Perfect Storm Ahead?

In the era of high voltage media blitz, it always pays to take information in the public domain with a dose of salt, if not chilli powder. Over the past two months, the favourite of the media was trying to predict the monsoon with the occasional sprinkling of selective coverage of the scams. Interestingly, the Sahara scam barely found a mention except on the day of the Supreme Court verdict. In the past, we avoided attempting to predict a drought and have consistently held that it is too early to call a drought (at least in AP) for the simple reason that historically, there were a number of occasions when there were floods in September - October. This does not mean that merely because AP has received its fair share of rains, the problems are over. The State benefits substantially only with abundant rains in Maharashtra and Karnataka.

Therefore, in times such as these, it is best to attempt to gain insights through more objective indicators (i.e.relatively speaking) and arrive at our own conclusions. Personal experience indicates that a detailed look at the chart patterns is useful. This short-post attempts to outline a few chart patterns that will have a bearing on the future.

A look at the US indices is instructive for a number of reasons. US is the largest economy, despite all the rhetoric about the demise of the dollar, that is easier said than done. A more important reason is that in the era of reverse globalisation, the major beneficiaries are like to be USA and Europe (after the present crisis drives down wages over the next few years). We say next few years as the charts seem to indicate that the markets may be heading into a perfect storm. Complacency is at historically high levels. Despite all the rhetoric of the free markets, hoping that the US Federal Reserve expands the supply of money is the hope on which the markets survive on a daily basis. The results of mining companies clearly indicates that the world economy may have topped. China seems to be hurtling downwards while India has no clue about what is happening. Brazil lies between the two, while Russia is not likely to well, especially when industrial metals and oil decline while food grains rise.

The chart below of the S&P 500 index in US indicates that the markets may be on a verge of a major down move. A look at the bottom part of the chart below indicates that while the S&P index has maintained a semblance of increase, the decline in the internal strength (in this case indicated by Relative Strength indicator) matches that of the decline between 2006-2007 that preceded the crisis of 2008

Think that is a statement that is sensationalism or filled with hyperbole? The chart below compares the volumes of the S&P 500 with price movement. Volumes have steadily declined, especially when the market have rallied, indicative of the lack of conviction among buyers? Or does it portend something even more ominous? Like the death of the 'equity cult' that was peddled to the middle classes as the road to riches? The short answer is that nobody knows. Little wonder that Keynes observed that 'the markets can remain irrational for longer than you can remain solvent' (sic).

 Over a longer horizon, the chart below of the Dow Jones Transportation Average (monthly) from 1990 the present should be a cause for greater concern. It indicates that the rally is not only running out of steam but is also likely to decline substantially (if the charts are any guide). Since the chart is monthly, the results are likely to play out over a period of months rather than a few weeks. If our fears turn out to be correct, the consequences for the global economy will be disastrous and will be felt for the next few years.

Therefore, it pays to be cautious.

India: Till Debt Do Us Apart

A common mistake that almost all of us make is, we mistake a bull market for our own brilliance. India's decade old boom is one such typical story. Over the past two years, we had deluded ourselves to think that we have made a dramatic and radical departure from the past. We even for a term for the low growth period: Hindu rate of growth. It is difficult to understand the term. We have convinced ourselves that we are in a completely different boat from more indebted countries and consumers in USA and Europe. Indeed, we are in a completely different from our US and European counterparts. Our boat leaks more than the others. 

India is probably as highly indebted as any of the other countries that are presently in deep trouble. It is just that we selectively disclose our debts. We are pure lucky that the world is more concerned with the US and European Debt crisis for the simple reason that they are more important to the world economy than India. The chart below - Debt to GDP ratio of different indebted countries (courtesy: tradingeconomics.com) indicates that it is time that we grow more concerned about our own debt. One crucial difference between all the countries mentioned in the list have a current account surplus and also have large foreign exchange reserves that are their own. Unlike the case of India, they may not melt at the sign of slightest trouble.

Figure: Debt to GDP Ratio of major indebted Economies

One should not be positively inclined or complacent on viewing the above chart. While the debt is likely to remain constant or even increase and rarely decrease, GDP is bound to vary substantially and will depend on economic conditions within India and Outside. A decline in GDP, as we can expect in the next few years, will make the chart worse.

