We need casinos, or thank you Bernie for showing us the error of our ways

Pols of all stripes, and the odd economist, rail against our 'casino' markets. In fact if our markets did not resemble casinos we may not have markets at all. Here is why:

1) Counting the skim taken by the finance industry as compensation, commissions and crookedness one finds the economic notion of no transaction costs laughable and one would laugh if one were not crying.
2) I estimate the long run skim at over 3%, which means that the return on equities drops from the around 6% of various academic studies to around 3% - hardly worth the trouble and time to reinvent the Consol.
3) Luckily, skewness comes to our rescue - we can count on the good old human gambling instinct to be beguiled by better odds than slot machines, with the same possibility of a huge return if one spots a Google in time.
5) Skewness also allows various excesses to be written off in one big bath and expunged from track records under the 'vintage' theory - i.e PE funds investing in 2000 all did terribly; that we lost only 15% makes us rock stars.
4) Poor people play the lottery; rich people play the stock market. And the online form is legal in the US with losses tax deductible and gains sheltered.
5) The Houses of Goldman, Morgan (at least the odd avatar) etc. always win.
6) Academic studies all run on sized portolios; I have never seen one that corrects for the denominator - you know that old bank trick - keep growing the denominator so the percentage of bad loans looks tiny. What if all markets are really one big Ponzi scheme that rely on inter temporal trust insured by inflation? Ouch.

Red or black, anyone?

Idiot Economists or is it Economist Idiots

Ah, the joy of being an economist who deals in frictionless markets, no transaction costs, immediate adjustments to supply and demand etc.

The dismal lot have twigged that either China must engineer a massive increase in domestic demand or must shrink its manufacturing capacity. Alas, it can only be the latter, and not because of the normally cited reason of Chinese cussedness. It will be because the demand in the west for running shoes, sundry toys and the rest of that generally low value added rubbish has been destroyed.

The Chinese probably want to consume more health care, education, entertainment, maybe even household goods - but toys and running shoes and bras? And factories are not frictionless - they cannot switch overnight from stuffed toys to cosmetics. Capital required to switch them is not mobile (at least not any more). Time is definitely not mobile - even barefoot doctors take time to learn.

It will be pain all round, then, and that pain will be transmitted through lower exchange rates, protectionism etc.

So the idea of the Chinese building lots more roads, ports and so on is not as daft as mainstream economists make it sound. The roads etc. may lead to nowhere, but a coolie on the road gang is no different really than a coolie on a toy line, and paying him/her is a good idea to make sure that consumption does not drop further.

In the meantime all us non friction free folk are wondering how the hell to cope with the brown stuff hitting the fan.

War and all that

The last time we did the eyeball to eyeball thing with the Paki’s at Kargil we lost a lot of our soldiers - as did the Pakistani's. Pakistan apparently lost between 2,700 and 4,000 soldiers and we lost about the same number.

Operation Parakrama, the 2001 nonsense where our soldiers, and theirs, hung around the border burning money fortunately did not cost many lives, but certainly helped to crater our economy.

At the moment Pakistan's army is nicely bottled up by its own people in the tribal regions and all indications are that they are losing more people every month than they did in the Kargil conflict. That is probably true - remember they are fighting the very wallahs who created havoc in Mumbai. I have it on so-so authority that P general’s are exulting that a mere 10 Muslims killed 200 Hindus. Actually, they killed 40 Muslims, about 140 Hindus and assorted foreigners whose religion was not of mention in the papers. Given even the Muslim to Muslim odds in favour of the militants, I would not want to be in the P Army’s shoes.

Remember, Mumbai lost 200 people in an epochal event. In the same period Karachi lost 100 to a bog standard series of Sunni-Shia riots. On the 4^th of December we increased airport security. On the same day they lost 10 people to bombers, with 50 more injured, 10 of those critically.

Not much of a society - their shia-sunni nonsense and other religious warfare costs thousands of lives a year.

And not much of an economy either. Many, many wealthy Indians who fear a decline of the dollar are wondering where to put their dough; most consider the rupee at 50 to be a mid term bargain. I do not think that any Pakistani thinks of repatriating money to Pakistan. They are buying houses in Dubai and London, not salivating over the prospect of a fall in Mumbai real estate so they can buy the flat they missed in the last downturn.

