Monday, December 28, 2009

Lies or Official Statistics- Take your pick

Check out this blog, from which I have taken an extract. Governments world over are notorious for manipulation of statistics. In India, the RBI and the Ministry routinely indulge in this.
However, what seems to matter is the first impact of such announcements. They seem to be self-fulfilling, in the sense, that revisions do not bother the financial world. So may be, to that extent, the governments are doing a proper job by telling lies. Incredible Shrinking Third Quarter U.S. GDP Figures
December 24th, 2009
Goto comments
Leave a comment It was with triumphant fanfare that the Obama administration initially announced that the Q3 results for the U.S. economy showed a robust 3.5% annualized growth, signalling and end to the Great Recession. Predictably, the Dow Jones index soared. Then, somewhat latter, a revised number came in from the Bureau of Economic Analysis; the Q3 GDP growth was a much more modest 2.8%, indicative of a sluggish recovery, at best. But even that is not the end of the story.

A second revision has now been released from the BEA, and it is even more anaemic, a mere 2.2 %. God only knows what another revision might reveal. However, even if the 2.2% positive growth figure holds, it must be recognized that is it based on gimmickry such as the infamous “Cash for Clunkers” program, which merely pushed demand for automobiles forward, in the process artificially inflating the Q3 number. As much as 1.45% of the 2.2% growth came from increased automotive sales due to this boondoggle. Subtract gimmicks and the vast level of increased government spending based on adding substantially to the national debt from the equation, and it becomes clear that the real economy of the United States is still in recession

Moneylife : SEBI is waking up to complete takeovers

Moneylife : SEBI is waking up to complete takeovers

Posted using ShareThis

Tuesday, December 22, 2009

A good read-- On ethics & Wall street money

Well said by Alice Schroeder, who wrote the tome on Warren Buffet.

Saturday, December 19, 2009

Of brokers, stock exchange wars and trouble in getting early to work

The stock broking in India is a cottage industry. It is an unorganized sector, with no common interests except that of making money. Each one has a different play. About a dozen large ones are the only ones that can be viewed as a broking house, akin to what is prevalent abroad.

The bulk of them have no business to be in this business. Many of them use the platform for proprietary trading. Many of them ‘rent’ out terminals to punters for intraday trading. Most of them employ an army of arbitrageurs, who keep skimming the inefficiency in the market to make money. If they were to pay a brokerage charge on this, the business would disappear. The myth used to explain their existence is that they create liquidity. I beg to disagree. The liquidity to the market is given by the promoters. It is no secret that most promoters have undisclosed ‘promoter holdings’ which is used as an inventory to make a market. They operate through a clutch of ‘house brokers’ who create circular trades in the stocks. They are the ones who let the arbitrageurs come in and make a living. These market makers are not only funded with the promoter stocks but they also arrange money by pledging these shares. They are the vital link between the promoter and the buyer / seller.

It is no secret that the key drivers of the Indian markets are the FII investors. Without the market makers, there is no way they can transact the volumes that they presently trade in. When they buy, the market makers step in and provide the supply. Depending on the action by other large holders of stocks and their trades, the market maker optimizes the price. When there is a bullish trend, the market maker creams the buyer. Similarly, when there is a one sided selling, no one has bothered to find out or report who the buyer is. The focus has always been on the glamour boys (FII, Institutions etc). At these times, the market maker crashes the price and absorbs the selling. It helps if some other buyers step in.

Of course, with the spread of institutional investors (mutual funds, insurance companies etc) the market makers role is made easier. Often, they will have to ‘push’ inventory by creating research reports. And since the market maker is a promoter link, he is able to offer some information edge and create a demand.

Let us look at the volumes. On any given day, the average volume is supposed to be Rs.100,000 crore. But this is a wrong number. Of this anything from 75 to 90 percent is the value of stocks traded in the F&O segment. If we exclude this, the actual volume is around Rs.10,000 to 20,000 crore. And of this, a substantial part relates to buying that has been done by arbitrageurs who have bought for cash and sold in the F&O. So, the actual trading volume is a much lower figure.

If the markets were really liquid, we would never witness any stock that is ‘locked in to a circuit’. Let us accept it. Barring a few stocks, liquidity is a myth. How many companies can say that they have a lakh of shareholders, with each holding at least 1000 shares? This is not a fancy number, but used to be one of the requirements for a company to get a listing on the NYSE!

The main fault in our industry lies in the fact that the entry price in to the broking industry is abysmally low. In the old days, I understand that Rs.5,000/- used to be sufficient. I also recall a sum of Rs.50.000/- for ‘professional’ category! I cannot imagine that any broker who cannot write a cheque for at least Rs.10 crore without running to a bank or a lender should be in this industry. To put it in perspective, the BSE has so many old members, who will perhaps not fulfill even the present day minimal requirement of net worth for being eligible to be a broker. A brokerage firm has to have enough liquidity to be in business. To be a full service broker they should be able to offer margin financing to clients also.

The recent move by the exchanges to start business at 9 am, has been met with lot of ‘objections’ from the fraternity. Let us look at them:

i) Operational Issues

Back office capabilities are today at a primitive level, except in the dozen odd large brokerages. The small ones survive on outsourced bullock cart systems, which are created by bucket shops. This needs investment of a large order. The other related issue is one of extension in working hours. This is unavoidable and the solution is to either have two shifts. Merely paying people higher, will not resolve the issue of fatigue. If systems are robust, why does the back-office have to come in two hours early? Also, if trading halts at 330 pm., ideally the back office should be able to wind down in an hour. Unfortunately, here the stock exchanges are the culprit. The day end prices are not frozen till 6 30 pm! I have seen mutual fund back offices waiting only to get that number. In today’s computerized world, why can not the closing prices be frozen by 345 pm? If this is done, then the back office can shut down by 5 pm or so, which is acceptable even if they have to start at 8 am. I have seen operations in Malaysia, in 1990’s, where the markets would start at 8 am and close at 2 pm. Even there, the staff would vacate the office by 5 pm. There is also some work which starts later and continues beyond the scheduled close. Surely, a shift system can handle this.

ii) Banking issues

This is another primitive area. Brokerages have clients who live on credit. Margins are not paid and the broker has to wait two days to get a cheque which again takes another two days to get cleared. This goes back to my argument about the low financial entry barrier. The other thing is that the brokers have hit themselves in the face with their price wars. Brokerages of one paise etc are going round. If they make the minimum brokerage to, say, Rs.100/- per trade or 0.50% in respect of cash business, their viability would be better. In F&O, they trade for their clients without taking margins. Why? I have seen large foreign banks trade in F&O and not pay margins. Brokers would take this business if they could arrange finance. Suppose the exchanges make it unlawful (with severe penalties), then this need would not arise. Giving credit to a speculator is like giving champagne to an inebriated person. The crux of the problem is that giving financial accommodation to clients has become a way of getting more business. One fine day, one client defaults and the entire month’s commission income gets wiped out.

iii) Commuting etc

Assuming that the most affected city is Mumbai, I actually see this move to start early, as a positive. Coming to work at 8 or 830 am means ducking the peak hour traffic and if you can close down by 5 pm, your quality of life will surely be better. Let the exchanges put their house in terms of giving their feeds to the brokers by 4 pm and this is a workable proposition. In the old days, the stock markets would open at 11 am. Only when the NSE came in, did the timings move up. Surely, the two exchanges have started a war of one-upmanship without any tangible benefit. If they expect arbitrageurs to generate more trading volumes they are on the right track. Investors and traders are not going to increase their trades. And my heart goes out to the army of arbitrageurs and the quant traders, who sit at their desks without a break. It is essential that the exchanges think about a lunch break, like is the practice in Japan and some Eastern Markets.

iv) Banking

India has lazy banking. Most banks have very relaxed banking hours. With everything getting technology driven, it is high time banking became a round the clock activity. We do not need physical banks to remain open to help the brokers or investors to trade. Maybe the nationalized banks can never get there, but all one needs is a few branches to do this.

v) Profiteering and the exchanges

And finally, BSE vs NSE. The BSE is a crony club that has robbed every customer blind, in the past. Only after the NSE stepped in, did the system stop the theft by the brokers. As regards NSE, one hopes it does not get complacent. Neither exchange should be run on a ‘for profit’ basis. Unfortunately, by selling stakes at ridiculous valuations, the exchanges have clearly indicated that they are out to screw the investors. If they have to satisfy investors, then they will only think of ways to increase revenue. That should NOT be the role of a stock exchange.

Tuesday, December 15, 2009

Andhra, Telengana, Marathwada, Vidharba, Neverland et other states of India

The gentleman from AP (TRC?) seems to have pulled a nice con job with the so called fast unto death. Speedy recovery and now a willingness to wait another 4 years! Wonder why this sudden change of heart.
Of course, this helped me to reinforce several things;
1. Corporate governance be damned. Sonia is the CEO for this country. She took the call, without any semblance for corproate governance. Her view was to cede in to the demand, damn the legislative process for splitting a state. How can one individual decide on such a thing, no newspaper or tv anchor questioned.
2. Now the demand for separate states is going to be a daily tamasha. All elections henceforth will carry 'promises' by traitors like the andhra guy to have a separate state.
3. The andhra guy seemed smart enough. His family is already in to the politics business. The media was addressed by son, daughter et al. He sure knows his onions and seems to have enough legit businesses that can be a platform for explaining future wealth!
4. None of the political parties have any balls to take a stand. Best example is the gentleman called Chandrababu Naidu who first supported and then opposed!
5. No one actually bothers to ask our PM about anything. Whether media or someone else. All things are decided by the Lady in command.
6. Media does not question if a polical party boss (Sonia) who is a mere MP can be the main person to enjoy all privileges reserved for heads of state. I do not know enough of the laws to be certain about it, but strikes me as another slap in the face for corporate governance.

Friday, December 11, 2009

Moneylife : Osian Art Fund: Art of a scam?

Moneylife : Osian Art Fund: Art of a scam?

Posted using ShareThis

Barclays Bank gets away scot free!

