Borrow US, Borrow

No glass ceiling for the US, it seems. We will know on 02nd Aug, if the lawmakers in the US raise their debt ceiling so that they can continue to borrow more to pay off their servicing due pertaining to their extant debt obligations! The credit card issued to the US is massively revolving its credit with exporting countries providing angular momentum for these revolutions by lapping up US paper. The exporting countries (most of them on this side of the Prime Meridian) obviously want to hold down their currencies from appreciating, but considering inflation and its political impact, they may not be able to go the full way. Maybe the US will be able to cleave the rating agencies and have at least one of them desist from swinging the axe of ratings downgrade.

So the coming week is going to get very exciting. The S&P 500 is sitting on its 200DMA. Whatever you believe, or whether you believe in nothing at all – you have to brace yourself for some tight action around this point. People look at such chart positions and either line up for a bounce (from the 200 day DMA line) or short-sell and expect a cut through the line. Since a majority do it, it becomes a very important psychological level.

Meanwhile, the credit default swaps markets are certainly pricing for a US default. Actually, may not be for a default as much as for a marked decrease in the credit worthiness of the nation. Now who holds US debt in what proportion? These guys must sure be a worried lot. And so are we all since the whole thing is one giant messy spider’s web. In our desi markets there are quite a few companies whose stocks are either rising up to touch their 200 DMAs or  have dropped down to kiss that emotional line. With interest rates going up in India, and loads of shareholdings of promoters being pledged to banks for favourable short-term loan rates, I’d rather bet on the market drowsiness to continue. Let’s see. Like Jaspal Bhatti, who once in a television serial, made a comedy that won an award for being the best tragedy (or vice versa), I hope that my logic and thoughts continue to be contrarian indicators! 😉

No disclaimer here.

US Default?

China notes that the United States is “playing with fire” if it agrees to default on its debt. Quite unwittingly and a bit reluctantly this will most definitely force countries like China to try to prop up the USD by purchasing more and more of the defaulted treasuries as they get dumped (mostly by US domestic holders of such treasuries). What a debt trap! China seems to have invested as much as 70% of its $3 trillion foreign currency reserves in US Treasuries! The posture taken by the Chinese is all about their concern that the money that they have invested in US Treasuries is safe, the reality is that the US wouldn’t care as much even if a “technical default” causes a fall in the USD. But countries exporting to USA would get killed – therefore in order to protect their exports, countries such as China, Brazil, even India, might be prompted to buy more to help hold down their currencies from appreciating.

The picture on the right shows the distribution of the lenders to the US Government. The main worry of the US would be that such a technical default would likely cause a ratings downgrade which would in-turn increase funding costs; raise interest rates; depress house prices and slide the economy back into a recession. And of course crash stock markets and shoot up gold. US benchmark 10 year Treasury yields are already hovering near their historic lows of 3%. Now, just what trigger would these notes need to start yielding higher again? A massive sell-off?

Assorted articles on the internet (I’ve pulled most of the ideas for this post from Reuters) seem to be placing the chances of a US default at near zero and many people are obviously dismissing the idea as ludicrous – but stop and think about what would happen if this really plays out like this. We’d know by mid August when some chunk of treasuries are up for redemption and payments. The chart on the top (click to enlarge) shows the US debt levels and the corresponding increasing in its debt ceiling levels. Now, the US Government cannot borrow more than its debt ceiling level and since it breached that level in May 2011, the Senate needs to vote in an increase of the debt ceiling. The reason why people are calling for a “technical default” is that a delay in voting for raising the debt ceiling may give time for economic forces to play themselves out and things to settle and solutions to emerge. Like a cooling off period. Before upping the ceiling. Most certainly it sounds like the political opponents of President Obama trying to generate real bad press and image for him by making the US Government “default technically” and then coming in to the rescue by voting to support the resolution to up the ceiling. That may be why the Treasury Secretary and the Fed people are saying that the results to the world economy will be disastrous if the US defaults.