We often believe that the rise in GDP is due the India's ability to decipher to secrets for economic growth all at once. Unfortunately that is not the case. The reasons for the rise in GDP are due to (a) Global boom, (b) Massive increase in debt induced growth along with other factors such as large increase in prices, asset inflation, etc. The jump in salaries due to the Central Pay commission induced increase in salaries should not be forgotten. The jump in commodities substantially benefited India. Nearly 35 percent of Indian companies that form part of the BSE Sensex are commodity companies, rising prices invariably helps them. Add to this their ability to fix prices and we easily understand the dynamics of rising prices.

An important reason for the illusion of the boom and delusions of India's economic might arise due to the exponentially large borrowings by our companies and individuals. It needed a drought to forcefully attention to that. As a nation, we seem to have convinced ourselves that we can borrow our way to prosperity. 

An interesting chart clearly highlights the borrowing binge that the largest groups have indulged over a short span of five years. It would be interesting to see the pile up in debt by all the listed companies. Since that is difficult,we draw attention to one of our previous post in which we had mentioned about the increase in bank credit.

Figure 2: Rise in debt of 10 heavily indebted business groups

Interestingly, the above statistics seem to indicate that the law of diminishing returns may be catching up. If diminishing returns are not having their effect then it is likely that money is being carted out of the country on a very large scale. 

The consequences of this borrowing binge seems to be playing out in the present. A large component of this money seems to have flown into speculation in land, followed by construction - again with a speculative underpinning rather than anything else. The best evidence can be garnered from the 'new' almost ghost townships that have come up in many cities - Kolkata's almost empty new city is evidence of the consequences of speculating on somebody's speculative tendencies. And, we never fail to poke fun at the Chinese who have 20 times more number of ghost towns.

As a nation we seem to have gained cutting-edge knowledge about the mechanics of recycling debt without actually infuriating the global bond markets. We will never infuriate the local bond markets because the largest player in Indian economy is the government. Historically, it does not pay to anger the biggest gorilla in the market. Moreover, the most profitable business are those that have mastered transfer of public resources. Incidentally, they are also the most indebted business. Ever wondered why our companies prefer to over-leverage themselves? The answer to that question is that banks are mostly publicly owned. CRISIL, the not so accurate rating agency (just like its owner, S&P) estimates that bad debts will reach about Rs.2,00,000 crores by the end of this financial year (ending March 2013) . However, if the banks were less economic with the truth, that figure could easily be 2-4 times higher. This excludes the thousands of crores that have already been restructured. 

This is not to claim that our banks will collapse. They will be bailed out by the government. But, we have to thank the RBI for that as their experience from 1947 to 1969 taught that. Unfortunately, in the post-liberalisation era, RBI cannot force the banks to reduce lending. So in order to hide their non-performing assets, the banks are increasing up lending. In the process they have end up increasing systemic risks as they 13% of their loans are to the largest 10 industrial groups. The banks seem to forget that their ability to raise money was their ability to attract money from overseas bond markets. That may be coming to an end as the bull market in US Treasuries means that the largest banks will find it more profitable to invest their money in US government bonds and ride the rising in prices than take risks. This is already happening.

Ironically, our consumers from top to bottom, are no different from our over-leveraged corporate entities. For decades, the richest have been able to borrow. Since, 2005 we have added the poorest as the new consumers of ever larger quantum of debt. At last they have deciphered the key to recycling ever larger quantities of debt. SKS Micro proudly claims that they lent more than Rs.5000 crores of debt to the poor in AP (before the government cracked the whip on their 'lend-beat-or-kill-and-collect-insurance business model collapsed'). Add the lending by rest of the MFIs and we have the larger picture.