My previous post about how India has a legal system, but an utterly useless one (useful one, I guess, if you can manipulate the end game)is proved by what SEBI has done(?) to Barclays Bank, which deliberately screwed up data and accomodated people it should not through the notorious and obnoxious P Note route in to Indian markets.
SEBI's actions reminds me of my childhood, when my mother would admonish me by saying " Please do not do it in future". How can SEBI let go of an offender like Barclays? Who took the call? Why? What did SEBI get in return?
Interestingly, all the money through the culpable PNotes, were invested in to R Com (Reliance COmmunications of the ADAG Group). Is that why there is no punishment?
SEBI has to explain this.
This was a great opportunity to tell Barclays that it can no longer deal in Indian capital markets in any capacity. Broker, Investor or Investment Banker.
The guys at Barclays must be laughing their guts out at the rap on the knuckle delivered by SEBI.

Moneylife : SEBI board cannot quash order against NSDL: ex-CJI

Moneylife : SEBI board cannot quash order against NSDL: ex-CJI

Posted using ShareThis

Tuesday, December 8, 2009

Two hoots for the law- This is India

SEBI chief still hanging in there, in spite of the pithy comments from Justice Verma about the way the SEBI Board is being used to scuttle investigations in to the IPO scandal, where NSDL played and key role. The then head of NSDL is now the SEBI Chief.
Similarly, we have a report about half a dozen companies that have violated the FCCB guidelines regarding end use of money. The RBI permits the proceeds of FCCB to be used in certain specific ways only. Right or wrong or downright stupid, this is the law of the land. Violation does not seem to matter.
RBI will 'fine' the company and leave it at that. Shareholders suffer.
What about the directors of the company? Nothing. The law should be changed to make sure that all the directors of such a company are barred from ever being a company director again, in addition to them being personally made to cough up the fine or face imprisonment in lieu.
The legal system in India abets the crook. So, if you think something is not legally permissible, have no worries. The government has a tariff for doing wrong. It is called a 'fine'. And we have plea bargaining. All it involves is some payment and some grease..

Andhra - The wedge in to India

In 1952, a 'gentleman' by the monikker of Potti Sreeramulu succeeded in rabble rousing and dividing India on linguistic lines. The then PM, Mr Nehru had no courage to take these people on. This set the rot and the Congress started using this tool of taking sides with rabble rousers, minorities et all and brand it as 'secular".

We are now at the cross roads again. Telengana agitation is one which will decide whether India will remain united for some more time or we will see a 100 states bloom in a few years. Telengana is only the beginning. Soon we will have other fights, whether it is in Karnataka or Maharashtra or Bengal or Rajasthan.
Congress has always found it advantageous to divide people by race, caste and every possible way to pretend to be 'secular' and take the easy way out of crises.
When Potti wanted Andhra, he also wanted Madras to be the capital of Andhra. Then as a compromise, Kurnool was chosen. Hyderabad was later. Now, Telengana will want Hyderabad as capital!! That time, a Nehru put the first wedge in dividing India. Today, a family member, thru a proxy PM will put the wedge that will sub divide India!!

Let the Pottis of the world immolate themselves or fast unto or beyond death. So many traitors to India less.

Government & its employees- Both rob you .. Mera Bharat Mahaan

Income tax is official theft, by taking away money from one pocket and giving it to another in the name of social equalisation. Now, what is left of your taxes is stolen by the employees!!
Truly, the government employees deserve to be hanged to death. Inspite of being paid so well, having pensions, prime land allotment at bargain prices, etc , they still rob you blind.
There is absolutely no hope for this crooked country.

And now, tax refund diversion racket!
Published on Apr 08, 2009
NEW DELHI: If you are a tax payer awaiting refunds at the end of the financial year, here's a shocker.

Tax authorities in New Delhi suspect money meant for refunds to have been diverted to some fake accounts.

As many as 10 complaints have been filed by the tax authorities with the Delhi Police against some data-entry operators who are suspected to have diverted money meant for refunds last year, a government official said on condition of anonymity.

The FIRs, filed with the Indraprastha Estate Police Station, near the headquarters of the Income-Tax Department, Delhi, named the operators hired by the department for processing returns in the capital.

In the last financial year, refunds of Rs 41,419 crore were issued, while in the previous year those totalled Rs 40,701 crore.

In Delhi alone, in 2008-09 refunds of Rs 9,459 crore were given against Rs 7,673 crore in 2007-08.

When contacted, a spokesperson of the Central Board of
Direct Taxes told PTI that these instances would not affect
the refunds and asserted that the computer systems of the
Income-Tax department have not been hacked by outsiders.

Thursday, December 3, 2009

Dirty names from recent history

Names confined to the pages of history. One or two were bankers to governments. One was a "thundering herd".. Each one bit the dust as greed overcame propriety, ethics, reason and fairness.

Lehman Brothers Dresdner Kleinwort
Bear Stearns ABN AMRO
Merrill Lynch Salomon Brothers
Donaldson, Lufkin & Jenrette
Barings Bankers Trust
SG Warburg Swiss Bank Corporation
Drexel Burnham Lambert
First National Bank of Chicago
Barclays De Zoete Wedd AG Edwards
Hill Samuel Yamachi Securities
Paine Webber Philips & Drew
Wachovia Morgan Grenfell
James Capel Kidder Peabody
Chemical Bank Robert Fleming
Manufacturers Hanover Trust
Greenwich NatWst Hambros
EF Hutton Dillon Read

Tuesday, December 1, 2009

India GDP Q2

Spectacular numbers. The key to this growth is the services industry numbers, which need to be checked out. In particular, the 'Social Spending' numbers that the govt includes as part of its GDP growth, is suspect. Suspect not because it does not exist but because it is counted twice. The money spent by the Government on Schemes like NREGA go to individuals, who spend it on goods and services. We are counting input and output all over again!
Albeit this small cover up, the numbers have caught most freaking 'economists' with their pants down. Shows the hazards of trying to second guess the government statistical division.
Now, with this high growth, the central bank is less tempted to tinker with its liberal policy (more write offs, lax accounting policies, easy money etc).
With the next two quarters also likely to show decent numbers, except agri, which actually should be negative for the full year, India could have a GDP growth in excess of 6.5% for FY 2009-10.
Shows the strength of the domestic consumer, who is neither shy nor reluctant.

All animals are equal.. Some are more equal

As per this report, some Anil Ambani (ADAG Group) companies have apparently violated the Central Bank guidelines regarding 'end use' of ECB raised overseas.
The stock markets ignored this news completely. ADAG group has clout and size and will get away with this, with a rap on the knuckles at worst.
And, penalty if any, will be paid by the company and NOT by the directors, who can go on with life as usual. Of course, if it was a small unknown company, the Central Bank would have put it out to dry.
In India,like in the US, white collar crime is a mere transgression. This being a RBI issue, there would be a 'prescribed' penalty. In short, when the law prescribes a financial penalty, the interpretation is that the penalty is merely the price for the violation!
Wonder why media bothers to report this at all.

Monday, November 23, 2009

My latest piece in Moneylife

My new piece in Moneylife.

Killing the mutual fund industry- SEBI style

SEBI wants mutual fund units to be traded through the exchange. This is already happening (or should happen) in closed ended funds and ETF’s. It is generally the experience that brokers do not have any enthusiasm to service the mutual fund investor due to the small change type of business.
SEBI took the first right step in waiving entry load for ‘direct’ applicants. Then it dealt the mutual fund industry a body blow by totally banning entry loads. SEBI has to understand that unless there is some money, no one will undertake activity. Yes, the distributors were screwing the investors with 3 and 5 percent upfront commissions. The NFO market existed only because of the entry load which the distributor got in full, in addition to goodies from the AMC’s. It also ensured that the distributor did not sell existing schemes. Today, we have a plethora of schemes, which mimic each other, have no focus and then fund houses like UTI fold one scheme in to another.
The doing away of the entry load, has in no way diminished investments in mutual funds, as can be evidenced by the steady growth in the Assets Under Management. What it will do however, is to stop the penetration of mutual funds beyond the traditional financial market centres.
The unfortunate part is that SEBI has no say over the insurance companies, which collectively cheat investors through schemes like ULIP’s and endowment policies. Here, the agent commissions can be as high as 40% of the premium paid in the first year and then taper down to around 5% p.a. In addition, the insurance companies dob the investor with administrative charges, management fees etc, that can amount to as high as 3.5% p.a.
As a result, the distributor of mutual funds is now hooked on to insurance products, none of which are insurance products in the true sense. I went to an agent seeking details of pure life policy and except that he showed me everything else! His idiotic logic was that there is some return of money!
SEBI should stop over regulating the harassed mutual fund industry and focus on regulation and ensuring a healthy platform for growth. Micro management does not help, because the regulator has no clue of the industry.
By pushing trading of MF units through the exchange platforms, SEBI is promoting the cause of the exchanges, which are seeking the holy grail of the capital markets. The broker will charge anything between 0.25 to 0.75% for buying/selling mutual fund units. In addition, service tax, turnover tax and STT will be loaded. If the same thing is allowed to the distributor, he will do a better job. In addition the investor would have to have a demat account (for which maintenance charges would have to be paid) and one more round of the obnoxious Kill Your Customer (KYC) compliances would evolve. Further, the stock broker is not going to help the investor in other areas like redemption etc. It will force the distributor to get some kind of a terminal, with SEBI oversight and SEBI will charge a fee for it. SEBI is merely pushing up the costs for the investors whilst pretending to save costs for the investors through making fund houses cut costs!
It is unfortunate that the mutual fund industry is totally at the mercy of the regulator. The investor does not seem to figure at all. Of course, the regulator efforts are clear when one sees the stock markets, where the number of retail investors is steadily declining, only to show a spike when IPO’s open the floodgate for spurious demat accounts.

Tuesday, November 10, 2009

Corrupting India

Three contractors are in a bar after work enjoying a cold one, when a truck crashes into the bar killing all of them.
Suddenly they're at the pearly gates and Saint Peter says “This is perfect. The gates need repair and I can get three estimates.”
He asks the first contractor Bubba what it would take to fix the gates. Bubba walks over to the gates, inspects them, measures them and gives Saint Peter an estimate of $750.
Saint Peter says thank you and asks the next contractor for an estimate. He walks over to the gates, inspects them, measures them and gives Saint Peter an estimate of $1500, and tells him I won't make a dime off this.
Saint Peter says thank you and asks the next contractor for an estimate. Anthony quickly gives Saint Peter a price of $2750. Saint Peter asks Anthony how he could come up with an estimate of two thousand seven hundred and fifty dollars without even inspecting or measuring the gates. Anthony replies, "Its easy Saint Peter, $1000 for you, $1000 for me, $750 for Bubba"

This contractor Anthony is surely an Indian contractor. Most infrastructure and construction contracts happen this way in India. In most PSU companies, tendering is a closed ring (especially in the eastern coal belt) and anything where spending is involved.
We have the recent case of a Madhu Koda ( one of the younger state Chief minister) who is alleged to have 'laundered' a few thousand crore (1cr= ten million) rupees. Whilst the media is going hammer and tongs at this, NO ONE QUESTIONS WHO GAVE THE BRIBES? SURELY EQUAL GUILT IS WITH THE BUSINESSMAN WHO GAVE THE BRIBES. If Madhu Koda is guilty, the guys who gave the bribes are more guilty and they should be the first ones to be punished.
Mera Bharat Kahaan?

