Electricity Consumption and GDP

One of the Chinese officials recently claimed that Chinese figures of GDP are suspect and he (Chinese official) looks at electricity consumption to arrive at correct GDP figure. I have read claims of relationship between “electricity consumption and GDP” in so many articles that I feel I should say something.

With invention of semiconductor material and energy efficient equipments, comparing electricity consumption will not give you true picture. To some extent, one can compare electricity consumption of other countries to arrive at approximate figures but such approach is full of errors. To take an example; Personnel consumption expenditure could be biggest contributor to GDP of other country as compared to your own country. Decades before, USSR produced fuel-guzzling cars. Therefore, if you had compared fuel consumption to arrive at number of cars on the road, you would have gone wrong. Provided your model takes care of such variables, electricity consumption can still be used as indicator of GDP.

Before I end this post, I will have quick look at Mr. Soros’s argument that capitalism is in danger (as per my knowledge, he claimed years before that Capitalism is under threat). Capitalism is very unlikely to end IMO; we may have something like Socio-capitalism but not socialism. I will have more to say in my future posts.

-Shrihas Pandharkar

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DYOR.

Country Stages

These cycles run for decades. Please do not think there are overnight solutions to Sovereign debt problems.

Though above cycles are meant for countries, they are equally applicable to individuals and families.

-Shrihas Pandharkar
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Euro Zone in Germany's Interest

Some people think that it is not in Germany’s interest to fund bond purchase of debt-ridden partners. In fact, it is more in interest of Germany than any other country. Germany is shielded by “fallen EURO" due to debt-ridden partners.

Note one-quarter time lag between “EURO FALL” and “German export machine firing”. It does not happen with dollar (at least till now). (Till now) Even if dollar falls, US exports do not go up much. Note also that Germany’s unemployment is at lowest level in last 18 years.

Now, let us say EURO zone falls apart after ten years. By that time, Germany will have exported so much that it will be entitled for windfall (as its reserves will be adjusted by account surplus) and new German currency that will float will quote at 4 dollars per unit (looking at projected surpluses).

Note also that inflation in Germany is at lower level because debt-ridden partners need EUROs, which they get by exporting to Germany.

It needs a mention that if German banks invest in bonds of debt-ridden partners then it may not play out as mentioned above after (if) EUROZONE falls apart .

-Shrihas Pandharkar

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Free Float Remnibi

China may benefit by free float of Yuan. If Yuan appreciates after free float, China can come up with 10 trillion dollar equivalent Stimulus that will send Yuan lower. Stimulus can also be effectively used to control inflation once currency is free float.

Like fractional reserve system, STIMULUS is becoming another tool to control inflation, exchange rate and (hopefully) growth.

-Shrihas Pandharkar

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Misunderstood

On face of it, policy makers may make statements like; we want to control inflation....target unemployment etc. However, the game plan is different. FED has more data than anyone has. FED has many intellectuals working with it than anyone. FED is effectively using reserve currency status of dollar to its benefit. All other countries feel trapped but they can do nothing. If they do not export to USA (which is biggest market) then they do not get dollars in turn they find difficult to import oil to run their transportation system. They can export only by keeping their currency low. If their currency appreciates and if they still export, it could attract anti-dumping duties. FED wants dollar debasement but it does not want to admit in public. That is all about present deadlock.

Jumping to the next topic, my suspicion is Mr. Bernanke has realised that he is getting nowhere in improving job market and that is why he recently targeted China. Never before, he spoke of China like the way he spoke last week. Americans may have had great time in last two decades but future looks dull for Americans. After all, if you borrowed so much expecting to repay by working in future then in future you have to work for repaying all that you already spent. I am not saying future is great for Asia, as Asia will also feel pain.

Some economists have claimed that QE2 will be success because it is targeting long dated securities. I am not sure whether I have understood their argument fully but it is very unlikely that QE2 will be success just because it is targeting long dated securities. Probably, they are saying that if you pull right hand side point of the yield-curve down then left hand side point of yield-curve also gets pulled down resulting in steepest yield curve. In my opinion, there is no such thing, as targeting long dated securities will have desired effect. Slope of the yield curve does play role in improving economy but there is limit.

-Shrihas Pandharkar
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China's Influence

“China's neighbours are already getting nervous about its rising global influence”, says George Soros. Mr. Soros will not make such statements unless someone at high level expressed concern over Chinese rise to Mr. Soros.

I can guess who must have said that. In my opinion, leaders of emerging economies will do well to program body language properly. Remember, when you speak, you are watched by many CCTVs. It is recorded. There are experts in reading body language. These experts form a team. This is a team-work. They rerun those recording and try to decode body language.

