the Metals Factory, and the Chrome Tanning Factory. He started the Bank of Mysore (now State Bank of Mysore) and The Mysore Chamber of Commerce. The Institution of Engineers (India) celebrates his birthday, 15th September every year, as Engineers Day.
He differed with Mahatma Gandhi whose view essentially was “Industrialize and Perish”, while Sir MV's motto was the opposite, “Industrialize or Perish”, but great men that they both were, both respected each others' views and capabilities.
Sir MV led a very simple life. He was known for his honesty and integrity. In 1912, Maharaja of Mysore appointed Visvesvaraya as his Dewan.

Before accepting the position of Dewan of Mysore, he invited all his relatives for dinner. He told them very clearly that he would accept the prestigious office on the condition that none of them would approach him for favours.

When on tour on official business, Sir MV carried a set of candles bought with his personal money, and used them for personal work like reading etc in the night after he was finished with official work.

Just think – this man lived a life of total personal integrity that we cannot even imagine today. It has taken another simple person like Anna Hazare to raise our collective anger against corruption. Across the political spectrum are ranged small minds who do not want to see corruption rooted out of this great country. They do not realise that because of their selfish interests, India is held back from fulfilling its rightful role in the world by the “hand-brake” called corruption. It is time to release the hand-brake and surge forward..

Dexia Bank Collapse: What it means for Europe, Belgium and the World

Dexia Bank is among the Top 50 financial institutions in the world. It is not just some small, unknown bank. It is different from other banks because it, and with it, Belgium, are caught in an uncomfortable spot. How? Let me attempt an explanation.

1. Belgium has external debt to GDP ratio of close to 100% already. The Government thus does not have room for manouevre to fund losses of Dexia. That's already been done once - in 2008, the Belgian Government took control of Dexia. Various arms of Belgian and French Government now hold over 50% in Dexia. This closes off one source of succour. Worse, there is a political standoff in Belgium because of which there is no functioning Government at all at present in Belgium! Worst time for such problems to hit.
2. Dexia's leverage at present is estimated to be almost 60:1 – double that of Lehman Brothers when its collapse was triggered. So Dexia is not in pretty shape at all. Worse, of its over €500Bn of assets, €20Bn are debts of Portugal, Italy and Greece, all of whom are in need of bailouts.
3. After the 2008 takeover by the Government, instead of getting better, things got worse, because Dexia was a source of funds for the various parts of Belgium's Government. When they took it over, instead of stopping loans to Government which were the major part of its NPAs, they stepped up lending to Government, which enabled the Government to reduce its fiscal deficit somewhat. Now, if the Government were to bear even a small part of the losses of Dexia, its external debt to GDP ratio will shoot up to almost the level that Italy is at currently (which is 134%). So PIIGS will no longer be a sufficiently comprehensive acronym of European states in deep fiscal trouble. We have to find some way of adding a “B” to it. Just for comparison, US, Australia and India are at 99%, 94% and 22% respectively. France, one of the co-owners of Dexia, is at 208%.
4. The only time-tested solution for banks or financial institutions in such a mess as Dexia finds itself in is to break up the institution into a “good bank” and a “bad bank” - like India did for Unit Trust of India a decade or so ago. Usually, the bad bank sells the 'bad” assets for anything they can get for it – which could be single digit percentages of the book value. In Dexia's case, this is apparently not feasible because (a) Belgium's Government does not have the money and the political will (there is no functioning government now!) to bail out Dexia because it would mean choking its own source of funding; and (b) “Good bank” assets have not takers almost anywhere in the world today. So the good bank-bad bank solution will not work very well for Dexia. But that is the only solution – so you can expect sell-offs of any saleable assets.
   
   
   Already, Reuters reports Qatar as being interesting in buying out Dexia's Luxembourg business. So the dismembering of the Bank has officially begun. The vultures are circling, but then, there aren't too many vultures, this time. Trading has been suspended in Dexia's shares, and S&P has downgraded Dexia's group companies steeply. In its downgrade press release, it notes that there is negative revaluation reserve in respect of available-for-sale securities of almost €6.9 Bn. Moody's has followed S&P in steeply downgrading (by 3 levels) the sovereign rating of Italy, and also some Italian banks in the last 2 days. Besides, 12 UK banks and 9 Portuguese banks have also been downgraded. Sovereign ratings of Spain, Ireland, Greece, Portugal and Cyprus have been cut as well. From the US, Ben Bernanke has said that the US economy is close to faltering. Deutsche Bank has warned that it will miss its profit target.
   
   
   One must remember that failing banks are not just like manufacturing or services companies that fail. Banks, as they fail, tear asunder the transaction enablement capability of its citizens. Thus, slitting the banking system's throat is akin to slitting the underbelly of a crocodile – however strong the economy may otherwise be, the banking system is its weakest link. This, all the above news in just a few days is bad news indeed, for the entire world. When banks collapse, other businesses will follow, and depositors will panic, causing a financial logjam in not just those countries, but in all countries where businesses have business ties with enterprises in countries whose banking systems are collapsing.
   In India, our very own SBI has suffered a downgrade because of its low Tier-I capital level that would require it to raise money and/or ask for Government help/ support. So where is the good news? If at all, it is in India where the Government has both, the wherewithal (with some difficulty) and the will and inclination, to support its banks.
   PostScript: This is the text of an email I received. Makes for interesting reading.
   Uncertainty has now hit Japan. In the last seven days, Origami bank has folded, Sumo Bank has gone belly up and Bonsai Bank has announced plans to cut some of its branches. Yesterday, it was also announced that Karaoke Bank will go up for sale and will likely go for a song, while shares in Kamikaze Bank were suspended today after they nose-dived. While Samurai Bank is soldiering on after sharp cutbacks, 500 staff at Karate Bank got the chop and analysts report that there is something fishy going on at Sushi Bank, where it is feared that staff may get a raw deal.

Re-visiting Modern Accounting Standards

Should acquisition cost of an asset depend on how it is financed?

To my mind, and to most non-accountants, the simple answer seems to be No. But that is not how modern accountants see it. Costs incurred (including interest) till the time an asset is ready for use is treated as part of the cost of the asset. Whatever compulsions may have been behind adoption of such a treatment as standard, it tends to militate against simplicity, and creates needless (in my view) complexity.

