Us and Them: On World Market & India Story

“So interwoven are all economies of the world that the sub-prime crisis in USA has affected not only the American economy but that of the world as a whole.”

What is this sub-prime crisis in USA? How is Indian economy tied up with that of the world? How will India be affected by this crisis? Will it have any impact what-so-ever on an average middle class household in India? Will ICICI Bank collapse!? Should I invest and buy more stocks now that the market is trading at such low levels? Should I wait and watch before buying gold? What will happen to the home loan EMI I am paying? Should I wait for a few months before buying any new land or house, so that real estate prices cool off? Will the diesel/petrol prices be revised further? Will LPG become dearer? Why is dollar increasing against rupee again?

Is there any connection between all these questions - apart from being the “Breaking News” on NDTV at different points of time?! Probably, a common thread called economics.

Ok. First things first – what is this sub-prime thing? Over the past few years, with affluence all around, the demand for homes in USA was very high. Everyone wanted a home, at any cost whatsoever. People needed home loans – banks provided those home loans, even when everyone knew that real estate was overpriced, even when the fact remained that most of the people could not afford to buy homes at such high prices. Banks did not check the credit worthiness correctly. There were mortgages and double mortgages taken against these homes so that people could buy another home! All these home loans and mortgages were then securitized by these banks.

But, what is this securitization? These home loans were pooled together, their worth combined and then divided into different classes or tranches based on the risk and payment analysis done by the banks. These classes or tranches were then sold as bonds in the market. Investment banks bought them, commercial banks bought them, hedge funds bought them, brokerage firms bought them, and probably a lot of high net worth individuals bought them as well.

Then what went wrong? Well, such high home prices were really not sustainable. Real estate prices started to nosedive. Suddenly, the assets for which people had spent their lives’ savings were worth nothing. Suddenly, they had no ways and means of paying back the annuities of exorbitant home loans they had taken! Their mortgage payments dried up, because the value of asset against which mortgage payments were being made had fallen as well. Why would I continue to pay you 5000 bucks a month for something which was worth 2 lakhs a year back and is not even worth a lakh now? I would find ways and means of renegotiating to get away with paying only 2000 bucks a month now! So, suddenly, all those home loan payments dried up. Banks did not have any means of making the payments due on account of those special bonds they had sold (tranches and classes!). They took ownership of homes for which loans were taken. But those homes were worth nothing really! Thus, the payments to investment banks, brokerage firms etc. dried up. So devalued were these bonds that nobody hoped to make any money out of it. Firms starting recording their value at current prices on their balance sheets, and this fall in asset values were formally “written off” by major banks – Merrill, Citigroup, Goldman Sachs, Lehman etc. A lot of them ultimately went bankrupt or were bought over.

Then how does this affect us, in India? Well, many lucrative jobs have dried up for sure! B-School placements are expected to suffer because many top notch recruiters do not exist anymore or have limited their operations so much that they really do not need any new people for the time being. What else? As trading/brokerage firms, many Indian companies also had bought some of these special bonds from the major US banks. Obviously, all those have been written off as losses. Many of our companies had trading obligations with these major banks. Now with these banks going bankrupt, there is a speculation that these trading obligations might not be honored and hence, top-line of major Indian financial firms might suffer. ICICI is one of these firms with some exposure to international markets. Hence, the volatility in its stock price in recent times.

Is that all? Not really. Here is where macroeconomics comes into picture. As discussed above, in the USA, banks do not have money to lend – they are short of funds. That is why the term – credit crunch. Every investor, whether an individual or an institutional one (banks, funds etc.), there is trying to get as many dollars as possible at the earliest and build a kind of “war-chest” for times to come. Hence, they are selling heavily whatever holdings they had in Indian markets. Due to this heavy selling, a downward pressure on the market is built. Why? Suppose everyone around you wants to sell the laptop they have and you are the only one willing to buy (more sellers, less buyers). Obviously, you will try and get the best bargain, i.e. minimum prices. Stock prices thus, fell (not to say this is the only reason, but one of the significant ones), and so did the Indian stock market.