Indian Business Culture: Profitability through Transfer of Public Resources

Over the past two years, this blog has been critical of the Indian business culture. At times, our views were construed as being against the very principle on which the markets survive. But the events of the past few weeks have proved and reinforced the arguments that have elucidated over the past few years. If markets are to survive and prosper they need to function properly in a manner that they gain the confidence and trust of all the stakeholders not just the shareholders. If they are to survive without shocks, it is imperative that they benefit the a predominant part of the population rather than a few. Unfortunately, the model of economic growth that India has encouraged actively creates oligopolies and rent-seeking. Government policies in various sphere encourage such rent seeking behaviour. Add to this, the model based on a valuation metric (capital appreciation) that has been stressed in the capital markets to build 'wealth' and we have a recipe for disaster. It is imperative to note that our recipe for disaster should not be construed as a collapse of the markets (or a revolution). On the contrary, increased dysfunctionality of the markets have the potential to cause large scale dislocation and social crisis in a country like India. The sheer size of the country is sufficient reason why we should be wary of such dysfunctionality in our economic life. 

The below image is a newspaper clipping from The Times of India, Hyderabad Edition, 18 August 2012 (p.10) about two such cases of looting of private resources. 

The nature of siphoning off public resources is such that the profitability of a vast majority of the listed companies, though not all, is dependent on government doles of different kinds. Little wonder that foreign investors prefer companies that have the potential to build oligopolies or rent-seeking businesses. We would argue that if the government subsidies of various kinds (sales tax, excise benefits, etc) were removed a large number of listed companies would either run into losses or would make nominal profits with margins of less than 3%. Add to this form of direct and indirect doles by the government induced bank lending, either those due to pressure from the government or due to extra-economic considerations and we have a classic case of companies that will invariably end up winding up. 

Historically, one of the problem that we have faced in India is that companies, governments, investors and borrowers believe that debt is no different from profits and hence the proclivity to borrow beyond our means. Glibert Slater words in 1929 seem prophetic: 'India has a scarcity of people willing to practice the unattractive virtues of thrift and forethought’(In to L.C.Jain, Indigenous Banking In India, Macmillan, London, 1929, p. xiii).

And, we complain of fiscal deficit, subsidies and lack of interest among investors in long-term investing!!! 

India @ 65: Rumours and Rent-seeking complete the cycle

Never in the recent years has the week before and immediately after an independence day been as insightful and never has it drawn such forceful attention to the socio-economic contradictions of the times we live in - provided we wanted to heed those warnings. In normal circumstances, it should have drawn attention to the delusions that we have allowed ourselves to be carried away. Unfortunately, the nation does not even seems to have realised these are problems. If only, as a nation we have a slightly more respectful view of history, we would have realised that we have reach an inflection point in our history.  There is never a dearth of people who claim that India is at the cusp of recognition as a 'Great Power'. As a figure of speech, a great power could also be understood to mean a 'great power' just like the Hapsburg empire at the turn of last century.

The week was insightful from a social and economic angle. In the realm of economy, a number of companies declared their results. The results drew attention (at least mine) to their debts. There are very clear indications that growth is rapidly declining. At last we have policy makers being less economic with the truth in this respect. Socially, it drew attention to the problem that we have faced for at least 100  years in different forms: ethnic tensions. Economic-geography wise (which may have been missed), it drew attention to the precarious nature of our cities - or those that aspire to become 'Global cities'.

When was the last time in India we had riots, rumour induced panics, high levels of inflation, high indebtedness, banks in cover-up mode because of bad debts and, people feeling brilliant because of a bull market? The short-answer is not far back in time in the period from 1989-1998! The bull market part was only till early 1995. How did we reach this point? Quite simple - actually. We deluded ourselves that we about to embark on a 'great transformation' of the country from a poverty stricken, third-world country to a 'developed' super-power in the making in the not too distant future. Historically, this is always the turning point when the bubbles and euphoria's are pricked but, we do not realise that for a long time after that. We forgot that, it never is dramatically different. The point of departure for the 1989-1998 period to the present is that riots then were a consequence of tepid and stagnant economic conditions that had accumulated over the decades. Now, ironically, they are a consequence of the economic growth.