Can a company have Net Profit After Tax equal to double its turnover for a quarter?

Common sense tells us that this is impossible. How can profits exceed turnover, that too profits after tax? However, modern accounting is not all common sense. Or maybe, it is such highly developed common sense that it takes truly uncommon levels of sense to understand why this can happen. As it happens, there are several reasons why this can happen. Deferred Taxation Accounting (DTA) is one of the reasons. DTA is one more area where accounting has been made dreadfully complex. So much so that it creates situations occasionally as the one described in the question above, where quarterly Net Profits After Tax of some companies exceed even quarterly revenues! How can accountants explain to laymen this paradox – where, say, the quarterly turnover of a manufacturing company is Rs.50 crores and its NPAT is Rs.90+ crores? Most accountants trying to explain this situation will end up tying themselves and their listeners in knots. This happens in the relatively rare instance when a company has just turned the corner after several years of losses. One argument in favour of the currently favoured treatment of deferred taxes is that it makes clear the differences in expected tax provision on reported profits, and the actual tax provision. However, we lose sight of the fact that the net result of the income statement becomes almost impossible to understand, even to reasonably financially literate individuals. Surely, this could not have been the intent of introducing such accounting treatment!

Is it a bad thing to allow retired employees medical treatment for life in hospitals run by the company?

Certainly, one cannot fault managers in Tata Steel if they begin to think like this. Accounting for Employee Benefits is another area where accounting complexity has reached ridiculous levels (in my view). Tata Steel used to routinely allow their retired employees and their families to be treated in the wonderful hospital they have built in Jamshedpur; and absorb and meet the net losses or cash shortfalls of that hospital quite routinely, as part of its employee-friendly initiatives. Let us say their costs were Rs.30 crores per annum, give or take a few crores. When AS 15 was made mandatory, suddenly they realized that because they allowed their retired employees and their families to enjoy these facilities for life, they suddenly had to recognize the present value of all the costs they expected to incur over the next several years, as a cost in a single year. This resulted in a hit to their Income Statement to the tune of hundreds of crores in the year in which the new Standard was made mandatory (if I remember it right, it was over Rs.250 crores). Why? Could not well enough be left alone? Now, it has accountants and managers thinking closely about the impact of such facilities to its past employees on its current profits, way beyond the actual cash expenses of offering such facilities. Simplicity flies out of the door, to be replaced by dreadful complexity. What I wonder is, what purpose is served by such complexity?

Why did Warren Buffett call derivatives "weapons of financial mass destruction'?

Buffett should have included "securitised, structured products" which are a class of "innovative" derivatives, by the same appellation. We know now that derivatives and securitisation have made financial life, and accounting for the new-fangled "innovations" they spawned infinitely more complex. Banks in the developed world are still facing the consequences of the complex accounting legacy of the millions of securitised structured note transactions it entered into almost without thinking in better times. They are now realising the impact of all that complex accounting – it only passed the parcel of risk onto others. It did not eliminate risk. Ultimately, every bank in the developed world was left holding such risk parcels to varying degrees. But they did not simply pass on risk to others. Some structured products passed on risks to a distant tomorrow.

We have yet to see the complete impact of such contracts that, in addition to passing the risk around to different people, also passed the risk to a future date. There are several apparently innocuous deals and assets sitting on the books of several companies (not just banks) which represent accounting legerdemain of pushing losses off to a point of time in the distant future, so that the current management came out smelling like roses though their results should have had the faecal matter hitting the overhead rotating cooling device. They are the financial equivalent of mines in modern warfare. They will go off and claim the lives of innocents at any time in future, without warning. This is because several best-selling "structured products" designed by mathematical geniueses sitting at investment banks the world over, were designed to hide losses from shareholders, future management and regulators alike. We have yet to see the full impact of such deals. Liabilities under such contracts will crawl out of nowhere, as it were, and trouble future managers and bankers alike. This is the long-term legacy of allowing untramelled financial innovation. AS 30, 31 and 32 (collectively dealing with accounting and reporting of derivatives) is something that almost 90% of practising Chartered Accountants – those charged with implementing them and checking their implementation incompanies, will privately admit to not being comfortable with. I think these Accounting Standards is a gigantic case of GroupThink – the management phenomenon where even a unanimous decision taken by a Group is completely at variance with what almost all of those participating in taking the decision privately think and opine. We need the small boy who points out shrilly that the Empe3ror is not really wearing clothes!

Why should we bother about all these complexities?

Almost all the modern accounting standards that have contributed their bit to making accounting more complex and less understandable have behind them the objective of making a company's Balance Sheet more "realistic". What they have actually succeeded in doing is to make the Income Statement almost impossible to understand or predict. Why should one prefer Balance Sheet accuracy to Income Statement accuracy? I think that the Balance Sheet showing assets at unrealistic low values based on historical cost is a form of desirable conservatism in accounting. We have succeeded in making the Income Statement, which is a good indicator of how well a company is being run, almost too volatile to be of any use – whether to compare results with past years, or to compare results with those of peers. Therefore, what I make above is a case for a complete re-thinking of the basis of modern, fair-value based accounting, and slowly going back to the traditional historical cost based accounting.

Steve Jobs, RiP

He was a technical AND marketing genius. I do not remember a single person who has had such deep impact over such a sustained period, as Steve Jobs has had, on the state-of-the-art in multiple consumer-facing industries. Personal computing, animation films, portable music players, music and entertainment marketing, smartphones, and hand-held tablet computers – all these are markets which he created, and in which he led his company to success at a level that can only be dreamed of by other companies. He did not make products – he made objects of desire. He changed the ways of working of every industry that he touched.

He built the first commercially successful personal computer in 1982 – the Apple II, after first developing the prototype in a garage, along with another technical genius, Steve Wozniak, whose autobiography is titled iWoz. This was the first commercial computer to have a mouse and an OS with graphical user interface. For several years – maybe 10 years, no machine came out on the market with comparable graphical OS. This probably represents the longest period of a technical monopoly ever.

He then went on to build the successors, called Macintosh computers, or Mac for short, which has been through several avatars. They became the gold standard for ease of use and stylish looks. Like every product that Jobs introduced, they were objects of desire, that sold even though they were usually far more expensive than the competition.