Saturday, November 7, 2009

Loan write offs, ARC's and other scams

Some mild thoughts on the Indian businessman and the farmers, who rip the system and have perfected the art of paratism.
The PSU banks are notorious for forgiveness. And the retired bank Chairmen end up with plum pickings.
The banks who forgive, do not even ask for something when the borrower becomes hale and healthy again and is rolling in the dough.
Businessmen and politicians have a ball with the stamp of legality given to this scam through creation of ARC's and the notorious thing called CDR.

Monday, November 2, 2009

IPO bazaar.. A mug's game

Questions posed to me by DNA Money:

1.Do you believe that the low listing day gains would affect the appetite of QIBs?

2.What would you say might explain the anchor investor's willingness to invest in IPOs even when aggressive pricing has been seen to leave little room for short-term gains?

My response was as under:
1. QIB’s are of different shades. Genuine Institutions would go by price and value equation and take a long term view. Unfortunately, in our markets, too many QIB’s appear to be of the buy and flip kinds (as evidenced by the huge churn on listing days) and to this extent, the appetite would be driven by expectations of listing gains. Often, subscription by QIB’s is not a cut and dried factor. Relationship and influence of the investment banker selling the issue is a strong factor too. Apart from this, there are informal arrangements, which influence the decision to invest.
2. The anchor investor is a misnomer. Thirty days is hardly any time for a QIB. Here, the influence used by the lead manager/book runner plays a big role. The merchant banker has to convince the QIB fund manager about the market making mechanism, the ability of the promoter to support the scrip through friends and associate etc . Also, if a QIB is sold on the issue from a long term perspective, they could come in as anchor. I also wonder at some of the brave QIB’s who come in as anchor investor at the kind of pricing that is prevalent. Perhaps, in a bull market, the Institutional buyer is more foolhardy and under pressure to perform. The participation level of retail vis a vis the institutional buyers in recent IPO’s clearly shows that the former is smarter.

The paper has carried some parts of my response in its write up which appears here:

The IPO debate will not die down. I maintain my stance" AVOID IPO's. THEY ARE INJURIOUS TO YOUR FINANCIAL WELL BEING".

Wednesday, October 28, 2009

Shaking the apple tree- The unsafe Liquid Funds

An interesting article on money market mutual funds :

In India, the name given is 'Liquid' funds. Here we have instances of some funds in the past that have broken the buck ( given negative returns on one or more days) and yet continue in business.
In the Liquid funds, more than 90% of the Assets belong to corporate investors including banks. Often, banks borrow in call money and invest in the mutual funds to arbitrage. This kind of an industry structure is fragile. I know of corporates who invest in Liquid Funds for tax arbitrage. The dividend receipts are tax free.
The net result is that since the corproate sector provides the bulk of the corpus, the mutual fund industry has totally neglected the retail (let us call it non-corporate) segment.
The only way the industry will get its focus right is if the government stops corporates and banks from investing in mutual funds. This can be done either by executive fiat (Only resident / non- resident indian individuals can invest in domestic mutual funds) or by tax legislations ( investment income of any kind for corporates will be treated as 'speculative' income).
Towards 2008 middle to end, a lot of mutual funds held "commercial papers" of real estate companies, which were in reality 'illiquid'. Most of them were 'rolled' over ( a ponzi evergreening scheme if ever) or sold to a group company before due date. There were defaults and liquid fund redemptions were an issue. Regulators and investors have conveniently forgotten it.
The worst are the banks that invest in Mutual Funds. Firstly they run out of risk limits on many companies to whom they lend beyond reason. often, the money they invest in the mutual funds is used to lend to these companies! So, in effect, they circumvent all legislation and regulations.
Like everything else in India (especially where you have a dumb regulator like RBI), change will be forced only by a catastrophe.

Don't yet kill the american banker..

The bankers are betting that the money they were given by the feds will be worth less next year than it is this year. So they exchange it for everything and anything, confident that when it comes time to pay it back it will be even easier to come by than it is now.

So far the bet has gone their way. Copper has doubled. Gold is up 20%. Stocks markets all over the world are up 60%. Foreign currencies, too, have beaten the dollar.

Will the wager against the dollar continue to pay off? Well, that’s the big question. If so, you should stay in stocks, gold and commodities. If not, you should move to cash.

But it hardly matters to the gamblers. They’re playing with someone else’s money! If the bets go well, they pay themselves huge bonuses. If they go badly...well...hey...gimme a bailout!

But you can’t blame the bankers. They’re performing a very valuable service. They are helping to separate fools from their money. Too bad we taxpayers are the fools...

From a column in “Daily Reckoning”- (

This clearly explains the ‘invaluable’ service bankers are doing to humanity and we should not grudge them their bonuses. After all, this is one instance where a small number of people make a huge difference to the entire universe.
Unfortunately, the world has chosen to ignore Shakespeare (Neither a lender nor a borrower be). In fact, at the heart of every banking led crises (I do not think there is any other kind) is debt. Straight debt, sovereign debt, packaged debt, re-packaged debt, microfinance scam, leasing scam, etc. The list is endless. Paper money ultimately is only paper. So long as we believe in the illusion, the world economic growth behaves as if it is on steroids. Without this illusion, probably, the developed world will be at a steady state (with zero growth) and the developing world will possibly struggle to remain in place because they will have no ‘currency’ of trust. Left to their own resources, the poor cousins in the world will become poorer. It is only the bankers who create this wonderful ‘feel good’ without any money, that the world is able to grow. We are also all stuck with America, whether we like it or not. The rich have their money in dollar. If you have a weak dollar, you become poorer. America dominates the world through its wonderful bankers. Even at the peak of the crisis, they made sure that the shrewdest banker was fattened with the flesh of the other bankers. So, don’t yet throw the banker away.

Cheers. Have a great day.

Wednesday, October 21, 2009

Fund Managers - Ethical Dilemma???

The recent news of Mr Rajaratnam, of Galleon, is sure to spark a debate on the Fund Managers and the definition of 'insider' trading.

In my experience of being on the sell side and interacting with the fund managers, I can say is that they are always looking for an 'extra' edge. They want information first. Typically, the business given to the broker is dependent on how much and how early is 'news' given to the fund manager by the broker. When the fund manager meets a company, I have rarely seen them asking for anything exclusively. If at all, they analyse as to how well the broker knows the company and uses the broker with the best contact, to get news about a company.
Yes, many things the fund managers do, will be borderline as regards absolute ethics are concerned. It is only when a fund manager uses his position to get some personal favour does it cross the boundary. For instance, we had a fund manager who used to pass advance information about his impending trades to a big time broker. The broker would use it to make money, given the poor liquidity of the local stock markets. Of course, he was sacked, but then promptly hired by another large fund house, whose sponsor was close to the broker. I have seen more cases of broker dishonesty or of fund managers passing more business to a particular broker (for obvious reasons) for reasons other than merit.
Yes, there are talks of some fund managers who have made fortunes by passing more business to a broker and by passing on inside info. Also, there have been cases, where a broker does trading based on advance information from a fund manager and then shares the spoils with the fund manager. There are fund managers who have done this and got away.
The competition amongst the brokers is so severe, that they look at every angle to snare a fund manager in to giving more business. Naturally this path becomes a trap for some fund managers, who cannot resist the lure of easy and quick bucks.
I have also met 'foreign' investors, who used to make a point that they want information ahead of others. For instance, I have received requests from fund managers to give them advance notice about any research report that contains any opinion change.
The investment industry structure is such that it encourages or fosters dishonesty. On the buy side, there is everyday pressure on the fund manager to deliver returns better than his peers. The pressure comes from his own sales team. On the sell side, the broker salesman is under pressure to get more business, which he can only do through making his client'churn' as much as possible. And, also to get more business from a fund manager than what is logically coming to him. To do this, he has to give and extra edge to teh fund manager. This can only be in the form of unpublished information or rumour or manufactured gossip.
Insider trading has always existed. After reading Mr. Warren Buffet's bio, you are not sure whether all the practices he did, would pass muster today.
So, I am sure that dishonesty in this industry is endemic and nothing will cure it

Tuesday, October 13, 2009

RBI authorised black money

Now one can forget the hassle of carrying large pactkets or cash for bribing someone. Just walk in to a bank and buy some'prepaid' gift cards with VISA or Mastercard branding. You can buy in lots below 50,000 rupees without giving any identity proof. You get a prepaid card, with stored value. Unlike many gift cards that can only be cashed at designated outlets, this can be used to draw cash from any ATM.
The receipient can just keep the card for as long as he pleases. In a tax raid, these cards are unlikely to get noticed, given that people are used to seeing multiple cards. And it is so convenient. The bribe can be paid in the government offices itself, since you are not carrying cash, but mere plastic!!

Of course, the RBI will not do anything. Someone has to 'bring it to their notice'.
This can happen only in our country, where on one hand we talk about corruption and on the other, we have the government owned banks facilitating in creating 'black' money!!

These can also be used overseas, so you can imagine the possibilities!!!
Mera Bharat Mahaan...

Monday, October 5, 2009

IPO fever. -- Cashing in on greed

The list of companies that want to foist IPO's is dominated by property companies. This is simply because the property companies have got stuck with land and unsold property funded by debt. Inability to deliver on payments collected because they diverted money to buying more land.
It is unlikely things will change. These IPOs will get 'fixed' by arranged subscriptions by their lead managers and other professional agencies. Laddering will be in full play. Add to that, the unsavoury practice of "IPO Financing" by the NBFC's ( RBI naturally turns a blind eye to this, because nobody has brought it to their attention) will pull in subscriptions. And mandates will be awarded on the basis of price (whichever lead manager promises highest price, gets the business).
Of course, real estate is just one. We will have a lot of greenfield things, like mega power projects etc which will be priced on earnings visible only through a binocular.
Time to be cautious. But history tells me that suckers never learn.

