Sunday, November 8, 2009

The Economics Behind Size 0 - Women Waistline, an indicator of economic growth

With the economy and markets taking a breather before their next move, I thought it’s time to talk about something that is a little lighter and shows that economics play a role in every small and big social aspect of our lives.

‘Size 0’ a phenomena that started from the ramps of London and Paris has caught the fancy of some circles here in India too. Technically ‘Size 0’ is a figure of 30-22.5-32 inches. I am yet to meet a person who says that Size 0 is a figure he likes. So the question that arises is why is size 0 such a rage in the fashion world and among many women. This is where the foundations of economic development kicks in. 

In economics we generally study state of equilibrium, however realty is that the state of equilibrium is just a mirage. The forces on either sides of the curve swing between extremes for a very long time till there is maturity in the markets and that's when you get the equilibrium state. The era after the World War brought about a prolonged period of economic boom. The lifestyle of the society started to change dramatically and this included the eating habits... with more processed foods to excite the taste buds now available the society went berserk after them. This is the vary first stage in economic development of a product wherein that product experiences dramatic growth rates almost to the point of maniac rage. Some stocks in markets become speculators puppies and market darlings at the start. This stage is what we call irrational exuberance. So we observe that since the onset of 1950s fat bellies were a fashion statement. Plumpness was not just considered fashion but acceptable. 

The reason: Simple because the more plump you were would imply that you had the resources to enjoy the expensive food and luxurious lifestyle of relaxation and enjoyment. This is exactly the stage where we find our society (India) today. Here plumpness is considered acceptable because that implies that you have the resources to enjoy life. Money to have good food, servants at home and cars to drive.

Since the onset of 21st century things started to change in West. 'Size 0' started to come in fashion, the twin forces on the economic axis started to shift from one extreme to another, irrational exuberance  resurfaced but on the different side of the spectrum. So the question how did it all changed and why did it all started.

The reason: As the economy grew and people became richer the most common need of almost all people was satisfied, which is good food and a good lifestyle. The first economic stage was complete. People with far greater resources needed to become different and so they shifted to altogether a different lifestyle which involved a diet of lettuce leaves/ rucola, fruits, proteins and very limited carbs. Ideally such a diet should not be that expensive, but hey since the rich people are after this diet and they have a higher purchasing power this diet became very expensive and envious to have. Trust me the food bill of my Sunday shopping that involves purchase of fruits, Soya Milk, Tofu and Juice is far greater than all my meals over the week. And yes not to forget the booming gyming and fitness industry that started. This again became a fashion statement and mark of high social strata. Because only rich people can afford it. Average middle class can neither afford it nor would get the time from it's daily chores to go for it. While the rich can take care of their work on cellphone or internet and take time out for gyming, good food and taking care after themselves. Only some stratas of our society (India) are beginning to reach that level and hence it shows that we still have a long way to go in terms of economic growth.

The extreme changing trends in the body structure and eating habits of humans shows that we still have to mature even with respect to the most basic human need "Food". Something as basic as food which is composed of basic nutrients can be an indicator of economic development and social status is indeed quite interesting. What impact is this trend going to have on the food industry right from agri engineering ,production, processing and distribution would be interesting to note and be cognizant about for future investment decisions. Maybe companies like McDonalds may face rough weather in the future while chains like Whole Foods may do very well, maybe the global demand of food products may shift from carb based to more protein and vitamin based food products. All I can say is that we are living in interesting times and for good or bad the current trend is towards Size 0. So the next time you look at women's belly remember that her waistline not just tells how fit and beautiful she is but also how fit , beautiful and rich is the country in which she lives.

Hold this thought, till next time.............

Sunday, September 20, 2009

Corruptionomics - It's not all Black and White

The Nifty crossed the 5000 mark last week.... So right now talking about markets might look a little incongruous, hence it's time to talk about something offbeat..... 

