Chaitanya Patel

by Radhika Pandey and Bhargavi Zaveri.

The CAG report on public debt management tabled in Parliament on 26th July, 2016, has made several adverse observations on the current state of public debt management in India.

1. It found the legal framework governing public debt lacking in several respects. The present legal framework on public debt does not define basic concepts such as 'public debt', does not indicate the objectives of public debt or the purposes of borrowing. It does not require the formulation of a strategy for the management of public debt.
2. Over the past two decades, all expert committees have recommended setting up a public debt management agency (PDMA) for performing the debt management function. However, except for a middle office (which also does not perform the functions assigned to it), no progress has been made on this front.
3. There is no entity that performs functions relating to the external debt of the Central Government such as analysing and monitoring risks and assessing the performance of debt managers against strategic targets or benchmarks.

Apart from the desire of the government to make more-than-incremental reforms, there are two other reasons why it is an opportune time to resume the long-delayed work of reforming the framework for public debt management in India. One, RBI has formally adopted inflation-targeting as the objective of its monetary policy, which heightens the conflict of interest between its role as the investment banker for the Government and the inflation target. All mature market economies separate debt management from monetary policy. As an example, the IMF guidelines on public debt management have emphasised that there should be separation of debt management policy and monetary policy objectives and accountabilities.

Two, RBI has formulated a road map for progressive reduction in SLR (the funds that banks are forced to keep invested in government securities). The SLR is proposed to be brought down by 0.25% every quarter till March 31, 2017. Reducing this `financial repression' is a good thing. But simultaneously, this makes life more difficult for public debt management. We need new institutional arrangements alongside breaking with the old, distortionary ways. Greater diversification of the investor base of government securities, in the quest for voluntary buyers, is required. The cosy arrangements of today for debt management and the bond market will not work in the emerging world.

It is poor policy analysis to proceed with inflation targeting, but not give the central bank the tool of a liquid bond market through which the inflation target will be achieved. It is poor policy analysis to  reduce financial repression, but not plan for the complexities of public debt management in that new environment. This article summarises the problems with the prevailing framework on public debt management in India and sketches the broad countours of a stand-alone law that should govern the same.

Problems with our public debt management framework

1. The elephant in the room is the lack of an independent public debt management agency (PDMA). This has formed the subject of much discourse in academic and policy circles. From the mid 1990s onwards, all expert committees in India have advocated setting up the PDMA. A recent IMF Working Paper on designing legal frameworks for public debt management has advocated ``centralisation of all debt functions in one single unit to reduce fragmentation and enhance coordination in debt managment''.
2. When a principal engages an agent to undertake a specific task, the contract between the principal and agent must be tight enough to build in accountability, performance measures, and at the same time allow the agent to perform its task without interference in transactions. While there is a lot of talk of "independence" for government agencies in India, this needs to shift to a mix of accountability on performance and autonomy on transactions. The current legal framework dealing wth public debt management in India is scattered across several laws such as the RBI Act (which obligates the Central Government to entrust the debt management function to the central bank), the Government Securities Act, 2006 (which deals with manner in which RBI will hold government securities, terms and conditions of government securities, etc.) and the Public Debt Act, 1944 (which continues to apply to Jammu and Kashmir). None of these laws codify performance measures or build accountability mechanisms for the agent to perform its task.
3. As the RBI only deals with marketable debt, a single repository containing all the data which is required for an overall picture of the outstanding liabilities, including contingent liabilities, of the Central Government is not available. As this information is absent, it is not possible to formulate or implement a strategy for public debt management. What we do in public debt management is all transactions and no strategy.
4. Market infrastructure for the government bond market (the exchange and clearing house) is owned and managed by RBI. The weaknesses in how this management is done has been an important source of failure in bond market development. Decisions about the appropriate market infrastructure for government bonds are best placed at the PDMA, which would be accountable for delivering low cost financing for the government, and would thus have the incentive to think about how to organise these markets.

What should a law governing public debt management look like?

