Tuesday, May 19, 2015

Where are we heading?

There were two financial reports coming out of the United Kingdom today – housing prices and general inflation. These reports petrified me – just as similar data from the US these days is causing a concern to me.

The housing prices in the U.K. have been going up at a pretty pace recently. The annual housing prices went up by 9.6% in the year to the end of March. The annual house price inflation in Scotland during the same period was 14.6% – the fastest since 2007.

Now, the general inflation in U.K. (as measured by the Consumer Price Index) turned negative (-0.1%) in April (year-over-year).

The two contradicting data above points to eerily similar situation during the housing boom before 2008. For the last decade, we have been facing this constant problem of asset price inflation not in line with the inflation of the prices of general goods and services. Now, remember, the central banks base their interest rate decisions on the consumer price index and not on the housing price index. In fact, before the 2008 recession, many central bankers thought that housing price inflation was not something to worry about. They did not believe that there could be a nation-wide housing market collapse – as they thought that housing price depends of various factors, many of which are regional. But what they failed to see was how the housing market was directly linked to the very heart of the global finance and how the collapse of the housing market could cause a chain reaction across many large financial institutions.

It would be hard to believe for anyone to think that the central banks did not foresee the link between the housing market and the banking system – as even in a traditional banking model, it is the banks which lend to the home owners and so anyone would have known that there would be an impact if the housing bubble bursts. But the irrational calculation that the central banks did at that time was that a bank, run by extremely savvy individuals, would not hurt itself by sub-par lending standards (we would call this “no-regulation”, but the central banks called it “self-regulation”). But what the central banks missed to see at that time was – it was no longer necessary for the banks to worry about the creditworthiness of the borrower – as long as the banks could securitize those loans and sell it to market participants, they thought that the risks were minimized. In fact, they thought that by selling these newly innovated financial products, the risks were shifted from just the lenders to the many number of financial market participants – participants who were more in number than one lender and who were thought to have the capacity to absorb the hit if in case the borrower defaults. These securitized loans were complex financial instruments that went under the radar of the supervising agencies of the government. So when the housing market collapsed, it set up a chain reaction with these financial instruments acting as a trigger that led to an incredible worldwide turbulence in the global financial markets - a turbulence whose effects are still being felt today, and a turbulence that brought us close to the complete shutdown of the global financial system as we know it.

Today, after ‘n’ number of new regulations introduced, various bank stress tests conducted, billions in fines paid and bills like the Dodd-Frank passed, we are again looking at data that points to assets like houses and equities going up when wages and inflation of general goods remain stagnant. Where did we go wrong? More importantly, where are we heading?

Thursday, May 7, 2015

A complete mug or a dodgy prime minister

Just a light-hearted post:

Today, May 7th, is the general election in U.K. I am not a British citizen and I have no facts in hand to comment (and probably no right too :)), but I am going to say this - I am rooting for David Cameron of the Conservative Party to win the election. How can one not vote for this guy? - especially after watching him obliterate the Labour Party leader Ed Miliband during many "Prime Minister's Questions" sessions in the House of Commons!

Tomorrow will be interesting to see if David Cameron who called Ed Miliband "a complete mug" or Ed Miliband who called David Cameron "a dodgy prime minister surrounded by dodgy donors" will become the next prime minister of U.K. :) 

Gotta love those British accented face-to-face funny yet intense Q&A sessions in the House of Commons!

Wednesday, May 6, 2015

The Free Speech for a Rational Mind

When I hear incidents like the Charlie Hebdo shootings in Paris or the one in Garland, Texas this week, I am immediately reminded of someone called Periyar E.V. Ramasamy. Periyar, who was born in 1879 in British India to Hindu parents and went up to live until 1973 - which was by then a free India - was an atheist and was the founder of the "Self-Respect" movement and a strong figure in the Dravidian movement that took roots in the southern part of India in the 1920s, especially in the state of Tamil Nadu. 

Periyar, through his self-respect movement, fought against what he said was the oppression of "backward" caste people by the "forward" caste people. He claimed that this oppression stemmed directly from the ills of the Hindu religion and said that the northern-aryanic brahmanism, a concept that he said was foreign to the southern dravidian race, introduced countless superstitious beliefs within the Hindu religion that led to people being marginalized and oppressed across caste lines. 