It is pertinent to recollect that the boom of the last decade was built on debt (and I suspect the return of money that was carted away in the past and hidden in the once tax havens through foreign institutional investor route). The boom was also aided by the massive increase in money supply (not only in India but also elsewhere in different parts of world) as well as the rise in asset values (real estate, stocks and commodities). Price rigging of equity values contributed their part magnanimously. The house that debt built in India is extremely large - probably as large as the debt stricken countries of the word. Debt per capita seems small due to our teeming population. Private sector debt is especially interesting: despite various creative accounting strategies, recycling and ever-greening of debt. The banks in turn postpone the problem through debt restructuring or (CDR in banking parlance). Interestingly, one wonders why the regulator allows such ever-greening when there seems to be sufficient evidence that indicates this restructured debt is likely to lead to a default in the near future. It has been pointed out that since the process of CDR was inaugurated in 2001, only 57 cases worth Rs.43,000 crores have repaid the loans - a large component was due to the global economic boom. I always thought that the first lesson of prudential financial planning and investing was to place a stop loss. Indian banks obviously think differently. The following table provides an overview of the total debt of the more indebted of a few listed companies. Some of these companies were also mentioned in a previous post, but  thought it would be interesting to understand how the indebted companies were behaving and therefore the updation in the original list.

Name of Company	Total Estimated Net Debt	Accounting Period
Reliance Communications	Rs.35,650 Crores	June 2012
Lanco Group	Rs.31,968 Crores	June 2012
GMR	Rs.33,600 Crores	June 2012
DLF	Rs.22,600 Crores	June 2012
Suzlon Limited	Rs.13,800 Crores	June 2012
Essar Oil	Rs.9,500 Crores  (after CDR +6000 crores sales tax dues)	June 2012
Kingfisher Airlines	Rs.7,500 Crores	June 2012
Bharti Shipyard	Rs.5,800 Crores (after CDR)	June 2012
Deccan Chronicle	Rs.3,500 Crores	June 2012
Bharti Airtel (consolidated - including Subsidiaries)	Rs.68,000 Crores	June 2012
Tata Steel (consolidated - including Subsidiaries)	Rs.54,020 Crores	June 2012
Tata Motors	Rs.47,149 Crores	June 2012
Hindalco (consolidated including Foreign Subsidiaries)	US$8.9 Billion	June 2012

Interestingly, debts seem to have increased for a few of the companies that were mentioned in the previous post. We never seem to remember that we cannot borrow our way to prosperity. The above list, compiled from different newspaper reports and the recently announced quarterly results, excludes most of the companies listed on the stock exchanges. It also excludes the debts of government owned utilities and the power sector. The debts of the power sector are reported to be about Rs.300 billion. The list is not representative of the larger problem because it contains only that information which could be found easily.

According to RBI report, the total borrowings from banks in India (at the end of 10August 2012) are more than Rs. 27.6 lakh crores (Rs.276 Billion). Total bank credit is more than Rs.470 lakh crores (Rs.47,000 Billion). Hence, the list provided above is a tiny part of the total borrowings. In September 1998 it was Rs.7,549 crores. (Disclosure: I am not sure if I have tabulated the zeroes correctly, and on the lighter side, I blame any discrepancy to increase in money supply and the way RBI states it: in 1998 it was announced in thousands of crores and now it is announced as rupees billions). The list is clearly indicative of the exponential increase in debts.

Will these debts ever be repaid and are these highly indebted companies intrinsically valuable? A more difficult question to answer is will they survive the present problems, which are likely to last a long time? The easy part of the question is the first part. A lot of companies in India are unlikely to ever repay their debts. The period from 1991 to 1995 was not very different (as we have pointed out in the past). Companies raised debt and equity in large quantities from overseas lenders and investors to expand capacities, which never proved profitable till at least another decade after their completion. A number of companies never completed their expansion because they did not survive. This time is not likely to be different.