The Financial Sector Legislative Reforms Commission (FSLRC) which recommended the establishment of a PDMA also drafted the blueprint of a law, the Indian Financial Code, that will govern its functioning. The key elements of the Indian Financial Code governing the functioning of PDMA are summarised below:

1.  It defines 'public debt' to mean internal and external borrowings of the Central Government. This would ensure that there is one single entity that has an overall picture of the outstanding liabilites of the Central Government, both internal and external.
2.  It codifies the objectives of the PDMA, namely, to minimise the cost of raising and servicing public debt over the long term and to keep the public debt within an acceptable level of risk at all times. For the first time, the manager of the public debt has clearly defined objectives which also translate into measures by which its performance may be judged.
3. It entrusts the management of existing and contingent liabilites on the PDMA. This ties in with the requirement of having a single manager who will manage all outstanding liabilties of the Central Government. The concrete output will be a single repository of liability-related information.
4. It codifies the relationship between the principal (Central Government) and the agent (PDMA, as the debt manager) in precise terms. For example, it obligates the PDMA to formulate an annual debt plan and a medium term (three year) debt plan, get the same approved from the Central Government and then implement it. The law also codifies detailed requirements for publication of the debt plan as well as a calendar for issuance of government securities.
5. It obligates the PDMA to foster a liquid and efficient market for government securities. It empowers the PDMA to advise the Central Government on market design and allow equal access to this market, as an integral part of this market design. Contrast this with the existing framework which is lacking in details on the market structure for government debt.
6. The entire machinery of governance, such as annual reports of defined standards, performance evaluation, external audits, etc. have been made applicable to the PDMA.

Conclusion

A short while ago, this work was done, but then it was rolled back. The Finance Bill, 2015 tabled in the Parliament proposed the establishment of a PDMA and its functioning broadly on lines described above. Subsequently, the reform was rolled back with a promise that the "...Government in consultation with RBI, will prepare a detailed roadmap separating the debt management functions and market infrastructure from the RBI, and having a unified financial market." It is a big missing link in the Indian reforms.


The authors are researchers at the National Institute for Public Finance and Policy.

The last week was a great reality check on the hyped India story. India’s two major cities and one upcoming smart city were flooded due to rains in three different parts of the country.We have already witnessed shocking scenes in another major city Chennai last year.  These were not untimely rains but pretty timely as South West Monsoons happen this […]

The post Latticework of Mental Models: Straw Man Fallacy appeared first on Safal Niveshak.

“Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men . . .”

The truth of Lord Acton’s observation gets confirmed with sickening regularity. Here I explore that point in the context of democracy. Why do democracies, particularly those with powerful governments, tend to elect bad people? What’s the analytical relationship between power, politics, money and corruption?

Politics and power are intimately linked, the link being money. That observation is trite but still worth noting because the triad of politics, power and money inevitably gives rise to corruption. Corruption is toxic because it destroys wealth and leads to significant avoidable human misery.

It was the English historian, author and politician, Lord Acton (1834 – 1902) who in 1887 noted the relationship between power and corruption. Power has a tendency to corrupt but only “absolute power corrupts absolutely.” The fuller quote reveals even greater insight — the relationship between the powerful and their moral standing. He wrote this in 1887:

“Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority: still more when you superadd the tendency or the certainty of corruption by authority.”

His phrase “great men” was a reference to popes and kings, but in our modern and more politically correct times, it has to be understood to include women as well, and in democracies it must refer to powerful politicians and bureaucrats. Lord Acton’s claim that great men are almost always bad men appears to be empirically accurate.

Which raises the question: why do democracies, particularly those in which the government is powerful, tend to elect bad people? What’s the analytical relationship between power, politics, money and corruption?

An economics analysis may be instructive. The short version of the argument starts with the observation that political power affords one opportunities to enrich oneself (and one’s cronies and family members) through the ability to tilt the economic game to one’s advantage. Generally speaking, the greater the political control of the economy, the greater the opportunity for financial rewards of being in politics. Consequently, those rewards attract the least principled and the most avaricious to politics, and to power.

