Deconstructing DeMon for the Inglorious liberal

The expression “Inglorious” is trending now amongst the battle fatigued caucus of Indian liberals ever since their flag bearer Shashi Tharoor, M.P. titled his book “Inglorious Empire” - that successfully made a cottage industry out of Indian bitching about the British Raj. Pratap Bhanu Mehta is a hard trier among liberals. Perhaps the popularity of Tharoor’s title success has tempted him to absorb some shine off it as he partakes the expression as a title to his op-ed piece today. But all it could do was to expose his frustration more than his version of economic reality that he struggles to outline in it. 

In fact, most critics of India’s massive Demonetization (DeMon) program initiated by Prime Minister Narendra Modi fall flat on their nose like Mehta does – the liberal camp in particular. Let’s take Mehta’s piece today, flesh it out and you’ll know why.

Mehta begins his piece by confessing his inability to figure the “technical reasons” cited by Amit Shah for the current GDP growth pegged at 5.7% from the 7.5% as it prevailed an year ago. But he as well guessed it right that the overriding preoccupation with the cockle warming debates on social polarization – the great liberal appetizer  – has distracted him from observing the economic realities on the ground like rising crude prices, the gradual but unstoppable Chinese slowdown, Trump in Capitol Hill, Brexit and EU recession all which dented global commerce in a significant way. Mehta comes out way too naïve in pretending not to have noticed it.

As Mehta concedes, barring a few experts no one is seriously questioning the Government on falling growth numbers.  We know how 2007-08 mortgage crisis exposed the experts as a breed. He doesn’t seem to get that average, un-elitist and the few sensible among the elites don’t link economic slowdown to DeMon or don't confront the obvious because they know it would only present them in a shade of poor “orange” - the color  distinguishing the ignoramus truant holed up in Washington – that nobody wants. Mehta perhaps has sufficient rewards more than gumption to risk it. So he perhaps does. Further politics has increasingly a negative correlation with economics

In the midst of flagging all his grave concerns, Mehta has somehow deigned to notice the macro-economic stability that prevails and overrides the gloom he struggles to figure. The unruffled Indian majority should owe him a lot on that count even though they have digested the slide down in other indices like IIP, Private Sector Investment by tallying it with geopolitical tensions in the neighborhood and have benchmarked global comparisons to boot. Only that India’s indices have been faring better than most of the other developing nations – a fact Mehta has overlooked once again attributing his preoccupation with the glorious anti-polarization liberal crusade.

Now to Mehta’s greatest of findings that this Government gets what he calls as a “Free Pass” because of the severe economic maladies it had inherited from UPA. In his hurry to underplay the role of UPA in screwing up India’s economy by its sustained insolence that PM Modi has boldly begun to address, he forgot that the “past” doesn’t just refer to a decade under UPA, it has to be multiplied by a factor of five - to include the years from Indira Gandhi era when Bank Nationalization swept so many economic ills then prevailing under the carpet – to get a complete picture. Perhaps Mehta does implicitly convey his unabashed adoration for Modi in expecting him to reverse the ills of the last five decades in under three years. Noted, Thanks.

The biggest gaffe that one could notice is when Mehta airs his pet grief - by managing low inflation the Modi Government has neatly masked its non-performance in areas of job creation and employment. Mehta is seen as a complete dud here. He pretends not to notice how his claim of job losses militates against the fact that despite losing jobs by the millions, people still buy stuff, crowd malls or even buy Jewellery. It takes a scornful liberal or a complete idiot (means the same) not to figure how people get by if DeMon has killed all jobs or what alternative means of livelihood people have adapted to for themselves.  Wonder what these jokers might ask at a time not so far ahead in future when Robots, AI and other industry automation eliminates conventional manual labour. I wouldn’t be surprised if they foretell death due to starvation for 40% of working population engaged in industrial labour, just like the liberals did as Modi marched forward triumphantly, winning one election after another. Poor suckers..!

The diminishing faith amongst the Private Sector that Mehta alludes is called "risk perception" which is an extreme variable. What is a manageable risk for a young Bill Gates or a Mark Zuckerberg could be a dubious abyss for a wizard like Warren Buffet. Again what Mehta doesn’t notice is that PE/VC investment in India has topped $ 22 billion in 2015 itself, a peak by itself. What the capitalists don’t invest in industrial ventures, they invest in financial assets. Just look at the record Sensex / Nifty performance of the last 3 years. It is called an investment cycle. Smart money moves in and out of asset classes and working capital in alternation. Grow up, Mr.Mehta.