Another issue – dollar being a major currency (acceptable worldwide for all kinds of transactions) - foreign investors are selling rupee heavily in the exchange market. As above, if everyone around you is selling rupee, the value of rupee is expected to fall and that of dollar is expected to rise- precisely the thing that is happening now. And how is RBI trying to support rupee and prevent its free fall? By trying and maximizing the amount of dollars it can lure foreign investors to invest in India – by measures like offering higher rates of interests to foreign nationals and NRIs if they invest in India etc.

With lower credit availability and lower spending by firms abroad, there is a speculation that the revenues of our export industry (primarily IT) might suffer. No new projects, no expansion plans etc. Obviously, those involved in financial services outsourcing would see a dip since many of their clients have gone bust, but what happens in general, remains to be seen.

So, what we see here is that Indian firms have lost money and clients. There are pressures to cut costs and boost bottom-lines. People have lost jobs. Imported goods cost more (increase in dollar value). Inflationary pressures, which existed in the Indian economy earlier (due to high money and credit supply), have resulted in higher costs all around. To cut this inflation (reduce money supply in the market), interest rates have been hiked. Thus, EMI rates have gone up. People prefer not to take loans; they prefer keeping money in bank deposits, earning the higher interest easily available. Foreign investors are pulling out money, as discussed above. It becomes difficult for domestic firms to raise capital and make further investments (no foreign investors and borrowing in local market is expensive due to high interest rates) in such a scenario. Without further investments, maintaining high growth rates is really not sustainable. Hence, the talk of downward revision in GDP growth estimates for India – from near 9% to around 7-8%.

What happens in future is really an issue of macroeconomic policy. India is an internal demand driven growth story. Yes, there are dependencies on world market as a whole, but our growth is not entirely due to a surge in exports or something. We have a huge consumer base, that is getting increasingly literate and well off. It remains to be seen how long such high interest rates continue – depends really on the time it takes for inflation to cool off, which in turn depends on oil (external) and food (internal). With a worldwide credit crunch, one can expect prices to cool off (lower demand, hence lower prices – demand/supply curve) in times to come. One can then expect interest rates to be lowered. One can then expect the Indian juggernaut to roll on further. How much time will all this take? Well, that remains to be seen and there is no point speculating!

People on Wall Street might be used to saying “Greed, for a lack of better word, is good”. However, experience shows that it is best to live within one’s means, strive to expand one’s means and once that is done expand one’s desires and that it is best to live by the motto “Deserve before you desire”

Rest, as they say, is one’s own choice.

Adding "Oil" to the Fire

"We might forget about lighting fires for now - the oil production seems to have "peaked". The D-day is not far, when we would walk to offices and come back, use solar energy to power air-conditioners on clear days, and wind energy on the not-so-clear days!" That is what the speculators who were and are bullish on oil might want the whole world to believe!

I am no oil-industry expert. Neither am I a financial market specialist, who, like fortune-tellers, can accurately predict whats gonna happen next. However, what I do believe is that such wild fluctuation in oil prices is something uncalled for. How can a resource, which was priced $31 per barrel a few years back (2003), was worth $150 a few weeks back, and now costs $90 odd? Is that reasonable by any yardstick?

I still remember those last few days of my IIT life, when, Mayank Jha, Priyesh Neema and myself had created a "demand" for biofuels on paper, working on a business idea, simulating scenarios when oil price would cross $70 per barrel, making bio-fuels economically viable. Never did we realise that biofuels compete for land (another limited resource) with food grains and a host of infrastructure projects. Too much of a digression - but I do not think bio-fuels are economically viable right now. Maybe fuel cells or some other technology that uses some unlimited resource (like water) is what we really need.

Anyways, a recent discussion with one of my colleagues, Shreerang Godbole, has inspired this post -a discussion triggered by the recent collapse of Lehman Brothers, the free fall of oil prices and hence, the realization that economics does affect day-to-day life.

What do oil prices really depend on? Traditional economics says - demand and supply. High demand, low supply implies higher prices. Simple.