Here’s the logic of the argument. Suppose having a certain political position gives one the opportunity to make an enormous amount of money. Then it is clear that a person who intends to actually make use of that money-making opportunity will spend a large amount to win elections that no honest opponent can hope to match. The corrupt can outspend the honest in any elections because only the corrupt will recover the expenses (and more) upon assuming office.  It would be pointless to fight for political power if that did not translate into economic power.

Since India is a socialist country, government control of the economy is by intent and design. Being in government gives one immense discretionary powers — to grant or deny licences, to block and prevent legitimate economic activity, to extract rents wherever possible. Therefore political power translates into economic power. This politicizes the economy, meaning economic policies are dictated by what is politically expedient or what is most financially rewarding to the policymaker. That leads to poor economic outcomes.

Politicization of the economy then leads to the corruption and criminalization of politics because ultimately money determines who wins elections. The lesson here is that corruption is not just an unintended side effect but actually the designed objective of a command and control economy.

Politicians routinely proclaim that they are motivated by the public interest and benevolence but that rarely translates into policies that are actually socially beneficial. The reason this is so lies at the heart of the mechanism of democracy. There are two assumptions inherent in the idea of democracy: first, that the general public knows what kind of policies are good for its welfare, and second, that the political leaders are motivated to make policies in accordance with the public will.

Both assumptions are questionable. The public often systematically errs in judging policy, and even when they don’t, policymakers have other interests than public welfare in their policy decisions. That is not to say that good policies are never made but that in those rare instances of good policies, doing good is not the primary or the only objective.

The US is the richest (and therefore the most powerful) democracy, and India is the largest democracy. In both places, elections are high stakes games because those elected to political power wield enormous economic control. So it is predictable that the intensity of the competition to be in government will increase in tandem with the increase in the size and scope of government.

Elections are the most visible aspect of democracy that lends itself to popular diversion and entertainment. In that regard, the US presidential elections in November this year promises to be the most expensive show on earth. Billions of dollars will be spent over the next few months because trillions of dollars are at stake.

The “Founding Fathers” of the United States (the only country that had “founding fathers”) were very wary of big government because they understood the corrupting influence of power. The constitution they wrote was primarily aimed to limit government. Despite that, over time the government has grown to gargantuan proportions and threatens the freedom of the people. But that’s the natural tendency of democracy.

Let Ludwig von Mises have the last word. He wrote this in his magnum opus Human Action way back in 1949:

“Democracy guarantees a system of government in accordance with the wishes and plans of the majority. But it cannot prevent majorities from falling victim to erroneous ideas and from adopting inappropriate policies which not only fail to realize the ends aimed at but result in disaster.”

The US is deviating from the constitutional ideal of a limited government.  It’s a worrisome development that does not bode well either for the US or the world in general.

{A version of this piece appeared in the New Indian Express print edition of July 26th.}

Bonus material:

More wisdom from Lord Acton.

• Advice to persons about to write history: Don’t.
• The danger is not that a particular class is unfit to govern. Every class is unfit to govern.
• Limitation is essential to authority. A government is legitimate only if it is effectively limited.
• It is easier to find people fit to govern themselves than people fit to govern others.
• Democracy generally monopolizes and concentrates power.
• Liberty is not a means to a higher political end. It is itself the highest political end.

 

When you have lived long enough on the planet, you have one great thing – the ability to look back. Obviously I can look back on investing and can look back about 37 years – when I started. It is also the same age as the relationship with my friend / philosopher / guide / […]

We recently discussed some wonderful mental tools from the great Richard Feynman. Let’s get some more good ones from another giant, Daniel Dennett.

Dennett is one of the great thinkers in the world; he’s been at the forefront of cognitive science and evolutionary science for over 50 years, trying to figure out how the mind works and why we believe the things we believe. He’s written a number of amazing books on evolution, religion, consciousness, and free will. (He’s also subject to some extreme criticism due to his atheist bent, as with Dawkins.)

His most recent book is the wise and insightful Intuition Pumps and Other Tools for Critical Thinking, where he lays out a series of short essays (some very short — less than a page) with mental shortcuts, tools, analogies, and metaphors for thinking about a variety of topics, mostly those topics he is best known for.

