Going ons...

It was good to see both aseem and gaudy last week after ages (a month, to be honest). We, as usual, spent time talking about what's on and what's not. Gossip, tales of Hewitt from gaudy which includes a generous sprinkle of funny anecdotes.....and after a while, spiritualism and our views on it. Sitting with these guys you just don't realise where time flies. Before you knew it, it was 230am and we were sipping some absolutely atrocious cold coffee (with Gaudy proclaiming "Doodh phata hua hai!") and paying a handsome sum for each of those. It's important to connect with people who are at the same wavelength.....and that's exactly what connects the 3 of us. It's hard to believe that someone like me who is extremely notorious when it comes to keeping in touch, would dial gaudy every couple of days while aseem and i were in dubai/singapore. 

As always, i managed to catch a couple of movies....and i absolutely cannot miss one if there's an animation in the theatre -- Monsters vs Aliens....not really great but definitely funny in parts especially, the blue gooey creature....that thing had me in splits! These movies really crack me up! Saw The International....an okay movie with a rather mediocre end.  It's just that I am a great fan of Clive Owen. I think he's simply marvellous.  Tried out a new restaurant after a while - it's called Chi @ Citywalk. Very nice food. This place is not specifically chinese but has a mix of oriental food, the menu is different from the regular oriental restaurants in delhi. Pretty good. Would love to try out their Tempura the next time. Haven't had good tempuras in a while. 

Well, while coming back from delhi, I realized that I had a stiff back. Next morning, the doc told me I am having muscle spasm. I was back to using a driver in aligarh -- no driving for a while. Anyway, medicines have done a wonderful job and feeling pretty good this morning. My santro does not seem to have the most comfortable seats when it comes to long hauls. Earlier on, i had decided not to buy a new car for another year (I find it to be quite a waste)  when some new models are expected and this one would finally have lived it's life but now, I just might...

IPL....what an amazing match b/w Rajasthan and KKR the other day,  the best I have seen since India vs Pak T20 wc finals. Simply superb! What it showcased was the impact of true leadership on a bunch of mediocre non-entities. This includes Munaf, who seem to bowl without a head on his shoulder. He was the quickest we had a year or two back. Now, he has neither pace nor shrewdness in terms of surprising the batsman.   

Nothing much on TV these days...American Idol is the only one that keeps me glued to the tube. Anoop goes out....sad, but then his time was up. Chris has really improved over the weeks and matt...he seems to be deproving over the weeks. We can see either him or Allison going out next week (though she absolutely does not deserve to!). Adam sits at the top of the pack...it's not his voice but the desire to amaze the audience every week with a very deliberate attempt to show his versatility to the audience. The others just look (as simon would say), "kareoke" when compared with him. 

This shows that you just don't need a good voice but also a brain to showcase your talent. But if you were to watch the blue gooey thing in M vs A, he would tell you (from experience) that brains are "highly overrated"!!! Do watch it if you have a taste for senseless humor!

  

Amazing!!

http://www.youtube.com/watch?v=9lp0IWv8QZY

What an ABSOLUTELY AMAZING rendition of a song that big - out of this world!!!

Exploring The Turmoil II -- Uncle Sam's toxic asset scheme

Before I start off with this post, on the contrary to what I had mentioned in my earlier post, I will not be talking about how well is President Obama doing with his efforts in getting the American economy off the floor again. That may not only take a few posts as there are so many different areas of concern which require to be and are being focussed on at the moment that this blog may turn to be terribly boring after a point. So, let's just talk about the toxic asset scheme unveiled by Mr. Geithner last month. Again, a word of caution, i hadn't exactly been reading a lot in the last couple of months. So, i may have missed some of the more significant (and insignificant) aspects of the scheme. In that case, my apologies to you all.  