One thing that we can do is to push proof of Pakistan’s complicity, if we indeed have it, and if it is not nonsense the way most of our government’s claims are nonsense. Pakistan’s refusal to act, for it will refuse to act, will be an excuse to pursue Pakistan’s expulsion from every diplomatic and trade forum imaginable. It will not succeed but it may create enough pain to tip their pathetic economy over the edge. Bread riots in the streets of Lahore have a way of occupying the minds of rulers to the exclusion of terrorism.

The best revenge for us is to let Pakistan stew in its own juice and lose more lives, but exclusively Pakistani ones. That is exactly what they are afraid of, which is why they are constantly threatening the US with having the Pak army leave the tribal areas and face off against India. The reason is that they do not have the stomach to face the sorts of fighters who saw off the Russians, the Brits and countless others before them. Or even the swine that created carnage in Mumbai.

It will give satisfaction to charge to the border, bomb the odd base, and sink the odd boat.

But it will cost a lot of lives and a lot of money. Save the lives and some of the money. Beefing up and modernising our security apparatus will cost a lot less than a war.

Instead, all our papers should carry on their front pages a running tally of the cost of internal terrorism to Pakistan in lives lost. No one does this at the moment but imagine the horror of knowing that you have lost between 10 and 100 people a day. That adds up to between 4,000 and 40,000 people per year and may make even the complacent Pakistani leadership wake up. They do not tell their people anything. Perhaps our free press should do the job for them and help to destabilize their monstrous society. Perhaps we can have a running clock at CST.

Better also to fix our current corrupt and rotten-to-the core police force (the bravery of their lower echelons notwithstanding). This will take decades of work unless something new is unleashed. A simple suggestion is to set up an entirely separate police apparatus from the current one, and insulate it from corruption and, therefore, politicians. If that can be done the new force will make the old one modernize, much as private (but Indian) banks made the government banks a whole lot better.

A better security environment may well increase GDP - a positive outcome no war can deliver.

For now the whole thing is best left in the hands of those that started it - let the yanks drone-bomb Pak based terrorists to bits, and stand behind the Pak army with bayonets, forcing it into the mouths of mullahs in Waziristan. Our job should be to gather proof and present it to the world, while threatening to bomb, so that the Yankees are forced to get on with their job.

The army will win, and in the process curtail its own religious, anti-Indian wing; or it will lose and the mullahs will win. But Megaton Mullahs will bring with them a very different level of action from the rest of the world, including from India, which ought to keep its powder dry for that very big event.

Our neighbour is a cesspit - far better to piss into it from a distance, and well upwind.

Use The Sea Route Stupid

We lived through the siege in Mumbai; luckily Wednesday was one of the few nights of the week we did not drop in to either the Taj or the Oberoi. Instead we were at Indigo where the staff cannuly switched off the lights though, given how much the swines knew, that would not have helped had Indigo been on the list. Many of our friends were not as lucky.

Fulminating about the Paki Bastards is of no use, given that their army appears to be ignoring their supposed government. The Paki army would like nothing better than a mobilization of the Indian army which would give them an excuse to cut back on the hammering they are finally giving the Taliban. Better to let the mullahs in uniform take a beating from an even more kattar set of mullahs.

That leaves us with having to devise something that looks like we are punishing the Paki's so that our bloodthirsty politicians can claim victory.

I suggest that our warships which are hanging around Somalia loiter a little bit north and start shadowing merchant vessels going to Pakistan while staying nicely out of the 200 mile limit. It will not be long before jittery shipowners cancel Karachi as a port of call, heaping just a bit more misery on the already miserable country.

Not Contained

China continues to show large rises in exports - up 19% in October. India showed a 15% drop.

Container rates from China, which used to be USD 2,000 have fallen to between 200 and 400. Rates from India, also 2,000 some months ago, have fallen to 1,000. Container repositioning driven or not the lower rate from China suggests a severe fall in exports is on its way.

My own company's anecdotal evidence is: more Europeans who used to buy in China are looking at India for supply. Why? No one will say.

