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.

GM's bankruptcy can be Creative Destruction

GM's probable bankruptcy is in news everywhere. As GM and other automakers in Detroit line for government bailout, stocks are already down a whopping 95% this year.

Government has already spent billions of US dollars in bailout of financial institutions this year and fiscal deficit is expected to be around $2.5 trillion this year. These bailout are a liability for our children and coming generations. Fiscal deficit is piling up year by year.

So, the big question around is that "Should the government bailout auto industry too?"

Supports of bailout suggest that the bailout will save around a million jobs directly employed by automakers and indirectly by their suppliers and dealers, and 3-4 million might loose health care benefits, pension etc.




But is it correct to reward GM's bad conduct, poor performance for the last many years with this bailout?

GM has lost almost $74b since 2003. This loss hasn't happened in a single day. GM has continued with poor management and business plans. It's hasn't concentrated on its core business and made risky investments in other businesses. GM is one of the biggest holders of mortgage backed securities in US.
GM has already laid of thousands of workers.

Moreover, GM business is not going to be healthy soon. More of 50% of US households with 4 or more members have more than 3 cars. So, people are not going to cars at the same pace as they have been doing before. GM should now give reason for people to buy new cars. And that won't come easy. Toyota and Honda have spend big money on R&D of next generation hybrid cars during their heyday. And they are sound even in these tough days. When the going gets tough, the tough gets going.

US is a capitalist economy. In the free market, it's not government headache to save falling business. If White House wants to play a role, it should have drafted strict regulations for companies, forced them to invest in new fuels and technologies.

A bailout at this time will only reward bad conduct. If I lose money, I might borrow money to kick start my business again. If I lose money again, then I won't and shouldn't borrow more money. It's not about confidence but plain financial fundamentals. One more failure and I may end up destroying life of my family members and debt for coming generations. A slow recovery is better than risky one.

GM has been losing money for last many years. With future business outlook, recovery is not in sight.
And bailout will be a liability for coming generations in US.

And bankruptcy is not a bad idea. Under Chapter 11, GM will have chance to reorganize. In a bankruptcy, the debt holders line up to come up with a restructuring plan so that they can maximize the return of their loans or obligations. The shareholders get wiped out, but with GM down over 95%, that has largely been accomplished already. It has happened before with thousands of other companies. This healthy process is called Creative Destruction.

Auto Industry has a lot to learn from Tech business and startup. Think Apple. Steve Jobs turned Apple into a success story with next generation products. The products which people like, which build company's reputation. What's good in having a company around that is not able to manage its business, innovate and prepare for the future? Employment? Come on. There is no lack of creative people in US and this world. People will get unemployed once. Some creative people will kick off new businesses and employment will be generated. Even today when many wall street companies are laying off, there are companies having open vacancies. Problem is that new vacancies are less compared to lay offs. Thousands of companies have ceased to exist since start of 20th century but we are still employed with unemployment rate around 5-6%.

Toyota may be selling hybrid cars in US at very low margin (because they are costlier to build) but these hybrids help them build reputation. Toyota owns near 70% hybrid market in US. Toyota and Honda lead in compact car segment. Usually people buy compact car as their first car. This way Japanese car makers win customers which Detroit has to fight for later on.

Another example is from Honda, India. Honda has build such a strong reputation in India that it doesn't even advertise its cars on TV. It sells only from Word of Mouth Marketing. Cars they sell come at a premium to cars from other manufacturers in the same segment. Honda has been able to do that because of good performance of its cars.

Detroit needs to reinvent itself. Cars will be build in Detroit even in future. But companies there need to change their mindset. And a bailout is not going to help in this change.