Now Mehta saves his ammo for his final pitch – Demonetisation. Like the thousands of insidious liberal critiques that preceded his, this one too heads straight to the trash can. Mehta’s sweeping criticism on DeMon – high cost, low outcomes, other means to achieve the same goals – all have been rejected outright by the people since it is short on specifics. The liberals are always ready with their objection to a public policy, before they are ready with the alternatives. If they say DeMon could have been implemented "better" which is a comparative, what is its "good" forerunner or a previous example they are benchmarking it to…? It is the first of the kind in terms of sheer scale and therefore an experiment well worth trying in an economy where the unrecorded cash floating in the system has far exceeded that in the recorded universe, fueling asset price inflation, hawala and its nefarious destination – terrorism, both social and economic. To those who speculate whether DeMon has ended all terrorism or have all unaccounted cash been sucked in, the answer is it will.  To those who quiz why have the government and RBI kept shifting the goal posts during DeMon, the simple answer is even they were learning on the run. Only that the liberal idiots have been too naïve not to recognize DeMon as an experiment as did most average Indians on the street. Hence they didn’t complain then and still don’t. 

The fact remains as Lord Meghnad Desai puts it "Demonetisation did not cause the economic damage people had predicted (even wished), and yielded political benefits. India is being digitised. GST has been passed after 15 years of dithering."

The liberals are too presumptuous to think the average man doesn’t speak up because he is way less intellectually endowed. In fact, he doesn’t because he is unassuming yet shrewd enough to pick up on weak signals, sees too much too early and knows way more than the liberals do.

Did you say global warming...?

Yipee.... here deserts turn green !

Going by the satellite imagery over the last 15 years seem to show a recovery of vegetation in the Southern Sahara. Most other deserts including the Namib Desert in Namibia have shown higher than average rainfall.

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Carbon caps..? to hell with it. The world leaders are robbed off an excuse to do annual rounds at Doha, Davos and even St.Kitts at U.N expense !!!!

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PE model threatened

Ivy League Universities and educational institutions have long been dominant investors in private equity firms. For some big ticket buyout firms like Blackstone and KKR, University endowments have been major source of funding. But now it appears that too is drying up fast.

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While Yale froze salaries to employees drawing more than $75 k, Harvard froze it across the board on its Arts and Science school. Harvard with an endowment of $39.6 billion freezing wages, huh? Yes, you heard it right. The 2007 figures and allocations for the entire $43 billion portfolio are disclosed in the endowment’s 2007-2008 year-end report.

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With such mainstay funding sources for PE firms fast drying up and leverage already a bad word, how long will the asset class sustain...?

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Bailouts drive Chapter 11 out of fashion

When Robert Reich published Supercapitalism: The Transformation of Business, Democracy, and Everyday Life in 2007, the U.S. economy was growing, the financial sector was intact, and the housing bubble had just begun to leak. Although that now seems like decades ago, the former Secretary of Labor’s core argument still has a decidedly clear ring of truth; indeed, perhaps now more than ever. Reich is currently professor of public policy at the University of California at Berkeley’s Goldman School of Public Policy.

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Now I read a fantastic interview S+B's Ed Baker had with Reich... Excerpts -

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"Why should Wall Street executives, shareholders, and creditors come out any better from this taxpayer-supported bailout than they would under a typical Chapter 11 reorganization, where they would get relief from a portion of their debts and bad loans, but not all of them, and they would have to restructure compensation, management, and governance procedures? Despite the bailout — and the relatively easy course that Wall Street has enjoyed — Main Street is still suffering: People are losing their homes at a faster rate than they did before. Small businesses can’t get loans, creditworthy car buyers and others are seeing credit lines shrivel and disappear. So from the standpoint of average Americans, the bailout has had no positive effect whatsoever.

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Frankly, I don’t quite understand why Lehman didn’t go into Chapter 11. Now, maybe it was too small, or it wasn’t prepared to go into Chapter 11. But in general I don’t see why Wall Street firms are in any greater danger of Chapter 7 liquidation when they can’t pay their bills than any company in the real economy. Even Citigroup: Presumably it is worth more alive than dead. Its creditors would much rather that it stay afloat to pay off its loans than disappear completely. And it has a lot of assets — not necessarily physical assets, but a very strong customer base and a lot of talent. No one would support that it would cease to exist if it chose Chapter 11.

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S+B: So you see the contours of the bailout as little more than a successful marketing effort?