The problem for some of the companies is that just as beauty is always in the eyes of the beholder, these companies were thought to be valuable because of the larger 'India growth story'. It was because of the perception at that point of time, that they could raise such large debts in the first place. That sort of 'symbolic capital' (in Pierre Bourdieu's terminology) is a rarity in the present circumstances. But, some of the companies hoped to able to establish themselves are gatekeepers to rent-extraction (like the roads business) and consequently, confused bull market related buoyancy with the inherent strength of the Indian economy. An example best illustrates this: the calculation for a number infrastructure projects, for which billions of rupees and dollar loans were accessed are based on impractical revenue streams. The reality is that instead of a booming economy we are likely to have a low-growth, high inflation economy - just like the 1970s to 1990s period. Most of these companies were thought to be 'valuable' based on those impractical revenue streams. It is pertinent to note that 'value' is always relative and based on perceptions of fickle minded investing hordes. In other words, they were all bull market stories or those in which a bull market was confused for brilliance. But, some of the businesses will invariably survive. The roads and port businesses will do well but they will be like the railway boom of the 1850s. The business itself will do well, but those who reap the benefits will be substantially different. Remember Keynes' observation: markets may remain irrational for longer than you can remain solvent!

A major structural deficiency of the Indian companies is that our companies are essentially rent seeking in nature. Innovation remains elusive for most of the companies, even those which like to think they are innovative. One need to look no further than the manner in which they bid for contracts. There are innumerable instances in the past decade where companies have bid for less than 1% margin to undertake some government contracts. One wonder how public, listed companies can survive on such low margins. On close scrutiny, it emerges that there is a clear patten: the reason is that their wrong reading of history is responsible for such fallacies and the desperation to place themselves are gatekeepers to the possibility of perceived outsized future profits. They often look at the history of the railways and believe that infrastructure makes great sense. Otherwise what explains a telecom company running up billions in debt, when they should have understood that voice would have to remain an important stream for their revenues considering the profile of India - most of those who own mobiles have insufficient literacy or own very basic models which means their ability to consume data related services is severely curtailed. We often forget that the markets have been around for a couple of centuries in different forms and are likely to be around for a couple of centuries more. The question that companies do not ask is if they will be around if they follow such unstable business models?

The foreign companies (and investors) have been extremely savvy and have realised early on that the only opportunities in India are in rent-seeking behaviour. Therefore, they have invested, essentially in companies that have the potential to maximise this rent seeking behaviour or in segments where oligopolies can be easily created - cement, moneylending, mining to cite a few. Thus, even the most innovative companies at the cutting edge of capitalism in the western world have invested in moneylending companies - see the list of successful technology companies from USA and Europe that have invested in micro-finance companies in India. Investors are keen in investing in warehousing which will be extremely profitable in a country like India, where information asymmetry and institutional protection is very weak. Imagine the kind of information that a large investor in warehouses will have about the inventory - especially food grains? This would contrast with that of the government, which either does not have information or even if it exists a large number of custodians of the information can be easily bought - if the price is right. It is pertinent to note that, the willingness to behave in a rent-seeking manner is all pervading. Harvester owners in a Mahabubnagar district were keen on fixing prices so that they could make outsized profits. Rice mill owners routinely fix prices for various by-products that they produce (like barn oil cake used as cattle feed). Cement and Steel cartel is probably as old as liberalization - irrespective of the category of owners.

The more we gloat about our great power status, the more quixotic that its proponents become with each passing month. We have never ceased to convinced ourselves that the whole world is lining up to invest in India. This has resulted in wages spiraling upwards, and productivity spiraling downwards - exactly at a time when the reverse is happening in the major consuming nations. This inversion removes the single most important factor that underscored the whole process of globalisation. Some of the western companies became truly transnational corporations producing and consuming on a global scale and serving markets in a very regional manner. A large part of the logic - if not all of it may be coming to an end.

Each passing issue highlights the problematic manner and the shaky foundations on which we have built our economic superstructures. Recent events in Bangalore and Hyderabad have underscored the frailty of India's economic foundations. The aftershocks of riots in distant Assam are felt more than 1000 miles away: Bangalore and Hyderabad. Thousands have fled in the after of rumours - not even actual incidents. The cost of nearly 15,000 fleeing Bangalore will only add to the economic woes. The costs have of such immediate removal of labour from the market is difficult to quantify immediately. End of the day, nothing has changed from the 1990s era. Ironically, both of these cities were ceaselessly marketing their "Global City" status and, along with Mumbai and Chennai are always competing for recognition at the high table along with New York, London, Hong Kong and Tokyo.