Periyar, to whom freedom of speech was not at all foreign, criticized the Hindu religion, its gods and goddesses and its belief system in ways and words that were considered extremely offensive to the millions of Hindus. He called anyone who believed in God a fool and even organized rallies where he broke the statues of Hindu gods and called upon his followers to do the same. He even compared the forward caste man, who is of the priest class in the Hindu society, to a "snake" who surrounds the legs of the oppressed people - where the snake doesn't allow the oppressed people to move (up the economic ladder) and if one still tries to move, the snake bites.

In a society that was vigorously religious, Periyar gained millions of followers. They called themselves "rationalists". Even religious people saw in him a figure that questioned the very faith that they were afraid to question. They saw in him the courage to use his "God-given" intellectual capability that they themselves were afraid to use to question the gods and goddesses. 

Periyar might have been very offensive in the ways he questioned Hinduism, but he also put forward "rational" thoughts and begged people to use their "thinking" capability to question everything rather than just blindly accept them. He hated when people called him an atheist, for he believed that that term was misused against anyone who used their thinking prowess and questioned the logic behind an assertion.   

Periyar admired Buddha - for he thought that Buddha was a rationalist of his time who questioned the Hindu religion and its practices. He refused to believe that Buddha was any form of divine incarnation and he didn't believe Buddhism was a religion. But he openly advised many oppressed and backward caste people to convert to Buddhism to break out of the "evil" machinations of Hinduism. But when some asked him to convert to Buddhism as a form of solidarity, he refused. And the reason he gave was that that it was easier (and in some ways logical and even ethical) to stay within the bounds of Hinduism to criticize Hinduism. 

Out of many millions of his followers, some went out to form political parties. And these parties and its atheist members have repeatedly been elected by the vastly religious society to govern the state of Tamil Nadu in the last five decades. And so was atheism accepted by the religious people of Tamil Nadu. In fact, today people demand that these atheists stay true to their atheism as a form of trust to their rational thinking and leadership. 

Periyar's free speech to question the ills of Hinduism was very effective because he stayed within the system to question the system. No one was able to question his freedom to speak against the Hindu religion for he himself belonged to the Hindu society. No one could deny him that right even during the pre-constitutional era. And I wonder if today's free speech against a religion's ills needs people like Periyar, who will not only have the courage to beg the people to question faith, but will also be members within that faith-system to make that very free speech as not just a constitutional right, but rather an intellectual tool that leads to rational thinking and real transformation instead of just a provocation. 


Thursday, April 30, 2015

Drugs, Death and Demand

I read in the news yesterday that Indonesia executed 8 men for drug trafficking. From watching movies over the years, I have also come to know that drug possession and trafficking is a serious crime that is punishable by death in countries like Indonesia, Malaysia (and maybe even Singapore, though I am not sure).

I have always been strongly against anyone who traffics or sells drugs – because the only reason I see why these people do what they do is greed and money-motive. It is just not excusable to traffic or sell drugs knowing that what they do is affecting young people and families in extremely horrible ways. It tends to destroy a society and its culture. So it is just not excusable.

All this said, I should also note that I am generally against death penalty. I just don’t believe that the state has the right to kill people. It seems barbaric and societies need to have an honest debate if these criminals should be executed even if they seem to exhibit a genuine willingness to change for the better and rehabilitate over the course of many years. Yes, some criminals don’t change and we all have to have a debate on what to do with these repeat offenders and how to punish them or put them away from society. But there could also be criminals who could be rehabilitated. Two of the eight persons executed in Indonesia are Australians and this is what the Australian prime minister had to say – These executions are “unnecessary because both of these young Australians were fully rehabilitated while in prison.” Now, we will not know for sure if they were fully rehabilitated or not. But what if they were? – especially considering that they were arrested ten years ago when they were aged 21 and 23.

Now the other reason why the criminal justice system in many countries still has the death penalty is to stop future offenders from committing the same crime – basically, these countries argue that the death penalty acts a deterrent. It may or may not be true depending on the crime. But what needs to be studied is – is the death penalty the only deterrent?