While the idea of the US defaulting does indeed appear crazy, nitpickers are therefore qualifying a “technical default” as being a different situation as compared to a real “failure to pay” kind of an event. The latter is catastrophic. The former is more like a pause that people do when enjoying a lavish luncheon buffet. They pause for breath, beam at their table-mates and reach out for their wine or water to catch their breath. Continuous eating, while supplying loads of calories, can be quite tiring. It also makes you a glutton. Take a look at this chart that I’ve sourced from Reuters (US online edition). How long can someone keep eating and eating and eating?

Return of the Diaspora

Here’s an infographic that I stumbled upon. The desire to return to India certainly surfaces when you talk to Indians living and working in the US over the past 8 – 10 years. I guess there is a threshold after which NRIs would typically drop the idea of returning and get on with their life here. I guess a very few of the older professionals would develop an ear for drums of a different beat and shift eastwards. These typically might be your very successful Information Technology professionals who have amassed loads of money and want to actualize some higher purpose in life by moving to their country of origin. The rest of the NRI professionals may just continue to work here in the US.

I had earlier written about the book “The Next 100 Years: A Forecast for the 21st Century” by George Friedman, where the author makes the point that countries with ageing working populations will compete against each other for talent. I am not aware about the credibility of www.corp-corp.com (name sure sounds shady) but if the survey is true and is scientific, then this seems to be a correction in the bull run in Indian immigration history. First trained Indian professionals migrated to India in droves – a sizeable and noticeable proportion of them became very successful in the United States – US faced a recession and India “seemed” to be growing rapidly – they returned to India with comfortable savings and no monetary worries – found it difficult to adjust and realised that the Indian growth story played out differently – returned to the US and if they couldn’t (due to retirement or losing out in the rat race) encouraged their offspring and other youngsters to migrate to the US, thus responding to United States’ campaign to attract skilled immigrants.

Wonder what George Friedman will say to this little bit of crystal ball gazing of mine. But then he has hardly mentioned India in his book.

The Next 100 Years

I had started reading “The Next 100 Years: A Forecast for the 21st Century” by George Friedman barely a couple of days before Osama bin Laden was assassinated and coincidentally was on the page where the author briefly talks about how the 9/11 strikes impacted USA. So, the interest in the book got sustained and finished it last week. It’s a rather boring topic (geopolitics) to me, but the fact that someone be audacious enough to predict what is going to happen to the world in the next 100 years coupled with my liking towards forecasting, Monte Carlo, etc. had prompted to pick up this book in the first place. But surprisingly, I was hooked. Now let me see what do I remember from it:

  1. Control of the oceans is key. The country that controls the waters controls the planet. That is the central premise that gets repeated again and again.
  2. The world population will grow and then hold steady for some time and then start declining as people age.
  3. The 21st century clearly belongs the US. No China or any other nation will upstage it – at least for the majority of the 21st century.
  4. Like humans, civilizations go through phases – a contradictory mix of juvenile brashness and fear – the US is described as a moody, teenaged adolescent; an accommodative maturity and a confused decline. USA is in the first stage of its life-cycle according to Friedman.
  5. The thing going for USA is its low population density and relative isolation from the world’s political hotspots.
  6. The preference for US is not to annihilate its enemies but to incapacitate them. Never allow any politically sensitive region to stabilize. US taxpayers will effectively fund this destabilization, thousands of miles away from their homes, via US aid money.
  7. There will be massive shortage of labour in the US. The country will ease its immigration policy and countries will compete against each other to attract skilled immigrants. President Obama is raising public awareness and debate in the US even as I type.
  8. BRIC! What BRIC? Though the author say as much, but the prognosis for the BRIC block is quite glum. Brazil is the best of the lot (more about it later). Russia tries to assert itself and reclaim its past glory but cannot match the dollars that start getting pumped into Poland. China cannot mend the tears in its society caused by the growing separation between its prosperous coast and penurious hinterland. And India? There is almost no mention of India at all!! 🙂
  9. Japan continues to grow and locks horns with the US over the control of the Pacific – at least the part which touches E. Asia.
  10. Turkey rediscovers its past glory and the modern version of the Ottoman Empire will rise and become a major superpower.
  11. The world’s reliance of oil will fade since it will become commercially and technologically feasible to capture solar energy in geo-synchronous orbits and microwave it down to the Earth.
  12. Japan will collude with Turkey and they have a World War III with the US. (Now it becomes a bit of a stretch really) Wars will be fought from guns placed in a geosynchronous orbit in space. Japan will use Turkey as a decoy and divert US’ attention there. Will fire projectiles from the “dark side of the moon” to US space bases along a path that’s non-collisional. US military observers will assume these are harmless meteors and space junk and ignore them till the point booster rockets and charges fire up on these Japanese projectiles to alter their course. End game: US will still win the war. It is here that India gets a brief mention as an US ally and the attacks that its western part will sustain from Turkish missiles!
  13. The soft immigration policy of the US I mentioned in point 7 above will reverse due to the waves of influx of the Mexicans. The Mexicans will take over their erstwhile territories that were annexed by the US. The US only knows to fight wars on foreign soil, it will have no solution to the threat that will rise from within. US Hispanic citizens will openly flaunt their Mexican citizenship and any sustained action on American soil will kill non-Mexicans too. The challenge from Mexico to US supremacy will be most perplexing and one for which the US will not have an answer for. This beautifully designed interactive chart shows how the center of density of US population is gradually moving in a south-westerly direction from the north-east. Towards Mexico.

