Wednesday, October 27, 2010
A new super hero in town - Dollar Man
Quantitative Easing, is weird term to describe a simple action by Federal reserve. In this intervention, Federal reserve print currency and buys medium and long term treasury bonds from the market. The objective is to keep the long term interest rate lower and the hope is lower interest rate will encourage people to spend and corporation to invest again. Once that happens everything would be fine.
I have two objections to this happy ending thesis, first is Chicken and the egg problem and second is prevention is better than cure. Chicken and the egg, currently interest rates in US are at historic low, however corporations and individuals are not willing to spend. Will bringing down interest rate down by another 25bps help corporations and individuals over come there reluctance? I don't know, but we all know currency flow across countries is free and there is more growth in BRIC nations. If some one offer me cheap money, I will rather invest in India than in US. I wonder if Fed loose monetary policy will fuel a bubble in Emerging markets this time. Second, there is a consensus in the market, that loose monetary policy by Federal reserve were one of the biggest culprit for the housing crisis. Cheap loans boosted housing prices to the extent that mere survival of economy became questionable when it burst. However, Fed is not willing to learn from its mistakes. Mr Bernanke is inclined to offer cheap money to corporation as long as he can. The only hope for happy ending is a belief that this time it is different. I am hoping against hope that Federal reserve will be able to control the loose money and the bubble loose monetary policy have fueled by then. May be the paradigm of bubble and bust followed by Soros is the best way for investing.
Friday, October 8, 2010
Books on my table......
Monday, May 10, 2010
Bailout - The new buzz word
In another associated news, Fannie Mae which being a government agency sailed smoothly through the financial crisis when Goldman bore the wrath of public anger, went back to US government asking for additional $8.4 bn. Total bailout cost of housing giants (Fannie and Freddie) stands at $145 bn and current estimate suggest that the total cost of rescuing can jump to as much as $ 500 bn by 2020.
My lesson from this crisis is simple work less, party more, borrow as much as you can, spend as much as you want to, but keep in mind involve everyone around you in the same behavior. If you can achieve a critical mass there is no reason why government will not sponsor bailout for you.
Monday, April 12, 2010
Addiction and will power
It is tough to understand what smokers go through when they try and quit smoking, until you have an addiction yourself and you decide to give it up. Only in the case of smokers it is probably hundred times more difficult because the substance is addictive. I am an addict myself, though my habit is not as bad as smoking but it is an addiction nonetheless.
Name of my disease is Television, now some of you will find it amusing, stupid or even crazy but watching too much television is an addiction in itself. To clarify as to why I am calling T.V. an addiction I will give you a recent example. This past Sunday, Boston was glowing in the morning, it was really beautiful outside, lots of sunshine, amazing temperature (kind of like mid March in India), a day which is a rarity for insane cold climate of Boston, but instead of stepping out and enjoying such an amazing weather I spent almost entire day at home watching Golf tournament, which I should admit was interesting but given the fact that I have never watched or played golf in my entire was just a game my mind was playing with me. Now, it is very easy to misinterpret me, let me clarify I am not saying T.V. is bad for everyone. Neither I am making any comment about quality of information provided on T.V. of course some of series and channels are amazingly informative, Nor I am denying the fact that watching an hour or half in the weekday can help you wind down. All i am trying to say is watching too much T.V. is bad not just for your physical health but your mental health as well and if you find it difficult to concentrate working and feel tempted to watch it all the time than you are an addict.
I don't really know how I became a T.V. addict but as far as I remember I have always loved watching T.V. I never cared about context, significance or content for that matter. I would watch anything and everything that is being shown on a T.V. set. Problem with addiction is not that you don't know what you are doing is bad, it is weak will power that prevent you from giving up your addiction and even if one day you summon up all the courage and stop it, the feeling of misery associated with not doing the act brings you back to it.
I was lucky enough to have amazing brother who realized how much involved I was with T.V. as a young kid and he didn't let it hinder my education. Obviously, I was mad when we lost our cable connection due to him but I don't remember I ever thanked him for doing that. Once I realized how stupid I was to spend most of time watching T.V. I worked very hard to curtail it. After graduation I stayed away from T.V. for a very long time, I didn't buy a T.V. and discourage my roommates from buying one. However, running away from the problem is only a temporary solution and one has to face his fears eventually. Recently, for the first time in last 6 years, I have moved in an apartment where my roommate owns T.V. and not just one. He has one in his room and one for the living room. I have started feeling miserable already. I have already told you about wasting a warm and sunny day. Now, challenge in front of me is to control my addiction and stop watching T.V. I am looking forward to this experience as this can give me some glimpse in the world of people who try to quit smoking.