The answer to those riots: top government officials' response is on the lines of "situation is tense, but under control". Generally, speaking that is the standard government response which essentially means 'that the we are groping the dark and you should fend for yourselves till we know what is happening'. Remember the Punjab problem in the 1980s and early 1990s - even 200 deaths a days was followed by the same response.

Hopefully, at after an insightful fortnight, we will prepare ourselves for the future. The sooner we wake up to the problems at our hand, the better. 

India: Forever Emerging and at Crossroads?

Sixty five years of Independence is a good time to introspect, not to gloat about achievements, but the likely directions that the country is moving. Generalising about India is like to be a terrible mistake. This is not merely because it is too big, but largely because it is too diverse. I will attempt to put together all my incoherent thoughts into a posting that will also serve as a reflection of the present.

A dose of history is in order to understand the pathetic stage we have reached. We denigrate the person (Mahatma Gandhi) who played a pivotal role in the independence movement ironic ways. Criminal elements (street level ganglords) adopt his name as their nickname. Political leaders are proud to have his photo on their publicity material without even knowing what he stood for or what his contributed to Modern India. We denigrate the man who built the framework that has enabled India to survive this long despite all its contradictions. We easily forget history and Gandhi is no exception. While it is easy to criticise him for his innumerable short-comings, we often forget that among all the de-colonised countries India has been the only country that has over the years largely remained a country with a functional democracy. All the other countries that gained independence from Colonial rule have lapsed into dictatorships or now resemble failed nation States. India remained an exception - except for a brief period of emergency by a leader who despite assuming Gandhi's name, inaugurated the process of subverting the framework he built. Indira Gandhi started the process of criminalisation of politics and her proteges have fine tuned the process into a fine art.

I believe, despite his many drawbacks, Gandhi was accepted as a leader because of two important contributions: (a) he brought the masses into politics and (b) he created a powerful framework which enabled the rulers to assimilate different contesting claims. Fundamental to the framework he built was the system that was sufficiently decentralised in order to accommodate various local interests.Indian National Congress (INC) before Gandhi's ascent was little different from a farce comprising of Macaulay's chamchas who were desperate to line up for the crumbs thrown by the colonial authorities. The INC sessions were contemptuously called 'three day tamashas'. Gandhi had the unique distinction of being the person who single-handedly forced the INC to broaden its base. He literally forced them to 'go to the people'. Thanks to Gandhi's legacy, today in contemporary India, we have everybody threatening to go the people: this list includes murderers, swindlers who fleeced the public exchequer to the tune of hundreds of billions of rupees to small time crooks hope to gain a few seconds in the electronic media.

Gandhi believed that the new State had to be built on innumerable compromises within a broad decentralised framework that would gradually assimilate various contesting claims and give them a powerful reason to remain within the broader Union. The INC he helped build was an organisation that was sufficiently broad-based to accommodate even those with diametrically opposite thinking across the spectrum of social, economic and political thought. This accommodating structure simply supplanted the elaborate British structure. Within a few years of Independence India was ruled by a bureaucracy that in essence functioned like its colonial predecessors. But, it has done a fantastic job of ruling the country that is essentially nothing more than a brilliant idea. The bureaucracy transformed the idea into a geographic entity by re-building a army (after it was routed by China), a force that also polices its people, a fantastic railway system and above all assimilating the dissenters (people or regions) through massive transfer of public wealth into private hands. 

Sixty five years after independence everybody has a stake in the system. That is the good thing: a revolution is unlikely for the reason that despite its dysfunctionality everybody benefits : from the billionaires to those below the poverty line. To those who are poor, we organise them into self-help groups and give them sufficient doles so that any challenge to the might of the Indian State are stamped out (remember one chapter of our history: long long ago there were some people called Naxlites who vanished into the night and never came back in AP). Within the next decade or two this story will be repeated in all the 16 States. To the ever protesting, never working middle classes the bureaucracy gave them some doles (called subsidies) they myth of a emerging super power, the goal of becoming a billionaire by following the work ethic that is present in capitalism: work hard and who knows you may become a billionaire. The global boom helped fuel these dreams and myths. It hooked a whole generation of Indian who can barely write even a few paras in any language without mistakes, who have near zero productivity, who protest corruption because they may never get a chance to be corrupt. 