Listing flashes of recollection from what you read is hardly a review and most certainly not a proxy for actually reading the book. Do read it, I am sure I have missed many points and certainly the tone and context that Friedman puts between the covers. This book will surely make you think.

My points –

  1. I’ve shown a map of the word showing the countries in which James Bond’s films have been shot and the countries which he visits in his films’ scripts – two separate data sets. James Bond is a good barometer of depicting the geopolitical footprint of the world and its roll-up to present times. But on the map, I’ve highlighted Turkey and Japan – visually at least they look so tiny! Oh yes, they have a strategic location advantage in terms of access to some heavily trafficked sea routes. But still…
  2. The internet and its impact on geopolitics is not mentioned.
  3. Lesson for Indian investors (who have a 3 – 5 year investing horizon): study the US. Understanding cross border flows of capital and patterns thereof can make money for you. At least for the next 100 years.

QE2′s Titanic Voyage

The QE2, now moored at Dubai is a magnificent ship. It is an awesome flotilla of human engineering with 5 restaurants, 2 cafes; 3 swimming pools; a pub, a nightclub and several bars; a casino; a 481 seater cinema; shops; health clubs; the largest floating library and a hospital – all comprising an ecosystem of 3000 people (incl full roster of passengers) that circumnavigates around the world in 80 days. Given the cacophony of the other QE2 (Quantitative Easing, proposed & hopefully stillborn Round 2) in the US, I try to compare this Cunard marvel to the US economy. I randomly switch between QE2, the ship and the Fed’s QE2 (the raising of a shipwreck)

I have been absorbing and echoing popular thoughts that the recent Indian market rally has been fuelled by Foreign Institutional Investment (FII) related flows and that once this spigot runs dry, we’ll have a nice juicy correction. A big enough gash to seriously bleed the short term traders. But I never counted on the Fed docks building and launching another armada of liquidity into the markets! The US docks, from this perspective just never seem to run dry. And now I am big time confused. The QE2 rush of dollars will only add fuel to the fire, right? So, will we be seeing a near parabolic rise in Indian equity? Will the Diwali rockets fire up real high this year? You may have noted my aversion to seeing parabolas in stock charts from some of my past posts and the accompanying note that parabolas are not self-sustaining. Good for the Indian Government really – considering the slew of paper that is about to be thrown into the ring.

