Friday, October 30, 2009
Unidirectional movement in prices of these asset classes is exceptional because of their different charateristics. Gold price goes up when there is a 'flight to safety', i.e. when the market is risk-averse. Stocks turn bullish when the market becomes comfortable with perceived risk. Movement in government bonds is a function of many variables including money supply (which of course impacts the other asset classes also), market's confidence in the government etc. In the case of US government bonds, China plays a crucial role in view of its vast accumulation . Of late, China has been airing its increasing discomfort with its possession of such bonds.
One factor that has contributed to this rare phenomenon is quantitative easing which has released excess liquidity. It is only a matter of time before the liquidity tap gets less open .
Reserve Bank of Australia has already taken the lead in reversing the quantitative easing. While increasing the key policy rate by 25 basis points on 6th Oct., RBA's governor said,
"In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead." Is he clairvoyant or overly optimistic? It is too early to say.
American economy grew by 3.5% in the July-Sep quarter after receding in the previous four quarters. This trend reversal also might have contributed to simultaneous growth in different asset classes.
It is now evident that we escaped a global depression despite the massive failure of the US economic system only because of synchronisation of liberal monetary policies in many economies. Since we are not known for co-operative behaviour, it is a moot question whether such synchronisation was a concerted action or mere coincidence.
Tuesday, October 27, 2009
Former Communications minister, Sukh Ram was sentenced to 3 years of rigorous imprisonment and fined Rs.1 lac by a CBI special court in New Delhi on 5th July 2002 for indulging in corruption by favouring a private party at the cost of Rs.1.68 crore to the public exchequer. The judge said, "Being the head of the ministry, he was expected to act in public interest , but he betrayed the trust imposed upon him---If the minister himself abuses his position, it will hardly be possible for him to check abuse by the other public servants working under him."
Poor Sukh Ram! He was defrauding the nation by a paltry Rs.1.68 crore. He did not belong to a party that had enough leverage in the cabinet to claim as Mr.Raja has done,"All decisions were taken in consultation with the Prime Minister. Let the CBI investigate and if anyone is found guilty, law will take its own course." In other words, if the minister is guilty, so too is the prime minister! If the minister is to be arrested, the prime minister also should accompany him to the prison!
Should the minister resign since the CBI has raided his ministry? The minister has answered himself. "Where is the question of resignation? I have done no wrong." Touche!
Monday, October 26, 2009
Internal insecurity of countries creates huge and perhaps interminable problems. Kashmir issue and Naxalite menace in India are standard examples. Many attempts have been made over a long period of time to solve these two chronic problems, but they continue to fester because some sections feel insecure and alienated. This is not to deny that there are players who fish in troubled waters.
On a global level, America has its own problem of insecurity while dealing with China. Recently, when the Dalai Lama was in America, Obama preferred not to meet him in contrast to the tradition set up by his predecessors. It was strange that one peace Nobelist avoided meeting another. In a way, the less deserving avoided meeting the more deserving. But the question is why Obama forsook the opportunity to talk to the Dalai Lama. He feels insecure as to how China would respond. An insecure person allows himself to be governed by others.
Sunday, October 25, 2009
Commissioner of Income Tax, Nagpur, one Ajay Kumar Singh was nabbed yesterday by CBI on charges of possessing assets disproportionate to his income. His wife also has been arrested. This is hardly any news because we have become inured to cases of corruption everywhere, whether it be in CBI, police, judiciary or AICTE.
Psychology of corruption is interesting. As the saying goes, an open door invites a saint. There are attractions aplenty in departments like the Income Tax. If one's ethical edifice is not strong, becoming corrupt is only a matter of time. There are only two bulwarks against corruption. First ethical standards must be strengthened and secondly the deviants should be punished severely and without delay. Unfortunately, we are failing on both counts.
Tardiness in dealing with charges of corruption vitiates the society. It is sad that tardiness is our national trait. Some of us may remember the case of Justice Ramasamy who became a Supreme Court judge on elevation from Punjab High Court. When corruption charges were brought up against him, Chief Justice of India made him go on leave. Since the only way of forcing a Supreme Court judge out of office before he/she turns 65 is through parliamentary impeachment, such proceedings were initiated in the Lok Sabha. The then prime minister, P.V.Narasimha Rao to whom politics was nothing but pragmatism (an euphemism for amorality) ensured defeat of the impeachment motion by advising his part members to abstain. Putting up with corruption amounts to encouraging corruption.