Try giving up your addiction, might make you realize how hard it actually is?
Friday, March 26, 2010
Is inflation really bad?
After emotional outburst of last week. It is time to digress a little bit and write about a subject which is very close to my heart. Last week, after a surprise announcement by RBI to hike the short term interest rate, financial news had been laden with critical assessment of RBI act. Terms like "lagging the curve", "hard landing" have been used too often, without clarifying the terms or the underlying assumptions. Even if I accept the fact that target audience for these articles are very smart, intelligent and financial jargon savvy, I cannot stop wondering how many people who write these articles can go beyond the normal rhetoric and explain "What is hard landing?"
In my search to understand the landing problem of the economy, I stumbled upon a much more basic and much more interesting question "Why are the central banks world over obsessed by Inflation". If you think about it inflation is just an adjustment to prices, what difference does it make if it is 2% or 10% or 100% (Apart from the fact that 100% looks little scary) net net at the end of year maths will work out and all that would effect us would be growth in real terms. For ex - Suppose inflation in economy is running at 10% for past decade, commodity prices (raw material) on an average will rise by 10% every year, corporates will be forced to increase prices by 10% every year, wages will go up on an average by 10%, borrowers will benefit by paying less money on the older loans but lenders will benefit by charging higher interest rate going forward. In essence, If there is no real growth in the economy, more or less everything would be same. So why is there such a hue and cry about inflation after all? Not just common people, economist world over are obsessed with inflation to the extent that some central banks have been mandated to manage inflation.
Only answer which makes sense to me is that inflation as such is least of anyones concern, surprised, may be I am wrong but central banks world over are worried about fluctuation (volatility) in inflation and markets expectation of inflation, which amounts to almost the same thing. If there is no volatility or fluctuation expectation will always be well anchored. Consider the same example I mentioned earlier and imagine instead of being constant at 10% inflation varied from 2% to 20%. Can you at least foresee the problems faced by you and your employer, how much wage appreciation should be there in the economy, how much price increase corporation should plan for, how much price rise should household plan for. The whole economic system will eventually be in chaos because no one will know what to expect (which is anyway the situation in India but it can be much worse), people will have to spend a lot of energy in hedging inflation instead of pursuing productive activities.
Does this mean RBI is foolish in raising interest rate when inflation rises, shouldn't they wait to see if volatility goes up or not. Absolutely not, last and final piece of this puzzle is, inflation in general tends to be more volatile at a higher base. So, central banks world over start raising interest rate as soon as they see sign of inflation gaining momentum, since there is a time lag between the act of raising interest rate and impact of raising interest rate on inflation. Analyst use the term lagging the curve to signify that increase in interest rate is late or insufficient to contain the momentum in inflation. Also, as I have already mentioned higher inflation leads to higher volatility, which leads to higher uncertainty it is not far fetched to assume that this can lead to a vicious circle of rising inflation and rising interest rate which can eventually lead to decrease in economic activity. It is this curtailment of economic growth by spiraling inflation which is considered as "hard landing".
Sunday, March 21, 2010
Language....
In this process of getting a rank, figuring out equations and formulas, I never really tried to understand the beauty and importance of language specifically English. For people like me its really difficult to understand, the magical formula of impressing people by good communication skills, to bond with people by listening intimately and responding warmly, to influence people by writing a simple yet insightful memo, to be able to read a good influential book, gain some insight from it and translate it into working knowledge of the language. I am currently so much behind the curve that it is not possible for me to write few paragraphs like this without hundred's of grammatical errors, (Which I am sure my readers, if any, will be kind enough to point out) thousands of spelling errors (Which no one will be able to find thanks to spelling correcting feature in this text editor).
I think there are two important ingredients of good article, blog or essay, first is the clarity of thought process and second being clarity of expression and I have none. I am young and I think there is still lot of time to clear up my head and my thought process. However, I do feel that once I have clear thought process, I will still be in the same condition or rather worse because of lack of English words to express it. It is very important to feel the language before you can start using it as a tool to express yourself. For example - I wanted to ask a friend of mine that where his "Kafilla" will go next, now this guy is American and obviously he has no clue what "Kafilla" means so I have to find a word in English which means the same but unfortunately for me there is no word in English which means the same. Of course, Google search tells you that Cavalcade is a close word but it doesn't really ring bell in my head, I can't feel that I will be communicating the same meaning by using Cavalcade and that makes me realize importance of Language.