The toxic asset scheme talks about the government tapping close to 100 bn dollars into its emergency bailout fund  and matching it "dollar-for-dollar" with private investment that would include hedge funds, private equity funds and other private sector investors in buying out mortgage-backed securities, derivatives and other troubled financial instruments. Infact, with the FDIC providing a guarantee for any debt issued by these entities to pay for their toxic purchases, they expect them to be able to leverage the capital by a 5:1 ratio, if not more. What this basically means is that if the private money is matched dollar for dollar by the government@100 bn dollars, we are talking about a capital of close to 200bn dollars which again can be leveraged 5 times or more leading to a sum of close to 1 tn dollars to be used to buy toxic assets. I was talking to zi and he raised a very valid point here -

The private sector will be buying these assets at substantially marked down prices. This would mean that the banks will have to bear losses in their balance sheet for these sales. Let's try and quantify these figures. If the assets were bought at 30% "discount", this would mean a cumulative loss of 300 bn dollars on a purchase of 1 trillion dollars! Now, what this would mean is that some of the major banks in the US may be close to folding operations if a significant portion of these losses were to show up in their balance sheet......quite the opposite of what the Obama administration wants really!! So, in order to cover these losses, will the administration recapitalize the banks with 300 bn dollar of taxpayer money? We haven't heard anything of the kind as yet. So, this whole toxic asset buyout program does not seem to have laid out all it's chips on the board as yet. We need to wait and see what comes next.....

We have already heard what Paul Krugman had to say about this bailout plan where the private sector seems to be in a win-win situation while the government just seems to be covering up the risks for them. It is a valid concern. No doubt about that. 

Now, let's look at a "happy-day" scenrio - what happens if the toxic asset buyout scheme does ease up the liquidity crunch...

1. Banks are in a position to lend. The question is - with a rapidly contracting economy, whom do you want to lend to?Automotive businesses, hotels, travels and several others don't sound such a good idea. Alternative energy......probably ( i am a great fan of this line but again, you cannot close your eyes to the fact that this source of energy is probably twice as expensive as that produced using fossil fuels etc.)
2. Now, a bank's job is not to hoard but to distribute the cash (especially when your largest stakeholder wants you to :-)). They will and with the no one being sure where the economy is heading,you may just end up creating more non-performing assets. What we see is that even with the scenario being good, the money may just have a negative impact on the whole scenario. 
3. We must not forget that a significant portion of 787 bn dollar fiscal stimulus package is coming from printing of new money. What does than mean? More money in the market in addition to the easing up of the liquidity crisis. This would lead to inflation in a contracting economy. Possibly, value of the dollar dropping. Is that good? To a certain extent, yes as it will help the exports but don't you think some of your good friends (read: China and the persian Gulf) may find this a little discomforting as the value of their investments may come down.       
   

   Well, the "rainy-day" scenario would simply mean that the liquidity crunch remains as it is. No change. Either way, what we are seeing is that this package may not really do all the good it is supposed to. I don' think what i have said really is a stretched reality. So, in all proabability, we will see some good coming out of the fiscal stimulus package and the toxic asset scheme together but probably not to the extent that the adminstration is hoping for.

Ladies and gentlemen, look forward to some more measures in the coming months...

Having said all this, let me now go to a more personal front.....having being fortunate (isn't this exciting???? Almost gives you a hard-on!!!!) enough to see a financial turmoil of this magnitude, I am yet not able to decide whether i am a liberal or a conservative. Somewhere I have believed that these interventions by the gov't will only prolong this crisis. If you let the too-big-too-fail organizations go down, the dust will settle rather quickly (with a lot of casualties) and we will see new opportunities rising faster. But then there are just too many variables in this equation to solve. If you let Freddie Mac and Fannie May fail, China won't spare you. Putting that aside, there will be millions on the street. Civil unrest looks like a plausible scenario. Not that easy. I had always believed that I was a conservative but we've all seen what free markets can do. Regulations? yes.....but then they are not free any longer and more importantly, I am not a conservative any longer either...sigh.....