Saturday, October 3, 2009

The IPO con - Stay far away... Balakrishnan / Investing~Losers’ Game

A view about IPO's in India.

Monday, September 28, 2009

Suzlon- Windmills of my mind

Suzlon. Would love to find out how many family owned companies are doing business with the company and how much is the revenue loss.
The company came with great fanfare and good publicity, now surely is struggling at the listed entity level. Promoters have been busy selling shares and creating their personal wealth outside of this company.
Watch the cash flow, the debt and the dividends. You can smell the company with these three things.

Corruption as a national trait

This kind of corruption is the NORM in India. Even if these &%^#( are paid a million dollars a year, they will not stop this corruption.
In Chennai, I have yet to find a single service from a government entity, that does not involve speed money.
In my lifetime, corruption is at its highest and getting worse day by day.
All you to do is to make a list of where the government servants send their children for schooling and higher education and you will quickly understand how.
Of course, property, gold, lifestyle, holidays are the other things to check.
India surely will scale new heights in corruption.
Mera Bharat Mahaan.

Saturday, September 26, 2009

Independent analyst- Is this an oxymoron in India?

When will we get independent analysts like this? This piece is also interesting in the light of everyone stupidly shouting for 'consolidation' in the banking space. Consolidation does not mean anything in banking. It does not increase availability of total credit.

Manipulating the listing price - IPO investors take care

In a process called 'laddering,' IPO shares are offered to particular clients by underwriting firms under the understanding that they will purchase more shares at a specified price after the opening company begins publicly trading. These 'particular clients' are frequently executives of companies that the underwriting firm does banking business with (and wishes to do further business with). The practice of laddering tricks the market. Investors observe that an IPO stock's prices are rising and join in the trading, assuming the shares are moving at an honest rate. Laddering artificially balloons the value of a stock, making it appear to be a hot pick before investors. After the IPO stock's value rises, the client-investors often sell their shares and make huge profits. Those who are not client-investors of the underwriting firms, and thus not aware that the value of the stock has been inflated, fail to sell, and end up holding highly overpriced shares.

L&T buys Chola mutual fund business. Chola Wins

At last,the Murugappa Group has realised its folly. It was doggedly hanging on to its mutual fund business, losing money hand over fist. Group companies support not withstanding, the size refused to grow. Performance middling, bloated staff strength and lack of shelf space in financial services. Now that they have sold it off to L&T, the next act would be to sell off what still remains in the Financial services space. It is sad, that of all the Chennai based fiancial services firms, Chola, with its staid though solid group backing, has been a disaster. Inability to think long term in this business, lack of risk management and a greed for moneylender type returns are not what will give you strength. Plus, unlike Sundaram which was focused, or Shriram(inspite of all the troubles it went through)which created a niche in second hand vehicle finance, combined with a big retail footprint in the south, Chola was a boutique which went sour.
For the Murugappa group, the situation would improve further once they also exit the financing business by selling out fully to DBS. That business is unviable and I doubt if the group likes loss making businesses.
Now, they should be very happy that someone has been stupid enough to pay Rs.45 cr for a handful of mutual fund schemes. For the buyer, I doubt if the non-group assets would be of any significant size and the 45 crore may actually turn out to be a huge percentage of the AUM that is non-group.
Now, L&T, has got a bunch of 80 odd employees and a new business which they cannot ever hope to make money out of till they exit the same. Maybe, with their brand, they will be able to rope in a crazy foreign partner who will pay a fortune to get in to bed with L&T.
As a business, there is absolutely no sense for L&T to get in to. Unless they think that the L&T brand will pull in a huge AUM and they can use the financial clout to get cheaper money for L&T Finance.

Thursday, September 24, 2009

Moody's caught with its pants down

Rating agency Moody's caught with pants down.
Proves the point of what I wrote in my ET piece. Listing and greed go hand in hand. Only way out is to delist the company. Distribute the capital between 20 or 30 odd banks who can form a committee to hire and fire people. Maybe some of the large investing insitutions like CALPeRS can sit in on the Board. Best way to preserve the independence of the rating agencies.

Politics of Business- Location, Location and Location

HyderaBAD. Andhra and Tamil Nadu are two states where politicians are in to serious business. A high number of Andhra MP's are from emerging business houses in 'infrastructure'. In essence, any business where government is involved. Tamil Nadu politicians prefer to stick to real estate, gold and media. AP uses the capital market route very regularly, whereas the Tamil nadu politician rarely does, preferring to keep affairs away from any form of scrutiny.
Andhra has given us a whole bunch of stories- Satyam, Maytas, Nagarjuna, Prithvi Info, Bartronics, The vanishing Leasing companies of the 80's, etc...
I recall that in our working career, we used to joke that if a company is from Hyderabad, Ahmedabad or Baroda, better be careful. These cities seem to specialise in nurturing greed, using whatever short cuts need to be deployed.
Of course, this abounds everywhere, but these locations seem to leave no route unturned, even if it means using the listing route.
Recently, the newspapers carried a story about how MP's from Andhra, who owned businesses in Infrastructure (and dealing with government for most business) were on committees that 'looked' in to delays and other problems in contracts with the National Highway Authority of India (NHAI). Of course, each of their companies has significant business with NHAI.
No follow up to the story. No TV channel raised this issue.
Of such stuff is corporate governance in India made of..

Tuesday, September 22, 2009

Some shareholders are different from others..

Very interesting news item. A family company uses the listed company to make money. Key employees get in on the act and do their own thing.
Virtually every listed company would have a satellite of family owned companies which take away the cream. The promoters build their personal wealth. Often, these companies are structured such that the promoters shareholding in these companies will be through near and dear rather than 'related' persons.
Some large groups have a separate corporate team of loyal employees handling this for them.
Surprising that this news item caught some newspaper space.!!

Wednesday, September 16, 2009

Tax evasion- the shareholder vs promoter

This story will die. The company will pay a fine from its corporate balance sheet. The directors who are responsible for skimming off the money not only from the tax man but also from the shareholders will get away scot free.
The Indian government's reluctance to punish white collar crime is well known, given that the vested interests are high.
This is precisely the reason that when anyone invests in an Indian company, the call to take is only on relative honesty and not in the aboslute sense. I even doubt if the next annual report of this company will comment on this.
This is precisely one of the events on which the stock exchanges and SEBI should insist on a disclosure from the company promoter/manager and seek explanation about what is the loss to the shareholders. Further, if any penalty is to be paid, it should not come from the company. The promoter should make good the loss of money to the shareholders also.

Tuesday, September 15, 2009

Hiring in times of boom and bust

This is good. In my corporate life, I have found absolutely no value add from the so called HR specialists. Often, they take your info and give it back to you in a different form. Generally, they end up hiking the cost of hiring and inflating the wage bill.I remember a firm called Hewitt or something like that which used to send me questionnaires and then ask for a fee for the full report! Wonder what the firm ever did to charge a fee! All they did was send a stupid excel sheet to a few firms and agglomerated the data. They had the cheek to ask for almost a lakh of rupees for this so called 'survey' of which the only use was that some key employee would study it and ask for what the highest paid in the bracket was getting. This survey single handedly pushed up the wage costs in the financial services industry. Typically, the CEO would like to hire juniors at as high a salary as possible, to justify his own fancy salary.
I found that the best way to keep the new hire pay down is to ask for the latest salary slip. Most candidates generally lie about their salaries. Even after giving their salary slips, they will maintain that there are some things 'off the record'. These are generally lies. Today, not even marwari companies give you too much 'off the record'. More disgusting is the lies the candidates make about 'expected' bonus. It is generally useful if you tell them to go collect it and then join. This usually is a ploy to extract 'sign on' bonuses, which became popular.

Indian Banking- PSU economics explained

One of my favorites from Catch-22:

Yossarian was riding besides [Milo] in the co-pilot’s seat. ‘I don’t understand why you buy eggs for seven cents apiece in Malta and sell them for five cents’
‘I do it to makea profit’
‘But how can you make a profit? You lose two cents an egg.’
‘But I make a profit of three and a quarter cents an egg by selling them for four and a quarter cents an egg to the people in Malta I buy them for seven cents an egg. Of course, I don’t make a profit. The syndicate makes the profit. And everybody has a share.’
Yossarian felt he was beginning to understand. ‘And the people you well the eggs to at four and a quarter cents apiece make a profit of two and three quarter cents apiece when they sell them back to you at seven cents apiece. Is that right? Why don’t you sell the eggs directly to you to eliminate the people you buy them from?’
‘Because I’m the people I buy them from’, Milo explained. ‘I make a profit of three and a quarter cents apiece when I sell them to me and a profit of two and three quarter cents apiece when I buy them back from me. That’s a total profit of six cents an egg. I lose only two cents an egg when I sell them to the mess halls at five cents apiece, and that’s how I can make a profit buying eggs for seven cents apiece and selling them for five cents apiece. I pay only once cent apiece when I buy them at the hen in Sicily.”In Malta’, Yossarian corrected. ‘You buy your eggs in Malta, not Sicily.
Milo chortled proudly. ‘I don’t buy eggs in Malta,’ he confessed, with an air of slight and clandestine amusement that was the only departure from industriour sobriety Yossarian had ever seen him make. ‘I buy them in Sicily for one cent apiece and transfer them to Malta secretly at four and a half cents apiece in order to get the price of eggs up to seven cents apiece when people come to Malta looking for them.’
‘Why do people come to Malta for eggs when they’re so expensive there?’
‘Because they’ve always done it that way.’
‘Why don’t they look for eggs in Sicily?’
Because they’ve never done it that way.’
‘Now I really don’t understand. Why don’t you sell your mess halls the eggs for seven cents apiece instead of for five cents apiece?’
‘Because my mess halls would have no need for me then. Anyone can buy seven-cents-apiece eggs for seven cents apiece.’
‘Why don’t they bypass you and buy the eggs directly from you in Malta at four and a quarter cents apiece?’
‘Because I wouldn’t sell it to them.’
‘Why wouldn’t you sell it to them?’
‘Because then there woudn’t be as much room for profit. At least this way I can make a bit for myself as a middleman.’
‘Then you do make a profit for yourself,’ Yossarian declared.
Of course I do. But it all goes to the syndicate. And everybody has a share. Don’t you understand? It’s exactly what happens with those plumb tomatoes I sell to Colonel Cathcart.’
‘Buy,‘ Yossarian corrected him. ‘You don’t sell plumb tomatoes to Colonel Cathcart and Colonel Korn. You buy plumb tomatoes from them.’
‘No, sell,’ Milo corrected Yossarian. ‘I distributed my plumb tomatoes in markets all over Pianosa under an assumed name so that Colonel Cathcart and Colonel Korn can buy them up from me under their assumed names at four cents apiece and then sell them back to me the next day for the syndicate at five cents apiece. They make a profit of one cent apiece, I make a profit of three and a half cents apiece, and everybody comes out ahead.’
‘Everybody but the syndicate,’ said Yossarian with a snort. ‘The syndicate is paying five cents apiece for plumb tomatoes that cost you only half a cent apiece. How does the syndicate benefit?’
‘The syndicate benefits when I benefit’, Milo explained, ‘because everybody has a share. And the syndicate gets Colonel Cathcart’s and Colonel Korn’s support so that they’ll let me go out on trips like this one. You’ll see how much profit that can mean in about fifteen minutes when we land in Palermo.’
‘Malta,’ Yossarian correcte him. ‘We’re flying to Malta now, not Palermo.’
‘No, we’re flying to Palermo,’ Milo answered. ‘There’s an endive exporter in Palmero I have to see for a minute about a shipment of mushrooms to Bern that were damaged by mold.’
‘Milo, how do you do it?’ Yossarian inquired with laughing amazement and admiration. ‘You fill out a flight plane for one place and then you go to another. Don’t the people in the control towers ever raise hell?’
‘They all belong to the syndicate.’ Milo said. ‘And they know that what’s good for the syndicate is good for the country, because that’s what makes Sammy run. The men in the control towers have a share, too, and that’s why they always have to do whatever they can to help the syndicate.’
‘Do I have a share?’
‘Everybody has a share.’
‘Does Orr have a share?’
‘Everybody has a share.’
‘And Hungry Joe? He has a share, too?’
‘Everybody has a share.’
‘Well, I’ll be damned,’ mused Yossarian, deeply impressed with the idea of a share for the very first time.

