The Ponz'd Matrix!

I am sure many of my readers have watched the film called “The Matrix” in which the virtual world is supposed to be controlled by a super-super computer called “Matrix”. Many of you also must have read about Madoff's recent Ponzi scheme that duped people of their billions. I see a great connection in both these concepts in real life like never before.

In the real life, mankind has turned itself into the slaves of a Matrix called “The paper/ credit Dollar based Monetary System”. This matrix is virtually ruling the most vital aspects of life on this planet. Take this as an example - What is the most precious thing on this earth for any average individual? I am certain – few years back – the answer could have been “Human life”, “My family’s life” or “My own life”. Not anymore. Not at least for all the human beings. I have been readings & watching news in recent times that suggest that many individuals are ready to sell themselves as “Human bombs” in exchange of money! That is the ultimate example of slavery to the Matrix!

The making of the Matrix
To understand how this Matrix got in the being, we need to step back a little to level set ourselves with some reality.

Let me start by asking a very simple question. Who is the richest person on this planet? The answers may vary from Bill Gates to Warren Buffet to Mukesh Ambani. Well… you are completely wrong. The world is not so straight forward as it seems. The statistics that you & I see around us may not be entirely true.

Try again. After thinking hard, some may conclude that perhaps due to the un-announced wealth, one of the Sheikhs of the petro rich OPEC nations could be the richest person on earth. Close but not the right answer again! Given up already? The answer is - the faceless creators of the Federal Reserve of USA. Surprised? These are the people who “create” the money supply for virtually the entire world. Technically speaking they could create trillions of dollars in a stroke of one board resolution & the US treasury would normally oblige. The world gave them this power through the current monetary system – normally referred to as Bretton Woods. Since the gold-exchange standard gave way to the paper/ credit dollar standard in 1971, the U.S. economy in general & US Fed in particular has become unique in being able to create credit – and foreign debt – without constraint.

Matrix enslaving the masses
Since the present monetary system does not warrant backing by Gold, the Fed & US Treasury got the freehand to create any amount of money to support their greed & ambition. This greed encouraged concepts like consumerism, living beyond means, debt etc. People are vastly encouraged to borrow & spend. In many cases the prices that we pay for are mere perceptions or interpretations of the real value the things bring to us.

The basic laws of economics indicate that scarcity should normally drive prices/ value. If that were the case, then should the prices of stocks, crude oil and houses all around the world drop like stone in just a few months? These are clear examples that all the buying in past was not attributable to real need. Speculation & greed for windfall was contributing to the bulk of the price rise in recent times. The consequence has been that debts on the economy-wide have grown more rapidly than the ability to pay.

You borrow going beyond your savings thereby discounting the future earnings, that are uncertain day by day & to top it, they (future earnings) do not rise as fast as the inflation does! So what you have at the end is a vicious circle of debt until the end of the borrower’s life. In the past generation, at least the life after retirement was somewhat guaranteed to be peaceful. However, the erosion of Social Security, pension & employee provident fund has converted “peaceful retirement” into a myth. You work until you die just to keep afloat over your debts.

In the process who wins? The Matrix & its creators. They are the suppliers of credit money that you & I borrow.

Matrix destroying the creators
The very greed that prompted the creators of the Matrix to pump more & more money into the system is now coming back & haunting them. In the few decades, The Matrix itself grew so big that it turned into an unstoppable predator. To keep feeding the monster, the creators needed to pump in more & more credit & paper money; lest we all go down under & the creators will not be spared themselves. This spiral created an unprecedented situation that perhaps not even the creators could have envisioned. Now the Matrix is turning to the creators to feed itself! There is a grapevine making rounds – the creators preparing to pump in trillions in the stock markets across the globe in perhaps their last ditch attempt to save themselves. Let’s see if the monster has grown bigger than the imagination of it’s creators!

The ultimate - Matrix in self-destructive act
The size & nature of Madoff scheme made it known to all; however such schemes existed even before. Many chit funds in many countries have duped thousands/ millions of investors in past. However there are examples that are more well-known that have shocking resemblance to such Ponzi schemes – Social Security in US, Employee Pension & Provident Funds in India. Even the global financial system is a big Ponzi scheme where more & more money is created to fund the inflation & debts.

The Ponzi schemes rely solely on the amount of principal inflow being constantly more than or at least equal to the amount of interest outflow at any point of time.

E.g. I launch a Ponzi scheme with a promise of an obscene guaranteed return say 5% per month or 60% p.a. I get $100 as the deposit by an investor. At the end of first month, my interest obligation is $5. So I need to find another investor who is willing to invest at least $5 so that I can pay my interest to investor 1 without doing anything. My total cash in hand still remains at $100 & my total liabilities have gone up to $105. The difference between liability & cash balance is my goodwill ($5). The goodwill is the valuation of the trust shown on me by the general investors. However as the time goes by, the system itself propels out of proportion as you can see from the adjacent table.

Same has happened to the Matrix. The “borrow & buy” system has gone out of bounds even for the system to manage. The trust (goodwill) reached its pinnacle & one fine day as the defaults started to come in, the whole pyramid started collapsing as goodwill started going down. Recently the Fed was compelled to buy trillions worth of toxic assets from the troubled banks in return of US Treasury bills. These bills/ credit money will eventually slowly find its way in circulation. Significantly more money chasing the same or just incrementally more number of goods/ services. A sure-shot recipe of generating exponentially more toxic waste, just to be consumed again by the Matrix. So what happens then? Fed issues yet another exponential quantity of Treasury Bills in exchange of toxic waste? Is the Matrix getting more toxic intake than it can digest? Is the Matrix Ponz’d?

In search of the equilibrium

What has happened since I wrote my last article?

Due to the liquidity crunch, banks & businesses are getting lesser credit. Hence they cannot have enough funds to spend on capital outlay or day-to-day expenses. Several of them have already retrenched the workforce because those businesses are already affected. Several others have started the retrenchment to prepare for the rough weather. This means lesser consumer spending due to increasing unemployment leading to lesser funds for businesses & the vicious circle goes on. This is happening at times when US citizens don’t have enough savings in their bank accounts!

There are many things still being unfolded, there are still several unknowns & we are yet to see the end of it all. Anyways, let’s take a journey through this thing called money & the system that revolves around it aka International Monetary System.

A little bit of philosophy (bare minimum but necessary)

What is money anyways? Is money the piece of paper? Not really. If that were the case, then every piece of paper would have had similar value attached to it. Then what is money? Well simply put, money is “trust”. You are trained to trust it for generations. Money is a perfect example about how well one rules the minds of masses in making them believe that the piece of paper that they hold is really worth a bag of wheat or bottle of water or 2 hours of entertainment in a movie theatre. Nowadays money does not even get represented by pieces of paper; it merely can be a few bytes of data on some hard disk in some data center of your bank!! That is what we all are really trained to believe to be of immense value. That’s what we all call money. That’s what we run after our entire lives, ultimately to die leaving it all behind! Let me give you an analogy of 5 monkeys for us to better understand what I really mean by “we are trained to believe in this thing called money”.