This time around, the Supreme Court also has become 'pragmatic'. It continues to dilly- dally when charges and counter-charges are having a field day in the case of Justice P.D.Dinakaran. Every case of alleged corruption that is mishandled only further fertilises corruption .
The quarter ended 30th Sept 2009 is seeing many banks declare healthy results. Year on year, Karnataka Bank has shown good progress in deposits, advances and low cost deposits. One would have expected profits also to fall in line (unintended pun conveying contradictory meanings). But that was not to be.
Profit after tax fell from Rs.73.60 crore for the quarter ended 30th Sept 2008 to Rs.16.35 crore for the quarter ended 30th Sept 2009. The figure for the latter period includes a tax credit of Rs.14.97 crore. So profit before tax was an abysmal Rs.1.38 crore.
Therefore what went wrong? Gross NPA has increased from 3.39% to 3.88% But this alone does not account for dismal results. It appears that the tendency of any new CEO to play safe in the first year is having its impact. (Credit-Deposit ratio has fallen steeply from from 62.6% to 57.8% perhaps indicating the preliminary cautionary approach of the new incumbent). The brighter side of this tendency is that Balance Sheets get cleaned whenever a new person becomes MD. There is a flip side also. Financial results cease to be consistent. Share prices become volatile.
Is there a remedy for this periodic event-based discontinuity? It will be worthwhile experimenting with having two CEOs (both outgoing and incoming) atleast for two quarters so that the outgoing CEO will get an opportunity to explain to the newcomer why he has done what he has done. Otherwise the new CEO may overplay the adverse impact of old CEO's managerial style. If we institutionalise the simultaneous presence of two CEOs for say two quarters, CEOs will become more accountable and it will also give a fair chance to the leaving CEO to justify his legacy. During the co-existence period the company will experience a salutary friction between the departing CEO's eagerness to post robust results and the incoming CEO's anxiety to avoid any window-dressing.
Saturday, October 24, 2009
Again this is an Airbus 320. The flight is again a double octave : it is numbered 188 (Northwest flight). On October 23, the flight took off from San Diego and overshot the destination, Minneapolis - St.Paul by 240 km before air traffic control succeeded in reminding the pilot about the destination. The pilots have pleaded that they were seriously discussing the airline policy and overlooked where to land. Cool. Another report says that the pilots were working on their PCs and therefore overlooked their descent duties. Northwest Airlines had not prohibited use of PC by pilots, unlike Delta.
The pilots are from Northwest which was taken over by Delta last year. Air India also recently saw the merger of Indian Airlines with itself. Are the flight crew suffering from post-merger syndrome that distracts them from their duty while on air? Is Airbus 320 equipped with a distractor that enables the pilots to unwind during crucial times?
Thursday, October 22, 2009
This religious putsch is as sensational as any business takeover. But this is not revolutionary because even earlier many Anglicans, individually of course, have been allowed to convert to Catholicism. (There was one stray case of an Anglican diocese collectively converting to Catholicism, namely the Amritsar diocese in the year 1975.) The Pope who was a professor in a German University earlier is executing a nuanced merger of sorts with considerable elan and elegance. Many puritanical Anglicans have been cheesed off in the recent past by the growing number of female priests and openly-gay clergy. The Vatican is taking advantage of this growing discontent in the 'opposite camp' and making an open offer with carrots. The Church of England which governs the Anglicans permits married persons to become priests and bishops. Though the Vatican is not in favour of married clergy, as a special case it is permitting the married Anglican priests to convert and continue as priests after re-ordainment. This offer is extended to vicars and not to bishops.
Many business mergers fail due to cultural incompatibility between the merging parties. Management of heterogenous cultures within the same business unit is a challenge that has overthrown many otherwise capable leaders. Presence of married priests in an organisation that values celibacy as a prerequisite for its clergy is bound to create disaffection and discord. Theological differences between Roman Catholics and followers of Reformation cannot be easily papered over. Irrespective of whether this bold initiative of the Pope succeeds or fails, it will have lasting lessons for management experts who are for ever puzzled by their own inability to arrive at a set of dos and don'ts to facilitate a smooth merger.
Wednesday, October 21, 2009
Anil Kumar, a co-founder of Indian School of Business who is a director in McKinsey is also allegedly involved having passed on some crucial information that he had as a consultant.
What to make of this alleged fraud? Galleon was apparently trading on information. Information is a double-edged sword. Privileged information when obtained illegally with a view to leverage it lands the informed in deep trouble. Information is power. It intoxicates and snares its possessor into an abyss unless it is carefully handled.