Monday, September 14, 2009

Change is temporary- SNAFU

Get ready for the next frauds to happen within calendar 2010. Already, danger signs in India. High priced and dubious quality IPO's, banks lending recklessly, accounting fudges happening all over.
The interesting thing is that the analyst community in India will be a party to this rather than find out. Research hiring increasing and sell reports are scarce. Every share is a 'buy' and every IPO is 'subscribe'. Honesty again gets a back seat. With Indian firms ruling the roost in the audit field,post Satyam, expect more creative and Nobel prize worthy accounting.

An opinion piece in today's Economic Times. On ratings

Saturday, September 5, 2009

Suing the Rating agencies

A very interesting development in the US, the home of the rating agencies. It is high time that the rating agencies are stripped of their 'veil' of 'independent opinion' and held culpable for their views. This development need to be watched.
It is very sad that when rating agencies are under a cloud, CRISIL wants to go and rate 'equities' of mid cap companies. Mid cap companies are a mine field, where the promoters are yet to line their pockets and personal goals have a big priority over anything in the company. I think that if anybody invests on the basis of a rating, the agency is surely guilty. The agencies market themselves stating that they do all their homework. So, an investor has every reason to base an investment decision on ratings. The courts need to recognise this and hold the agencies accountable. Though I do come from a rating agency background, what I am seeing today in credit rating agencies is shocking.

Thursday, September 3, 2009

Banking consolidation , Microfinance et al
The insightful article on microfinance is a must read. Micro finance is not just about making credit available to the small guys and replace the money lender. It is also about understanding whether money will come back. All was fine till the government introduced this thing called the NREGA (like a dole, but guaranteeing some Rs.100/- per day for 100 days in a year to rural Indians) which has made rural India lazy. A family is quite content with this dole, which is also aided by rice at One rupee a kg (market price 30/- plus, free electricity and housing which is free of any cost.
The rush of people in to microfinance will make rural India undergo a 'credit immunity' syndrome. Very much like in the emergency days of Indira Gandhi, when the nationalised banks were forced to go on a rural lending binge. The borrower ultimately refused to give money back. Bankers who tried to recover were threatened physically and told to buzz off.
Micro finance kind of gives me a 'deja vu' feeling.
I am wary of nationalised banks, since the politicians will use it to get votes and the bank staffing leaves a lot to be desired. Bank chairmen are appointed at the fag end of their careers, where they are reluctant to take decisions, fearing subsequent enquiries, or are so corrupt that they use it as a time to build bases for a corporate life as a director or advisor. No one lasts long enough to give a vision or direction to the bank.
Recently, the ET talked about banking consolidation.
Consolidation in the banking sector, by bringing together banks is a great buzzword and virtually everyone wants it. The argument is that a bigger balance sheet enables you to lend more to a single customer. How true and nice it sounds.
Wait. Let me get the arithmetic right. There are two banks, A and B. Bank A buys Bank B. The cap of A is 500 and of B is 500. So the combined capital, logically, should be around 1000 (Let us not get in to valuation arguments here). So, Bank A, which could initially lend say 75 (if the banks’ single customer limit was 15% of capital) to a single customer, can now lend 150 to the same customer. Does this prove the point?
Let us delve further. Formerly, Bank B was also lending 75 to the same customer. Now it no longer exists. So, what has changed? Instead of two lenders of 75 each, we have created a single lender of 150. Is this what is desirable?
Let us not blindly repeat what everyone says. India is a tiny country, financially, with per capita GDP of less than a thousand dollars. When this rises, the banking sector will grow correspondingly. Global banks have to be large because they operate across borders. Indian banks also can, if they raise capital. By merging two existing banks, nothing changes. Two and two is four, when it comes to counting money. Yes, accountants can make it twenty two, but that does not take you very far.

Indian IPO's--- A great resource

My good friend, Ashok Kumar, runs a great site called
He has sharp and incisive comments on IPO's hitting the market. The great thing about him is that he calls a spade a spade. Anyone who follows him is very unlikely to go wrong.
He also provides a host of corporate services which you can gleam from his website.
I am delighted to provide a link to his site.

Tuesday, September 1, 2009

Maytas- A Fish story....

IL&FS takeover of Maytas. Is it good money after bad or just a change in status, with the money already having been lost? Having lent huge amounts to the promoter against shares in Maytas, the ownership was already there. Suspect that there is also huge lending and co-investment in projects by IL&FS and other institutions, which could have gone sour had Maytas been hurled in to bankruptcy. So, this move will perhaps help all to salvage some accounting value rather than real cash flow. One fails to understand how a company like this could have lost a sum of nearly Rs.5 billion in one accounting period. There were also talks that many properties that are supposed to belong to Maytas the company face issues relating to title and traceability. Now, there is a long haul. With IL&FS admitting that the company needs 'recapitalisation' one does not have to read between the lines to figure out that what is gone in to the company now, has perhaps vanished.
These kind of bail outs smell. Do not think that any one would have shed tears if Maytas had folded.

Friday, August 28, 2009

Textiles from India. Dreams of a Scorpion..

Export. India has always had a problem in finding something to export. At each and every level, what happens is that the government subsidises them so much that it is like subsidising the consumer overseas. The textile industry in India is perhaps the finest example of why we cannot go up the value chain. We are happy with exporting grey cloth and some made-ups. Companies like Arvind Mills go through the revolving door of economic fortunes. When they set up a denim making plant, other poor countries were busy setting up a finished denim making plant! Indian textile has yet to put a single bloody brand in any part of the globe, except a Raymond to cater to NRI's in the middle east.! India does not have any competitive edge in textiles or garments. Why make it a big thing? Instead, why not let the big time fashion designers come in to India, give them free space and let them set up design shops here. Maybe they will also use Indian resources and create some jobs. Do not waste tax payers money by letting mills export commodities at below cost.

Companies like Arvind Mills have cost the exchequer hundreds of crores in terms of bad debts written off by banks as well as export subsidies. India would have been better off without such a company. The only benefits seem to have gone to the founder family, who have been living in style generation after generation, while the workers, bankers and other shareholders bled.

Wonder why the government is still coming out with stupid schemes like allowing them duty free import of capital goods. This will only encourage companies to export below cost. And we will end up exporting power .

It is time we recognised that a rethink on what India can really export, profitably, without any subsidies is possible at all. Otherwise, let us stick to the airconditioned sweat shop model of our so called IT industry, which at least brings in dollars, creates jobs and does not rob peter to pay paul.

India cannot be a viable exporter unless there is power at global costs and of gloabal quality. And the capital to put in. It is also impossible for Indian companies to do away with the propensity to cut corners when it comes to quality. They always think that what is good for the domestic market will do for the global market, which is spoilt for choice.

I would rather that the government let me have basmati rice at 40/- per kg instead of exporting it. Why should I pay Rs.80/- per kg as a domestic consumer? I am subsidising the foreigner and the domestic exporter is a parasite who is living off the others.

It is disgusting to see that everyone is justifying free loading. All in the name of vote bank politics.

Wednesday, August 19, 2009

BJP- The beginning of the end??

With the 'dismissal' of Jaswant Singh, the BJP seems to have axed itself out of contention with a lot of followers who were not with it because of fundamentalism. After the election results in May, LK Advani should have gone. However, he seems to be sticking on like super glue. The party does not have any followers left from outside the Hindu RSS club. At one point, there was great hope that BJP would provide national leadership.
The party has to completely over haul itself. Time to drop the geriatrics like Advani et al and give more power to the likes of Arun Jaitley. Also, the party has to make peace with the RSS, without actually being seen to be fundamentalist. A tough ask, but if the BJP cannot get back to track, it will be a national tragedy.
The Congress is a one (wo)man party. The cabinet is appointed at will and pleasure of the Italian lady. And this party does not have a clear economic agenda, with some of its leaders being seen as reformers (mistakenly so) and the party following a socialist policy apart from dividing the country in to pieces in the name of 'appeasement' of so called minorities. It is the Congress which has used religion as a card, since independence.