But where is the demand from? Who are the suppliers? I am afraid I haven't done any due diligence here, but oil demand is really not stagnant world wide and is definitely growing. In the recent years, it might have been triggered by economic boom in India, China and other developing countries. It might also have been boosted by the Olympic Games in China last month! Another fact to be considered here is that oil demand might be elastic, but one suddenly doesn't start using more oil or less oil overnight (as compared to say, expensive clothes). If the price does rise, it takes some time for consumption to come down as businesses change strategies, and households change their lifestyles. Elasticity is over a longer term not over a very short term.

And the supply? OPEC countries - majorly Arab countries, some African countries, Russia, Mexico, countries around North Sea etc. Supply too has been increasing over the years, with better methods of exploration and extraction. Iraq invasion might have reduced supply from that part of the world for now. However another issue is that most oil producing countries are not very open about their production capabilities and reserves left. They treat oil as a 'national treasure'.

But, then what about things like speculation and dollar weakening? Well, yeah, coming to them - every major financial hub trades derivative contracts on oil. For the better part of last few years, number of people going long on oil have been much more than those short on oil (i.e. people expecting oil prices to rise have been larger in number). This implies that prices of call derivative contracts on oil would increase (i.e. value of contract which says that the price of oil would be 1.2X three months from now if the present price is X, would also increase - since number of buyers of these contracts is larger!). And hence, derivative markets expected oil prices to rise.

Now, combine this with the nationalistic pride of oil supplying countries. Agreed that derivative contracts are just paper contracts and settle in cash than in actual oil barrels, but consider a situation where you were an oil merchant and the market world-wide says that oil price will rise, and the market world-wide doesn't know how much oil you hold. What would you do? Obviously, you would sell in as small quantities as possible at prices as high as possible. That might have been the case all this while!!

What about dollar weakening? Well, that is akin to changing the scale. Dollar is a globally accepted currency to settle contracts, close deals etc. However, with the US trade balance worsening (imports increasing more than exports), demand for currencies other than dollars increases (a US importer would pay an Indian exporter in rupees). Hence, people want lesser amount of US dollars for trade and more of other international currencies. And therefore, US dollar value goes down with respect to other currencies. This only means that if we had a hypothetical stable universal scale of measuring value, called aana then although the price of oil remained X annas, since dollar value went down from Y dollars per aana to 2Y dollars per aana, the value of oil in dollar terms went up from XY dollars per barrel to 2XY dollars per barrel.

Then why did oil prices crash with the fall of Wall Street giants? Well, bears have outnumbered bulls in the financial markets for sure. Oil prices had been high for a decent amount of time. That would have resulted in demand elasticity coming into picture. Net growth in demand would have come down. All this leading to reduction in prices.

Thus, to me, it appears that supply uncertainty, bullish-bearish outlook in financial markets and international trade - all have a role to play in this oil price fluctuation.

I don't know what is in store for future. The best bet for us, and for the planet, maybe, is for us to live within our means (avoid credit crunch situations like the one we face today), accelerate ways and means of exploring & extracting oil efficiently, start saving energy in our own small ways, and wish that scientists make fuel cell/fusion/solar energy/wind energy solutions more economical soon!

Times: Now and Then ...

I miss you,
I miss your voice.
Into a shell you've gone,
By your own choice ..

Whether to coax you out
Or, respect your choice?
I do not know what to do,
But I do miss your voice ..

Those long hours before sleep,
They were fun.
I'm sure the wait will soon be over,
Those times again, will come :)

Rest assured,
I'll wait.
Looking for you, forever;
across the gate ..

All I hope is, in the end
It doesn't become too late.
'Coz life's a journey,
And not indefinitely do flights wait ..

Sometimes, I wish ...

It's that time of the year,
Romance, is in the air!

Lightnings glow
Cool winds blow!
Little droplets of elixir all across;
Life's so refreshingly slow!

Yeah! It's the time of the year,
When I wish YOU were here.

It's the time of the year,
When I wish WE were here.

Talking endlessly, all the way.
Walking all along the bay.
You, me - Us,
Just the cool breeze between us!

Sometimes I wish
It remains forever.
The time of the year,
When we are together!

Sometimes I wish
It remains forever.
This time of the year,
This amazing weather!