In other words, the boom has created a generation of India who are unemployable but would like first world salaries. A recent newspaper editorial stated that nine out of ten who completed professional education are unemployable. We have built an education system which has absolutely no idea that the world has moved beyond Indus Valley Civilisation that they would like to teach. We have a government apparatus that works because a few visionaries still think it should work. The rest of them push files satisfying their ego about their exalted rank and kow-towing by 'beautifully useless' petty officials, who are experts at following procedures and suffer from a remarkable poverty of intellect. We have a 'dynamic' stock market where price rigging is the norm rather than the exception. Our stock market regulator has to be forced into action only because the regulator of another country threatens to embarrass it sufficiently to take action. Our corporate sector is full of riddles: companies that claim to have thousands of crores of 'cash and equivalents' on their balancesheets but prefer to borrow a few crores from the banks at higher cost than the returns they earn. There are companies that rig stock prices and with the proceeds actually build businesses, etc (these are the 'good' guys). We have companies that are essentially no different from a land grab and which thrive because of the a century old model. The Bombay textile mills that survived due to their land holds now inspire a legion of 'new economy' companies that loot in a very old fashioned manner: dispossess petty landholder of their asset at a pittance but always complain that they do not get any subsidies.Indians are experts in changing the way the world thinks about them. Global Cutting edge companies that make money by selling technology products to the whole world invest in moneylending (microfinance) companies in this country - nothing beats rent as a source of income.

The end result is that we have a system that works when the visionary official forces it to work. But, even in those times, it lumbers along with all the attendant problems that combine the worst of the first and the third worlds. Our political and economic class is adept at siphoning off public wealth through a complex mechanism that includes stock exchange listed companies, transfer pricing and simple old fashioned hawala carting off money. Almost all the important politicians control listed companies directly or indirectly. Each ruler has revolutionised corruption. They now protest because they realise the next one has carted out more than they had ever imagined. 

Yet, we consider ourselves a regional power because we can bully irrelevant countries like Nepal, Bhutan, Sri Lanka and Maldives. The best we can do is to compare ourselves to a neighbour which is essentially a failed state (Pakistan). 

After sixty five we have a system that is wilting under its own weight but hopes that it can continue blissfully unaware that globalisation that enabled it clock growth rates which in turn helped it overcome the social and economic upheavals is about to change direction. We are blissfully unaware that reverse globalisation has started and it is likely to gather steam in the next five years. Once that starts, capital will start to fly out (now it is only flowing out). The edifice of the bureaucracy and other sections (Army, Police and Railways) that we have cited above, that were built on complex assimilation of contesting interests is being stretched unlike any time in the past. The police and Army which are so vital to the law and order mechanism is seething in indiscipline. Imagine this is happening during a period of economic well being. Imagine, our position if we enter a recession. 

This is not to claim that we will have a revolution in India. Far from it, since everybody has a stake in the status quo all we need to do is to simply increase doles and we will be able to tide over the problems. We have done this in the past and there is no reason why we cannot do it in the future. Who needs Gandhi for that.

Five Year After the Crisis: Vindicated, at last ... but at a big cost

In retrospect and on first thought, it always feels good to be vindicated. But, as we think about the consequences, the cost of that vindication is quite sobering. Five years since the crisis started, we have deluded ourselves about a recovery. Our policy makers say it is round the next corner but we always seem to be waiting in the wrong corner. The reality is that the recovery is more like a mirage. As a student of history, a lot of what is happening has a eerie sense of Deja Vu (as we said in a previous post). Yet, the contemptuous ignorance of history that people have is shocking: the first question that I am often asked is 'as a history guy, what value can you add'? I give them a reply that was common in the 19th Century: 'Cicero once said that everything has a history so, history is everything'. Their poverty of intellect makes them miss the essential point - that I am insulting and belittling them by giving a 19th century reply in the 21st century. 

The personal reflections end there.

We have been saying the same thing for a long time and it has become quite monotonous. So instead of reiterating the same thing over and over again which will do nothing but force our readers to lose interest, I thought it would be a good idea to present some interesting charts that I have complied from various sources (duly acknowledged) with a few insights. After all, charts often speak a different tale (as some of the charts we have produced in the past show).