One needs to be counter-intelligent in this world.

-Shrihas Pandharkar
DYOR.
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First Greece then Portugal......

First Greece then Portugal and who is going to be next?

I am not talking of PIIGS crisis but China manoeuvres. Chinese President visited Portugal and assured of support. In my earlier article, I probed China getting aggressive in reply to US Stimulus and that is what is happening.

-Shrihas Pandharkar
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Federal Reserve IPO

Why not IPO of Federal reserve?

After all, Federal Reserve made good money in CITIGROUP and few other stocks. It is creating money out of thin air. This money is given on 0.25-1% interest rates. In my opinion, Federal Reserve is making good money.

Federal Reserve IPO will get valuation of at least trillion dollars. This IPO will generate jobs, as you will need underwriters, printing machines etc.

Trillion-dollar IPO will save American economy as taxpayers’ money will not be required anymore. If FED needs money it can come out with rights issue in future and for ever (looking at the requirement of finance).


-Shrihas Pandharkar

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Entrapment

In my spare time, I look at videos of Mr. Bernanke’s speeches. Now, please allow me to step into his shoes.

The whole USA looked directionless in 2008 financial crisis. Therefore, US citizens needed someone who could save them and Mr. Bernanke stepped in. With inventory adjustments, he proved himself right by showing 5.6% GDP Growth in 2010 Q1.

However, following points needs mention;
• If I am Mr. Bernanke and Helicopter is my copyright, then I will have every motive to prove it right.
• I will not want to become villain by withdrawing stimulus prematurely, as world will blame me for deflation and I can be sued.
• Even if I get 1% growth, I can promise 6% growth in future, which may or may not materialise.

Now stepping out of Mr. Bernanke’s shoes, I see higher chances of maintained-stimulus resulting in excellent growth not for USA but for emerging economies if they play it right.

-Shrihas Pandharkar
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600 Billion Dollar Helicopter

Last few days, newspaper headlines are screaming opposition from Non-US governments to 600-Billion-Dollar-Helicopter.

Very few have understood action plan. If people oppose this 600-Billion-Dollar-Helicopter, then they themselves will suffer. If FED withdraws stimulus, money will be withdrawn from markets all over the world and at least half a billion population will starve. Remember, as long as commodities are priced in dollars, any opposition to 600-Billion-Dollar-Helicopter will be foolish. It will be suicidal for all emerging economies including China.

First step should be to isolate rest of the world from effects of dollar money.

Therefore, it makes sense to support 600-Billion-Dollar-Helicopter and get the money inside country. Develop infrastructure using that money. Now, money will not flow for nothing. Therefore, give small stake. Money that will buy these stakes is borrowed money. This borrowed money will need to be returned by borrower (read “Primary Dealers"). Remember in stock markets, only few make money. Therefore, one or two primary dealers may make money in the process.

Therefore, the game plan should be;

Step 1: Develop infrastructure etc. at the cost of Primary dealers

Step 2: Once you are on par with developed-economies-infrastructure, bring resolution in IMF to price commodities in other currency.

Now, before I end this post one small story.

I have seen one successful investor from very close. You will ask me whether he was hedge fund manager. The answer is, No. He was government servant. Four decades ago, he bought a property in emerging economy for 180 pounds (at today’s exchange rate). The property is valued at 75,000 pounds today. For all along, this successful investor commuted 2 hours and worked nine to five. He did not know location of stock market building which was 2 minutes from his workplace. Morale of the story; if you intend to spend all your life in one country then “DO NOT THINK OF ACTIVE INVESTING”.

-Shrihas Pandharkar

DYOR.
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Stimulus steps

Mr. Bernanke’s steps on stimulus:
• Make securities held by banks liquid (like MBS, CMBS...etc.)
• Banks get cash for the securities that they hold
• If Inflation rises, sell these securities back to banks and suck the liquidity.

In my earlier articles, I explained what banks are doing with this money (which they get by selling securities to Mr. Bernanke) and why Mr. Bernanke’s experiment is failing.

The day, Mr. Bernanke decides to tighten, stocks all over the world will fall like pack of cards. Perma-Bear will be back with bang, as Dollar index will touch 120. If Mr. Bernanke continues with present set-up, nothing major will happen. It is stupid to predict Inflation or deflation at this time. All depends on action of Mr. Bernanke. There are also other factors like; Intelligence agencies, Chinese approach etc.

Small example on related topic is in next paragraph.