The famous story of how he got thrown out of the company he had founded is too well-known to recount, but genius that he was, he continued to develop cutting edge technology, in a company appropriately called NeXT. While the company never did come out with a commercial launch, several technologies developed there were incorporated into later versions of the Mac OS and other products. During that phase when he had nothing to do with Apple, he also bought and spent time on building a young startup company called Pixar Animation, where he learnt and taught the world how to to create full-length ultra-realistic 3D animation feature films using cutting edge computing technologies that his company used, as well as nifty software that it developed for internal use. The only other company that had successfully made animation films before, Disney, had made 2D films. Toy Story, Pixar's first film, was a blockbuster hit heralded a new genre in personal entertainment. It was inevitable that Disney and Pixar would merge, especially after Apple Inc reclaimed Jobs as its own. However, the success of Pixar and the deal with Disney made Jobs wealthy independent of Apple – an important factor that allowed him to dictate his own terms when he came back. Apple had become a basket case in the nearly 10 years that it ran without Jobs – to the extent that Jobs got arch rivals Microsoft into the company to continue to make Office for the Mac, and also a significant stake in Apple. This horrified Apple loyalists, and people felt that Microsoft had bought into Apple at a throwaway price, that allowed Apple to raise some much needed money and to stay alive, something that Microsoft also needed to defend themselves against charges of monopolistic behaviour. The reality was that Microsoft needed Apple to be alive, not kicking. But he had not contended with Jobs' steely determination to reinvent Apple.

Jobs' speech at Stanford's commencement, Stay Hungry, Stay Foolish, is an all-time classic with advice for anyone who aspires to be a creative success. It is a story of persistence and resilience, along with curiosity and willingness to question the weight of collective wisdom. It is something that every young person on the threshold of a career would be well advised to read and internalise.

Jobs' second innings with Apple has been even more exciting than the first, by almost any measure. He revived a moribund company to become the most valuable company on Earth by market capitalisation and profits. Jobs has left behind a company that has more liquid cash resources than the US Government. It sits on the largest cash pile in the world of any manufacturing company. It may be surpassed probably only by Berkshire Hathaway, which is mainly an investment company.

Jobs' second innings at Apple began with the i-Mac – with transparent plastic-encased monitors, computers and peripherals, not much functional difference, but great looks that evoked gasps at first sight made it the first hit product that gave Apple its second wind. Thereafter, there has been no looking back. i-Pods,i-Tunes, i-Stores, i-Phones, i-Pads, and the yet unheralded i-Cloud have all followed in monotonous succession; each redefining rules of the marketplace, and creating new standards to such an extent that Apple blazes the trail, and the entire world simply plays catch-up. It seemed as if Apple was unstoppable – till, cruelly, cancer took hold of Jobs. He battled on for a few years, but all the medical knowledge of humankind could not extend the life of this great man.

I don't envy Tim Cook – while he has been Jobs' close aide and confidante for several years, and been the de facto day-to-day head at Apple for a long time,  stepping into Jobs' shoes won't be comfortable – he will feel like a pygmy wearing three-league boots. The world will keep comparing him with Jobs. Like the i-Phone's latest version (4S) released a couple of days back, even though it has almost all-new innards, looks no different from the earlier version. Early reports suggest that Apple loyalists seem to be disappointed – quite possibly because it was the first product in more than a decade to be launched without Jobs' involvement, either at the launch or in its making.

Steve Jobs, RiP.

Is Consumption of Rs.32 per day a realistic poverty line?

Simply stated, Yes. 


It is higher than it has ever been. The number of people  defined as poor by this yardstick are higher than they have ever been.


That is reason number 1 - we haven't objected in the past, so why the outcry now? 


This is a consumption figure, remember. And a per capita figure. Not the gross revenue of any itinerant businessman on a single day. Thus, your domestic servant's family, with 4 earning members earning an average of Rs.3,000 per month (translating to a family income of Rs.12,000 per month) are possibly under the new poverty line as drawn. How many of us are comfortable with paying a full-time bai more than Rs.3,000 per month, though she sets at least one of you free to earn not less than 10 times that sum? 


If your bai  has an unemployed husband, she is most definitely under the line. But how many of us are willing to bear the burden of maintaining a husband on a salary of (say) Rs.3,000 per month? 


We  are a poor country - we have lifted as many people as the entire population of Australia out of absolute poverty in the last 15 years alone. But we still have just as many queueing up! Poverty is a BIG issue in India, and will remain so for the next 15-20 years, make no mistake. We can look forward to abolishing absolute poverty levels and setting relative ones, linked to quality of life, that they have today in richer nations. I saw that in the UK, the homeless bring out their own monthly magazine with ads, to generate revenue. I really hope that in my lifetime, I will buy or advertise in such a magazine in India.


One possible accelerating factor is if we realize anywhere near the fullest potential of the UID Scheme, and convert all welfare and subsidies into direct  cash transfers through the banking system straight into the accounts of beneficiaries identified by a combination of 10 fingerprints and 2 iris scans. When, and to the extent that happens, it will prove to be a welfare accelerator that will make the India of today seem like driving with a hand-brake fully engaged. Today, it is estimated (no, there is no way of finding out the actual figure) that nearly 85% of the welfare spending, running into lakhs of crores of rupees per year, does not reach the intended beneficiaries. That is why I am rooting for Nandan Nilekani's UID Scheme completely.  If we can extract 7-8 times more welfare for every buck the Government spends on welfare, our GDP growth rate will surely soar, with the increased demand from people who have more money than ever to spend. Giving a fillip to all local businesses. It will be the tide that raises  all boats. 


Of course, so many of our babus and businesses will then have that much less black money  money to throw around. But few will shed a tear for them.  And I am sure that Ratan Tata and Adi Godrej and Savitri Jindal won't mind if they pay Rs.1,000+ for the gas cylinders in their home kitchens. Why should they be subsidized? Better to remit Rs.600 per cylinder purchased direct to the accounts of those who are below the poverty line automatically, minutes after they have paid for their own cylinder at full prices. This is a dream that I hope comes true. All power to Nandan Nilekani and his gang. 