Like QE2, the American economy moves slowly and consumes a lot. The QE2 reportedly moves a cool 40 – 50 feet per gallon of fuel. That implies a mileage of 3.7 meters per litre of fuel. A snail (if blown up proportionately) will be supersonic in comparision, I guess. Like the ship, the American economy is moribund and is crawling towards what many are calling a recession? The QE2 has been navigated by 23 Captains till date, the Fed on the other hand has seen only 14 Chairmen at its helm. The QE2 was introduced in 1967, the Fed came about in 1913. The Fed Chairmen are quite sticky: like barnacles I guess. The QE2, when it was floating around used to consume 430 tons of fuels per day. My back of the envelope suggests that the US drinks 2.3 million tonnes of gasoline a day. I guess India’s figure is at 100 million tonnes of petrol a year.

The other important point is that the Royal Navy recruited the QE2 in 1982 to serve the original Queen in the Falklands War. Similarily, the Fed Captain is pushing QE2 to prepare for war. Only this time it will be a war that will be played out on the currency screens of traders across the world. We seem to be bracing for a full scale global currency war as the QE2 sets float. The difference being that this new artifact from the Fed is being pressed into service on an already raging sea of liquidity. The voyage around Tierra del Fuego has always been notorious – imagine creating a tsunami on a particularly nasty day aross this southern tip of South America as a solution to taking ships over and around the bend! Davy Jones Locker, surely. That too a man-made artificial tsunami. That’s what the Fed is doing, I think. Raising the waves in the hope that domestic (read US) yatchs, boats, dinghies and sundry canoes will start ‘consuming’ the momentum by hoisting up their sails, revving up their motors, rigging up the tow lines and picking up their sculls. Really? What many think is that nature will always choose the path of least resistance and this extra liquidity will quit the Atlantic and flow down towards more Pacific waters. Whither QE2? What will it achieve if that happens?

And finally one last lesson to pick up from QE2. It’s new owner is the Nakheel Group – an Asian real estate group with diversified interests in asset management, liesure and real estate whose website, just like the QE2 seems to be quite slow. The lesson is that developing nations one day will get tired of having to bear the responsibility of mopping up all of this money that the QE2 is spilling out. Unfortunately, it’s not a cornucopia – it’s really a runny nose. And the virus is catching on fast. Emerging economies will one day realise that they’d be better off buying US assets and directly injecting equity into the US system as opposed to buying the rapidly falling US Dollar. If the US domestic investment does not get kickstarted by this QE2, can foreigners buy mines, companies, set up offices in the US and provide employment directly? Can they, is the other question. Arnold Schwarzenegger is touring Asia to see who can build a high speed train system for California.

 The war is on. We saw two wars around the time the gold standard was abolished and the major countries of that age took it upon themselves to support local inflation by printing currency to fund war. After the dust had settled down,  the US dollar was to be much more than just the national currency of the US. After the gold standard was abolished, the US was at its zenith, unscathed by the World Wars and it took it upon itself to make the USD a truly global medium of exchange. The people managing the USD (the Fed Captains) therefore, theoretically at least had a global responsibility. They still have. The point is that when the Fed does things like QE2, the pain is equally felt everywhere. That is why this unilateral stewardship of the world economy will make the recalcitrant new kids on the block itching to pick up a fight. The rednecks will stolidly hang on to their artifical currency pegs while the boys in blue will stoke up local inflation. Common man will get crushed under the weight of rising prices and a Government might fall.

Additional reading:

  1. A view from Infosys’ Think Flat blog: Will QE2 sail or sink?
  2. A caption that I do not agree with: QE2 to speed triumph of emerging markets

Are we done yet?

We are now at a 31 month high for the NIFTY (@ 5590 therabouts)!

And my mood is getting to be optimistically cautious. It surfaces immediately in my latest tweet which in turn was inspired by the recent tweet from Clifford Alvares, an Outlook Money correspondent.