Galleon has an office in Mumbai also although its investments in India are marginal.
Tuesday, October 20, 2009
Monday, October 19, 2009
Though the names of High Court judges who are implicated are in public domain, the name of the Supreme Court judge is not disclosed. But certain details are available. For example, he has a house in Kolkatta. His son was provided with costly equipments by the scamsters. So we are led to imagine that the impugned judge is from Bengal and thus zero in on a couple of judges. Such lack of transparency is very unjust to the judges who may not be involved but are suspected by people in the absence of full information.
In the interest of judicial governance, it is expected that the Chief Justice of India would make all relevant details accessible to the public. A key accused person who had started spilling the beans has now died while in a Ghaziabad prison. It is suspected as a case of murder. Would we ever know the truth?
Sunday, October 18, 2009
Despite the apparent triviality and quirkiness of issues proffered by the authors, their method is rigorous. Levitt says he applies data in an unemotional way to emotional issues. The authors' earlier bestseller 'Freakonomics' is credited with having sold more than 4 million copies.
Saturday, October 17, 2009
Phibro's talented (or plain lucky?) trader Andrew Hall was entitled to a bonus of $100 mn. for his last year's performance. Citigroup could not renege on its agreement nor could it give away the bonus without displeasing its 34% owner i.e. the US Treasury. "Risk mitigation" is the ostensible reason given for divestment of Phibro.
Such skewed transactions are an unintended consequence of state funding for private banks in the aftermath of financial crisis.
This is very surprising. The French are not Japanese. The French work shorter week hours, have longer weekends and have a leader in Sarkozy who advocates adoption of Gross Happiness Index in preference to GDP. Is global recession taking its toll? In a survey conducted in 2008, France Telecom found that 67% of its workers felt 'stressed out' and 16% reported being in 'distress'. It is worth noting that this company till recently was owned by the state. Is the transition from public sector a matter of concern for its employees? The spate of suicides has engendered calls for resignation of the company's CEO, Mr.Didier Lombard who has responded saying that he as a captain will not quit the ship in a storm.
Centre for Work-Life Policy has found that in the period from mid-2007 to end-2008, the proportion of employees who professed loyalty to their employers fell from 95% to 39% and the proportion of employees suspicious of their employers rose from 21% to 78% in America. Quite revealing statistics ! Thankfully, recession seems to be nearing its end.
Friday, October 16, 2009
Mr.Ambani has contested the findings saying they were not discussed by the auditor with the company. The auditors (Parekh & Co) have confirmed that they had duly discussed with the company. Either the company or the auditor is economical with the truth. If the alleged findings are true, the company has outdone even Satyam. Satyam overstated revenues but did not evade any payment to the government. In the interest of governance and fairplay, DoT should release the special audit report in the public domain forthwith.
Thursday, October 15, 2009
Whatever be the cause, the rivalry has to be assessed in terms of its impact on corporate governance, shareholder wealth etc. If the passion of brothers is sublimated to produce better corporate results, the economy would benefit immensely. But this is not what is happening. Anil Ambani, typical of his persona, is more in the news. He continues to blow hot and cold. One day he extends the olive branch. The next day he viciously attacks the 'corporate rival'. Mukesh Ambani is less demonstrative in public.
Do shareholders of either group deserve to have their companies devalued by public portrayal of personal meanmindedness? It is ironic that the minds of corporate barons are narrowing at a time when the market valuations of their companies could be poised for a quantum jump. Do the brothers, however wealthy they are, have a right to utilise the public space to settle their private scores? Or as some cynics believe, are they enacting a sham battle to fool the public and take governance for a ride?
Wednesday, October 14, 2009
What caused the economic mayhem? Global economic imbalances (mainly American deficits and Chinese balance of payment surplus), rapid erosion in home equity in America, over-financialisation of the economy, large-scale securitisation, misselling of derivative products and inevitable ups and downs in global economy have all been blamed for the crisis.
Who caused the crisis? Here the answer seems to be less divided. Brilliant engineers who entered the Wall Street via the business schools were smart enough to invent complex derivatives, clever enough to market them, intelligent enough to alchemise BBB investments into AAA but not wise enough to understand the implications for the economy. They were driven by the toxic combination of intellectual hubris and hedonistic greed. These value-destroyers set off smart bombs which exploded and destroyed economies while preserving and multiplying their own private riches.