Some years ago (in 2009 actually) the third post on this blog was a call to remember the history of -Japan accompanied by a chart. That chart was that of the Japanese equity markets since 1992. It was essentially to draw attention to a particular salient feature of the world economy that I pointed out for a long time - just like a broken record. Since we often forget history, I thought I would update it and start with that. I must confess that like many others, I too underestimated the crisis and thought of only the next three years (which will be over soon). I thought it would be a good idea to update the chart of Japan (below):

 

The world will be no different in the next many years, only the intensity of the up-moves and the down moves may increase rather than decrease. The world economy should consider itself lucky if there is no further deterioration and if we can simply chug along the bottom for a few more years till all the excess of the last 25 years are slowly overcome. Thus, we are likely to have many years of bad economic conditions that will be accompanied by sharp rallies in the markets - which will make us feel good and ... think that the recovery is just around the corner.

The process of recovery can be hastened if the big banks are broken up and there is rescheduling of debt that runs into tens of trillions dollars. Since these are unlikely to happen in a hurry, the recovery is unlikely to gain traction for the next few years. As we have reiterated so many times in the past, a semblance of normality (over the short-term and probably the medium term) is possible if we have a few more trillions of dollars pumped into the economy. But, there is never a free lunch, somewhere, at some point of time, the costs have to be tabulated and will be tabulated.

Japan is important for another reason: The impact of demographics on the economy. The chart below is an excellent illustration of what we can expect from those countries where the demographics are staked against them:

(Chart source - http://twitpic.com/photos/M_McDonough)

Who cares! Our proclivity to be carried away by what we would like the world to be is all pervading and quite dangerous. The following chart will probably give more credence to the view that the recovery is long way off. 

The best places to invest for the next few decades: Africa! 

But don't write off the west, all that they have to do is to open the floodgates for those who want to come in and within the next 10 years the picture will look different.

Indeed the world is looking a lot like Japan - as we had mentioned in July 2010. None of the questions about the global economy that we have been raising for long have any answers - even five years after the start of the crisis. At last, we are increasingly hearing voices that are willing to remind investors of the stark reality. Nothing much may change for the simple reason that none of the problems that got us into the trouble in 2007 have been solved, they have  only been postponed. The policy makers should be given the credit for their ability to postpone things for so long.

Even five years after the beginning of the crisis, all the important indicators seem to indicate that we are nowhere near the end of the crisis.

The above chart of the Baltic Dry Index (sourced from Bloomberg), indicates that it will take years before the crisis comes to an end. The index is an excellent indicator or freight rates of dry commodities that make up the bulk of the movement of goods. Since 90% or more of the world trade is on the seaways, it is an important indicator. Importantly, the Index (along with various other shipping indicators) seems to be indicating that the process of reverse globalisation seems to be very much underway. That is probably the reason why the US Railroads have witnessed better days. 

Our optimism that we may be recovering at last may be largely be misplaced. The chart below shows the traffic passing through the Suez Canal. Though it has recovered marginally, it does not indicate a trend that is likely to be different from the past three years - i.e. a sideways trend.

(Source: Bloomberg)

But, we are likely to be down for so long that the 'new normal' will be nothing different from the long process of readjustment that we have to come to grips with.

Sorry to douse all the enthusiasm about a possible recovery with gallons of ice-cold water. The recovery is far away as indicated by the chart below:

But, dont lose faith: look at our Japan chart at the beginning of the post and we should remember that nothing moves in a straight line, especially in the markets.

The line downwards can be quite unnerving as the chart below indicates the correlation between waste and GDP.

Personally, I am more inclined to bet on a deterioration in the next two quarters, especially in countries such as India and China. Indians are so enamoured by thinking about a bull market for the next 100 years that we have forgotten what it was like in 1996-98. Those are precisely the times when we will be woken up from our dreams and the reality will be quite stark. We were so convinced that we could sleep our way to 9% growth that we still dont believe that we could stumble back into the 'hindu rate of growth' - that is not very far from 5.5% GDP growth.

The India tumble-stumble story is too long to be covered in this post we will come back with another post.