Clifford Alvares Tell-tale signs of the next downturn: Slow-down in daily FII figures; market PE of 24+; unjustified run in small-caps — and free lunches. 5:50 PM Sep 6th via web Retweeted by you

Most of the people tracking and working the markets will be cautiously optimistic now, but I’m a worm. And worms have no spine. It’s getting to be a cacophony of dire predictions and upbeat prophecies. The more one reads and listens and watches, the more confusing it gets. But if you dont read or listen or watch, you might as well invest using your keen sense of smell or touch, maybe. Thats puts a weird thought in the wormy head. I am thinking of taking a leaf out of Curtis Faith‘s “Way of the Turtle“, where two stock market professionals recruited a couple of dozen bright men and women with no prior experience of trading and transformed them into star traders in two weeks flat (or maybe more). The basic premise being that trading is a skill that can be learnt just like any other academic/vocational course and that traders are made not born. So, what I’m going to do is recruit a dozen sharp blind men and women. Then as study material I’m going to give them thousands of historical stock charts converted into 3d, beveling up the stock price movement lines and make them trace their fingers on the line. The charts would run only upto certain arbitrarily chosen past points in time but I would urge my blind charges to carry on the “momentum” of their fingers….the future path which  the fingers take will be compared against actual historical movements and feedback will be provided….. if this experiment of mine ever gets done, then my hypothesis that blind people can make the best technical investors can be tested. Maybe this personal blind worm method of forecasting will work for me. I’ll write a book, become hugely famous and after a hundred years, people will falsely believe that the phrase “momentum investing” was coined off the tips of blind star traders.

The reason for this lunatic ambling within moving average envelopes is that expert opinions are certainly not helping:

The New York Times carries a story telling us all that the cloud of a double dip recession seems to have passed us by while Nouriel Roubini chastises the US economy planners that we are now defenceless against the looming threat of a double dip. A year or so back, if you’d have mentioned double dip to me, I’d have visions of Taj Mahal tea bags and “dip dip dip, and it’s ready to sip. Do you want it stronger, then dip a little longer. Dip, dip, dip..and it’s ready to sip”. But that’s a triple dip – maybe a new challenge worthy for Roubini. But for now, everyone and her pet poodle is talking of double dips:

Double Dip: the pet food of your pet bears. “Dip, dip and it’s ready to slip. For teddy to be stronger, dip a little longer. Dip, dip…and it’s ready to slip”.

I felt that this interview of the equity analyst, Sangeeta Purushottam dispensed some sane advice. It seems to say that there could be money waiting on the sidelines and it could come pouring in taking our local markets to euphoric heights. But the premise operating here is that there is indeed money waiting on the sidelines. Is there? A browse through global investing sites does not indicate a clamour to invest in the much discovered Asian bourses. Indeed, for all that noise about the NIFTY reaching it’s 31 month high, this country performance table by The Bespoke Investment Group is quite educative and humbling. But then the presses in the USA are printing and printing and printing. Strange things can happen.

So I crawled the SEBI website to ferret out FII net flows into Indian equity over time.  I left out derivative data and picked data representing the FIIs’ stock exchange investments and primary market data only. I think the chart speaks for itself. The main question however remains unanswered: is there is more cash coming India’s way via the FII route for the remainder of the year (net inflows)? Since Jan’10, c 60,000 crores of rupees have come into Indian markets via the FII direct participation in equity. Logic dictates that we should definitely get in more for the remainder of the 115 calendar days left in 2010. However, I noticed that typically there are 3 months (modal frequency) that see net FII withdrawals from the equity markets. We have seen two down months this year (January and May) – is a third one coming? So money will definitely be made, euphoria or not, but it calls for nimble trading and investing. That to me is a big problem since I am a worm after all. Any advise will be greatly appreciated.

Earth, Lights and Money

The night lights of the world, India and parts of Asia look like these (click images to enlarge):

I was surprised to see India pretty well lit up and not looking too bad on the world slate. I now know why the BJPs India Shining political campaign did not work on terra firma – since it you can see this only from extremely high altitudes and politics is all about keeping your ear to the ground. To me Japan looks the brighest and USA a very close second. Africa is truly the dark continent. Given what is now being said about Nigeria and Ghana, I guess they’ll light up in the decades to come. South Africa, as expected stands out and so does the Nile channel in Egypt. Western Europe, is aglow with the prosperous lumens that dissipate quickly as one moves eastward eventually following the path of the Trans Siberian Railway. If the natural earth glow is filtered out, I’d have missed Australia completely. And finally, China is well lit on its eastern side. The fact that the eastern sides of largish land masses are better lit than the western side is striking. The US east coast, China’s eastern provinces, Australia, the African continent, South America, the sliver of light that is Japan, UK, the Meditteranean Coast – all have brighter eastern sides. Why? The exception seems to be India. Its east side is darker.