Tuesday, August 11, 2009

Swine Flu

Given the apathy and the total lack of ability in the health ministry, I am afraid that the swine flu is going to take a huge toll on India. One state was mentioning that the health ministry does not have a measly sum of under Rs.20 million to buy diagnostic kits!!
Added to government apathy, the bigger contributory factor is the misery of the human race in india. Poor hygeine standards, 'bugger thy neighbour' attitude and the sheer number of the slum dwellers is mind boggling.
The wimp has 'advised' the Health Minister to take 'suitable' action. Shades of "Yes Minister".
Mera Bharat Kahaan

Wednesday, August 5, 2009

(B)ailing airlines

Mr Prannoy Roy made an impassioned plea as to why the government should bail out the private sector airlines!!. Then, I realised that if it goes through, the next in line could be media companies!!
What an idea, Sirjee!!

Wednesday, July 29, 2009

Insurance- Regulator stirrred but not shaken

The Insurance Regulator (IRDA) has capped the selling commission on the Unit Linked Insurance Policies (ULIP). ULIP has been masquerading as an insurance product and has been the biggest instrument of legal cheating in India. However, the IRDA seems to be a reluctant regulator. There is no attempt to address the opacity in the insurance product. Customers are being ripped off whilst their fear is being used as a selling tool.
I have belief that we need health insurance, crop insurance, fire insurance (not so sure), accident insurance etc., However, one insurance man does not need is Life Insurance. And ULIP is NOT INSURANCE at all. (T)ULIP it is.

Thursday, July 23, 2009

Official Lies - The inflation numbers

As per government data, inflation is negative!! Wow. Does it mean anything to the man on the street? All the mindless TV channels keep harping on this and playing it up as if it is a great thing. Not one of the effin anchor understands this number.
Food prices are going to rocket to unprecendented highs. This, the government statistics are unlikely to record. As the failed monsoon (government will use some statistic to prove that monsoon is 90% of normal, again a myth) screws up crops, the demand supply gap will push prices through the roof.
People are struggling to make ends meet. The TV channels and the government seem to be hand in hand in projecting an image of India that is so unreal.

Friday, July 17, 2009

Education - The racket getting busted

Continuous stream of news about catching some corrupt official or a private college on the capitation issue. Is Kapil Sibal going after them, at last? My good wishes are with him.
Mr.Sibal, just one thing. When you catch these corrupt bastards, use your legal skills to ensure that none of them escape the noose. Death by hanging for the entire family should be the bare minimum. Confiscate all their wealth.
And also address the fact that most of the 'deemed' universities are owned by members/relatives etc from the administration. No quick fix possible. It is a system ruined by decades of Nehruvian strategy designed to keep education away from as many people for as long as possible.
At least, let us have quality education, based purely on merit. You can make a beginning by doing away with the effin reservations and by doing away with multiple agencies like state boards, cbse, icse, etc etc.
You should also let the Harvards and the Whartons set up schools or colleges (away from Metro cities please) so that the rich and filthy rich can send their spouses there.
Also, let private sector education be run on a for profit basis and subject them to income taxes.

Sunday, July 12, 2009

Law firms shattered

Service tax on lawyers. The previous FM spared them. Surprisingly, Pranab (accountant??) has spared the shattered accountants / company secretaries from this (ex)cess!! It is difficult to fathom the rationale, when every damn thing in the country is subject to service tax!!

UPA rules OK

After a disastrous (non) robin hood budget presented by old hand Pranab, it is now the turn of the Health Minister, Mr Azad. He believes that television watching is a good way to control population growth. If people do not watch tv, having nothing to do, they end up producing babies. Ergo, TV will prevent that activity. Wish his old man had watched more TV.

Sunday, June 28, 2009

Jai Ho- Kapil Sibal

You are on the right track. We have one of the worst education systems in the world, notwithstanding the IIT/IIM. Today, if you do not have money or a caste certificate, education is not for you. Private participation is restricted to politicians who set up colleges and collect capitation fees.
Sir, have ONE Board English the medium and all languages optional. Take away the powers of the state to tinker with education.
Pay the teachers well. Force all the SEZ's and builders to compulsorily build schools and colleges as a pre condition to getting approvals. Make corporates set up schools / colleges and manage them. If the private sector will not do it, let the PSU ' s do it. Give them double deduction benefits on this.
We badly need change. For 60 years, the politicians have made sure that education does not reach the masses, in the fear that they would lose power once the masses get education. Now, even if you do not, the media will make this happen. So, do something positive, for a change. Carpe Diem, Mr Sibal.

SBI gives financial guarantee

Old news. Tatas got SBI to guarantee a debt paper. Once upon a time, financial guarantees were strictly prohibited by the RBI. Nothing has changed in law. But the regulator winks at this, since the top brass of SBI seem to have the clout to get away with this. It will be interesting to see if the guarantee is revoked or modified. If that were to happen, every investor would have to get a refund. If past is any example, the Tatas will write to every investor and say that if we do not hear from you, we presume consent. This is how corporate India functions and regulators snore.
Now, how can SBI refuse to guarantee other corporate paper? Surely, many must have already approached.
To my mind, this guarantee smells..............

Saturday, June 20, 2009

SEBI- Lost and yet to be found

SEBI wants 'anchor investors', who will stay on for at least thirty days!! This is supposed to give confidence to retail investors.
I wonder when will the pretence stop and we realise that in stock markets, it is 'caveat emptor'? SEBI cannot catch capital market crimes. So, it resorted to 'compounding'. Now it has nothing to do. So trying to micro manage every damn thing and in the process, screwing up.
When will SEBI realise that its role is as a watchdog and a judge. It is not for SEBI to boost trading volumes or to change sentiments.
Simultaneously it has attacked the MF industry by banning entry loads!! Whilst it regulates every aspect of the mutual fund industry, it does not do anything to presecribe even a minimum qualification for a fund manager. Yes, the bus passengers and the conductors should have a license, but the driver can be anyone. I think I will launch a MF with my house maid and the driver as fund managers. It will be legal and you cannot do a damn about it. It is also very likely that they will outperform the fund managers out there, if past performance is any indicator..

Wednesday, June 10, 2009


SEBI oversteps

The announcement by SEBI that it will recommend a dilution in the Securities Transaction Tax (STT) is a sad one and made without ‘application of the mind’. STT was introduced in lieu of abolition of long term capital gains and a very thin rate of tax on short term gains.
Our market does volumes of more than one lakh crore rupees on most days with ninety percent or more being of the satta bazaar variety (the F&O segment). This clearly shows that the STT is not a deterrent to trading. Trading is more a function of the state of the market. The government has already made capital gains from listed stocks on par with agriculture income.
More dangerous is the fact that this kind of a recommendation comes from a market regulator, who has been like the proverbial police in the hindi films. SEBI should stick to what it is supposed to do. Let them not get in to thinking that they are here to grow or throttle the market. Their sole job is to provide a clean platform and also ensure speedy punishment for wrong doers. Whilst they have managed the first one reasonably well, the second role of punishing wrong doers has been a dismal failure. To cover that up, they borrowed the immoral concept of ‘compounding’, from the West, where all malpractices in capital markets originate.
Let SEBI focus on regulation and leave the economics to market forces. The irony is that the exchanges (which are akin to public utilities) are busy issuing stock and playing the market cap game. It is matter of time before they impose levies on players and participants in this endeavour. Let SEBI stop this first rather than doling out favours to players who are in any case addicted to gambling on the bourses. SEBI is like the child who has a toy, but does not know what to do with it, so eyes someone else's toy.

Monday, June 8, 2009


The arrest of a lady of the erstwhile industrial family is heartening. Not that there are others with unaccounted money. But in this case, surely it must be old money that escaped the tax men as well as some bank that wrote off a loan to some Mafatlal company. All the NPA promoters seem to be rushing overseas to bring back their wealth, before someone publishes a list of people of Indian origin with bank accounts in Lichenstein and other taxfree steins. Sadly, this lady could not escape enemies within the house.
It is funny to see a lawyer pleading that "for a 'measly' 30 lakh duty evasion" why should the client be jailed? I do not see the difference between a pick pocket or a thief or someone who evades duties. In fact the tax evaders are the true scum of the earth, who pour misery on the salaried employees and this crime is the worst of all. If I get a chance, I will surely hang tax evaders. Do not waste your tears for crooked businessmen (ex or present). They are the true pick pockets and parasites.

Thursday, June 4, 2009

The Education Racket

The fatal quota cum reservation system in Education has given the politicians a huge money making machine. It is an open secret that most engineering and medical colleges are owned by politicians who auction the seat to the highest bidder. Land for the institution is given away as a freebie by the state, nationalised banks give loans for construction (with most loans having gone bad, except for progressive businessmen who have built a chain of educational institutions) and the upper middle class and the NRI who are denied seats due to the quota system are easy targets for these temples of learning. It is a well known fact that you can end up having to pay any where between a couple of lakhs of rupees to fifty lakhs to 'buy' a seat in a medical college. This is payable in cash, with no receipt issued. So, if you think that any politician has a noble objective in setting up a school or a college, think again. The Return on Investment is enormous, since land is virtually free and construction loans seldom get repaid.

Tuesday, June 2, 2009

Paki colours

So, Pak has formally dismissed the case against LeT. It is a shame that we continue with the charade of friendship with this country. Time for our politicians to stand up and act. Since 26/11 our politicians have only been 'talking' tough. Now, the Paki government has called the bluff. Wonder whether the Indian politicos will do anything at all.
Let us forget all pretences. The Paki will not change. Cut diplomatic contacts, stop them from visiting us and do not let our folks visit them (of course, Dubai / middle east will always facilitiate the Indian traitors to visit Pak from there, with no passport entries). Stop trade and sports with that country. That is real and will not surprise anyone. The US, in any case will support Pak as it does want Pak to be a thorn in India's flesh.

Saturday, May 30, 2009

Family first (My family and other legislators)

Finally, Karunanidhi dots the 'i'. One son given cabinet, one the state, grand nephew taken care of. Daughter not yet taken care of, so lets watch for this.
Family rule at Centre, J&K, Tamil Nadu, Bihar, Haryana, Punjab, Delhi.....
We are surely a big happy family.
So, as party members realise that they cannot climb up the family tree, they will have to be content with the cash and other monetary benefits thrown to them by the ruling families.
Ergo, corruption has to go still higher. Already at its highest since independence. Not that this bothers the industry or anyone. Industry happy that at a price 'impossible is nothing'. Politicos happy that the money tree is growing. People have iron in the soul. Good story for page 3 media to air, gives them TRP's.
The joys of the family spread happiness. Rejoice.

