Monday, September 5, 2011

Are Indian Speculators About to Find Religion?

Wow! Its been a long break from blogging. My last post was in April 2009. And I have enjoyed all this time doing my computer science studies, researching and learning new technologies.

But, there is something else about this period. There was a bull market in stocks, commodities since March 2009 of historical proportions. Credit has flown big time in emerging markets during this time and India has been a big receiver.

Speculators made hell lot of money during this time. Stocks, commodities, real estate, bla bla. And what were Indian businesses doing all this time. Any guess? Speculation. Very easy :) My logic behind saying so is that people who were playing government policies, money flow etc made good money. Everyone seem stressed to recover from 2008 blow.

Availability of easy credit encourages speculation and kills innovation. India was already on very low side of innovation since economic boom starting in 1990, but bull market since 2009 caused even more damage.

For me, its easy to see that actual long term growth comes from real innovation. America has grown in 20th century not because of fast food drive thru chains, but because of industrial, rail road, aviation, computer, internet, & telecommunication boom. Market for American banks contracted after 1970 due to rise of corporate bonds and they starting looking for growth outside. They are good at engineering boom bust cycle, making truck loads of profit in between. All they need is "favorable government policies". And what goes into favorable government policies.
  • Willingness to force people in speculative assets by lowering bank saving interest rate.
  • Stealing money out of common men pocket by creating inflation and making sure that debtor gets paid for foolish speculation.
And India has favorable policy response by running 10% inflation for more than a year. RBI was "behind the curve" for major portion of this time in interest rate tightening.

Who gains for this "favorable government policies"? If one thinks technology companies like Infosys etc. then he/she is wrong. Infact, technology companies come under pressure to raise salaries because employees can't keep up with rising prices of all the stuff we need and want (home/property).

I have seen a lot of guys (especially since start of 2003 commodity and stock bull) who were poor in studies, lazy, dilatory make good money. And lately they have been feeling very confident. They feel as if guys who burnt mid night oil in their teens, studied in 115 F temperature without A/C were fools. And they have gone neck deep in speculation.

Stocks and other speculations are stairs up and elevators down. Losses come fast and wash out profits of last few years. Stock markets are like NBA. Only difference being its easy to jump in and start playing. But, organizers of this game are not lame and they are not here to distribute paper money among incompetent people. James has presented this fact really well in his article CAN THE AVERAGE JOE MAKE IT IN THE MARKET? that one is more likely going to get his butt handed to him in market.

Unfortunately, for speculators, bull market in India came when world was beginning to enter prolonged bear phase. Fed's low interest rate policy enabled hot money flow to emerging markets and Fed's low interest policy is in place because US and world economy is on shaky grounds.

Recently, I have seen 2 casualties in my circle due to speculation. And I am sure this count will continue to increase till 2015-2016 by which time I think assets around the world will correct severely to the downside. This will be good for free markets in long run. And I am sure that Indian businessmen and speculators will find religion by that time.

I only wish that things remain good and favorable for innovative, hard working people. Though some pain will be inevitable.

And those who think technology or software is dead.. Software is not dead, it's just the beginning. If software become less profitable, that doesn't mean software is dead. It can be very profitable at some time in future. And software is not just able microsoft, apple, google, or facebook. I would like to quote Prof. Hal Abelson from Lecture 1a "Introduction to Lisp" 

"thousands of years ago Egyptians thought Geometry was about surveying instruments (measuring earth).. when some field is really starting, its easy to confuse the essence of what you are doing with the tools that you use.. right now we know less about essence of computer science like ancient Egyptians knew about geometry.. Now when we look back at Egyptians, we know that they were actually trying to formalize the notion about space and time, to start a way of talking about mathematical truth formally, that led to all the modern mathematics.. Similarly, in future people will look back and say those primitives in 20th century were fiddling around with gadgets called computers but really what they were doing is starting to learn how to formalize intuition about process.. how to do thing.. "

With all due respect to Prof. Hal Abelson, I agree with him. And my thoughts on software are very similar to those expressed in the article Why Software is Eating the World.

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