Hope this does not seem idealistic in retrospect! 

A Crash Course in Economics - and many other things!

I recently read an “autobiography of a Pencil” written in a simple style, but an essay that is up there among the classics for its deceptive depth.

• It brings out the economic impact of co-operation, exchange and sharing.
• It encapsulates the Division of Labour of Adam Smith; it also equally facilely incorporates Ricardo's concept of Comparative Advantage.
• It shows the benefits of co-operation without coercion, of team work, of how the sum of the parts can be more than the whole.
• It has resulted in trading systems that set price for various products in various ways, and it is the bedrock of the currency system.
• It results in inventions astounding in their complexity; indeed, in producing things (like the Pencil in this great essay) that no single person knows how to make.
• It teaches us economics, helps us understand the theory of domestic or international trade.
• It helps us understand the base of exchange rates.
• It points to dangers of not co-operating on a continuous basis.
• It highlights how we can, and why we should, encourage innovation and serendipity.
• It illustrates and explains why producers and consumers will work together in spite of their divergent interests.
• It explains why free societies are more desirable than repressive, dictatorial ones – the former are simply better at fostering exchange of ideas.
• It makes us understand why Force is a poor nutrient for harvesting a crop of sustained co-operation and fertile innovation.

In listing the benefits of this essay, I am in danger of exceeding the length of the essay itself. So here I end. Not without giving you the link to this great essay. Read it yourself, and enjoy it. But please honour copyright. The man who gave us such wisdom deserves it.

Algorithmic Trading - Why Indian Stock Markets are Endangered

A few months ago, I had blogged about tight coupling in financial markets. In that entry,I had explained at a micro-level the impact of algorithmic trading. Given below is a "macro" story about how high-frequency trading in securities using computer programs played a big role in (though I would stop short of saying that they caused) a violent fluctuation in shares' and securities' prices on Wall Street last year. In less than 15 minutes, the Dow Jones Industrial Average Index plummetted and lost almost 6% of the opening value - and then recovered almost all of it in the next 15 minutes.

What happened on May 6, 2010 on Wall Street?

Major equity indices in futures as well as securities markets, already down 4% from the earlier day's close, suddenly plummetted a further 5-6% before recovering equally quickly, all in minutes. This affected almost all the 8,000 securities and ETFs in similar manner. Over 20,000 trades were reported to have been transacted at prices 60% from their prices just a few moments earlier.

Why did this happen?

At 2:32 pm, on an already volatile day, Waddell and Reed Financial Inc (not named by the joint CTFC-SEC report dated Sept 30, 2010, but named by many news reports) started a computer program to sell 75,000 E-Mini futures contracts worth close to $4.1 Bn. This was programmed to sell at any price and time, so instead of an orderly sale over a few hours, it sold this huge quantity of contracts within the space of 20 minutes, accelerating the sales as prices fell.

What actually happened during the crash?

The contagion spread to the equities market when arbitrageurs noticed the growing gap between the equities and futures prices. A significant finding is that 6 HFT (High Frequency Trading) firms (i.e., firms that extensively used algorithmic trading) remained active in the market even during the crash period of a few minutes. A blow-by-blow account follows:

• Five minutes into the crash, at 2:37 pm, data feeds from computers groaning under the huge numbers of contracts, started slowing down, leaving both, exchanges and investors uncertain about where share prices stood.
• The NASDAQ went into “self-help mode” at 2:37 pm where the transactions were not routed through NYSE's Arca electronic trading platform. CBoT and BATS exchanges (BATS at 2:49 pm) followed and also went into “self-help mode” which means that trades on NASDAQ, CBoT and BATS did not need to honour an Arca quote from NYSE.
• By 2:40, some trading and market-making firms started pulling out, due to algorithms that pause when they sense large price movements that could be due to questionable data feed. This left the market short of ready buyers and sellers. Apple, for example fell by $23 in 2 minutes, with the buy-sell spread going up to $5 instead of a few cents.
• Volumes of E-Mini contracts that normally mimic the S&P 500 surged but liquidity dried up. As a result, at 2:45:17 pm, E-Mini prices plunged 12.75 cents in half a second. This set off a circuit breaker that halted trading for 5 seconds.
• As individual stocks declined as much as 10%, ETF traders started withdrawing from the market.
• Then, at 2:46, even more strange things started happening because of the sheer speed difference between trades being put through and displayed – P&G shares were offered for purchase at prices higher than offered for sale! This is never supposed to happen in an electronic exchange.
• At 2:47, Dow reaches its nadir for the day, down 998 points or 9.2% from the opening level. Accenture, trading minutes earlier at $40, was offered at 1 cent.
• Then, at 2:49, the Dow rebounded by 300 points in 1 minute.

• There were no takers for ETF shares – iShares S&P500 Value Index Fund traded for 11 cents. But the broad recovery continued. By 2:58, indices reached the level they were at 2:30 pm.
• At 3:01, almost a half-hour to the minute since the crisis began, NASDAQ snapped out of its self-help mode and resumed routing orders to the Arca trading platform.
• At 4 pm, the DJIA closed 340 points below its previous close.

The Joint CFTC-SEC investigating committee reported that several HFT firms they interviewed had algorithms that took trading decisions based on direct proprietary data feed from the exchange directly rather than on consolidated market data, to reduce “latency” or delays measured in milliseconds. These algorithms went awry when the data feed from the exchange slowed down. Those HFT firms that did not depend on direct feeds for trading decisions got contradictory feeds that led to unease in taking decisions. Yet others that were not concerned with data latency in milliseconds simply withdrew from the markets.

The HFT firms that depended on their algorithms for trading decisions were not affected by the “self-help” declarations of NASDAQ, CBoT and BATS, and continued to rout orders to these exchanges. Therefore, the “self-help” declarations were ruled out as a cause of the volatility.

While no clear single cause was pointed out, HFTs using algorithms to trade rapidly (in one documented case, 200 trades exchanged hands 27,000 times in 14 seconds) were commonly thought of as the villains. It must be said, though, that there have been spirited defences by algorithmic trading experts, who point (among other factors) to volatility when markets are closed (ie difference between closing prices and opening prices on next day) as the real villain of the piece – on the logic that overnight differences can only be caused by humans, who are prone to panic unlike computers.