Belief Rally in the Indian Stock markets

Strong cash in to the market, expectations that the new government (new??) will execute the wish list of all the capitalists and the 'fear' infused in to the short sellers have all pooled in to take the stock markets to a new range. Hopefully, the market may not crack 12k on the downside, but looks like touching 16K soon.
This rally is thus, based on BELIEF and hope rather than on any fundamentals. Of course, markets do not respect fundamentals at any given point of time. Hope the mid cap rally continues, so that we can sell of junk which we 'forgot' to sell in the last rally.
The economic growth numbers across the world seem to indicate that 2009 end will see a revival. India continues its growth on the back of government spending. Fiscal deficit is not a worry for any one as demand compression is keeping prices low. This is the only wedge of worry.
Apart from that, our GDP should clock 5% next year also, I think.

Tuesday, May 26, 2009

Family affairs- Making of a cabinet

The Wimp and the Iron Maiden are stuck, almost ten days after the so called 'clear' mandate from the voters. With the second and third (de) generation of veteran politicians getting elected (no surprise since these off springs are born in to so much wealth that they have to get back in to the gutter to multiply this wealth) there is a problem of seat and ministry allocation. With some of the families having both generations elected, it is indeed a dillema for any irrational root of a rational number.
Of course, loyalty to the ruling family has its rewards, with plum ministries.
Dekh tamasha, dekh.
Whilst every good human being is happy that Arjun Singh is no longer screwing up the education system, the equally big fear is of someone else wanting to play the 'secular' Congress card by promoting even more reservations. Maybe the new person will also have a fiat for quotas in private sector jobs also. Will be one more brownie point for the next election for the Congress!!
God save the citizens of the world's largest family ruled nation.

Tuesday, May 19, 2009

circuit breakers - artificial interference

Mr Ajay Shah has argued against circuit breakers.
I support this. Why should the regulators interfere? Do we have to wet nurse everyone? Any one who plays the stock market, is a gambler and should be at the mercy of market forces. The job of the regulator is to catch wrong doers and manipulators. If they do that well, they serve their purpose. Instead of abetting manipulation (I think circuit breakers permit manipulation). A compromise could be to see if the markets trade at or near the articifical barrier of 10 or 15 or 25 percent for a minimum period of time, say one hour. By shutting down the market, investors lose an exit opportunity. And to my mind, exit is more important than entry. Every small investor wants to buy and when he loses because he foolishly entered, he cries wolf.

Monday, May 18, 2009

The unbearable burden on Congress

Today was a quicky at the stock markets. Surprised by the ease with which the Congress is forming a government, throwing aside the left, the lalus and the amar singhs, the market is going to be on a tear for some time. The fun will be if the FII buy orders that are not executed today, get called off tomorrow. Reasonable to expect that, given that stocks are 20% higher!!
Fundamentals are not to be dicussed. Enjoy the ride, sell if you had forgotten to in the last rally. Economy will take a year plus to recover. Stocks will become cheaper again. The Congress now has the unbearable burden of expectations. From here, one can only expect disappointments, given that the market wants divestment, FDI without ceiling etc.,
Interesting is the SEBI chief's remark " we are closely watching the market". Are they not supposed to in any case?
The gossip is that Ketan is short, Anil is long and someone big is short.

MIOT hospital at Chennai

Chennai, the home of medical tourism for the firangs. Heard of some bad experiences, which ought to serve as an eye-opener. This link is about someone's experience of MIOT hospitals, a high profile hospital, which advertises in a big way.
I know of another family who had a terrible experience out here.

Saturday, May 16, 2009

What a verdict

Whilst personally disappointing, the election results appear to be a good thing. Hopefully the UPA can keep back the begging bowl for a rainy day. Hope they now have the balls to implement a national agenda, free of the Left and the ilks of DMK , Samajwadi etc.,
At the point of writing, PC has lost (so much for his arrogance) thanks to the Tamil film industry campaign. (Unfortunately, he has won in a recount, so we will have to suffer his arrogance for another term) . It would be better if Manmohan Singh is the Finance Minister. He can hold two portfolios, since in any case the PM one is just a rubber stamp as "authorised' signatory. Naturally, Karunanidhi wants cabinet berths for his several family members. One no daughter, one no son (one no son for the state) and one no nephew. So the moolah can keep pouring in to the family coffers.
The BJP has to do some serious re-think. They now have four years to decide whether they want to be a national party or not. They have to dump LK Advani and promote the younger guns, drop Ayodhya etc and focus on Bijli, Sadak and Paani.
The Congress should thank the NREG programme. A few villages I visited have been totally swept by this programme, even if they do not see the full money. Even a daily dole of 30 bucks for each family member is working wonders. Forget what it does to the fiscal deficit.
Now the Congress will have the unpleasant task of shit cleaning the mess it thought that someone else would inherit. Let us hope that the global economic recovery is rapid enough to hid this and we emerge smiling.
One thought. On Monday morning, we may have a great opportunity to sell stocks.

Wednesday, May 13, 2009

The ballot box- What does it hold?

At last. Votes have been cast. In two days, the count will start. Till then, the TV channels will go crazy with exit polls, likely permutations and combinations and such other serious intellectual masturbation. The anchors know it all. They cut off the speakers in the middle, dis engage when the topic gets too hot and when the agenda gets out of the comfort zone. Of course, the talking heads from different parties also like to ensure that the other person does not get to talk.
I managed to cast my vote, with great difficulty. Not finding my name in the list, no election official willing to help out and finally brute force of seeing the list personally helped. The election officials all seemed to be in the employ of the ruling party. A call for complaint to the 'election' observer (who I am told is generally an IAS rank) was shocking. When I told the person about my name not being on the list, inspite of being on the list with several party desks outside the election office, the observer said. "too bad". I got pissed off and asked the person whether that was their attitude to everything. In response I was told to lodge a formal complaint. Surprise!! The complaint was to be addressed to the observer. The election commission is just a charade and is clearly a tool in use by the ruling party. That is the impression I walked away with. At the polling centers, the presiding officers made no move to help and were eager to shove me out.

Coming to the results, it will be interesting to see the outcome. Will not be surprised if a cobbled up Nth front is given 'support' by Congress, if the exit polls are anything to go by!! So, we can look forward to another fresh era of heightened corruption as the new netas try to milk their kursi's in the shortest time possible, due to fear of the government not lasting the full term.
And with netas joining the band wagon to form the government likely to make heavy demands, we are in for surprising cabinet.
Most likely, we are headed to a big khichdi, with the rice missing.
Long live democracy.

Monday, May 4, 2009

Election outcomes and impact on India

1. Who comes to power is immaterial.
2. Reforms ceased in 2004.
3. Industry is immune to politics
4. Politicians have become practical and corruption is here to stay In fact, I think corruption is highest since independence and will get worse.
5. Any party in power will inherit a pigsty of an economy, with 15% combined fisc deficit and falling revenues.
6. If there is global recovery India will also recover, but the problem we will face is inflation of unprecedented magnitude. This is because of rampant M3 growth and supply bottlenecks.etc
7. Even if Mayawati or Jayalalitha come to power, things cannot get too bad
8. Whilst BJP looks like a good bet, we must remember that this time around, there is no Vajpayee. LK Advani is rabid and is 'economically' challenged and a megalomaniac to boot. He will probably be a poor choice.
9. Whoever comes in to power, will have around 20 odd partners to please. Means higher corruption, more freebies and gradual erosion which will ultimately lead to civil unrest and further fragmentation.
10. RBI will panic ( as my good friend Anupam Gupta points out) and raise rates too fast, but as usual, they will be under the grand delusion that monetary policy holds the key to economic growth.

New Pension Scheme- Teething pains, but good one

There is a great opportunity to improve long term government finances by making it mandatory for all government employees to move out of the present pension system, which amounts to pick-pocketing by government employees from tax payers.

The New Pension Scheme is interesting. Some quick takes:

Contributions to the NPS from salary should become tax deductible;
The way it is structured, maturity benefits attract taxation; this will surely change to make it tax free;
The Pension Fund Managers are no great investment managers, with the usual suspects from the banking and finance industry;
Investment is only in debt and in the stock ‘indexes’. Why should this attract high fees?
Record keeping fees is ridiculous. In a mutual fund, the R&T fees come out of the permitted cap of charges that can be charged to the investor;
The government should also offer a ‘fixed return’ option like the PPF for risk averse investors. Let it be fixed at around 8 or 9 percent per annum for small investors, say for annual contributions up to a lakh of rupees. Even if the government has to subsidise part of it, it should not matter. This burden will be far less than what it gives to the farmers or sugar cane growers.

Net net, I think that it is a good thing. Over time, competition will bring down the costs.

The government should also ensure that each and every government employee (whether state or central or PSU or from the RBI or SBI or any other government employer) shifts to this NPS compulsorily. This is the only way that the future generations will be saved from the burden of mounting pension bills. Today, in a few state governments, the pension bill actually exceeds the current wage bill!! And this burden is borne by honest taxpayers like me.

Mumbai ducks the voting

The media has made a big thing about the poor voter turnout in Mumbai. The valor, compassion and other fantastic attributes given to the ‘Mumbaikar’ are a creation of the media and the page three intelligentsia. The real Mumbaikar is of several shades:

i) the businessman trader community who worship Goddess Lakshmi. They have no loyalties or affiliation and love any politician who helps them to make money, evading taxes in the bargain. They can afford all the worldly comforts, lack for nothing and do not care who is in power. They believe that everyone can be bought at a price. They talk in ‘petis’, ‘khokas’, etc ,;
ii) The middle class NDTV / Timesnow /CNN watcher. Typically working in offices, having comfortable lifestyles, with houses bought on housing loans. This Mumbaikar is one who likes to talk a lot, but will not go out on a limb to help anyone. His problems are focused on the EMI, school admission, and higher education for children etc., No time for politics and at heart, really does not care who comes to power.
iii) Same as above, but a government employee. Works for some form of government or a government company. Low working hours, some side money, pension, etc. Highest level of job security. Not concerned with who is in power. Limited ambitions, uses public transport and is more worried about train crowds rather than anything else. Generally does not vote.
iv) The slum dweller. Has migrated from Bihar, UP, Tamil Nadu. Is divided by religion and language. Sponges on the city, whilst at the same time providing a cheap source of labour for above classes. Always on the lookout for freebies and a high propensity to be argumentative and is the backbone on which the local politician and the gang lords thrive. Will vote for the highest bidder. Provides the crowd to all election meetings.
v) The chawl walas. Each and every suburb of Mumbai has this in large numbers. Pre-occupied with day-to-day living. Only aspiration is to buy a house. In the last few years, with this being out of reach, a high spender on things material. Watches soaps, sports and Barkha Dutt/Rajdeep Sardesai. Has an opinion on everything, joins rallies from time to time. Generally makes it to the polling booth with friends and family.
None of the above have any hidden agenda of trying to help anyone. Help is on if it does not come in the way of what my life is. I do not mind waving a few candles here and there. For 26/11, I am glad it was not me. On 27/11 I have to go to work. If not, I lose my job. Simple. Do not label it saying that Mumbai has ‘bounced’ back to normalcy. As they say in Hindi “Majboori ka naam Mahatma Gandhi”.