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REICH: It’s a giant public relations campaign. But I’m not sure that anyone consciously regards it as such. The Treasury Department traditionally has been Wall Street’s embassy in Washington. Treasury secretaries traditionally are closely allied with Wall Street. I’m sure Hank Paulson views Citibank or Morgan Stanley or his old hunting ground, Goldman Sachs, as profoundly different from a manufacturing company or another major services company. The funny thing is, I think that Paulson would be aghast to think of what he did as industrial policy. But of course that’s exactly what he did.

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[On reviving Big Three from Detroit] - Today, the management of the Big Three seems to believe that if they can only get through the recession, they’ll be fine. They view their challenge as primarily cyclical. They may be right technically, but they’re wrong over the long haul. Their challenge is structural. They’ve been losing market share for years, they’ve been producing cars that the public doesn’t want. Few young car buyers would ever think to buy an American car anymore. The Big Three have to come up with an entirely different vision of their industry and of their operations, and I hope that that is part of any bailout.

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S+B: Why has it taken Detroit so long to get this message, when it’s so obvious to so many people?

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REICH: The culture at the Big Three is very insular, for one thing. The invasion of Japanese carmakers into the U.S. to make vehicles shook up Detroit, and in response, the Big Three have made substantial improvements in quality. But management and labor are still living in a different age. They haven’t been shaken up nearly enough. Labor understands the situation probably better than management. The new UAW contract recognizes the need for substantial changes. Young workers will be coming into the Big Three with wage and benefit packages not all that different from what American workers are getting from the Japanese automakers. But there’s still a long way to go on the management side.

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Superb insights. Hope Obama and Tim Geithner read this before they push more bills to the Congress :-)

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Fishing for VCs

Throw a line into the Thames and likely you could net a VC.

VCs in UK warn hundreds of tech companies could shut shop if the government can’t come up with a £1bn ($1.4bn) fund of funds to support the sector.

As stock markets are in effect shut for initial public offerings, it adds pressure on venture capital firms. They must rely on trade buyers to achieve an exit from their investments, or finance them for longer. More than a third of UK venture capital groups expect to write off at least three investments this year due to lack of follow-on funding, a survey by Populus of 80 members of the BVCA found.

The survey said that 86 per cent had found it hard to raise secondary rounds of finance for their companies in the past six months. A similar number said portfolio companies still in product development stage would survive less than a year on cash reserves.

In San Francisco, earlier it just took a walk down the Sand Hill Road to land a VC. In UK, you need a boat and little fishing break is all it takes; you may not land the money though :-)

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The cut runs deep

So the US congress have agreed upon an economic stimulus plan. Now comes the real rocker - how to value bonds that have no takers?

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Getting this right will not be easy.

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The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of S&P, the credit rating agency.

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The financial institution that owns the bond calculates the value at 97 cents on the dollar but S.& P. puts it at 87 cents, based on the current loan-default rate. It could be worth 53 cents under a bleaker situation if say, the defaults double. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

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Both Washington and Wall Street ecognize that there are no current market prices for these toxic securities. But bond dealers say most kinds of securities can be valued and are being traded, but trading has slowed as sellers and buyers disagree about what that the price should be.

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The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?"

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To them normally one would suggest go by the realizable value of underlying assets. But even that is a problem if the bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

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Holy Fuck !!!

Mess up bigtime and you are safe everywhere

The famed American justice system is often compared by other nationals, notably Indian NRIs settled in the US to condemn the slowness of proceedings and the abysmally low rate of convictions back home. The surging nationalistic pride is swallowed by the natives (that despite recognizing the bother of having to control a population of a billion plus people by any Government) read them and even feel it is something that deserved to be condemned, while pining for some early turnaround in the Indian way of meting out justice.

But then they get to read about the travails of Mr.Bernard Madoff that made-off with his $50 billion ponzi scheme. Mr. Madoff was charged last month with securities fraud but has remained free since posting bail. Excerpts from NYT report.

"The judge’s ruling allows Mr. Madoff to remain in his Manhattan apartment, wearing an electronic monitoring device and being watched around the clock by a security team paid for by his wife.

Prosecutors had asked the court to revoke Mr. Madoff’s $10 million bail, secured by various family homes held in his wife’s name, after he violated a court-ordered asset freeze by mailing about $1 million in expensive watches and jewelry to family and friends on Christmas Eve.

In addition to the jewelry that was sent out, prosecutors said, Mr. Madoff had plans to transfer $200 million to $300 million of investors’ money to family members and friends. When authorities searched Mr. Madoff’s office desk, they found $173 million in signed checks ready to be sent."

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I am sure it would make NRIs feel a lot lighter.

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