Now coming to the drug problem, I think countries are fighting it in the wrong way. As like in any product, as long as there is demand, there will be supply. We kill one supplier, then the next supplier pops up. The more we kill, the price of the product increases, as the demand remains the same and supply dwindles. It is just a matter of time before another supplier (this time well organized) fills in the gap as the risk/reward ratio would have gone up. So we will kill more and the cycle would just continue thereby creating mafias and drug gangs along the way. So I believe to address the drug problem, the demand side needs to be addressed – meaning, demand should be brought down (almost to nil would be ideal) along with the supply. How to bring down the demand is a matter to discuss and debate by the societies concerned - but I would recommend a little civilized way rather than a barbaric death sentence.

Reference:
1. http://news.yahoo.com/australia-cant-more-death-row-prisoners-indonesia-055550357.html


Tuesday, April 21, 2015

The Golden Manipulation

India today celebrated the “gold festival” – the so called “Akshaya Tritiya”, where it is considered to be auspicious to buy or gift gold to friends and family. And I remembered a conversation I had with my mother last year. I asked her at that time when did she first come to know about this festival? She told me a story that around 15 years ago, one day she and a friend of hers went to a jewelry-shop in town to purchase some silver-based ornaments for the friend. And suddenly the staff in the jewelry shop recommended her and her friend to buy some gold as well as it was Akshaya Tritiya. My mom and her friend went – “What? What’s Akshaya Tritiya?” The staff explained. My mom and her friend weren’t sure if what the store-staff said even made sense. They returned home. Some jealous neighbors who had come to know what that day was about thought that my mom was out to the store to buy gold and thereby to buy “luck”. So they rushed to the store to buy some gold (my guess is they would have bought one or two gold coins). And so spread the word to a few in our street.

Fifteen years later, the entire town rushes to the local jewelry shops to purchase gold today. There are literally lines waiting outside the shop to enter. In my view, this is a classic example of manipulating consumers by a mix of religion, culture, sentiments, myth and superstition.

Now, gold mining in India has died a long time ago. Almost all gold in the country is imported. And if one has read any gold related news in the past month or so, the constant news was that this festival was calculated as a factor to support gold prices worldwide. India is the largest gold importer in the world and consumes, by some estimates, close to one-third of all gold produced globally.

In March alone, reports indicate that India imported 125 tons of gold – now in dollar terms that is around $4.8 billion. India’s trade deficit in a year stands around $200 billion. And gold imports make roughly 10% of that deficit.

When I was starting to think how the world’s gold industry has manipulated the Indian consumers by leveraging their weakness, I remembered something else my mom had said – that some jewelry shops are now promoting Akshaya Tritiya as a 3-day festival. And I know that it is not just the world’s gold industry, but the Indian jewelry industry too.

Friday, April 17, 2015

Bloomberg media

So as a person who watches Bloomberg television channel often, and as someone who frequents the bloomberg.com website to update myself on the day's financial and market news, I was taken aback by something I noticed today, or rather something I didn't notice. One of the major news in the markets today, albeit with less impact, was an outage of the bloomberg terminals that caused a disruption for traders worldwide. Here is an excerpt from an article in today's Wall Street Journal (http://www.wsj.com/articles/bloomberg-terminals-go-down-globally-1429262782) 

"Bloomberg LP was hit by a massive computer-network outage Friday, forcing its terminals out of action for hours and leading to major disruptions for traders around the world who rely heavily on the machines.
The blackout, which started shortly after European markets opened, also caused the U.K. to postpone a scheduled multibillion buyback of government debt. The £3 billion ($4.5 billion) tender was rescheduled for the afternoon."
And here is an except from an article in today's New York Times (http://www.nytimes.com/2015/04/18/business/dealbook/bloomberg-terminals-outage.html?_r=0) - 
"The failure at Bloomberg, which provides data and trading services for 325,000 financial professionals around the world, effectively shut down some parts of the capital markets and forced traders to confront their level of reliance on the Bloomberg system."
Now, I was actually watching Bloomberg television channel this morning - almost for an hour just before the financial markets opened and Bloomberg never reported this news. I actually first found out when I accidentally switched channels to CNBC which had this "breaking news". I thought I might have missed this reporting on the Bloomberg channel when I was busy enjoying the taste of my morning coffee. But then I went to bloomberg.com and still didn't see this news anywhere. And now again in the evening, I checked the site and even googled for it - but I don't see it. I just don't see it. I don't know if it is buried somewhere in the website under the pile of news, but I don't see it.  
I have had great respect for bloomberg media, but if they did not report this news or under-reported it, then I am afraid that I just would have lost a little bit of respect for them. 