They really are different - 2

From the WSJ of this weekend (emphasis mine):

In a speech Saturday to the first-ever summit of the Group of 20 industrial and emerging nations, the commander-in-chief of the world's fourth-largest economy said efforts should be made to promote the Doha Round of trade talks and achieve positive developments soon.

For some reason the US financial jocks seems fixated on military analogies and terminology.

Given the gift of turmoil they have recently bequeathed us perhaps we should pack them all off to Iraq and Afghanistan with WSJ staffers embedded within.

Wen Smoot-Hawley

The first shot in the coming trade wars has been fired by the Chinese by the raising of export incentives.

I admire the calm of commentators who are now talking about what carrots they will have to offer China to get them to cut the surplus, now that the other evil twin, the US deficit, looks like it is being involuntarily tackled.

Nothing much will work and I fear we are heading into a showdown with les Chinois who, to go by the noises they are making on the India border, are feeling their oats.

The reasons are simple:

1) Dictatorships, whether of plutocrats (the Great Depression) or the proletariat, feel no need to help the common man get a bit more of the pie. They have tin ears.
2) The Chinese ought to consume more the pundits say. But consume what?
a) Not housing because the buggers need an immigration visa to move anywhere nice in their own country. Which means no furniture, bathrooms with tin plated taps etc. Investor visas for Beijing, anyone?
b) Not the stuff the country makes - how many toys or DVD's can a Chinese person buy?

The US will adjust - a few carmakers will go bust, but the country has the dough and the flexibility to get its ass out of a sling. Manufacturing will once again be fashionable (and cheap compared to Europe). Good people become available again proving that sometimes what is bad for Wall Street can sometimes be good for Main Street. The one will indeed kick start green energy, which is no bad thing and that should help.

China has no such options. It is locked into other people's consumption economies and supply chains.

Prepare for the fall of the bamboo curtain. Just remember these are usually brought about by mad elephants rampaging around in the enclosure just beyond.

They really are different

This is from today's NYT:

When prices topped $4 a gallon over the summer, Jim Booth of Cleveland could not afford gas for his 1992 Dodge Caravan to visit his 2-year-old son, who lived just eight miles away.

The idea of a bike ride never occurred to this man? When my little beast was 2 (or even now) I would quite happily have trotted the 8 miles there and back. And, in the future it would have made a nice story - quite as nice as I walked 8 miles to school and back and may even have allowed papa to put a little guilt trip on the grown kid.

So, I apologise in advance in the event the man turns out to be handicapped but, the statement above shows why the US will be so hard to bring into the comity of energy poor nations.

Terms of Trade

India is changing. Our daughter is about to lose her dance teacher who has endured many years of 3 hours a day on the local train getting to Colaba from Borivali. He has now found clients around Borivali who will pay him the same.

Progress.

In India Only the Schizoid Survive

For the last few years I have spent my time building businesses that cater to the high end of Indian and European customers. Guess what? The European business chunters along on plan. As for India? In one business we have run out of the high end; in another we have no demand for the low end (which when we started was pretty high end by the standards of anywhere but the Luxe market in India and Araby).

So what we have to do is to find a way to cater to the low, the medium and the high ends - it's a bit like being Walmart, Saks and Bon Marche rolled into one, while handing out the service of a 6th Arr boutique - in every segment.

Each business has to have its own cost and structure and raison d'etre. Bloody Hell - change my name to Sybil and give me enough personalities.

Indian Moments

You want to know about the challenges that will face India in its attempt to live up to the India Rules the World headlines of those oafs at the Times of India group? Here are two Indian Moments that took place last week.

We have spend tonnes of money and effort trying to get two local machine makers to design and make machines for us that will give European levels of speed and productivity while being 35% the price. We think we will succeed but we have a long way to go.

Machine number one was designed to be accurate to within +/-.1mm, the same as market leading machines in Europe. We spent buckets getting the transport right using parts from all over the world, and in fact even buying the critical components already machined from Europe. In theory this should have given us a machine that was dead easy to set up and run. In reality the damn thing often took two days to get to real productivity. A lot of troubleshooting later the cause was found to be that while the transport and all the components were dead accurate the louche louts making the machine had a different level of accuracy programmed in their brains and hands so they had set up the machine with +/- 2mm tolerances.