I am still working on my inclinations....but yes, a state is expected to take care of it's citizens and rather unfortunately, the Americans lost the plot at the beginning of this century. 

Finally......Amit, Shandy, Aseem - miss you all and the vociferous  discussions we used to have for hours on such (and many other) topics. We need to connect. 

Let's talk about the Persian Gulf the next time.....hmmm.....may be not....probably what I am currently watching on TV these days....we will see.....

Exploring The Turmoil -- Is the dragon scared...?

You spin my head right round, right round
When you go down, when you go down down...

It's been a while but I am slowly getting back to my newspapers and mags. The financial turmoil still hogs the headlines as they did the last time I was reading the papers. Seems like we are stuck in a time-warp. Something very significant that's come up recently is China's insistence to make SDRs the reserve currency instead of the dollar.

Some say that this is China coming of age. Let's try to analyse the impact of this one such movement if it were to happen anytime soon...

1. China's trillion dollar investment in US treasuries.....down the drain....if people stop buying the dollar, do you really think this trillion dollar investment will be worth even 50 bn USD? I don't think so. is China willing to lose so much of investment. Don't think so. So, logically speaking, we may see China moving from long term treasury bonds to short term investments and slowly moving out of them to some extent. 
2. Yuan is part of the SDR....and if not, it will be. This would mean that people would buy the Yuan to suport their reserves. This would lead to appreciation of Yuan which would, in turn, lead to Chinese exports becoming more expensive and a further impact on the Chinese economy. The era of Yuan as a managed float will end very soon... 

Is China willing to take such drastic steps during these uncertain times? I am not very sure. Hence, there seems to be a sense of desperation in the tone of the Chinese Central Bank governer. They seem to have lost the plot somewhere in the quest to have "competetive" (to speak modestly) exports. There may just be a little panic behind the yellow curtain. 

Having said all this, i personally believe this is a step in the right direction. This takes them one step closer in becoming an economy running on consumerism. I have always believed that the Chinese have to stop relying on the US economy to keep up that growth. It is expected that with these fundamental changes, the GDP growth will hit some serious bumps but that is expected and required. These may be termed as a few "necessary corrections" that will be good for the Chinese economy moving forward. Again, let us not be fooled into believing that China is an export driven economy. It is not. Exports contribute roughly 15% of Chinese GDP, which is to say the least, not very much. But this 15% today supports millions of cheap labour which is rapidly getting unemployed. So the concern is more political than economical really. Though the Chinese society is not known for demonstrations et al, it is never wise to underestimate the reaction of a man who is unable to put food on the table. We are currently hearing about the 500+ bn dollar stimulus package that china had announced. Well, this sounded more of a talk and very little substance. 

You spin my head right round, right round
When you go down, when you go down down...(damn! i love this song!!)

If one were to look at the nos, China today has a per capita GDP somewhere in the range of 3K USD, which is quite good really keeping in mind the huge population it has, but (with no statistics to really confirm this) the wealth seems to be concentrated in major cities and there is a growing divide between the hinterlands and the towns and cities in terms of economic prosperity. In short, this is another classical case of "India Shining" not really impacting the common man living in the hinterlands of China. India lost a government owing to this. Will China see any disturbances....? 

Here again there will be several Keynesian proponents ( is there anyone who is not) who will talk about how the stimulus-induced infrastructure projects are expected to bring economic prosperity to these regions. But I believe that there are a few additional things China must start looking into. So, let's talk about certain rather abstract steps which are required to be taken in order to bring a more balanced growth into the Chinese economy...

1. Artificially low wages to keep exports cheap needs to be stopped. These are the millions who will finally become the massive consumer base in the years to come. 
2. Encourage entrepreneurship. A government is not supposed to run enterprises but create the environment for people to think. In India, it's the opposite- we see entrepreneurship exists despite government efforts not to provide the required infrastructure!

Next time, let's talk about Obama's efforts to save the US economy.