"Corruption", the word sends some vivid imagery across the mind. Setting ethical issues aside its time to analyse this issue of corruption differently..... There are obvious disadvantages of corruption:

- It increases the cost of production
- If the money is channeled outside the country in Swiss accounts, Cayman Island hedge funds it's further loss to the country, though these days such money is finding it's way in the stock markets
- Investing in land in this country is still partly done in cash and an ideal investing source of Ic (corruption income)
- Corruption Multiplier, this is the most serious effect of corruption. Let's say an x amount is given as part of corruption for construction of a house, over a period of time this amount x becomes part of internal psyche then this amount increases from x to x+c
- The control of money supply (M3) is lost by the central banks

However corruption is not always bad and it's predominantly because of 2 reasons:

- The cash generated in the corruption economy is either invested in land, parked outside the country or used in consumption and this spend on consumption ultimately finds it's from black to white.....
- However the biggest advantage of corruption is that it can increase the pace of work..... All big projects take sometime because of the red tape and infinite number of clearances and rules, corruption can short-circuit all this and ends up actually reducing the cost of project (because of the short time in which a project is executed)

So the question that one must ask is that is "Corruption Good or Bad"..... and the answer unfortunately is that it's not all Black and White, while in day to day work corruption is undoubtedly bad as it ends up just increasing the cost of production as the money paid as part of this system doesn't actually quickens the work.

However if corruption is smart, tactful and artistic then it is of great value.... Greed forms the bedrock of human development and prosperity. It is the basis of Capitalism with corruption forming one of its important ingredient. It's just like a dope that if taken everyday would soon make economic framework look like a debilitated patient but on a rare basis can give an instant kick to the economy taking it to a new high..... The crux of issue is if corruption happens so much that it can improve the speed of the project so much that it can reduce it's cost it is indeed beneficial. However even in this case it has to be rare and done by very smart people else it would channel down to the bottom to average morons and when this happens the disadvantages of corruption would surface......

Moral of story: Corruption is one of the most effective weapon in Capitalism but only meant for smart people........

Tuesday, August 18, 2009

Markets - A Recovery or A Fluke - Part 1

Markets always have the dubious nature of surprising everyone, a bull market will make even the biggest bulls gasping for breadth while a bear market would in the end make even the most vociferous bears taking cover. While I am not at all convinced by the recent upswing in the market but then I could be one of the many who are thinking the same and the market could prove all of us wrong, nevertheless it would be foolish to go short in such a market, at best short condors/butterfly static trades might work for the time being.

The reason I wrote the last article was to set a setting for this article and the following ones, to emphasise on the importance of asset over cashflow. Hold this thought while you read on. The world was on the verge of a collapse (literally), the governments across the board came up with stimulus and relief packages, with relief packages of over 10% of current world GDP flowing in a span of 1 year it's a lot of money coming into the system in such a short span of time.

Ceteris Paribus if I put this kind of money flow in this basic Keynesian equation:

Y= C +I +(G-T) + (X-M) the economy size increases proportionately. The issue here is that this is just a very instantaneous type of equation i.e. captures just the moment. The point is that because of such Herculean government spending the global economy that was falling apart at rapid pace not only stopped falling but infact has even started to grow for the time being.

What the government's across the world did was important and should have been done but it would not be enough because there is a structural misplacement in the global economy (would discuss this in the next blog) and that the worst is yet to come and this is just the part 1 and unfortunately the global slowdown might be longer than earlier anticipated. Here is the thought process behind this argument.

By end of this year the debt of the great American nation would equal it's GDP, in other words the nation has to grow at around 3.5-4% annually to even pay it's interests!!! or else get into a debt trap or sell assets. Even at the best of the times US grew at around 4%, so simply put it US assets are going under the hammer, A 12 trillion dollar economy is currently driven by around 60 trillion dollar of assets, an impressive return of around 20%. But when this quantity of assets start going down the growth itself would start coming down and lower growth would mean more asset dilution leading to further lower growth leading it into a vicious circle. Europe is even in worst shape with debt ratios of many countries almost matching that of the US but even less growth. Lesser assets would further mean more exposure to event risk(last blog) and lesser financial stability. So while I believe that this temporary hump is because of this huge government spending all it has done is to shift the leverage from private balance sheets to that of government and the bolts of this ship would start falling apart once again but maybe not before it converts the last of the bears to bulls.