Once, five monkeys were put inside a cage. The cage had a ladder with a bunch of bananas at the top. As soon as one monkey started to climb the ladder, cold water was sprayed on all the monkeys. When another tried to climb, cold water was sprayed on all the monkeys again. Soon, no monkey attempted to climb the ladder. One monkey was removed and a new monkey was put in the cage. The new monkey saw the bananas and tried to climb the ladder. Not wanting to be sprayed with cold water again, the other monkeys quickly pulled him down. The new monkey never understood why this was happening to him. He tried repeatedly but in vain until he understood & accepted the fact that the other monkeys will not allow him to climb the ladder.Another monkey from the original lot was removed and a new monkey was put in the cage. Again, the new monkey saw the bananas and tried to climb the ladder. Not wanting to be sprayed with cold water, the other monkeys quickly pulled him down. The first new monkey also joined the rest 3 old monkeys in pulling the newest monkey down!This exercise was repeated until all five original monkeys were gone, and five new monkeys were in the cage. None tried to climb the ladder, and none understood why!!

During the monetary system evolution in past thousands of years, mankind has witnessed multiple major phases. The monetary system moved from pure law of jungle to somewhat barter, to pure barter, to coins issued by various kings/ rulers, to gold-silver standard, to pure gold standard & right now a USD based standard. Even though the system seemingly evolved through these visible phases, the law of jungle has not gone away completely. During all these transitions & phases, perhaps thousands were killed in the past that refused to accept certain form of currency that the ruler offered. Hence due to fear ingrained in them as a result of these massacres, the generations of mankind have trained themselves to act like the last five monkeys in the cage. Same is true in modern monetary system history. Countries with sophisticated weapons coupled with technology, knowledge & willingness to use those weapons are virtually ruling the world. In 2000, Iraq converted all its oil transactions under the Oil for Food program (started by UN) to Euros. When U.S. invaded Iraq in 2003, it returned oil sales from the Euro to the USD. Even the original Oil for Food program was not restored.

We cannot consume anything like currency notes/ bullion/ precious metal. At the bare minimum we need social life, food, clothing, shelter, sex & entertainment. Natural resources hold the key in the real sense. Am I hinting at a barter economy? I am not trying to hint at anything in particular. Just putting the facts here.

Functioning of the current Monetary System

I thought it necessary to explain how the international wheels of money spin. We many a times act like the last 5 monkeys not completely understanding why, what & how of the system.

USA acts as the supplier of reserve currency to the entire world. USD is the de-facto world currency. USD to a lot of extent has replaced gold as the reserve currency for the central banks of the world. Any country that has positive balance of trade (exports more than imports) ends up adding on to their USD reserves. Obviously rather than sitting on idle reserves, the central banks of these countries invest those funds in US Treasury Bonds, ending up financing the US budget deficit. Take the example of a Chinese manufacturer selling a TV set to a US customer. He gets USD in return which in turn he sells to his bank to get Yuans. Chinese banking system starts piling up such USD. The central bank of China invests these USD in US Treasury Bonds that yield 4%-5% return. Now understand this carefully – the TV set exported to US obviously ends up in the USA. US economy adds to its own deficit since import of this TV set adds to their foreign payment obligation/ spending. US economy gets back the USD (by Chinese central bank buying treasury bills) that they paid to the Chinese manufacturer, thereby financing the US deficit! USA has the TV as well as the money to buy it too! Well, you might say that USA needs to pay back the debt through maturity of the Treasury Bonds, they need to also pay interest on the same. You are theoretically perfect. How does it happen in reality? Sure US Treasury pays back these liabilities… by doing what? By issuing more Treasury Bonds!!

On the other hand, since most of the industry has moved to cheaper destinations like China, India, Mexico etc. the biggest hope for US economy to grow is “consumer spending”. By continuously lowering interest rates, US Govt. encourages the average consumer to borrow & spend. However lower interest rates also mean that the Chinese economy (extending the TV example) finds investment in US Treasury Bonds less attractive. They may decide to hold their surplus in some other form – Euro, Gold or something else. That would mean lesser avenues for US economy to fund the deficit. However increasing the interest rates will mean the US consumers will be in a lot of pain & will slow down the growth. A real dilemma for the policy makers.

What is expected in the upcoming G7 extraordinary meeting in November?

Obviously USA & other troubled nations including Europe are trying to find an answer to the present unfolding disaster. I think following options or a mix of all those may emerge from these discussions.

1) Concerted interest rate reduction by all central banks – This has happened at least once in last 2 months. However the participation needs to be more wide spread by many other central banks.
2) Continue cajoling, coaxing, pushing & prodding the nations to continue their “trust” in the USD based current monetary system. One way to get these nations to pledge their renewed support is to play on their fear. If the current monetary system collapses, no one will be spared!
3) Continue strengthening the military prowess
4) Sweeping powers to the legislators thereby giving them access to touch the retirement funds or savings of US residents – Perhaps already initiated through the recent TARP, making all financial institutions in USA the Federal financial agents. In case the rest of the tactics do not yield the desired results of having all countries to continue trusting $ as the de-facto reserve currency, then US Govt. must find another way of financing the deficit – either through creation of more money (which means probably devaluating USD which would already be under tremendous stress in such situation) or by turning to their domestic savings, gold & retirement funds market to get the money required to finance deficit.

What next for individuals?

Like any other system, the financial system will strive to find equilibrium in the months to come. I don’t know what that equilibrium will be. The change could be good or ugly. However I can only say this – continue to be prudent, convert your assets in the forms that are traditionally considered safe (some may put gold & land in this category & for others it may be something else like food or water), develop & nurture the strength to safeguard your assets & be prepared for a rough ride… tighten your seat belts!

Result of financial imprudence

After more than a month & half long sabbatical, I am back. I really did not have enough time to write a new article due to several other commitments; however the present economic activities around us just could not let me watch things go by. For this article, I am possibly going to overshoot my self-imposed limit of length of an individual article. So be prepared for a long one. But I assure you that this will not be boring!

Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Bear Sterns, Merrill Lynch, Washington Mutual, Wachovia… and the list goes on. What is going on? Why is this happening? What is the magnitude of the crisis? Most importantly when is it going to end?