Even so, the SEC has since instituted a system of circuit breakers to arrest rollercoaster falls like the one experienced on Wall Street on May 6, 2010. This is another lesson that they have learnt by experience – instead of simply looking eastwards and learning from Indian bourses.

What can we learn from this?

But now, the stage has come to re-learn from our own wisdom. Algorithmic trading is now allowed on Indian bourses. Reports have suggested that over 40% of all trades are done by computers on NSE and BSE. Add to it the other dangerous fact - that FIIs that invest "hot money" that can fly out of the country in seconds account for over 70% of all floating stock (ie, stock that gets traded on the bourses).  See this in juxtaposition with the often displayed behaviour of FII fund managers who, like a herd of sheep, make a beeline for the two exits (NSE and BSE) for their investments at the merest sniff of danger anywhere in the world (even if it does not endanger their holdings in India), and it becomes clear that we have set up our bourses for spectacular volatility where securities' prices falling off a cliff in minutes will become sickeningly regular occurrences.

BofA reacts to an article that says things remarkably similar to what I wrote 13 days back!

On August 10, I wrote about Bank of America, and headlined my blog entry with the words, The Death Spiral beckons ... . I then wrote a follow-through piece, on  August 16, highlighting the gathering storm clouds around BofA. Then, I attempted to put what I wrote about BofA into perspective for Indian readers of my blog, by explaining how serious the situation of BoA was, really, for itself and for the US economy, and indeed, for the rest of the world. 

On August 23, Henry Blodget, a former Wall Street analyst and currently CEO of Business Insider, an online financial news and views publication wrote about Bank of America. Blodget has cited many more figures - and exaggerated at least two, according to Bank of America's official Press Release. But Blodget exulted, 'Oh My Goodness: Now Bank of America is blaming its Collapsing Stock on Me!' He admitted that BofA was right about one of the two points of rebuttal, and updated the article to reflect the correct figure.

Why do I write about Blodget and BofA? I think I may have just influenced what Blodget wrote. Of course, it is entirely likely (and probably true) that Blodget arrived at the same conclusions as I did on his own. But that cannot obfuscate the fact that the substance of what he wrote on August 23 is remarkably similar to what I wrote in the three pieces referred to above. He even uses the same phrase - the death spiral - in his piece. Now, that is a coincidence, indeed!

Imitation, it is said, is the sincerest form of flattery. I should feel flattered indeed, except that

(a) Writing about BofA pained me, but when elephants flail around, ants get trampled. So I thought a warning was in order, to point out something the bank was hiding behind accounting opacity. Now, I have no illusion about being so well-regarded that BofA or the US economy or Wall Street would take note. But then, through Henry Blodget, exactly that seems to have happened!

(b) When what (in my view) is almost inevitable happens, those who took evasive action to the extent they could (after understanding what I, or for that matter, Blodget, had to say) will have me to thank in a small measure. That is the only moral justification for predictions of financial doom (which have a disconcerting habit of being self-fulfilling these days) in writing. What makes me puke is that Blodget is enjoying the discomfiture he is causing BofA.

Of course, Blodget has not cared to acknowledge that he has read my blog and been influenced by what he wrote. But then, how will he know that my blog had more readers in the United States than in India in the week upto August 16? (you need to be logged into Facebook to see that link).

Blodget probably thought he was the only guy in the US who read it. But then, even after being in the online news business, I am sorry that he has not fathomed the power of the Internet.

Now to Bank of America again - their Press Release  reproduced here defends itself weakly by talking of its tangible book value per share as of June 30. This is a non-GAAP measure by BofA's own admission in its Balance Sheet (read the footnote to my death spiral writeup). GAAP means Generally Accepted Accounting Principles. Non-GAAP measure thus means, by definition, not a generally accepted accounting measure. If you read what BofA wrote about Goodwill, the only figure I concentrated on in the death spiral blog entry, you will realize that BofA knew it was on tricky ground there.

Libya - Another instance of western countries going beyond UN resolution

The UN Resolution in March 2011 only authorised the implementation of a no-fly zone over Libya. That objective was achieved almost immediately thereafter, but all along, the intent of the US and European leaders was to effect regime change. They are now closer to that objective - though the only thing they were authorized to do by the UN was to implement a no-fly zone. By openly supporting and arming the rebels, they have thrown caution to the winds, and are on the threshold of regime change, but no one knows what the new Government of Libya will be like, who will head it, and so on. A typical case like Iraq and Afghanistan - they have a plan for the war, but not for the peace that follows. 
Update:
Worse, there are now reports that the supposed scent-of-victory situation in Tripoli is mere war propaganda, and that Gadhafi' son and heir apparent has not really been captured. He appeared in person before international reporters in a hotel in downtown Tripoli. This is egg on the face of not just the rebels but all who are supporting them. 

Vultures rapidly heading towards extinction - and how that will affect us

The population of vultures in India is down in only 15 years from 50 million to 60,000. Imagine, our children and future generations yet to be born may never see a vulture!  
The cause?  
Feeding Diclofenac as a pain-killer (like Ibuprofen) to livestock for cracked hooves and swollen udders. Diclofenac ingested from carcasses causes untreatable fatal kidney failure in vultures. In spite of its being banned, this is still being used and prescribed by several vets and quacks.
The effects? 

• Cows cannot be killed in India; now their carcasses will have to be handled and disposed by humans. This will become a public health problem.
• Parsis will have to worry about how to manage disposal of their dead in absence of vultures, when there is no alternative solution in their scriptures.  
• Vultures can ingest without any problem foot-and-mouth, brucellosis, tuberculosis and anthrax-ridden carcasses. Now these will have to be handled by humans. This too could become a public health problem. 
• Population of aggressive scavenging dogs has gone up in several cities, among them Bangalore. That is nature's way of filling up the vacuum left by vultures. Whether we humans like it or not. So now we have to control the dog menace. This has already become a public menace.
• Here, nature is helping us, by the spreading incidence of dermatitis (shows up as loss of fur on the skin) in almost 40% of these stray dogs, that eventually kills them. 
• But dogs aren't interested in dead Parsis. Besides, now that Diclofenac is present in several human formulations as well, who knows which Parsi's remains will end up killing a few more of the remaining venerated vultures?     