Dreams (Really) Unlimited!

It has really been a long while since I wrote. The thoughts have been itching to be put into writing all these months! Just that they did not get an opportunity to be expressed. Anways, I guess it has more to do with procrastination than with anything else!

All this while, this aura, this feeling of hope, this feeling of enthusiasm all around in my India (you just cannot ignore it), have left me wondering. Anywhere you go, you can find people, especially those of your and my age, thinking, dreaming, planning and aiming for the big things in life - really amazing! And the whole feeling is so infectious. Just takes five minutes of interaction and the brain goes ga-ga over so many ideas. It seems that innumerable opportunities exist for each one of us to book our places in the pages of history. And finally, it seems that we - "the young turks" - will realise the destiny of India, that of being a self-actualized nation (more on this in a later post!).

I just hope all this continues. I guess the key to all this is dreams. We all dream about lifestyles, about power, about wealth, about being self-sufficient, about responsibility, about splendour, about greatness, perhaps! And it is these dreams that guide us, that make us act. And its these small acts that will eventually take us where we all belong to. I just wish that we all keep dreaming. For, as Abdul Kalam has said, it is only when we dream, that we generate thoughts. And only when we generate thoughts that we act. And it is these actions, each small bit of them, that will take us to our rightful place.

And I am sure no philosophy, no culture, no religion at its core does limit us from dreaming big. Lifestyle choice by no means is in any conflict with any kind of spirituality. Our religions only guide us to have faith, to be good to mankind and nature in general. They only ask us to remember that we are not supreme, that something somewhere is more powerful - something that is responsible for our creation. Okk! So I believe there is a supreme power, I have faith, I am good to other fellow beings - but all this while I might as well spot opportunities, capitalize on them and earn millions and billions (the right way, truthfully) and thus, live lavishly and comfortably. It only is a matter of my choice and liking, isn't it? No conflict, no issues :)

Mahatma Gandhi (truly a great person) had himself said - If you think you can, you will. But if you think you can't, you wont. The strange thing is that a man acquires the ability to do a thing the moment he believes he can do it, even if he did not possess the ablity to do it before!

So keep dreaming, keep believing, keep doing. Be hungry, be happy :D

Remembrance!

It was great.
The time we had together.
I hate, to remember
The time we had together.

Can I bring it back,
I ponder.
So wonderful it was to wait for you,
I remember.

What was my mistake,
I don't know.
Guess it was made up in heavens.
To not be with you.

Those aimless ramblings,
short walks, long coffees.
I wish I could live again
those great chats
Over cakes and toffees!

Hope when I'm gone
you are never dreary and alone.
For your memories shall be with me
forever, in Paris or in Rome!

Career Gyan!

This one's for the young ambitious turks just getting out of college. So many different job profiles out there, which one's what? Presenting a brief synopsis of the "hot" profiles in the market:

Consultant: A friend goes to him asking for a lollypop. He goes to the nearest mom & pop store, buys a lollypop, giftwraps it, gives it to his friend and charges for lollypop, freight charges and gift wrapping costs.

Financial Analyst: A friend asks him how to make money. He tells his friend to give one room in his house to him. Then, he rents out that room, pockets the 70% of rent, gives a miniscule share to his friend and charges him for the financial services rendered.

Logistics/Supply Chain: Tries to figure out how many trucks are there, where they are, what they are carrying & whether they have sufficient permits or not.

IT professional: A friend asks him to develop an application for a logic. The friend tells the logic. He goes to http://www.google.com, keys in the requirement & types what he gets. In case any problems arise, it is called a 'software bug'.

Project Manager: His friend asks him to construct a building. He calls up a contractor, arranges a meeting of his friend with the contractor & disagrees to work both with the design that his friend wants & the rates that the contractor asks for. Ultimately, the construction gets delayed, design is faulty and costs much higher than what the contractor wanted!

Enough blabbering about profiles now. I still wonder abt one thing: Bangalore is so cool (climate, I mean) & Saharanpur so hot. Then why do people in Bangalore have so much melanin & those in Saharanpur seem to lack it!?? Much has been said about generations of evolution, yet ...