As I had anticipated…

Before we start analysis, I would like to draw your attention to the fact that in my earlier blogs (Inflation & Gold series) I had mentioned about the possibility of something similar happening. I mentioned in the first article of the Gold series “USD itself may lose it’s poster-boy image in International monetary system. In the short term, chaos that may be created, if this really happened that is, Gold will certainly hold more than equal status.” Things really have gone bad since then. To be honest when I wrote those articles in past, I never anticipated things to worsen so fast. I was in fact looking at a 6 to 12 months timeframe.

Size of the current crisis

Around March to May’08 timeframe, multiple press reports suggested that the crisis was about to get over. Example here. However we are here now. One wonders just how big is the size of this crisis. You must have by now known that US Govt. has announced official figure of $ 4.3 trillion being lost by the various US financial giants. On top of that, just yesterday US Congress passed the $ 700 billion financial bailout package for shoring up the tumbling stock markets & money market. Both these figures together amount to $ 5 trillion!! (Of course there could be some overlap between these 2 figures – 4.3 & 0.7 trillion). We all have known from past experiences that there is always a tendency on any Govt. to not tell the whole truth in one go. This to me means that the real problem is much bigger than this figure alone. On a separate thought, I think Govt. may have been telling the truth; it’s just that they are also most probably searching for more information!! That’s the worst situation to be in.

Anyways, back to the size of this debacle – this known figure of $ 5 trillion alone translates to more than 36% of the GDP of USA! And to me, it’s far from over yet.

One more statistic may throw some more light on the gravity of the situation. Some of the financial institutions that went bust in last few months, had successfully weathered & survived the biggest ever depression in the history of USA – The great depression of 1929! And those financial institutions were wiped out with one clean swipe in just under 1 year!

On a slightly different but related note, I would like to share some data on US National debt. David Walker – Comptroller General of USA (http://www.gao.gov/) mentioned in one of the broadcasts that USA currently has close to $ 8.3 trillion dollars in national debt. He forecasted that at the present pace of events (Govt. expenditure & revenue), by 2040, the net federal interest liabilities will almost equal the yearly tax revenues of the Govt.!

Why did the current crisis even start?

So this is big. Beyond any doubt. But why is it happening? I think all of you must have read several reports about the sub-prime crisis in multiple media reports. I don’t think it is worthwhile to repeat the whole story here. However I will bring up some highlights.

The upward move
For many years US interest rates were too low. That has encouraged US residents to invest in housing & real estate in general using borrowed funds. This goes for prime (creditworthy) as well as sub-prime (not-so-creditworthy) borrowers. Since the sub-prime borrowers are charged higher interest rates, the financial institutions wanted to take advantage of the situation & started lending more & more money to these borrowers. In the process, the financial institutions (FIs) created derivatives out of the securitization of the sub-prime loans. The derivatives increased the exposure of the financial system at a much bigger extent than the loans alone (please contact me if want more details for understanding this better). At the same time, the FIs started following non-prudent policies for taking higher exposure to such risky assets (sub-prime loans). This had a snowballing effect. As more & more easy funds were available to sub-prime borrowers, they started to borrow more & more. The more the borrowings, more the demand for real estate. The real estate prices started going up. Obviously even the Prime borrowers started to get cheap funds & they added to the real estate frenzy. The prices sky rocketed & kept moving up in last 15 years.

The downward journey
And sometime in last year, the inevitable started to become a reality. Many of the risky borrowers started to default on their mortgage commitments. FIs were forced to start foreclosures on these loans; which meant that there was more real estate added to the supply stream. As the supply started slowly overtaking demand, the prices obviously started falling. So for the borrowers who had entered in the real estate market at high prices, the current prices started looking unattractive. People even started to think if they really want to continue with the real estate at the current low prices while their mortgage payments are still at the higher points. More & more foreclosures started happening. Yet another snowballing effect but now in reverse direction! Now the prices started falling more & more sharply. This ultimately impacted the health of the assets of all FIs that had exposure in this market.

A few statistics would help understand the extent of exposure - 5.3 trillion sub prime loans were disbursed 2004-07. 10 trillion total outstanding (including sub prime & prime) by Q108. Which means the ratio of sub-prime to prime assets is almost 1:1. Before that, the ratio of sub-prime to prime was 1:5!! The exposure by FIs in sub-prime was too greedy & too imprudent. The snowballing effect continued & now the death nail was driven – Prime loans delinquency almost doubled in last 1.5 years!! This is how we ended up with the current mess. The single root cause in my opinion is greed!

Where are we? When is it going to end?

Is this over yet – I wish it were; however I know we are not done yet. We have been witnessing a lot of distress in US financial markets. A lot of FIs that have tumbled are from US. However the exposure of big European FIs to the sub-prime & mortgage derivatives is still unknown & it is unfolding slowly. Fortis in Belgium went down. A few signs of distress in Ireland are seen. I am more worried about the Swiss banking system. Some of the big names like UBS, Credit Suisse etc. These Swiss banks hold deposits equivalent to 6 times the Swiss GDP!! Their exposure to the current crisis would be the final blow!

So what is going to be the economic situation going forward? The current world Monetary system revolves around US Dollars. US financial systems overly encourage the residents to spend beyond their means (by keeping low interest rates & following imprudent practices). This means the demand from the US for goods & services produced by other nations goes beyond their national income thereby giving rise to negative balance of payments. Since USD is the currency of the world economy, USA can pump in additional $ in the system without those amounts being backed by any solid assets (like Gold or natural reserves). All this USD supply without good asset backing has been surviving purely on trust, faith & fear. Fear on part of other nations because other nations know that if the US economy falls, they will not be insulated either. In any case what is money anyways? It is just a medium of exchange on which people trust! Why do you need money? Money by itself is not the end, but the means to an end. We ultimately want to fulfill our needs through money. What if the things that we need are available to us? Would we then value money at all? Do you need money if you have things that you need? More on this in later articles. The point I am trying to make is that with the nature of the current crisis, USD dominance on the world monetary system will wane slowly. The monetary system may slowly try to find a new equilibrium.

Explanation of recent movements in Gold & oil prices

Most of the traders in Oil market seem to have receded their speculative activities & that has a huge bearing on the fact that crude went down from $ 140+ to it’s current level of around $ 90 per barrel. Besides this, liquidity crunch, economic crisis slowing down various economies & hence their expenses, the fact that development work for Olympics is over have had drastic impact on crude prices. All of this was expected to bring Gold prices down proportionately if we look at the past correlation between Gold & Crude. However that did not happen. In fact in last 4 weeks, a rare event has happened - gold broke correlation with crude! In last 2 weeks or so, in fact the Gold has shown signs of an upward movement. This fact is a clear indicator that speculators/ investors/ general public have gained more faith in the precious metal.

What are implications for India & other emerging markets?