Machine number two was shown to me yesterday and the proud maker claimed that it was running at a two second cycle time (design criteria was three seconds). Me, I counted one thousand and one, one thousand and two, one thousand and three, and thousand and four and said it was four seconds. Whereupon machine wallah and all his minions peered at their computer screen and said 'no it is two seconds - actually 1.8'. I went through the 'one thousand and one' bit again several times before they consented to actually measure against reality rather than look at their screen.

When I sent the video to my office in Paris the first thing that the CEO there did was to count off the seconds though I had said nothing to him.

I do not know if this disconnect is because we Indians for the most part do not as children tinker with things when we are young, or because at school we learn but do not question. If it is the former then God help the progress of the world as no tinkering takes place anywhere now, except in the virual world.

Still, all's well that ends well though the timing of the end has cost us a great deal of loot. Machine number one is indeed accurate and simple to set up; machine number two runs within its design cycle time.

The Metaphysics of Quality or Ten Little Indians

A few days ago we had a complaint from an agitated customer who was upset enough to send a whole team to the plant to get to the bottom of the problem. (BTW the problem would have passed un-noticed by the majority of large European players so Hurrah that we are really getting quality conscious in this country).

Once the team reached the factory our fellows managed to convince their fellows that the problem that occurred could not have occurred because of the superior systems that we followed and the way that the machines worked. All agreed and the inspection team left - no one had looked at the actual article and all had relied on verbal descriptions of the problem.

Sadly, once pointed out, a blind man could have seen the problem and any of dozens of people could have figured out why it had happened - operator error, which is what it is always. Luckily the customer was dogged and we did take responsibility and have fixed the problem. Along the way the customer upgraded to a higher product line so the unpleasantness had a silver lining. But it could have ended in tears.

The question is why Indian's do the following:

1) Argue about what might have been instead of what was
2) Never admit a mistake

Not the Riviera?

Attached are some good reasons to try and cut pollution. For a few days last week early rains and a reversal of the prevailing wind direction cleared Bombay skies to an extent I have not seen in 30 years.

These are views from my apartment - the mountains in the background appear to be the ghats - but that cannot be, can it?

Time to raise fuel prices?

A Foretelling

A glance at the IPL scores will tell you a lot about the India to come. The teams of two of the richest owners, Bombay and Bangalore, are in the cellar and it look likes they have no chance of making it out of there.

Does this mean anything for the scores of businesses that at least one of them is trying to dominate? Will Reliance Retail be in the cellar of the retail business? The entertainment business?

Frankly, I have not been amused by the land grab mentality that is driving our largest groups, driven entirely by their unequal access to capital. The reason that the government and the RBI ought to free up banking is to allow the best retailer to triumph - not just fat cats. But that would dent the contribution train, as we as the job patronage train.

The great thing about the IPL is that everything is played out in double time with the result known in 45 days. Business failures will take much longer to figure out but the result will be the same. The Ambani machines cannot triumph in every sphere and some of the biggest and best PE opportunities of the future will the divestment of these businesses. Let us hope that the founders make their initial attempt truly gold plated so the secondary buyer has lots to play with. And let us see if taking the cap off players salaries will allow the Indians to recover next year. Or will the IPL, like business, have just too many good players for one man to own and will the format itself be too unstable to allow a star team to win. I bet on the latter.

No Gasso in the Carro

The rupee has started its reversal a bit quicker than I thought. The next instalment to this story will be a shocking deceleration of industrial growth and an acceleration of inflation, probably peaking at over 12% around Diwali. In the past, periods of high industrial growth have cratered because of overcapacity driven price cuts and low profitability. This time growth will crater because of no capacity. Unless the government moves fast to hike the price of oil and up the price of electricity, while making both available to those who can pay, industry across the country will grind to a halt. Already electricity boards including the formerly almighty GEB are refusing new connections.