My friend, Rajrishi Singhal, in his blog “Monday Mocha”(see link) has written a very nice piece about the poor turnout. The irony is that people who sponge on Mumbai cast most votes. The sad part is that the intelligentsia or the thinking voter is so starved of choice in Mumbai. How do you vote for a Priya Dutt or a Deora? They have all made it big without doing a drop of work. It is not surprising that most MP’s have added so much wealth between two elections, but what is new is the openness about it. And of course, the election commission has added a new dimension. It has said that if there are falsehoods in the ‘affidavits’ filed by the candidates, it is not a big issue!! Wonder why bother with the effin affidavits at all?
In this election, we Manmohan Singh, who wants to be PM but not an MP!! This can happen only in India. A wimp who is scared to face the electorate and a demonstrated rubber stamp is a wannabe PM!! Shame, shame!! Or we have a rabid LK Advani with a team of fanatics, to whom economics is a second priority. Of course, not to mention the ladies’ brigade of Mayawati and Jayalalithaa!! With choices like this, do we want to vote?? Especially if I can use the voting day holiday and club it with a couple of days to get away from the hustle and bustle of it all.

Friday, April 10, 2009

Economists - The one handed perception

When I was a boy, they called me a liar.
Now that I am old, they call me an Investment Banker.

When I was a boy, they called me a born loser;
Now, they call me a Fund Manager'

When I was a boy, they said that I was always confused;
Now they call me an Economist.
The following piece appeared in The Weekly Standard. Raises some interesting questions

A Question for the Economists Is the overly predicted life worth living? by Harvey Mansfield 04/13/2009, Volume 014, Issue 29
One group of those involved in the present financial crisis has so far escaped notice--the economists. They are masters in the science of prediction, but as a group, if not to a man, they failed to predict a crisis that has wiped out nearly half the wealth invested in the stock market and elsewhere (measured of course from the peak). The economists did no better than their unscientific rivals, the stock pickers, who are in the business of prediction.
Perhaps we need a second look not merely at the existing models by which economists predict but at the very idea of prediction as the goal of social science. Economists had been in the habit of asserting that they had come a long way since the Depression, that such an event could not happen again. Yet people are now actually speaking of another Depression as possible. Maybe we know how to avoid the Depression we had, but what about a new one with a new character we do not recognize? Isn't our present crisis new? Isn't every crisis new--since surprise is the essence of crisis? If prediction were reliable, we would be prepared for every chance, and our lives would be crisis-free and much duller.
We can approach the idea of prediction by asking the economists a question they do not usually have to answer, which is this: In the present crisis is it better for citizens to spend or save? Or more generally, how do you economists recommend that we live?
To spend seems the civic thing to do--that's what the various proposals of stimulus are for--but to save seems more prudent, since most people will likely be receiving less income in the near future, perhaps considerably less. Which is better?
Already, readers who are economists will have given their reflex response, which is to say that our goal is to predict, not advise. But we mustn't let them dodge the question in this seemingly modest way. It's not really modesty to proclaim a goal, fail spectacularly to achieve it, and then disclaim the consequences. What they did in advance of this crisis was to make available mathematical models that promised to predict the risks of certain investments but actually obscured those risks. Did not this bad prediction constitute a recommendation of such investments? Isn't this what is called "enabling"?
Let us set aside blame, and see how the economists, despite what they often say, do actually advise us, not merely on particular investments but also more generally on how to live. We know that economists are not politically neutral; they are all either liberal or conservative or in-between. Either their analysis is politically driven from the beginning or it just comes out as political in one direction or another. It doesn't matter which, because a certain analysis harmonizes with a certain politics. The same is true of morality; economists are not morally, any more than politically, neutral. The moral tendency of economics has to do with prediction itself, and it is common to liberal and conservative economists.
The economists I know are generally, as individuals, sober and cautious, the most respectable of all professors and in their honesty and reliability representing the best in bourgeois virtue. But when they get together as economists, they give way to boyish irrational exuberance over the accomplishments and prospects of economics as a science.
What has happened in the last few months should give them pause. It should make them consider the necessity of looking at economics from the outside, at how it looks and behaves as a whole. There's no way to do this from within economics--no way to formulate an equation that will correctly predict the failure of equations to predict. The idea of prediction itself has to come into question. Prediction is designed to reduce the role of chance in our lives, eliminating unpleasant surprise and replacing it with gratitude and satisfaction. But somehow it doesn't have this effect.
The very measures we take to anticipate the future make us more dependent on others and less dependent on ourselves, because those measures consist in spreading the risks to which we are subject. Spreading the risk seems to reduce it by sharing it with others, but the sharing enlarges the network of an individual's involvement to encompass other agents, other factors beyond his ken. Without realizing it he joins a market, in which he may feel riskless but also feels weightless, no longer having influence of his own. His livelihood, his wealth, his life come to depend on the state of the "economy," even the global economy.
The economy is not under an individual's control. If it were, or to the extent that it is, he would face the risk of controlling it well; this is the risk governments take when they try to take control of the economy on our behalf. Yet the economy does not control itself in steady or stable fashion. It does not control itself at all without episodes of great volatility such as we are now going through. Economics (like all science perhaps) aims at the reduction and control of risk. But who now has the sense that risk has been diminished and control over our lives vindicated by the science of economics?
One can see, on the contrary, that economics tends to aggravate our sense of feeling subject to chance. Return to the question of whether in present circumstances it is better to spend or save. Perhaps the correct economic answer would be, that depends on what is in your interest. It is sometimes in your interest to spend, sometimes to save, and you should calculate which it is just now. You should be flexible because the calculation may change and you must be ready to start saving and stop spending and the reverse.
The trouble, however, is that people look at others to see how they are calculating, and indeed they must do so in order to calculate correctly. What is in your interest becomes confused with what other people think is in their interest, and your calculation becomes shared, no longer yours. When choosing a stock, as Keynes said, you have to think not of who is the most beautiful girl at the ball but who will be considered the most beautiful by most people. Thus does your economic interest come to be determined by collective passions, by greed and fear. Hence follow crises of over- and underestimation, of bad calculation based on bad prediction.
Economics wants to be able to intervene to prevent such crises. Its notion of your economic self-interest would advise dampening both your fear and your greed, which is nothing other than buying low, when others are afraid, and selling high, when they are greedy. Fear and greed are not in your interest, and yet the recurrence of crises shows that consulting your interest will not stop them. The market is too fragile and too complicated to be controlled, and your interest is too subjective and too obscure to be known. The pursuit of self-interest with the general purpose of making yourself less subject to chance leads to your falling under the sway of fear and greed, thus more subject to chance. Government cannot prevent this result any more than can an individual; it is the common condition of civilized life in our times.
Thus the predictions of economists tend to give the impression that the economy can be predicted. Economists are intelligent people, well-connected and well-educated, gainfully employed in prestigious institutions. Although they rarely reach the top offices, they are often the top advisers to the top officers. So they seem to know what they are doing. They impart confidence in their predictions, which are often or mostly in the ballpark. Except when they are not, as at present. In a crisis the confidence they impart most of the time is exposed as overconfidence, a delusion that sets us up for surprise and disillusionment. We are not so surprised by the delusions of crowds and mobs--who does not know they are unreliable?--but that their delusions should be supported and promoted by scientists of the rank and caliber of economists might easily shake our confidence in the reliability of our elites and even of our scientific civilization.
Overconfidence in overcoming chance is the way of life recommended by economists. It is the way of life known as progress by liberals and as growth by conservatives, who are secretly united by overconfidence in their knowledge of the future which they describe diversely and call by different names. This recommended overconfidence transforms the predictions of economists into overall advice--not advice with a condition, such as if you want to get rich, do this, but advice on how to live while getting and being rich. Of course economics has been known as the dismal science because it confronts human necessities with the fact of scarcity, and in theories of overpopulation like that of Malthus, it may find that we will not get as much as we need. But it could also be called, whether dismal or promising, the triumphal or hubristic science for what it claims to be able to predict.
Now, the main consequence of living the over-confident life is to believe that virtue is not necessary. Perhaps this is the main cause as well as consequence of that life. Virtue is a chancy quality because you may not have it or live up to it. It seems less reliable than self-interest with its allies, fear and greed. Everybody has self-interest, which is not true of virtue. But at least virtue does not depend on predicting the future. On the contrary, virtue is a resource for everyone when bad times come--something to fall back on, to give cheer, to restore. On top of that, virtue will save you from being corrupted by good fortune as well. This is the great truth taught by the Stoics.
Virtue is a habit, not a calculation. It reflects the fact that human beings live in an overall way of life, in diverse ways of life; it is not possible for us, or most of us, to live perfectly flexibly, always ready to calculate anew in fresh circumstances what it is in our interest to do. Thus the ideal of calculated self-interest posited by economics is not a human possibility. We will get in the habit of being spenders or savers and will not be able to turn on a dime, changing our behavior when our interest changes. Indeed our selves are not independent of our ways of life, and it is not possible to calculate your self-interest without knowing your way of life.
Economics needs to stop trying to duck responsibility for what it recommends. It needs to examine the whole of life and to focus on the virtue or virtues of different ways of life. It should give over talk about "preferences," as if human desires were given facts unaffected by the science of economics. It should abandon the crude positivism that claims that one can study facts without giving advice, or that one can confidently predict without causing people to believe in one's predictions. It needs to replace its false modesty with true moderation.

Harvey Mansfield is professor of government at Harvard and a member of the Hoover Institution's task force on liberty and virtue.