If in general USD is supposed to be weak due to the financial crisis, why then is Indian Rupee depreciating sharply against USD? This must have been one of the questions that many of you would have thought about. The explanation is that a lot of Foreign Institutional Investors (FIIs) have been sitting on huge profits from Indian stock markets. Now they need to save themselves elsewhere in the world for their exposure in the current crisis. Hence they are now selling off their Indian assets & trying to repatriate their earnings after converting those into USD. Naturally, this has increased demand for USD v/s Indian Rupee.

For India, the ramifications are mixed. In the short term Indian economy too will be affected due to the financial ripple effect. However I feel India has greater potential to rebound in the long term. I don’t expect the financial crisis to hit India directly since Govt. has retained control over capital allocation through the Indian banking system. The current financial crisis in fact sets back the case for further financial reforms in India. Though there will be an indirect impact in the short term, world needs to find the bright spots once the current crisis starts to end (maybe another 2 years). There are not too many bright spots. I think India is still one of them. The urgency with which the nuclear deal between USA & India was passed is a strong indicator of how USA looks at India market.

What are the implications for individuals like you & me?

If you had been prudent over last few years by arresting wasteful expenditure & avoiding going overboard with credit, then you are probably in good shape. One who has cash or liquid assets in hand in these days is going to rule. There would be multiple opportunities where some distress assets will be available at a very attractive price. The ripple effects of financial crisis will impact other assets such as real estate etc. So keep cash ready for such distress opportunities, next 2 years will throw all such opportunities. Be very prudent. Don't borrow & buy, avoid wasteful expenses like cars & luxury goods that have low resell value. Look for bargains – you will get those. I am looking for some white goods corporate or an electronics retail chain to go bust or turn into distress sell mode so that I can buy my side-by-side refrigerator attached with HD TV! :-)

Article for this weekend - 17-Aug

Due to some other important & effort intensive writing that I need to do this weekend, I was unable to publish my next article on Finance Capsules (c) . The very nature of articles on this blog does not permit me to post anything without minimum research.

I regret the inconvenience caused to those who were waiting for my next post. I should be back next weekend.

Employee Stocks Unveiled!

Recently due to strong quarterly results of my organization, the stock price showed a significant upward trend. There was suddenly a buzz of activity going around within my team members & fellow employees. I could really sense the excitement on all the floors of our office. Everyone wanted to figure out when to sell their vested stocks & which ones to sell! As a fall-out, I received many queries from my colleagues. Some of those were generic & some very specific. I wanted to cover the generic aspects in today’s article.

There are 3 ways (other than buying the same from stock exchange) in which an employee can acquire stocks – Employee Stock Option Plan (ESOP), Restricted Stock Units (RSU) & Employee Stock Purchase Plan (ESPP). We will discuss the first 2 since those are the most popular forms today. There are further classifications within ESOP & RS. We will restrict this article to the most common forms i.e. Non Qualified Stock Options & Restricted Stock Units.

Before we start understanding ESOP & RSU, I am assuming that you are generally aware of key terminologies like – Grant, Grant Price, Vesting, Exercise, Exercise Price, Fair Market Value etc. Most of these terms are explained here:
http://financial-dictionary.thefreedictionary.com/Employee+Stock+Option+-+ESO.

There are 3 major events that happen in the life cycle of ESOP or RSU – Grant, Vesting & Exercise/ Sell. ESOPs are granted at a grant price which is normally the fair market price of the stock on the day of the grant. Vesting happens as per the details of the plan. Only the vested stocks can be exercised or sold.

Let’s see how one can determine whether to sell ESOP or RSU depending on the market conditions. Refer to Table 1 that has an illustration. Let us assume that an employee received both ESOP & RSU on the same date. The vesting rules for these are different & hence the number of stocks vested today will be different. Assuming that he/ she sold the entire ESOPs today, the total gain would be $ 3,556. Similarly for RSUs it would be $ 1,099.

Now let’s consider some other facts – Assume that the employee is working in India office of this US corporation. He/ she expects the stock price to go up by around 10% in next few months. So now he/ she is pondering if she can sell ESOPs or RSUs or both? I would recommend booking partial profits in any case (remember our principle of realized gains?). However in this illustration, I would also recommend selling RSUs first if one expects the stock to go up further. Why? Look at Table 2 now.

In this example, just 10% of expected price increase will mean > 40% increase in profits in case of ESOP! But in any case, are there any other reasons why one would recommend selling RSU? Well, it is simple really. First, regular profit booking or loss cutting should happen, irrespective of the type of your holding. Second, if you expect the stocks to rise by 10% over 1 year, then it is probably better to book the profits (by selling RSUs first) in US markets & invest the money in Indian market where you probably can expect to gain at a faster rate (assuming that exchange rates will more or less remain the same).

Converse is true as well. If you expect the stock price to go down in future, then it is better to sell ESOPs first in the above example.

As far as the tax implications in India are concerned, there are 2 types of taxes that come in play – Fringe Benefit Tax & Capital Gains Tax. In India, employer needs to pay FBT to the Income Tax Deptt. The triggers are different for both ESOP & RSU. Legally, the employer has an option to recover this tax from the employee. Refer to Table 3 for an example of FBT & Capital Gains Tax implications. Please note that this is a simplistic example to enable quick understanding for the readers.

The capital gains tax needs to be paid by the employee through advance tax system since there is no tax deduction at source.

In a nutshell – There are definitely some quirks associated with ESOP or RSU, however when one wants to determine the timing of sell, it is just the same as any other stocks that you held. Periodic realization of gains once the price reaches your target, still remains as one fundamental principal whether the shares are from ESOP, RSU or open market.

Real Estate - My Experience with a sell

I recently helped one of my neighbors sell his house. He is a high ranking officer in Indian Army & was posted to North India around 9 months back. He wanted to sell his house in Pune & requested me to handle the deal on his behalf. I was skeptical about my ability to provide enough time & attention. At the same time his expectations were quite high as compared to what I thought could have been the price for a quick sell. He expected around 9 to 10 million rupees from this sell. I checked with many experts in the field before accepting this task. Among various people I spoke to the builder who has built that property as well as nearby real estate brokers. Everyone seemed to suggest that the house would get sold in the vicinity of 7 million. Everyone thought that my neighbor’s expectations were quite high & probably unattainable!

This data worried me as well made me little excited. Worried because I did not want to ruin the relationship with the neighbor by denying extending help & excited because I thought selling the house at 9 million would be quite challenging task. The excitement rose even more after I considered this fact – as an average real estate investor, I have had few good experiences about buying a property however I have never dealt with a sell transaction of this size. This transaction provided with an excellent opportunity to get the first hand experience without assuming the financial risk! I started considering this as my chance of testing my negotiation skills for a fair sized deal. As I mentioned in one of the earlier articles, I strongly believe in realization of gains rather than sitting on notional profits. However the nature of investments in real estate does not normally present opportunities of cashing out for an average/ small-time investor. This transaction would prove to be a learning experience for me. So ultimately I accepted the challenge & started working towards the goal. I got so much involved in this transaction that I quickly forgot that I was trying to help my neighbor! There was an ulterior motive for me too. That was to have an influence in choosing my new neighbor!