Some people don’t like the disconnected nature of the book, but that’s precisely its usefulness: Like what we do here at Farnam Street, Dennett is simply trying to add tools to your toolkit. You are free to, in the words of Bruce Lee, “Absorb what is useful, discard what is useless and add what is specifically your own.”

***

The book opens with 12 of Dennett’s best “tools for critical thinking” — a bag of mental tricks to improve your ability to engage critically and rationally with the world.

Let’s go through a few of the best ones. You’ll be familiar with some and unfamiliar with others, agree with some and not with others. But if you adopt Bruce Lee’s advice, you should come away with something new and useful.

Making mistakes

Mistakes are not just opportunities for learning; they are, in an important sense, the only opportunity for learning or making something truly new. Before there can be learning, there must be learners. There are only two non-miraculous ways for learners to come into existence: they must either evolve or be designed and built by learners that evolved. Biological evolution proceeds by a grand, inexorable process of trial and error–and without the errors the trials wouldn’t accomplish anything. As Gore Vidal once said, “It is not enough to succeed. Others must fail.”

[…]

The chief trick to making good mistakes is not to hide them–especially not from yourself. Instead of turning away in denial when you make a mistake, you should become a connoisseur of your own mistakes, turning them over in your mind as if they were works of art, which in a way they are. The fundamental reaction to any mistake ought to be this: “Well, I won’t do that again!”

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“You should become a connoisseur of your own mistakes.”
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Reductio ad absurdum

The crowbar of rational inquiry, the great lever that enforces consistency, is reductio ad absurdum–literally, reduction (of the argument) to absurdity. You take the assertion or conjecture at issue and see if you can pry any contradictions (or just preposterous implications) out of it. If you can, that proposition has to be discarded or sent back to the shop for retooling. We do this all the time without bothering to display the underlying logic: “If that’s a bear, then bears have antlers!” or “He won’t get here in time for supper unless he can fly like Superman.”

Rapoport’s Rules

Just how charitable are you supposed to be when criticizing the views of an opponent? […] The best antidote I know for [the] tendency to caricature one’s opponent is a list of rules promulgated by the social psychologist and game theorist Anatol Rapoport (creator of the winning Tit-for-Tat strategy in Robert Axelrod’s legendary prisoner’s dilemma tournament).

How to compose a successful critical commentary:

1. You should attempt to re-express your target’s position so clearly, vividly, and fairly that your target says, “Thanks, I wish I’d thought of putting it that way.”
2. You should list any points of agreement (especially if they are not matters of general or widespread agreement).
3. You should mention anything that you have learned from your target.
4. Only then are you permitted to say so much as a word of rebuttal or criticism.

Sturgeon’s Law

The science-fiction writer Ted Sturgeon, speaking at the World Science Fiction Convention in Philadelphia in September 1953, said,

When people talk about the mystery novel, they mentioned The Maltese Falcon and The Big Sleep. When they talk about the western, they say there’s The Way West and Shane. But when they talk about science fiction, they call it “that Buck Rogers stuff,” and they say “ninety percent of science fiction is crud.” Well, they’re right. Ninety percent of science fiction is crud. But then ninety percent of everything is crud, and it’s the ten percent that isn’t crud that’s important, and the ten percent of science fiction that isn’t crud is as good as or better than anything being written anywhere.

This advice is often ignored by ideologues intent on destroying the reputation of analytic philosophy, evolutionary psychology, sociology, cultural anthropology, macroeconomics, plastic surgery, improvisational theater, television sitcoms, philosophical theology, massage therapy, you name it. Let’s stipulate at the outset that there is a great deal of deplorable, stupid, second-rate stuff out there, of all sorts.

Occam’s Razor

Attributed to William of Ockham (or Occam), the fourteenth century logician and philosopher, this thinking tool is actually a much older rule of thumb. A Latin name for it is lex parsimoniae, the law of parsimony. It is usually put into English as the maxim “Do not muliply entities beyond necessary.” The idea is straightforward: Don’t concoct a complicated, extravagant theory if you’ve got a simpler one (containing fewer ingredients, fewer entities) that handles the phenomenon just as well. If exposure to extremely cold air can account for all the symptoms of frostbite, don’t postulate unobserved “snow germs” or “arctic microbes.” Kepler’s laws explain the orbit of the planets; we have no need to hypothesize pilots guiding the planets from control panels hidden under the surface.