Cadbury stock languished at 400 pence only to jump on the possibility of offer by Kraft Foods. Kraft foods succeeded in taking over Cadbury. By taking over Cadbury, Kraft foods insulated itself from any erratic currency movements. If dollar falls, it gets more dollars for sales overseas. If dollar does not fall, it has nothing to lose. Please note that talk of the town is “Dollar Fall”. Takeover of such companies is paid in dollars, which is just a paper (which has value at the moment).

-Shrihas Pandharkar
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Economic Growth and ponzi scheme

Let me take my own example. Let us say I earn 40,000 Pounds. With that salary, I can buy a house worth 300,000. This is possible due to availability of credit. Let us say, I buy that house and after few years find that house is worth 450,000. I sell it to Z and buy some other assets. Z who bought house at 450,000 will approach bank for credit. Once Z satisfies all credit checks, he gets a loan. Is this an example of economic growth? No, it is an example of ponzi scheme. Z sells this house for one million and world thinks economy has expanded.

Now, I will explain you how world believes we grew. I may use 450,000 that I earned from selling house to buy some goods. My buying goods generate demand for goods, in turn keeps factories busy...in turn factories employ people...in turn generates wage income... cycle continues....

Example in Paragraph 1 equally applies to Stock markets, bond markets and all such markets. Remember what Greenspan said recently. He said, “If stock market remains high forever there will be no need of stimulus”. All are ponzi schemes. But, that is where opportunity lies. One can become rich if he/she plays well. Unfortunately, “playing well” is very difficult.

Now, let us say, I break this ponzi scheme and instead of buying assets/spending money, I bank it. Am I stopping ponzi scheme? No, I am not, in fact, I am encouraging. Banks take my money as deposit and give loan to let us say hedge funds against some security. Hedge fund runs ponzi scheme with my money. Someone who banked money thinking ponzi scheme ended, is repenting now.

When can such ponzi scheme stop? Answer is, after currencies collapse. Some people argue that if currencies collapse then assets denominated in those currencies should rise. I am not denying that. Asset prices will spike in (and for) a very short time. But, in shorter run (2-5 years), excess built in the system will be sucked.

The question is, when and which currencies will collapse? Answer to “which” is easy but answer to “when” is difficult. That is why I request all small investors to get out from certain markets. The time is NOW. Small investors may repent for some time as in Paragraph 4 but not forever.

-Shrihas Pandharkar

DYOR.

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QE2

If QE1 did not yield anticipated results, then why is Mr. Bernanke going for QE2?

Deeper thinking makes me believe that it has nothing do with stimulating American economy. Please do not get me wrong. My guess is Mr. Bernanke wants China to abandon fixed exchange rate policy (or atleast revalue its currency). The only way he can do it is to inflate.

I think Mr. Bernanke thinks that China will have to take notice of trillions of dollars flowing in the world and revalue its currency. But, what if China plays it smart?

Note that China helped Greece when Greece was almost written off. Note that Russians asked China to dump treasuries at the height of 2008 crisis (In his testimony, Mr. Henry Paulson informed this to senate, if my information is correct).

In my opinion, Stimulus money is buying stocks in emerging markets and is not helping Americans as much as it is expected to. In my opinion, stimulus money is helping emerging economies more than American economy. Note that in capitalist model, people will tend to invest money for maximum returns (taking into account risks involved). Note the diminishing return theory proposed by the author of this article.

-Shrihas Pandharkar

DYOR.

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Keeping in Control

Financial assets decide allocation of capital. Productive assets generate real income for the economy.

Why am I saying this? A partial successful attempt was made to make London the financial hub of the world. Policy makers looked at opening statements of this article and they noticed something.

Due to expansionary policies, individuals were expected to have more disposable income in their hand. What would one do with excess income? He would buy assets (allocate income). Individual would need someone expert in allocation of income. Therefore, someone who is expert in allocation of income would charge fees for nothing (I am saying “nothing”, here due to disclaimer clause by all financial advisors). This expert would decide allocation of income and not individual himself. Enter “Hedge Fund managers”.

In 2008, money was lost. Note that in 2008 money was lost, no one lost productive assets. If money was lost then it was made up by STIMULUS. Who lost money? Answer is “banks lost money”. Banks were given money, so simply speaking, no one lost money except few companies/individuals that went under. That is what we call “ALLOCATION OF CAPITAL”.

Now, here is the real danger. Year 2008 will repeat itself but in some other form. This time it is going to be banks/individuals holding dollars. That is what I call “ALLOCATION OF CAPITAL”.

Now, you know why attempts were made to make London the financial hub of the world. To CONTROL..,


Shrihas Pandharkar,

DYOR.