After circulating 2 advertisements in one of the popular newspapers, I started getting a few phone calls for enquiries. I was encouraged by this fact. However very quickly I realized that many of the calls were from real estate brokers & not from the direct buyers. Most of the brokers wanted to update their own databases with information about this property. A very few had any live requirements from any of their existing clients. I quickly changed the wordings of the next circulation of the advertisement to target the direct buyers. Slowly the number of inquiries dried down to a trickle. However whatever few inquiries came in were from direct investors/ buyers. I felt like I was back in business!

The first serious inquiry proceeded to the second level – site visit. The person was a businessman & wanted to purchase the house for himself. He liked the property & we quickly moved to the next level – site visit by his family. On the same night we discussed the financial details of the transaction when I experienced the first big disappointment in the deal! He offered 6 million for the house as his final price! Obviously I was dejected to say the least. Suddenly the faces of those who said that that property was worth 7 million flashed in my mind. However I was still convinced that the property was worth much more. In any case this offer gave me the floor price for the deal. I viewed this as the positive side of the offer.

I spoke to the neighbor on phone that night & we had a long chat. He was saying something like putting the sell on hold for some time. However I urged him to have patience & continue. We finally decided to continue for another 15 days. It had been 2 months already since I accepted this task. I was feeling the pressure.

I changed the newspaper, the layout & wordings of the advertisement. Either due to these changes or due to sheer luck, the next week was very busy with at least 4 serious inquiries. All from direct buyers with decent backgrounds. And this time the offers ranged from 7 million to 9 million!! Of course I had also made significant changes to my sales pitch too. Both of us were quite encouraged. We felt that we were very close to our target price & hence he flew down to Pune for final negotiations with the shortlisted buyers & to finalize the deal. We spent another week & managed to sell the property for 10 million!

Needless to say I found a few surprised faces once this deal was known to people. However more important for me were the learnings that I gained from this transaction. Some of the significant ones are:

1) Choice of media based on class of buyers was important. At first I chose a newspaper with highest circulation in Pune. However when I changed over to the one that is read by cosmopolitan crowd, the response went up exponentially.
2) Choice of words & layout is very important. More than the layout, words are more impactful. Use of fluffy or glorifying descriptions of the property hardly works. It is best to leave the language simple & factual.
3) Even though I avoided real estate brokers, on the hind sight I think involving 1-2 brokers with good reputation & client base could have been a quicker way of selling the property. However there are a few aspects of dealing with brokers too. More about it in some future article. I also have discovered that one should not at all hesitate paying a few extra thousands on brokerage rather than bargaining with the brokers.
4) Another very important fact is that in real estate sell, patience is of utmost relevance. We were on the verge of bailing out or selling out at lower price. However persistence helped.
5) Real estate sell is a different ball game. There are many peculiarities of this market. For starters, this market is not very well organized or regulated. Price movements are largely determined by cartels of builders. There is hardly any official data published on real prices. There is no transparent data available about how many deals were struck by end-users v/s investors etc. So your approach for deal making in this market needs to be totally different.

Anyways, after some time, I got another serious inquiry for the same property & the buyer was willing to pay 11 million! However since the deal was over, I politely declined the offer. I have kept the contact details of this buyer, just in case my new neighbor cries foul in future! :-)

I still get phone calls from a few interested parties. Some of them have asked me to keep an eye on any such similar deal in the neighborhood! I think I might be staring at an option for a second career. :-)

Life Insurance - Myth & Reality

History of modern forms of life insurance in India goes back almost 200 years when Europeans setup their life insurance companies to insure the lives of westerners living in India. Subsequently lives of Indian natives were also covered. First at heavy premiums & later at equitable premiums as compared to the ones being paid by Europeans in India.

Before we move on to the few common myths about life insurance, it is necessary for us to understand the peculiarities of this form of insurance as compared to the rest. Few important differences (from end user perspective) for life insurance as compared to other forms of insurance are:

1) Loss cannot be indemnified – Once the life is lost, there is no indemnity/ repairs. It’s a point of no return.
2) Claim can be made only once – Unlike general insurance, the claim for life insurance can be made only once. E.g. one can claim car insurance multiple times.
3) Initiator of insurance claim – Unlike in other forms of insurance, the claim for life insurance can never be done by the owner of the insurance policy or the insured. The beneficiary is always someone else!

There are a few major reasons why an average person goes for Life Insurance. These are the reasons which carry some of the myths too.

Firstly for safety or risk cover. This has to be the biggest motive behind taking up an insurance policy. The insurance claim can never be made by the insured. Hence the safety or risk cover is always for the family members who are left behind & not for you. I see many people taking insurance policies for their kids. While this has an emotional value, if I look at such insurance policies from pure risk perspective, I see no reason for doing this. Unless your child is an earning member, taking an insurance policy in his/ her name is not going to help. I would strongly recommend insuring only those individuals whose death will cause stoppage of income or increase expenses or will make the survivors pay for his/ her liabilities.

Secondly as an investment option – Many of us go for endowment, money back or Annuity/ pension policies from the point of view of earning returns. However if one looks at the kind of returns one is expected to receive on investments in insurance premium vis-à-vis let’s say long term bank deposits then the investment motive for life insurance begins to look weak. Let’s take an example of Life Insurance Corp (LIC) in India since it has the longest & solid history. One of their best endowment insurance policies today is Jeevan Saral. In our example the insurer is 36 year old male with standard health. He has 2 options – Option 1 is to go for Jeevan Saral with a sum assured of Rs. 2.5 million. Option 2 – go for pure risk cover (Amulya Jeevan) & invest in bank deposit.

Going with life insurance for pure risk cover & investing rest of the amount in bank deposit every year definitely looks lucrative. Option 1 is financially attractive only when the insurer dies during the tenure of the insurance policy.

One may argue that the maturity payments from LIC are tax free which is not the case with returns on bank deposit. I agree completely. However there are a few options there too – one could go for direct investments in mutual funds. Mutual funds have historically provided higher gains than banks & the long term capital gains from these investments are tax exempt! Again I mentioned “direct investments in mutual funds” & not the ULIP (Unit Linked Insurance Policy). Why? The reason is simple – would you want to pay 24% to 70% charges of your first year contribution? Surprised? This is indeed true. LIC has the lowest “Allocation Charges” @ 24% of your 1st premium while some of the private insurance companies can charge as high as 70%!