If we really do not get our hands on either electricity or diesel and if the country faces de facto rationing the industrial production will go for a toss.. A low tech business that does not produce for a day a week loses less than 1/7th of its turnover given the inefficiencies of most small Indian companies. A day off for most modern factories built under the liberal regime of the last 5 years loses far more than one day as getting a 24/7 factory back to work takes a day in itself; add up losses from daily power 'tripping' and you could very well have production losses of over 20% of capacity.

Large companies can afford to pay a lot more for electricity, making up for the cost on higher productivity, and that is what they in essence do by running on diesel for 1 or 2 days a week.

Many companies can survive, though with bleating customers, even on INR 70/litre diesel, but will the oil marketing companies have access to the cash needed to lose 100MM USD a day (or more) in order to continue to supply? Or will the credit crunch make banks warier than in the past about lending to sick puppies, whether or not they are government guaranteed? You can be sure that what comes in will be doled out in a 'people friendly' manner so there will be a nice black market created.

The chance of the world's shortest Sardar and his Milanese Sardarni seeing out the term is zilch because waiting will merely subject them to further beatings at the hands of the public and messrs Wretchedury and co. A resignation around August means that campaigning at least will be in generally pleasant weather - absolutely necessary for the gerontocracy who rule us.

Though making the b______ face our music in June in UP would show them what they have bestowed on the country.


Till then expect to see diesel shortages, power cuts and general hell for smaller manufacturers, which will take a nice bite out of GDP.

The Game is Up for Citibank

Look for the small things. I have a slightly overdue bill of USD 14.00 (that is correct, fourteen) on a card that I have had for 15 or 20 years (can't remember). Paying the amount requires that I enter all sorts of forms that one cannot do online (foreign address - something they have known for at least 14 years). It is interesting that the form asks how long I expect to be in the financial straits I am (presumably) in.

More interesting - the phone numbers to call (or even for normal assistance) are outside the normal working hours of Europe, and certainly of India. So is the message to not look to buy or travel overseas? Or is their card base too broke to do so? Is the cutback of service wise? Or do they have no choice as they charge to preserve earnings.

Bad signs. While I do not believe the rumours that they are going down perhaps a put option may be a wise call - while at the same time buying crosstown rival JP Morgan.

Ciao to the Rupee - buying opportunity coming

I have been one of the earliest rupee bulls - called the turn about 5 years ago.

Now, all and sundry are carrying on about how the rupee will keep rising. It won't for one simple reason:

The price of oil will continue to be high and our pusillanimous politician's will not raise the price to the people. One has to assume that foolish foreigners will continue to indefinitely buy expensive Bombay real estate on a nutty promote to boot (see Unitech et al vs. Goldman and Lehman) so we can import oil. Nuttiness is not forever.

Look for a reversal with the rupee cratering sometime around this time in 2009 when the penny will drop on a lot of silly investments and new managers will sweep out the good with the bad.

Want a precedent? It took till the late 90's for the first lot of private equity investment to reveal its returns and till the mid 2000's for the second lot. There was a lot of turmoil within the PE and investing community and new managers did not at all like what their predecessors had done. This lead to a lot of stock being tossed, the good, the bad and the ugly alike. This was more so when the sponsoring institution had also changed hands back in NY, London, Zurich or wherever. Back then, the industry was playing for tiddly winks. Not any more, and this time, when 'discovery' of the real return is made the parent may be going through some hard times as well.

Dolly the Sheep

Now that the IPL is well and truly launched we need to educate our sportsmen on what is expected of them. I see a sad want of ability in our boys to waste money on the accoutrements of successful sportsmanship and ask the bat and ball wallahs to look to the UK for inspiration.

True, some of the victors did announce that they will buy the odd Porsche or Hummer, but not much beyond that. One, at least, is dating Bollywood starlets - but they are of no use to spectators or the media for no matter how free and easy their lives, they are not allowed to be seen to be free and/or easy or their audiences will vanish. The rest of the squad are married to delightful stay at home women, are waiting to marry their high school sweethearts or, better, like those other successful Indian men, our computer engineers in the US, are waiting for Mummy to find them a nice, homely, girl with whom to settle down.