Occam’s Broom

The molecular biologist Sidney Brenner recently invented a delicious play on Occam’s Razor, introducing the new term Occam’s Broom, to describe the process in which inconvenient facts are whisked under the rug by intellectually dishonest champions of one theory or another. This is our first boom crutch, an anti-thinking tool, and you should keep your eyes peeled for it. The practice is particularly insidious when used by propagandists who direct their efforts at the lay public, because like Sherlock Holmes’ famous clue about the dog that didn’t bark in the night, the absence of a fact that has been swept off the scene by Occam’s Broom is unnoticeable except by experts. 

Jootsing

…It is even harder to achieve what Doug Hofstadter calls joosting, which stands for “jumping out of the system.” This is an important tactic not just in science and philosophy, but also in the arts. Creativity, that ardently sought but only rarely found virtue, often is a heretofore unimagined violation of the rules of the system from which it springs. It might be the system of classical harmony in music, the rules for meter and rhyme in sonnets (or limericks, even), or the canons of good taste or good form in some genre of art. Or it might be the assumptions and principles of some theory or research program. Being creative is not just a matter of casting about for something novel–anbody can do that, since novelty can be found in any random juxtaposition of stuff–but of making the novelty jump out of some system, a system that has become somewhat established, for good reasons.

When an artistic tradition reaches the point where literally “anything goes,” those who want to be creative have a problem: there are no fixed rules to rebel against, no complacent expectations to shatter, nothing to subvert, no background against which to create something that is both surprising and yet meaningful. It helps to know the tradition if you want to subvert it. That’s why so few dabblers or novices succeed in coming up with anything truly creative.

Rathering (Anti-thinking tool)

Rathering is a way of sliding you swiftly and gently past a false dichotomy. The general form of a rathering is “It is not the case that blahblahblah, as orthodoxy would have you believe; it is rather that suchandsuchandsuch–which is radically different.” Some ratherings are just fine; you really must choose between the two alternatives on offer; in these cases, you are not being offered a false, bur rather a genuine, inescapable dichotomy. But some ratherings are little more than sleight of hand, due to the fact that the word “rather” implies–without argument–that there is an important incompatibility between the claims flanking it.

The “Surely” Operator

When you’re reading or skimming argumentative essays, especially by philosophers, here is a quick trick that may save you much time and effort, especially in this age of simple searching by computer: look for “surely” in the document, and check each occurrence. Not always, not even most of the time, but often the world “surely” is as good as a blinking light in locating a weak point in the argument….Why? Because it marks the very edge of what the author is actually sure about and hopes readers will also be sure about. (If the author were really sure all the readers would agree, it wouldn’t be worth mentioning.)

The Deepity

A “deepity” is a proposition that seems both important and true–and profound–but that achieves this effect by being ambiguous. On one reading it is manifestly false, but it would be earth-shaking if it were true; on the other reading it is true but trivial. The unwary listener picks up on the glimmer of truth from the second reading, and the devastating importance from the first reading, and thinks, Wow! That’s a deepity.

Here is an example. (Better sit down: this is heavy stuff.)

Love is just a word.

[…]

Richard Dawkins recently alerted me to a fine deepity by Rowan Williams, the Archbishop of Canterbury, who described his faith as a

silent waiting on the truth, pure sitting and breathing in the presence of a question mark.

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Still Interested? Check out Dennett’s book for a lot more of these interesting tools for critical thinking, many non-intuitive. I guarantee you’ll generate food for thought as you go along. Also, try checking out 11 Rules for Critical Thinking and learn how to be Eager to be Wrong.

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I was asked on twitter how students of Indian origin do in the maths equivalent of the US spelling bee contests. (I had written a blog post on how students of Indian origin appear to have cornered the market on US spelling bee contests.)

@atanudey How do Indians do in the US Math Olympiads? Are they less, more or equally important to Spelling Bees? Just asking!