As one of the “value for money” consumers, I have one simple rule - Pay vendors for their core competencies. Pay the insurance companies for what they do the best i.e. insurance/ risk cover & pay the mutual funds for their investment management skills.

Another point of view is – Why would LIC restrict total sum assured per individual to Rs. 2.5 million on pure risk cover policies? This restriction does not apply to other types of policies. Obviously there appear to be strong business reasons behind this restriction. They surely want to encourage their customers to go for policies where LIC has the most financial benefits! Take this example – I interviewed one of the best LIC agents in Pune. He has around 10 year career with LIC. Over this period he has provided new policies with total risk cover of Rs. 600 million & total insurance premium payments of around Rs. 15 million. Any guesses as to how much total value of claims were made by his clients in these 10 years? Well, it was not more than Rs. 4 million! And he mentioned that the claims were slightly on higher side when he compares with his fellow agents!

To conclude - As a tool for Income Tax rebates & pure risk cover, life insurance definitely sounds attractive. I think pure risk cover policies offer the biggest value for money. Insure only those individuals whose death will cause decrease in income or increase in expenses or will make the survivors pay for his/ her liabilities. One should treat insurance premium as expenditure rather than an investment. Pay the life insurers for their core competence only – risk cover!

Turn your loans into Investments

Did you know that the loan tenure & total repayment amount - payable over this tenure (inclusive of interest & principal) - moves up exponentially with just 1% rise in interest rate? In the following example (Table 1), you will notice that just by increasing interest rate from 11% p.a. to 12% p.a., the tenure increases from 20 years to approx 29 years AND the total repayment amount increases from Rs. 4.9 Million to Rs. 7.2 Million! This is of course assuming that the interest rate will not change in future & that you keep the same EMI as before. This is true for those who have existing floating intt loans. The EMI for such loans has already been decided. Hence any movement in rate of intt directly impacts the tenure.

From Table 1, it should be clear that an intt rate increase of 1% in absolute terms causes both the tenure & total repayment amount go up by more than 45% each! One may ask if this is equally true for fall in rate of intt too. The answer is – No. If the interest rate falls from 11% to 10%, then in the same example, the tenure & total repayment will both come down by approx 17.5%! If you are one of those who have a question of why this happens, then send me an email & I will explain. It should suffice to mention here that the pace at which one repays principal largely defines tenure & total repayment amount.

4 year back (June 2004) the home loan intt rates were 7%. Those have been rising steadily up-to 13% today for many banks!

One usual discussion point that I come across on lunch tables these days is – ‘What are the options in current economic trend that can help us beat the superfast pace of inflation?’ While I agree that there are not too many options that can reliably make this happen, I wanted to start discussing about a few that are promising. As mentioned in one of my last posts, it is absolutely important for an average investor to play defensive in economic conditions such as today. As part of the current series of posts, I have already presented the option of Gold. In this post, I am going to discuss the ways in which we can make our existing borrowings work for us.

Most of the types of consumer loans today have intt rates higher than the rate of inflation. Consider one of the most popular & cheaper forms of consumer loans – home loan. Even this presumably cheap form costs more than the inflation today.

My recommendation is to use part of your investable funds to repay at least some part of your loans – if the rate of interest is more than inflation i.e. if the intt rate > 11.7% p.a. (as of today) & if your objective is to beat inflation.

One would argue – what if I invested in some other option than repaying my loan? One of the most reliable long term options (accessible to average individuals) is Bank FD with a reputed nationalized bank. The rate of intt on these is not more than 9% today. Table 2 shows the comparative gains for 2 options. Continuing the same example as Table 1, let’s assume that the rate of intt has gone up to 12% & that you have Rs. 100,000 to invest.

It is clear that repaying the loan is financially wise option, even if we assume that in Option 2, the bank offers monthly compounding option (as assumed in Table 2) on the Fixed / Long Term Deposit! If we assume half yearly compounding (which is realistic), then the gain with option 2 becomes even less glamorous! Again with Option 2, you are not beating the inflation too!

If the option existed for average individuals, then the best thing to do is to borrow in Yens in the International Monetary market & re-pay or invest in India! Yen denominated loans are the cheapest (not more than 0.75% p.a.). One could have used these Yens to repay the Rupee loans. One catch is that one would have to assume the currency fluctuation risks until the Yen loan is squared off. However I think the quantum & surety of gains is worth the calculated risk. But alas! This option is not available (not at least in the direct forms) for people like you & me.

Anyways, back to our original discussion. Lump sum re-payment makes more logical sense when you are expecting that the intt rate on the loan is either going to remain at present level or will go up. It is not ruled out that the present intt rates on various home loans will revolve around current levels for at least few years to come. You can of course actively look at the option of increasing EMI to maintain the same tenure as before. A mix of lump sum repayment & increase in EMI can also be considered.

In general, whether for beating the inflation or not, it is one of the prudent financial policy (for an average investor) to continue re-paying the loans that carry highest intt rates on a regular basis. I have one strong belief – “Becoming risk-free is the solid step in being a high risk-taker.”

In gold we trust! – Part 3: Where to invest?

There are many forms of gold investment. How an individual chooses to invest in gold depends on the size of the investment, his/her reason for investing, and the purpose of the investment.

Physical Holding - Bars and coins, ornaments, Bullion Accounts (allocated & unallocated) with banks, metal vaults, demat gold on commodity exchange etc.

Derivatives or indirect forms - Gold futures, options, gold ETF (Electronically Traded Funds) i.e. gold traded in the form of a security on stock exchanges around the world.

Most of these forms of investment are well defined & explained on World Gold Council’s website at http://www.invest.gold.org/sites/en/how_to_invest/.

I am assuming that the reader has gotten acquainted himself/ herself with these options. I will jump right into my recommendations.

I prefer options that provide Physical Holding over the ones that give indirect ownership on gold. Why invest in derivatives when the paper that you hold is not backed by the equal quantity of gold itself? If one wants to invest in derivatives of gold, then why not hold currency notes?! This may sound little extreme or even misplaced to some. However if one looks at the evolution of global monetary system, even today gold has a significant role to play. May be that role has somewhat been diluted since collapse of Bullion Standard. However there are a few vivid examples in recent times that point to the significance of gold even today. Remember the occasion in 1991 when Indian central bank (RBI) had to pledge physical gold with the UK? Central banks still try to back their currency through gold reserves. Almost 12% to 15% of total reserves held by central banks are in gold. So the currency notes are in a certain way still a derivation of gold itself! Why go to other gold derivatives when some of your wealth is anyways in form of cash or bank deposits?