The next article I shall walk through the major countries of the world and talk about their debt situation and if and how they can come out of it, then after painting this doomsday scenario I shall talk (probably in the 3rd article) on how ultimately this issue would be resolved, by talking about the structural problem the world is facing today, till then hopefully enjoy the bull run......

Thursday, August 6, 2009

Land or Stock where to Invest

The markets are at an interesting crossroads these days..... The classic "Bear Market Rally" dilemma - Is this rally a Bear Market Rally or a Bull market. But anyways let's leave this discussion for some other day..... Let's get to same basic investment dilemma, where to invest the money: Land, Stock.........

Let's first analyse Land as an investment asset - Let us say on a piece of land one is able to produce a crop yield of 100 rupees in one year. Taking a discounting rate of 10% we can come to the conclusion that the land would then be valued at 1100 rupees. 

Now let's say there is a productivity rise next year due to discovery of some new seeds, the rise would mean that the same land can now produce 10% more. The value of land rises to 1210 rupees. However if nothing of this sort happens my land still remains at 1100 rupees.

Now let's say that instead of just buying the land, I rent it start a business to grow crops and try selling some stocks of my business... at the average level of productivity of the economy I would
make almost no money and the value of my stock would be, yes you guessed it right "zero"

However I might be better than the average and could produce the crop at a higher productivity, so let's say instead of producing crops worth rupees 100, I produce crops on the same piece of land worth rupees 120..... My business would starts to make a profit but thats not all the 20 rupees I get can be reinvested in getting better seeds and that lets say increase my productivity by 9% anually!!! well because as I make more money I can buy even better seeds so now the value of my stock would be 2200 rupees!!!......

The story is still not over looking at my production strategy all those moron farmers copy it and now to my disadvantage (but to the advantage of the economy and the asset holders) start growing more. The value of land would then rise again and would catch up to 2200 rupees. What's more next year there is a drought that puts me out of business, the land prices suffer a decline but comes back to it's normal price that following year, unfortunately the business is not that lucky!!!

Now let's go to the third and final scenario.... I buy the land and start to till it.... Sell stocks in the market for this business, even if I am growing crops worth rupees 100 but can mantain the 9% productivity growth my stock would now be valued at 12,100 rupees!!!........ and now even if there is a drought next year my stock would still be valued at something as I still hold my asset which is land.......

So what can we conclude from this whole song and dance!!!........

- While investing in land is a sure shot investment decision, investing in stock is not so....
- Never invest in businesses with lower to average productive rates
- Even if the productive rate of the business is very high when it comes to taking a call of investing in land or a business "invest in land" unless.....
- the business "own its assets" and then do their production on it... and if this is the case then owning stocks is far better than owning land.....
- Land should be owned in places higher productivity rise is anticipated and most importantly the competition level is high
- To end the discussion I would add that the productivity of the economy and which means asset appreciation would happen in a society that encourages free flow of information or in other words is an open society, else after a point of time the productivity starts to decline and all the assets become worthless, this might be happening in some countries but because they are closed we may not know so soon... you can guess which countries I am talking about.........

Sunday, March 1, 2009

My Article published in Financial Express....

My article published in the Financial Express; March 01, 2009 Edition, page 2

Monday, February 23, 2009

World in a Debt Trap.. Who would pay the bill

Almost every country today is in the need of debt. Now when every country wants debt only one thing happens.....

- Someone would end up printing money !!! and lots of it....

Fortunately or unfortunately that someone is going to be the rich nations of the world (rich atleast till now); US, UK and the Euro zone. Now let's say out of these three only Bernanke & company end up printing money. Now the question is would the US dollar really depreciate against Euro and pound. The answer is absolutely No!! and why is that... well let's have a look....