This is an eco-catastrophe in the making (indeed one that has reached an advanced stage before effective diagnosis or action). Should we shed a tear for these descendants of Jatayu who once valiantly at the cost of his own life,  tried to prevent Sita's abduction by Ravana?


Read this article for more detailed exposition.
  

Ratings are rotten - proof from an insider

Earlier, I had written about the fact that rating agencies' methodologies were suspect - "Rating agencies will have to revisit their sovereign rating norms. Currently, it is unthinkable in their models to question the rating of AAA to the US".
Now, there is proof from an insider that the rating agency Moody's was utterly compromised and conflicted.  This 78-page Comment on SEC Proposed Rules for Nationally Recognized Statistical Rating Organizations makes for shocking reading, though it confirms what we had always suspected - that conflict of interest permeated all levels of this "Nationally Recognized" rating organization. It is a must-read for those trying to understand how the crisis of 2008 could have happened, and the role of rating organizations in this crisis.

Putting the Bank of America situation in perspective

What would you think of the state of the Indian economy, if what I said of BofA and Citibank was said of State Bank of India and ICICI Bank in India by some economist of repute? 

The situation is that serious for the US and for many countries in Europe, where the nation's top banks have dug themselves into deep holes that not even the EU or their respective Governments can afford. All these economies have their underbellies exposed.

On both continents, banks are hiding behind accounting gobbledygook called Impairment and Fair Value Accounting. But the understanding is filtering through. Tonight (in India) brought news of a blood bath on bourses in the US and Europe. So tomorrow (19th August) will almost certainly see a bloodbath on Indian stock exchanges - as FII Fund Managers make a beeline to the nearest exit. Expect a fall of at least 400 points in the Sensex on 19th August, 2011 before short covering enables a partial recovery.

I believe that this is the beginning of the unravelling of several economies in Europe and of the US economy as well, with them slipping into R-2, needing QE-3 and possibly QE-4.

I shall write again tomorrow to report whether what I said about the bloodbath on Indian stock markets was accurate. I feel comfortable making these gloomy predictions because I currently am sitting on cash, having (fortunately) believed in my own predictions and taken my own advice!

The Gold Standard: In Memoriam

On August 15, 1971, 40 years and 3 days ago, President Nixon, remembered today for another of his “achievements” - the Watergate scandal, announced that the United States will go off the gold standard. Till then, the gold standard meant that the money supply in any country would be limited to a specified proportion of the gold reserves owned by the Government. The gold standard was abandoned when the consumption-hungry Americans found the fiscal discipline it imposed on all Governments too inconvenient, and substituted it with a promise of the United States Government, then the most powerful and richest country on Earth.

After this epochal action, demand for Gold fell worldwide. To such an extent that India (its citizens, not the Government) was the only net importing country in the world, importing what the rest of the world exported, for well over two decades. Till India reached its economic nadir in 1991, when the Government was forced to sell or pledge tonnes of gold to save the country from financial bankruptcy. After that, India has slowly picked up its gold buying again, and Indians are still the world's leading buyers of gold. The RBI has bought back all the gold it pledged, and more. I am also sure that the RBI has recently bought more gold – it announces the value of its foreign currency reserves in US Dollars, but the actual composition is India's best-kept secret. I suspect that the RBI has fallen back on the age-old wisdom of buying gold when all currencies' future looks uncertain.

For aeons, gold has been considered in India as a refuge against uncertainty, as well as a status symbol – something no family would sell unless they were in dire straits, and then too, with the internal understanding that they would buy it back at the earliest. So while India's Government is the 10^th richest in terms of gold holdings officially declared, Indian citizens' private hoard of gold, if added to the RBI's holding, would probably make India the richest nation with the most liquid reserves in the whole world.

In the meanwhile, the freedom from the peg to gold allowed the United States to spend like there was no tomorrow. Whenever it looked like tomorrow would dawn, the United States would instigate a competitive devaluation game among other countries, which enhanced the external value of the dollar, which ensured that tomorrow was deferred yet again. Dollar prices of gold went up briefly following the 1974 oil price shock; and then again after the 1979 oil shock. Then, it continually fell till 2001. So, if one compared gold prices against inflation or any other currency value, gold always suffered, till end of 2001 when it was $272.22 in the NY market. After 9/11, some Middle Eastern countries and their residents, sharing the Eastern love for gold with India, began hoarding up on gold. So dollar prices of gold started looking up. But then, in 2007-8, tomorrow arrived.

By 2009, gold had crossed the hitherto unthinkable barrier of $1,000 an ounce. To put this in context, in August, 1971, when the gold exchange window closed, the price of gold per ounce (1 troy ounce=about 31.1 grams) was $37.60 (according to Niall Ferguson in his excellent book, The Ascent of Money). Going to $1,000 in 38 years means a CAGR of around 9% per annum. A handsome rate, but absolutely mind-boggling, if one allows for the fact that for almost 32 of these 38 years, gold prices hardly rose at a CAGR of 3% in dollar terms, when it rose at all. Do you know what the price of gold now is? It is $1,794 an ounce as I write this, in August 2011. Which means a growth of 79% over the 2000 value of gold.

Let us look at this from another perspective. If an American had turned in $1,000 before the US went off the gold standard, he would have got almost 26.6 ounces of gold. The same quantity of gold today would be worth $47,720. This is an index of how much the value of the dollar has slipped and that of gold has gone up. This means that gold worth $1,000 is now worth almost 48 times as much in 40 years – a CAGR of about 10.1%. Not bad, for something considered as a bad investment by the whole world, for almost 30 years! When the world realizes that gold has proved to be a safer haven than any other currency, there could be a renewed weakening in the belief in the US Dollar as a store of value and as a reserve currency.

Way back in June, 2008 I had written that it was time to buy Gold.  Elsewhere, I have written that gold prices could touch $4,000 an ounce in 3-5 years. At the rate the price of gold has been shooting up in the last few months, this price point should be reached much sooner than 3 years, if only because of the expected continuing weakness of the dollar. So will we see a return to the Gold Standard, or some variant of that? That has to be counted as a distinct possibility after the S&P downgrade of the AAA+ rating of the US.