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Inflation, deflation and stocks

Let us visit 1932. In the year 1932, the USA was on gold standard and so was rest of the world. QE could have sent USA in all kinds of problems as the currency was gold backed. Markets fell about 90% in the USA. In rest part of the world fewer stock markets existed. Demand for goods from rest of the world was negligible.

Let us fast forward to the year 1990. Japan faces similar problems. But this time, currencies are not gold backed. Demand generates from other part of the world and Japanese stock market plunges 75%. Stock markets in other part of the world rise after brief plunge.

Now, are we in position to predict what will happen to stock markets worldwide? Can we say whether we will have deflation or inflation in the USA and rest of the world?
Analyse first two paragraphs carefully and you will have the answers.

-Shrihas Pandharkar

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Which is the biggest economy?

Which is the biggest economy?
Is it the USA? Yes, if you look at the numbers.
How do you look at the numbers? We denominate these numbers in some currency, dollar in this example. So, we say China is smaller than the USA because in dollar terms china produces less than the USA.
Now what happens if Chinese currency appreciates by 200% against US dollar?
Simple, China will be the biggest economy in the world at least for some period (because if exports start to fall due to currency appreciation then China will not expand much).
What if EURO appreciates 100% against the dollar?
Simple, EURO ZONE economies will be bigger than the USA.
The dollar cannot fall much as of today, for the reason that oil is priced in the dollar. If the dollar falls the oil rises. This in turn exports inflation to all emerging economies as they have to pay in dollars to buy oil.
Do you see how valuation of a currency can play havoc?

-Shrihas Pandharkar,

DYOR.

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Uncertain Outlook

The world is busy blaming the US for financial crisis of 2008.
Basically, most of the people in emerging economies would not have imagined such luxurious lifestyle if it were not USA. It is still not luxurious in emerging economies, but lot better than 20 years before. Fiat currency has helped everyone on the planet.
Much has been said about inflation in the USA due to QE. There is a debate going on both sides. One side is claiming deflation and the other is claiming inflation. QE money is still in the banking system and not in the hands of general public. Efforts are made by policy makers that this money goes as a trickle. If this trickle is not controlled then we may have higher inflation. Argument put forth by the chief that there is underutilization of capacity and so we will not have inflation does not hold. Hyper inflation can happen in the USA only if the world loses faith in the dollar. For hyperinflation, the necessary condition is “loss of faith in the dollar”. I am not dwelling anymore on inflation in this article but will keep updated in future articles.
Let us see now why Lehman Brothers went under. At that time there were at least 12 candidates waiting for bankruptcy. Let us see why Lehman only went under (along with Bear and sterns). The plug was pulled by one of the banker. I suspect the biggest reason was Public Relations. I have strongest doubt that PR machinery of Lehman failed. If they had maintained good relations with the bankers then we would have seen some other company going under.
Let us see why I am saying this.
Relationships (I am talking of relationships based on model not personal relationship) in finance are not deterministic as in engineering. No one is right all the time. But, it does not happen in engineering. If you know basics relationship in engineering (basic theorems that governs relations), for example; e = mc2, then you can do job well. Even if you have not exactly good relations with boss, you can remain in the job because boss knows that if XYZ goes on the job, he is sure to complete it.
But in finance you are not likely to be right all the time, so it makes sense to be in good relationship with boss.
Very rarely you will see engineers on top position. The reason is, engineers least bother about personal relationships. Those who care reach on top.
It makes sense for XYZ to introspect and change.
-Shrihas Pandharkar,

DYOR.

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Currency and illusions

Who decides true value of pound that I am holding? The answer is “No one”. Pound is free float currency and value of it is decided by crowd. Now, who is the leader in the crowd? The answer is “No one”.

All such currencies are not backed by any kind of reserves from which the value can be decided.

So, we wake up in the morning and say, UK is a great place to live, good infrastructure....and so on...Does that decide value of pound?? The answer is “to some extent, yes...”

How do you decide value of any emerging market currency which is not free float? The answer is “will look at trade balance, government deficits etc...”

If you read carefully, do you think currency value is PR exercise in the short run??
Do you think fear of shortage drives major currencies?? If a country do not have dollars and tomorrow it needs oil, from where does it get dollars?

Oil is the single biggest contributory factor for "the dollar holding its value against emerging economies currencies". Oil imports have highest share of imports for all emerging economies.

Why do they need oil?? The answer is to run automobiles for transport of goods.

Central banks of emerging economies hold dollars out of fear. Once the fear is gone, they will not hold dollars.

To remove fear, it is in the interest of all emerging economies to develop solar power, as sun is in abundance in most of the emerging economies. They will not fear for “Shortage of dollars” anymore.


-Shrihas Pandharkar,

DYOR.

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