When a country takes debt it has to pay it back (not your fathers money, unless you want to be occupied or sanctioned) and how do you think Europe and UK are going to pay back the debt. You can only pay back debt by:

- Selling assets
-If your future cashflows are high enough to service the debt (in this case the high GDP growth) Such kind 

Assets with Europe!!! What a joke.... All the while Europe was rich because it looted assets from around the world and remember an old adage - Such kind of income doesn't last of eternity. So it's time that this wise saying come true. The party is over boys. Money taken from Papa is gone and you have nothing left but empty coffers.

Next we move to future growth. The dwindling & aging population (poor demographics) and add to it the mounting debt burden doesn't augurs well. So the future cash flows would be insufficient to service the debt.


- Many countries of Europe (including the rich ones) would become bankrupt.
- Euro as currency might fall apart
- Even to disliking of the countries, Europe and Uk like the US would end up printing lots of money.

Now lets come home. Even India's fiscal situation is bad and there are some predictions!!! (astrology) that because of this the long term interest rates would harden thus hampering future growth. Well that might happen but in my opinion the most likely scenario is this-

- The fiscal situation has gone awry because of reduced growth and increased government spending to revive it. The debt India will end up taking would be serviced by future growth and hence the Indian rupee would appreciate again. The appreciating currency vis-a-vis the currencies of the Western world would further reduce the debt burden and this would have a cascading effect leading us into a debt reducing and growth increasing cycle.

So in my opinion the ideal trade a few months down the road would be short dollar long Indian rupee and short Euro and long Indian rupee and even short Euro and long Dollar..... Till then as I always say let there be chaos before the pattern emerges..........

Sunday, February 1, 2009

Rich & Poor Nations and the Process of Natural Selection

In the 18th century Adam Smith came with his opus ' An inquiry into the Nature and Causes of the Wealth of Nations'. In this book he magnificently explained the dynamics of free markets and how some nations become rich. However I always felt that a piece is still missing from what is otherwise an immaculate economic architecture ever written. Don't get me wrong I am nobody to question a genius but understanding economics and wealth creation for mortal minds requires conglomeration of material from various sources even if they seem a little unusual at the first glance.

About a couple of months back I was traveling in a train from Rome to Venice. Trains are usually a good place to learn more about a country and it's people. Sitting a couple of places from me was an interesting person who teaches mathematics in Mestre. The discussion started from countries, interest and religion and went to economics and genetics. How did  genetics came into picture well we were discussing similarities between Indian and Italian culture. But suddenly I realised how genetics and economics are interconnected. How Charles Dickens process of natural selection completes what is missing in the wealth of nation.

Natural Selection is a process by which favorable heritable traits become more common in the successive  generations

Wealth and richness follow the same principle. People become rich by some reason (explained in the Wealth of Nation) of by some accident and then over generations this richness increases exponentially and passed onto successive generations just like good genes are passed on (as explained by natural selection). However unlike in genetics whereby the poor genes are slowly obliterated in economics things behave a little differently. The rich invest their money and the asset value grows over a period of time, hence the rich becomes richer and the sheer weight of their demand push up prices making it unaffordable for poor people so in a way the rich becomes richer and the poor gets poorer. The wealth is not just created but is transfered and in economics the wealth transfer takes place as:

Poor -----> Rich (The flow of wealth)

Hey I am not promoting any socialist ideas here, all I am stating is the process of wealth creation and transfer. This is not just the case with individuals but between countries and within countries. 

So even in India we observe that the rural income growth is just 2-3% while the income growth in services sector is 18-20%. While the Inflation rate is around 6%. This means that people in cities employed in the services sector are becoming richer and the people in villages are getting poorer. This is not a very comfortable situation and can lead to social unrest unless checked quickly by introducing some structural changes in the rural agriculture sector (more on this in some other article)....

So India being a poor country, a part of the reason is because US is rich. Ofcourse I am not blaming US for being rich or shifting blame for ills in this country to US it's just a process and like any process this process ends and reverses. Eons ago Dinosaurs ruled the world but one single event changed all that. Something similar happens in economics. People, countries become rich and richer till some event happens and the pedestal changes. The events happening today may be just that event and if thats the case we are lucky to be witnessing history and being on the right side of the history. So hold on watch as the history unfolds in front of your eyes.......