Till that happens, we Indians should thank our womenfolk for consistently ignoring advice that investing in Gold was a poor bet. Thanks to that, India is possibly the most liquid and financially secure economy in the world today. What's more, it is a hidden strength - it is the reason why Indian families will survive in a world without Medicare/ MedicAid/ Social Security.

(Historical gold dollar price data sourced from www.measuringworth.com and current price from http://goldprice.org)

 

BofA: The vultures are gathering ...

Barely 3 days after I blogged on the death spiral Bank of America seems to be sliding into, the signs of death throes have become clearer. Already, its share price represents only 32% of its book value, showing that the market agrees with my assessment that its assets are massively overstated. I had pointed out only one asset, Goodwill, that called for significant impairment.  
Wall Street Journal now reports that Bank of America has entered into deals to sell the following:

• its Canadian Credit Card portfolio to TD Bank
• its Spanish Credit Card unit 
• its small-business cards in the UK to Barclays

WSJ also reports that BofA intends to sell other card units in Europe. It further speculates that BofA may also sell its stake in China Construction Bank Corp. Another report states that Bank of America has also sold off portions of its credit card business within the United States to Sovereign Bank and to Regions Financial Corporation. In April this year, BofA sold its stake in Black Rock Inc.. 
All these sales are obviously intended to shrink its way into a viable situation by raising money without a share issue, and also thus raising "tangible net worth per share" of Bank of America.
If you think BofA was the only bank in trouble, look at this list of 64 FDIC-insured banks that have failed and closed down in the first 7 months of 2011. This is in addition to 157 banks that failed in 2010, and 138 in 2009. It is obvious that things aren't getting better. But that they have company is cold comfort for BofA, around whom vultures are gathering. 

• In early 2011, it settled charges of mortgage-backed securities fraud charges with BlackRock, PIMCO, Freddie Mac, Fannie Mae, insurer Assured Guaranty and a few others, agreeing to pay $8.5 Bn. These settlements have run into some trouble, and are now facing opposition.
• Already, AIG has claimed $10 Bn damages for securities fraud in sale of mortgage-backed securities by BofA, Merrill and Countrywide. 
• In addition, over 90 similar suits have been filed demanding damages of $197Bn, says the above article, quoting LawyerLinks, a legal consulting firm.
• Now, it  is being reported that the National Credit Union Administration has declared that it is suing several banks for damages of up to $50Bn for misrepresenting safety of securities it sold to several credit unions that collapsed as a result of the investments. Among those likely to be sued is Merrill, now part of BofA. 
• Credit Default Swaps on BofA have risen to their highest level since May 2009, showing nervousness of investors.
• BofA has begun writing down principal on Californian "underwater" home loan mortgages of troubled borrowers. BofA is reported to be seeking immunity from prosecution in return for paying fines and writing down principal outstandings of underwater mortgages.
• Elsewhere, BofA is facing energetic protests from locals fed up of the number of foreclosed properties that are ill-maintained, sending property values in entire localities tumbling. 
• The richest Hedge Fund Manager in the world according to Forbes' 2011 List of Billionaires, John Paulson, and who is known for sticking to his bets for longer than most fund managers, has sold half his stake in BofA and Citigroup.

There is speculation that it could spin off Merrill Lynch Wealth Management and Investment Banking operations. There is also some speculation that BofA could put Countrywide, acquisition of which is by consensus considered as a big corporate blunder, into bankruptcy. However, moves taken to consolidate Countrywide and BofA have clouded BofA's ability to ringfence Countrywide-related liabilities. 
Watch this space! 

The Death Spiral beckons ...

Bloomberg reported that as of August 10, 2011, 186 US-based financial services companies traded for less than 60 percent of their book value, or common shareholder equity, including Bank of America, Citigroup Inc., Morgan Stanley, AIG and SunTrust Banks Inc. Together, they had a market capitalization of $300.5 billion, compared with $686.4 billion of book value. This means that a fall in their share prices to this extent (40%) is well nigh inevitable. 

How likely? These banks are very, very vulnerable. For example, earlier this week, AIG filed a suit accusing Bank of America of securities fraud; demanding damages of $10Bn. This sent the BofA stock down 20%, in addition to the bloodbath that the Dow Jones has experienced in the week after August 2, and the S&P downgrade. Its market cap stood reduced to $68.6Bn. Compare this with just one year-end intangible item on its 2010 Balance Sheet: Goodwill is shown at $73.8Bn (see p.130, Table XIII. See also Footnote 1 below)  – forget the rest of its balance sheet, BofA would have the world believe that this intangible item alone, built up from excess over book value paid for its past acquisitions, is worth more than the entire BofA is worth on Wall Street. How many will believe this, and for how long? There will always be the small boy who shouts, “The Emperor is not wearing any clothes!”. After reading Page 114-115 of its 2010 Annual Report, any accountant will understand that BofA will have to write down goodwill significantly (it wrote down $12.4Bn in 2010) - and to keep the shareholders' equity intact after this write-down, it would need to raise more equity. The dilution this would almost certainly drag the share price lower. Which will require them to raise more equity at even lower prices ... leading to a death spiral.

What about the demand for financial sector shares? All but non-existent. Retail interest was never very visible in the US in equities; now it has disappeared. Institutional investors are worried about what write-down of such intangibles would do to the Balance Sheet – and will stay away from any further issues in sufficient number as to make a public issue a very big gamble that could very easily fail. So the only solution – a government bailout wherein the financial institutions that still bear the TBTF tag (Too Big To Fail) are partly nationalized. Expect this to happen in the not too distant future, when the pressure of reporting numbers that have no relation to stock market prices forces them to look for ways of raising their net worth to blunt the edge of the writedowns that are inevitable already. 
What if the US Government finds it politically unpalatable or impossible to rescue these firms with a QE3? Refer to the title of this post! 




Footnote 1 referred to above: 
Table XIII on p.130, and Table XII and Table XIV before and after it, were the result of BofA's attempt to dress up their Income Statement and Balance Sheet, and the justifications for using these were on page 40. If they had followed GAAP alone, the Tables and the explanation on p.40 would be unnecessary. They used "non-GAAP measures" - euphemism for accounting legerdemain to make accounts smell sweeter, euphemism for which is "additional clarity". The footnote to Table XIII reads: Presents reconciliations of non-GAAP measures to GAAP financial measures. We believe the use of these non-GAAP measures provides additional clarity in assessing the results of the Corporation. Other companies may define or calculate non-GAAP measures differently.