What is the lesson for us in this calamitous drama? We should not crave for complexity. Simple Finance should remain as it is. It should not be converted into a rocket science which it certainly is not.
Sunday, October 11, 2009
Every Sunday, they pose and discuss a different issue that is of general interest and importance. www.becker-posner-blog.com is a delight to those perennially interested in sharpening their thinking process.
The minister for company affairs recently asked CEOs to avoid 'vulgar' levels of (self-)remuneration. Corporate bigwigs rallied immediately against government dictates. The minister softened his stand. The prime minister has now said that the decision is with the companies. Last year the prime minister exhorted the CEOs to be more careful regarding their pay.
It is suggested in some quarters that shareholders ought to become more active in approving the compensation to top management. Well, compensation committees are very much in place in many companies though it is very doubtful if they are taking their role seriously. What do the shareholders do when the compensation details are placed for approval? They unanimously pass such resolutions.
Shareholder activism simply does not exist in our country. Recently, in the AGM of one Chennai-based company, one shareholder expressed his view that a particular director who was too busy to attend any of the committee meetings and AGM of the company should not be re-elected. This opinion was supported by two other shareholders. When the resolution for re-electing the said director was taken up, one of the latter two shareholders duly proposed the resolution and the other one seconded the proposal. So much for shareholder activism !
Saturday, October 10, 2009
Does he really deserve the Nobel so soon and that too before he hopefully starts delivering on his words? Opinions may differ, but there is unanimity on one thing. It is that he owes the prize to George W.Bush. His predecessor has made his job very simple. He has only to undo whatever Mr.Bush did and do whatever the latter had left undone. I wonder if Obama has conveyed his thanks to George W.
The Nobel Committee has acted smartly in incentivising the American president to continue to abstain from bellicosity that the world has come to associate with Uncle Sam.
Friday, October 09, 2009
Combination of unbalanced economy and unreliable data is a potent mislead that will belie all our predictions and unsettle all our plans. Therefore the hype regarding this century becoming the Chinese century or even the Asian century is far-fetched.
American economy is a learning economy. It is also innovative. The lessons of ongoing economic crisis will enable the American economy to correct its extravagance, pull up its socks and reinvigorate itself. As time passes by, the Chinese threat to US economy will recede further.
Wednesday, October 07, 2009
The authenticity of the report is not yet established. If true, it is a momentous event heralding a revolutionary change. If apocryphal which is more likely, it means that China and perhaps Japan are floating a balloon to test the waters. These two countries will feel the maximum impact of any change in the status of US Dollar. If the dollar is dethroned as the oil currency, it is likely to suffer a precipitous fall in value vis-a-vis other major currencies. Correspondingly, the values of forex holdings of China and Japan will fall by the wayside.
Dollar's status is linked to the puissance of the US as a global power. American GDP is around 14 trillion dollars and China's only 4 trillion. Those who are bearish on dollar argue that China is growing by 10% p.a. as against America's 2% growth and therefore China will catch up with America in economic size. This argument overlooks the imponderables afflicting China including its totalitarian political system and lack of credibility of its statistics and product quality in general. We may not be at an economic crossroads as yet.
Sunday, October 04, 2009
Reasons for the slugfest ('scuffle' according to Air India) are too crass to be mentioned here. When this unprecedented entertainment was on, the cockpit remained unmanned ! Aviation experts say that the air travel was least risky during the time the cockpit was not manned.
The pilot had threatened to land in Pakistan. This threat brought the entertainment to an abrupt end. Had the aircraft landed in Pakistan, the co-pilot would have been subjected to Sharia jurisprudence and would have been castrated straightaway.
P.S.: The fare for IC 884 is being doubled forthwith.
Saturday, October 03, 2009
1) A single judge of the Delhi High Court had earlier held that information on assets declared by Supreme Court judges in the possession of the Chief Justice of India comes within the ambit of the Right to Information Act. This decision was universally applauded. Now the Supreme Court Information Officer will file an appeal before a Division Bench of the High Court against this prudent decision.
2) Central Bureau of Investigation has filed an application in a trial court seeking permission to withdraw prosecution against the Italian businessman , Quattrocchi. CBI has once again come under political compulsion.
3) The unedifying corruption allegations against Justice Dinakaran are allowed to fester by Supreme Court's delay in taking a decision. In the meantime, the Forum for Judicial Accountability has sent its third petition to the CJI giving details of the alleged purchase of property by the judge in different parts of Tamil Nadu.