From personal aerial experience I know for sure that Mumbai shines the brightest of all Indian cities. I guess it’s got to do with two factors – A) density of population in an area and B) the degree of urbanization. The latter is more important, I think since while Mumbai has the world’s largest slum, the slum lights will fade out if seen from such high an altitude. These are closely placed street lights (the streets lights in Hyderabad are not closely placed at all) and residential light fixtures. Highway lights again, would get too diffused, I think. But just take a look at the Indus basin. No wonder the rich alluvial soil and the 5 rivers spawned the Indus Valley Civilization 5000 years ago. The Punjab provinces (both Indian and Pakistani side) seem to be bathed in white! On the other hand, you just cannot make out the path of the Ganges at all. Beats me. Also, if you follow my eye, you can almost see the lights carving out the combined boundary of Maharashtra and Andhra Pradesh. Leaving out Orrisa, Chattisgarh, Madhya Pradesh and Jharkhand in the dark. It’s almost as if the previous two states had dotted light beacons along their perimeters. Is there a correlation between insurgency and electricity consumption? The problem of naxalism seems to be hitting states that are darker at night. And therein lies the answer – light up these areas and the arms that hold the guns will pick up laptops instead. Alas! If wishes were horses, beggars would ride – read my latest tweet on our Government crazy Robin Hood logic. Agreed, that the income disparity amongst states needs to be reduced. But don’t do this by making the richer states poorer! The New Delhi think tank is tackling the problem of runaway food inflation in the agrarian states of India (Punjab, West Bengal, etc.) by increasing the procurement price of food stuff. Their logic is if food prices are increasing (it’s c20% in these states), lets give more money to the farmers so that they can afford to buy more. How can you fight inflation by increasing prices?

Leaving bumbling babus behind, I panned out to look at Asia and peg the two big neighbours against each other. The electricity consumption in India is quite less as compared to China. Now, while China has a much larger land mass, much of China is in its east. Also, the land masses of eastern China and India are almost equal in size. So what explains the fact that despite the higher consumption of electricity by China it does not appear brighter than India? China seems to consume 3,650 TWH of electrcity per annum (a neat 10 TWH per day!) as compared to just 568 TWH/yr for India. So, eastern China should appear 6 – 7 times as bright, right? I guess whats happening is that almost all of the incremental electricity (as compared to what India eats up) is being used to fire the foundries that line up the dragon’s belly.  This article from China Daily sheds some light on the issue. Are the Chinese producing too much too soon. Maybe they should slow down.

This sudden reading up on lights, lighting and night lights came about when I was contemplating a company called MIC Electronics – they’re the LED solutions company that’s lighting up stadia, streets, festival venues, the Commonwealth Games, village lanterns, railway coaches, airports etc. They’ve got a nice banner on their website and the spooky thing is that this company is also from Hyderabad! God knows whats wrong with me – Shakti Met Dor, Hyderabad Industries (contemplating) and now this! It’s a nice city ok, perhaps a bit sleepy but investing like this is crazy. I’ve taken up a small position in this company so that I don’t lose track of it and am reminded that I need to think more about it. I read a reseach report about it sometime back but as yet I am not fully convinced that it has the power to light up my portfolio. My first issue with this company is that it currently shows up at rank 33 when I search for “LED lighting india” in Google. Which is not that bad considering that A) they are largely B2B and that B) this website itself shows up at rank 58 in a google search on Kaushal! And no, I have not heard of search engine optimisation – but maybe the MIC guys have? Actually doesn’t matter since they largely sell to people like Indian Railways and other assorted organisations who don’t really need Google to find out about them.

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