Thursday, April 16, 2015

Netflix

Netflix: is a company I admire; it’s product I enjoy; its stock I watch with envy. Just five years ago, a Netflix share was around $100. Today, it closed at around $560. That is a whopping 460% rise in the share price of the company. Just from the beginning of 2015 alone, the stock has risen more than 60% - that is, in the last 4 months.

This is a company where you could have the “felt” the growth over the years – a company that grew almost without any formidable competitor. I have to admit that I have been a Netflix customer for less than two years now, but even I “felt” it in this time period. As cable channels grow boring and repetitive filled with commercials every day, Netflix becomes interesting with ever changing content. Recently, I have also noticed that the content quality has vastly improved. What’s more? - For a crime/mystery/thriller fan like me, who is very much into the details of every scene and dialogue, the “rewind” option comes handy, which I don’t get it in regular TV. And that is just one lovely option amongst many.

Moreover, Netflix has a lot of room to grow in international markets and the company has tested only one kind of revenue streams so far – the subscription model. All this make me drool for this stock. And by the way, I have to admit that I have entered and exited this stock once with a small profit in the past. But I question myself: why did I exit so early? First of all, I entered this stock because of enormous growth potential. But I exited the stock (in hindsight too quickly – it was relatively a quick in and out) because of some of the same reasons why I won't enter again today –

·        The stock is trading at 130 times its earnings. That’s too high a ratio for me to be comfortable with.

·        I fear that the potential future growth in the international markets is over-estimated. Yes, in Europe, Japan, Australia and New Zealand, I see enormous room for growth. But in other Asian markets, I fear that Netflix might face a severe competition from piracy. Lack of proper high-speed broadband infrastructure in most of the Asian and African markets is not even discussed in Netflix’s strategy. And what about local content and their costs? And what about competitors in these international markets from local businesses? Like I said, I still see a lot of room for the growth in subscribers, but I just fear if the expectations are running too high that potentially could not be met due to the above mentioned reasons.

·        Competition is starting to pop up. I am amazed that Netflix has had too little competitors so far – who, by the way, were not even close to Netflix’s brand and growth. But I see that changing. Amazon Prime is a prime example. At first, I shrugged it off. But with their package model – where reduced rate (or free) retail shipping combined with video-streaming looks like it is working. Going forward, online shopping is going to be the norm, and amazon is well positioned to capture these twin markets of online shopping and video-streaming in one package offer. My opinion is that – currently, the pricing model of amazon is crippling its growth, but over-time, I think they might be able to work it out – especially given the fact they have multiple businesses under the same brand - which they can leverage.

·        Apple/HBO product could turn up to be another formidable competitor.

·        I tend to agree with people who say that Amazon or Apple/HBO need not necessarily cripple Netflix because the customers might go for both Netflix and amazon (or HBO) instead of choosing one among the many. But my problem is that this fact is already priced into the stock.  And what about more competitors? I am thinking that there is going to be many more companies before new competition fizzles out. I know Netflix has a first-mover advantage in the market, but the companies that will be entering this space in the future are ones who already have the infrastructure or will move so fast that it will be difficult to see a significant time-lag (remember, this is based on internet technology and not machine parts production).

 All this being said I still love Netflix. I so badly wanted in. In fact, an analyst recently mentioned that the stock could go to $900 a share. I might be completely wrong and would have missed a great opportunity, but because of its enormous price tag for a share where all the positives of the company are already priced in, I fear any negative can significantly bring down the stock price. Netflix has mentioned that they might do a stock split preceded by possible dilution – if they do, depending on the diluted price, I might look for a good entry point. But for now, I am going to sit on the sidelines while enjoying my Netflix shows.