Now let’s turn our attention to physical forms of gold investment. According to World Gold Council, 75% of gold demand is for jewelry, 10% for industrial use and only 15% is for investment purpose. For centuries, an Indian has been “investing” in gold by buying jewelry. I wonder why we think that buying ornaments is a form of “investment”. After interviewing few jewelers, I discovered that any person who buys ornaments stands to lose anywhere between 7% and 18% of the original investment – depending on the making charges for the design – when it is time to encash the so called “investment”. Making charges vary from Rs. 50 per gram for very simple designs to even Rs. 250 for some exotic varieties. No jeweler – not even the one from whom you purchased the jewelry – puts any value to the making charges when you want to sell it. Similarly the buy/ sell spread for jewelry is usually high. You would hardly find any jeweler who would give you cash for the jewelry purchased from any other jeweler. He may offer to exchange it though; however the discounting could be high.

Gold bars & coins – During the last decade, Indian banks were allowed to import gold & sell it in the open market to the retail customers. However here too, the loss is too much to bear. E.g. ICICI Bank charges up-front premium of approx 15% over the ruling gold prices! Besides, they are not going to buy the same gold if you wish to sell! You still have to turn to the jewelers to sell it. And guess what – the jewelers will mostly deny giving you cash in return!! They might exchange it for their own gold though.

So what is the way out? Here is what I would recommend.

If your quantity is limited, then find a local jeweler who has a strong history & credibility in the market. Purchase ‘Vedhane’ from the guy. ‘Vedhane’ is kind of a bare-bones gold ring without any special making charges. The advantages are that this comes in pure gold form - 23.5 to 24 carats - & does not attract any making charges. Plus the buy/ sell spread when you go to encash the same, is minimal. Based on my interviews with a few well known jewelers, I concluded that the transaction charge (including buy & sell) can be as low as 0.75% to 1% barring VAT which anyways is common for any option you take. Safety of your investment is a challenge in this option. Hence a Safe Deposit Vault with a reputed bank is recommended.

If your quantity is in kilos, then demat gold (e.g. i-Gold offered by Multi Commodity Exchange of India – MCX) or metal vaults (e.g. something like Bullion Vault) are recommended. In both these options, the investor gets a guarantee of physical delivery if one demands it. Also the buying, selling, storage & safety of your investment are virtually the non-issues. However the charges are obviously slightly high. E.g. if you bought & sold 1 kilo of demat gold through i-Gold in single fiscal year, then you would end up paying anywhere between 2.25% to 2.8% as total transaction charges depending on the turnover commitments that you make. These charges include brokerage for buying & selling, service tax & custody + insurance charges for 1 year. I have not considered VAT here too since it is going to be common for any transaction (1%).

So to conclude – have your gold investments as a mix of “Vedhane” from a reputed jeweler & something like i-Gold, depending on the individual’s deal size, safety parameters & comfort level. If you have a choice, then I would recommend buying this form of gold in non-festive & non-marriage seasons. As for me, I am a regular buyer & seller of “Vedhane” & have had adequate returns! I am actively considering an i-Gold account for myself. Remember – any investment is as good as the quality of your decision to buy AND sell. I strongly believe in realized gains.

In gold we trust! – Part 2: How much to invest?

In my earlier post, I evaluated gold as one of the recommended investment options in the present global economic situation. It would be worthwhile taking a look at some more hard facts before we move to questions like – How much to invest? In what forms to invest?

In the recent months, a tiny country like Vietnam has doubled it’s appetite for gold as compared to last year. It has been tipped to have surpassed even India! Why? One wonders. But look little carefully & there is a fact that probably explains this phenomenon – rising inflation! The current rate of inflation in this tiny nation is 25%. As I mentioned in my last article, inflation, interest rate & demand for gold seem to have shown close interrelationship yet again!

Gold has returned slightly higher than it’s 1980 peak of > $ 900 per OZ. When you look at stock markets from 1980 most have more than doubled. More so in the emerging economies. Even looking at the levels after present battering, the global stock markets are easily sitting at more than double the levels as compared to 1980’s. By this comparison, gold remains the grossly undervalued investment option as compared to stocks, real estate, crude oil etc.

Again does this all point us – the average investor with average risk posture – to having gold-heavy investment portfolio? Again - Absolutely not! Not even in the current inflationary & somewhat recessionary trend! There are a few reasons for this:

First, gold is uniquely positioned – as a commodity as well as store of value. While it is great as store of value & in some occasions, a trusted medium of exchange (world’s central banks hold around 12% to 15% of their reserves in gold), gold is not a directly consumable commodity, except for the industrial usage.

Second, the rules of diversification apply to any investment option including gold. “All eggs in one basket”… While we are witnessing a general slowdown, I firmly believe that India growth story is not complete yet. The present situation (political & economic) may throw some more nasty blows in next 2-3 years & the growth rate may see further dip; however Indian economy is expected to find it’s original growth trajectory eventually. Diversification continues to be a fundamental reality of good investment strategy.

For an investor with average risk appetite, I would recommend keeping gold exposure of 5% to 20% of their periodic investments; depending on the opportunities presented & economic conditions. In the current situation of inflation, rising interest rates (India) and slowdown in growth, 10% to 15% of one’s periodic investment to be put in gold, seems logical to me.

Now let’s turn to the part 3 of my gold series to know my views on the recommended forms of gold investment.

In Gold We Trust! - Part 1

An average Indian’s, love for the ‘Yellow Beauty’ is well known for ages. In the monetary system evolution, Gold & other precious metals – e.g. Silver – assumed great importance as the medium of exchange after the end of Barter system.

For the past 4 centuries it has been proven that Gold is one of the very few assets whose purchasing power has remained stable. A research by World Gold Council clearly shows that Gold is the only medium of exchange that has maintained purchasing power as compared to the major currencies of the world. All major currencies (USD, Sterling, Euro, Yen etc.) have in fact gone down in their purchasing power. (Image Source: http://www.gold.org/)

I did a quick scan of Indian inflation & Gold price movements in past 37 years. Gold rose around 70 times since 1970 in Rupee terms (Indian Bullion Mkt), whereas inflation in India – after adjusting for WPI base year shifts – has risen between 16 & 19 times during the same period.

So does this mean we have to invest heavily in Gold? Absolutely not!

This data in isolation of other information may mislead an investor to have a Gold dominated investment portfolio. The huge gap seemed lopsided to me. In earlier years, Gold imports were strictly governed in India. The Gold price differential during years 1970 to 1992 between Indian domestic market & world market was very significant (e.g. in 1970 the difference was 100%!). Obviously this lead to parallel Gold market whose movement remained unreported & hence unmeasured. If one looks at the domestic price movement & inflation since 1992 (the post liberalization era) then slightly more realistic picture emerges. Price index has gone up by 281% whereas Gold price has moved by 305%.

Conclusion - Gold still remains the one major commodity whose value has either kept up with inflation or beaten it!