No, what we need are imports. We have imported players galore. Now we need to imports wives and girlfriends in the football league mould for they will provide much more sport to the punters. Consider:

1) They will launch a much needed paparazzi industry as they are seen shopping at boutiques (for sex toys even), throwing up in gutters after a girls night out and doing other wives and girfriends things.
2) By posing in their knickers they will give some anchor of Indian-ness to the page three shots that plaster the front page of even our leading financial daily. If we cannot do without blondes with big boobs then at least let us contract them to be our blondes with big boobs.
3) They will help our fashion industry by forcing the lazy fellows to cut for women with figures as opposed to making their dough stitching tents for the seriously obese attending the big fat Indian wedding.
4) As the cult of celebrity widens they will exchange partners with other celebrities, as they are wont to do. In time we may even see Big Indian Industrialists dispense with the mistresses hidden in London and move on to the second, Trophy Wife.

In short we must import WAG's because, like much else that we bring in, from bags to best practices, this too will put us at the cutting edge.

Sarin Gas

Went to the Businessman of the Year thingummy this year at the Regent. Dragged myself an hour and a half across town because, actually, Anand Mahindra does deserve the damn thing and is a nice man to boot.

His acceptance speech was well enough written though the odd metaphor was overwrought. What was clear was that he wrote it, he meant what he said and what he said affected him, which is why he probably wrote it. Circular enough for you, that? He may have inherited his crown but no one can call him, who has so enlarged his kingdom, an unworthy King.

Mr. Sarin of Vodaphone fame on the other hand was trite, platitudinous, loud and hectoring, having no doubt learned his speechifying a the knees of some consultant.

Let him remember, as we all should, that he is merely an overpaid minion of a multinational whose only claim to fame is buying a large business in India. He did not build it; it was sad therefore to see the man who had built it, from scratch and on the cheap, kowtowing to the new Chief.

Global warming will drive us all to live on the coasts just as they submerge

As carbon is priced the heaviest hit will be to transportation and remote living. Let's face it the interiors of most countries are heavily subsidized by cheap fuel - you can live cheaply in Gary, Indiana because raw material can get to the metal bashers stationed there and then the bits and pieces they make can get out again. Since we cannot dismantle the global economy and since sea freight is way more carbon efficient (that means really really cheap once we have a carbon price) the only way to cope is to cut the percentage spent on hauling stuff around the continent by relocating more industries near ports. This has the added benefit of pushing up housing prices, which means smaller homes which means less energy is used to light, heat and cool them. High prices mean high building which means public transport.

And you thought there was no God.

Terminate Turbanator for Cause

Let's face it. Either Harbhajan is lying or he should turn in his turban and get that shave. The reason? No self respecting Punjabi would ever say 'Teri Ma Ki'. The term is 'Teri Ma Di' as in Ma Di Daal.

Obama and the removal of the Opiates of the Mass Market

The US is about to hit its toughest problem - the intersection of its long undeclared war against the poor and USD 100 per barrel of oil. How do you tell the poor bastard who works at McDo(ugh) that 1) he can't afford to pay for gas to get to work; 2) his work may not be there anyway; 3) the lack of heat in his home may give him pneumonia for which he will not be able to afford treatment and 4) the price of food will rise because of subsidies to corn fed f***wits and the higher price of transportation and 5) cheap stuff from China sold at Walmart won't be so cheap anymore. Oh yeah, let me not forgot, how the shysters from Wall Street conspired to take away her home and leave her further in debt.

The average Joe may not be quick enough to figure out the economics of how he's been had, but know he does.

The vote for Obama in an all white state is not some message of racial tolerance. It is rather the solidarity of class - the subtext being "that poor black bastard is more likely to know what life is like for me". Maybe he will even do something about it.

One cannot but be keen on the return of healthcare, education and public transportation to the US. It was once a great country. Alas, I fear it is too late for the US to recapture its lost glory - it is too indebted and likely to be riven by internal strife for the next decade to be much of a world player (except by its death throes causing the rest of us pain). I do not mean its deficit, but its rather too large environmental footprint and the likely result of its reduction.

There is no longer doubt that US consumers must reduce their use of world resources - the repricing of the dollar and oil will see to that, as will the rise of China and India. The question that will exercise America is who within that country will bear the brunt? Will the poor and disenfranchised find a way to keep some of their standard of living?