What goes around, comes around ....

The US, IMF, and the World Bank have lectured India on the need for fiscal discipline, how to allow market forces full rein, and allow businesses and companies to close down rather than support them in difficult times, which is what the Government was wont to do. The US have not taken their own advice, on the specious plea of "Too Big to Fail", and bailed out top investment banks, commercial banks and insurance companies.  The IMF and the World Bank conveniently forgot to lecture the US for the same folly - of letting deficits go haywire.
What goes around, comes around ....
The UK Press had a great time, roundly criticising the organising gaffes of the Organising Committee for the Commonwealth Games. They preened over the fact that with one year to go, their preparations for the Olympics were ahead of schedule. In less than a week after this, the London riots have exposed the seamier side of the recession-hit economy - about how thin the veneer of civilisation is, even in what is considered one of the more civilised countries in the world. All it requires is a little financial discomfort in enough people to spark riots, arson and looting. And now, there are worries about how secure London really is, with a few sports ties being called off due to the riots. Who knows if the 3rd test between India and England will happen now? If you think such rioting is uncommon, see this from November 2010 and this protest in March 2011 pushing for greater profligacy from a Government that already has racked up a cumulative deficit of 4 times the country's GDP. 

What goes around, comes around ....
The BBC calls the London arsonists and looters as "protesters" - a cute euphemism - but coyly refrain from saying what they are protesting against. A far cry from what they call helpless victims in unmanned drone attacks and in cross-fire between the "Coalition" forces seen as interlopers and those protesting their continued meddling in Iraq and Afghanistan  - "insurgents". See synonyms of insurgents here and judge for yourself how many of these terms apply to those perpetrating violence in London more accurately than "protesters".  And then Google this phrase: "Insurgents Iraq Afghanistan BBC". Orwell's 1984 is well and truly upon us. Long live Doublespeak!

The US Debt Crisis: What does it mean for the World?

Let us do some crystal-ball gazing. 

1. The US debt crisis would certainly have spooked central bankers the world over - they will already have stopped thinking of the dollar as impregnable. If dollar is not reliable as a reserve currency, what is? A few years ago, the Euro would have been seen as a viable alternative. No longer. The Euro and the Dollar are locked in a waltz on a downward sloping dance floor. 
2. No single alternative will emerge. Over a period, before the US gets hit with its next politico-financial crisis (see para 7 below for a more detailed explanation), central bankers of smaller countries will move out of the dollar, eventually maintaining (maybe) no more than 3-4 weeks' US$ transactions worth of dollars. China will do it slowest of all, because they will get hit the most if they were to enter the market as sellers - China is an 8,000-pound gorilla in this arena. Three alternatives come to mind: (a)  more bilateral, regional and broader multilateral initiatives will emerge, for transacting in currencies other than the USD. (b) Gold will be a natural alternative for both, central bankers and the population in general, and (at least in dollar terms), gold will soon zoom past $2,000 per ounce though the present price, an all-time record, (at the time of writing) was at $1,637 in the spot market. (c) some strong currencies like will emerge as temporary havens, for example, Swiss francs.
3. Rating agencies will have to revisit their sovereign rating norms. Currently, it is unthinkable in their models to question the rating of AAA to the US. The rating is maintained even though the country is (by their President's own admission on prime-time television) four days away from default. India's rating was junk grade in 1991, when India teetered on the brink of default, having forex reserves to pay for three weeks of oil imports.  Today, besides the US, Ireland, Portugal, Spain, and Italy (all these countries are either on the brink of default or have been bailed out at least once) are rated higher than India in Euromoney's 2011 country ratings. This already looks so untenable as to damage the reputation of the rater, rather than the country that is rated low! What's worse, rather than downgrade countries, Moody's created three sub-categories within countries with the same rating: resistant (the highest), resilient and vulnerable. So you have countries considered vulnerable in the sense that there is high probability that it may default on its debt. Yet, they have a credit rating of AAA. A higher rating means that companies in these countries can raise money more cheaply from anywhere in the world. 
4. So it is ridiculous that world-beating companies from India have to pay a higher rate of interest on their borrowings when: 
5. • both, the country and its companies boast of far better than average financials and economic projections,
   • very stable Government and political establishment, where successive Governments headed by different political parties have demonstrated continuing commitments to reform and globalization, 
   • the world's most transparent and efficient secondary capital markets (with T+2 settlement cycle), 
   • healthiest banking sector compared to almost any country in the Western world, overseen by the world's most competent central bankers, 
   • higher GDP growth rates and projections than most countries in the world of any consequence bar China,  
   • and world-beating companies and innovators that are major contenders in every major acquisition of any consequence in almost every country in the world.
6. About gold, there is something strange going on: the record prices are bringing people in Europe to the jewelry stores, selling their necklaces and earrings. In India, the reverse is happening. Indians are buying up more gold than before, even at never-before prices! Make no mistake, the Indians are the wise guys. 
7. The US debt crisis is worse than one thinks. The US Government has gotten used to record fiscal deficits. There is no way they will mend their ways. Even if the August 2 crisis is averted, President Obama himself has said that the current law raising the limit will only enable the US to pay for what they have already spent. Nobody seems to notice, especially the sovereign credit raters, that this is the classic definition of a debt trap - struggling to borrow to pay for what you have already spent. Before long, the US will need more limits, to pay for the deficit they are already building up. Obama will end up specializing in going to the House to ask for more money to pay for his predecessor's follies and his own inability to entirely reverse them. A simple statistic is telling: From April 2010 till today, the average per capita GDP has gone up by $1,100 with rising unemployment ("jobless growth") while US per capita National Debt has gone up by $5,200. 
8. China has to manage the other end of the sword - while the US's declining influence will mean its rise, economically, it will hurt more than any other country save the US, from a declining dollar, because they have trillions of them in their coffers.
9. I was amused to read that Apple Inc is today more cash-rich than the US Government, the most powerful Government on Earth!