Does Gold ALWAYS beat inflation?
While it is a general belief that Gold has proven to be consistent hedge against inflation, there have been a few remarkable milestones in recent history that point out that there are some other factors in play too. For instance in 1980, Gold price went beyond $850/oz on the back of Russian attack on Afghanistan. The US economy was witnessing unprecedented inflation rate of close to 17%! USA Fed head Paul Volker in 1980 raised domestic interest rates to 20%. That probably helped to calm down 17% inflation levels in next several months. However it is believed to have dealt a blow to Gold prices. How? – high interest rates rewarded more cash balances & probably killed speculative activities in Gold trading.

Probable Conclusion – Inflation needs to be more than interest rate for Gold to attract more returns than cash.

Today's situation
Does one really anticipate USA Fed today to take U turn & drastically increase Dollar interest rates? USD itself may lose it’s poster-boy image in International monetary system. In the short term, chaos that may be created, if this really happened that is, Gold will certainly hold more than equal status.

I interviewed few colleagues & ex-colleagues from countries that recently witnessed hyper inflation & economic crises – Malaysia & Thailand (1997) & Russia (1998). The interviews unsurprisingly pointed out the undisputed role of Gold in such economic disasters.

In the current global economic situation – rapidly rising oil & food prices, looming recession on the biggest economy of the world (USA), plummeting stock markets – an average investor with average risk appetite is recommended to play defensive. Every such investor needs to look for locking the value of one’s wealth & probably increasing the same at a rate which is at least equal to rapid inflation rate if not more. Obviously one would not recommend hoarding US Dollars for wealth retention. While all the world economies will try shoring up US Dollar valuations to protect their intertwined interests, I would definitely recommend hedging against sharp USD depreciation by investing in Gold.

In the next post, I will talk about various forms of Gold investment & recommended exposure to Gold in your portfolio (considering an average risk appetite).

In the coming weeks...

1) In Gold we trust
2) Real estate options
3) KB - Monetary Systems evolution, present & future
4) Comparative analysis of a few well known investment options
5) Repay loans v/s Invest elsewhere

*KB = Knowledge Base

Every weekend I will handle at least one topic. This is a generic list & does not necessarily represent the order in which posts will be published. I may have to insert any other topic(s) if the situation demands so. I will keep updating this list as we go along.

Current Affair – Rising Inflation

Simply put, Inflation is rise in prices of commodity basket relevant to a base year. Conversely, it also represents change (usually downward) in buying power of a single monetary unit.

Method for inflation calculation
Most developed nations calculate inflation based on Consumer Price Index (CPI). India has adopted Wholesale Price Index (WPI). WPI is calculated on a weekly basis with a lag of 2 weeks. It is the index (base year 1993-94) of weighted average of prices of commodities.

In India, Office of the Economic Adviser (OEA) - attached to Ministry of Commerce & Industry – is responsible for Compilation and publication of the weekly WPI.

Why is inflation rising?
Qualitatively economists generally are blaming the global inflationary trend on 2 basic reasons – rise in fuel prices & rise in food prices.

Quantitatively here is the trend of inflation in current calendar year. Now let's to look under the covers for constituents of WPI in India. WPI is calculated based on 3 commodity groups:

1) Primary Commodities
2) Fuel, Power, Light & Lubricant
3) Manufactured Products

Each commodity in these groups & in-turn the groups themselves have weights assigned. And now the all too revealing WPI movement across the commodity groups the same period! (Chart 2)

If one closely looks at the various commodity movement in chart 2, then the correlation between recent spurt in “Fuel, Power, Light & Lubricants” group & the one in Inflation % is quite obvious! So in short the figures corroborate (to a large extent) the qualitative information. A little more drill-down into data shows aggressive movements in past 1-2 months in Mineral Oils, LPG, Petrol, Aviation Turbine Fuel etc.

Macro economic strategies of various countries
While India has placed more importance on arresting inflation; the USA seems to be going after “Growth” issue. For India, growth is not a challenge in the present situation while USA seems to have put Inflation management secondary to solving looming recession. The macro measures these two countries are taking are representative of what issues are more important to them. USA is slashing interest rates whereas India is raising those! This clearly indicates that USA Fed wants to encourage speding (by improving money supply) so that they tackle the “Growth” problem. However for India, restricting the money supply (to arrest inflation) is the way to go by increasing the cost of borrowing.

It is also said that rising crude prices are in the best interest of not only the oil producing nations but also of USA (apart from it's role in oil production). The simple logic provided is that bulk of oil trades happen in US Dollars. More the price per barrel in USD, more the demand for Dollars in international market. This helps create one of the many outlets for absorbing the rising Dollar supply. While to some extent this may save falling Dollar, it definitely adds to global inflation!

Well, this is just a scene when we look at 2 national economies. Once we start looking at all major nations, the situation becomes quite complex. One would wonder if there is any way out! The answer is not that simple. Probably one of the initial ways is to look at world as one whole economy rather than individual nations. This role being already played collectively by WB, IMF & UN, it is interesting to see how far the major national economies of the world stretch the current global monetary system. The more conflicting the national strategies, the faster we accelerate shift from current monetary system. More about the monetary system(s) in subsequent posts.

Finance Capsules(c) - Rationale

'Is money important to you?', if the answer is a resounding "No!", then you are probably wasting your time reading this blog. However if the answer is "Yes" or "May be", then read on.

If you are still with me, then in past you must have dealt with multiple questions surrounding money - 'How do I make more money through legal sources?', 'How can I achieve financial independence?', 'How can I grow my money?', better still - 'How can I effectively manage whatever money/ wealth I have?’ & many such relevant but apparently simple topics. For those who have figured out the answers, this is not the blog to be.

While interacting with those who are still trying to figure it out, I normally come across many conversations. There are multiple common themes that run through these conversations. One of the more prominent ones is – ‘I know that I don’t know enough, however I don’t know where to start. There is sea of knowledge out there to cover in my entire lifetime!’

This blog is an attempt to share whatever limited knowledge I have about generic Finance. The goal of this blog is twofold –
1) Share information, knowledge & analysis of current affairs, while clarifying some basics.
2) Do this in concise manner. I will attempt to ensure that none of my postings are beyond 800 words +/- few. Believe me – this is a tough challenge for a person who likes to write loads of stuff :-). That’s why the blog title – “Finance Capsules ©”.

To start with, I will divide my posts in 2 categories – Current Affairs & Finance Concepts. As the names suggest, while the posts in first category will provide analysis of present happenings around us, the second category will focus on clarifying finance at conceptual level. You may find a few cross references from one category to the other, however I will try to keep those to-the-point without disturbing the main theme.

The usual disclaimer applies here too - This blog does not provide silver bullet for your financial situations. It is merely a tool & knowledge base that you can use to make your own financial decisions. Readers' discretion advised!

So shall we begin? Let’s go!