— speaksanskrit (@sanatanabhasha) July 24, 2016

I guess they do well in math too. I did a bit of searching on the web and here’s what I found. The USA Mathematical Olympiad (USAMO) is the preeminent high school mathematics contest administered by the MAA’s American Mathematics Competitions program (AMC). The 2016 competition results selected 12 out of 325 contestants from across the US. Of the 12 winners, going by their names, two were clearly of Indian origin: Ankan Bhattacharya and Mihir Singhal.

The USAMO is a national competition. There’s an international competition too. “The International Mathematical Olympiad (IMO) is the World Championship Mathematics Competition for High School students and is held annually in a different host country. The first IMO was held in 1959 in Romania, with seven countries participating. Today more than 100 countries from six continents participate.”

How did US students do in the International Mathematical Olympiad? In 2016, more than 100 countries competed in July in Hong Kong. and the US team won the first prize. That US team of six high school students, again going by their names, had two of Indian origin: (the aforementioned) Ankan Bhattacharya and Ashwin Sah.

(For the kind of questions that feature in the IMO, see this. Example:

Let P = A₁ A_{2 …} A_k be a convex polygon on the plane. The vertices A_1, A_{2, …,} A_k have integral coordinates and lie on a circle. Let S be the area of P. An odd positive integer n is given such that the squares of the side lengths of P are integers divisible by n. Prove that 2S is an integer divisible by n.)

This was the second year in a row that the US team placed first in the IMO. The 2015 competition was held in Chiang Mai, Thailand. The team of six students had one of Indian origin: Shyam Narayanan.

The US teams appear to do OK in the IMO, just like they do in the regular Olympic games. That’s understandable considering that it is a big, rich, industrialized country. How do other countries do? Here’s a bit from the wiki page on IMO.

The following nations have achieved the highest team score in the respective competition:

China, 19 times (from the first participation in 1985 until 2014)
Soviet Union, 14 times
Hungary, 6 times
United States, 6 times
Romania, 5 times
West Germany, 2 times
Russia, 2 times
Bulgaria, Iran, South Korea, East Germany: once each

The following nations have achieved an all-members-gold IMO with a full team:

China, 11 times
United States, 3 times
Russia, 2 times
South Korea, Bulgaria, once each

How about India? India predictably does not show because it has never won the IMO. India is poor and has perhaps the worst educational system of the large countries of the world. India’s educational system is a disaster because of incompetent government control. Just as an aside, I believe that the Ministry of Human Resource Development is the biggest enemy of the Indian educational system.

The bottom line. The IMO and the Spelling Bee successes of students of Indian origin reinforce one fact: Indians do better outside India than in India. Indians in the US form a tiny fragment of the US population: less than 1%. Yet they are over-represented among the top performers in several domains such as science, engineering, medicine, business, education, social sciences, etc (with the exception of music and entertainment.)

I think Prime Minister Modi should spend some time pondering this fact during one of his many trips abroad cheering the NRIs.

Fund Managers/ Fund gatherers aka Asset management companies and their agents need stories to sell the fund to the investor. Will they ever, ever say sell equity funds and wait in liquid funds? No. Will they sell equities and wait in cash on your behalf. NO. They cannot and should not. This is exactly where […]

Wikileaks.org has set a cat among the pigeons. Or you may say it has upset the (rotten) apple cart with what it calls its “Hillary Leaks Series.” Follow the @wikileaks twitter account to get interesting bits. However if you are a real political junkie, you can search through the entire collection of “19,252 emails and 8,034 attachments from the top of the US Democratic National Committee.”

I am no Bernie Sanders supporter. (That’s an understatement considering that I can’t stand socialists.) But I do feel sorry for him that he had as his opponent HRC. I have no love for Trump but I’d pick the crude, crass, bloviating blowhard as the POTUS over She Who is Crooked. As it happens, I am a citizen of California, which always votes Democrat. So I guess I will just vote for the Libertarian party candidate.

In any case, this gives me an opportunity to present my views on Wikileaks. I have written approvingly of wikileaks. Read my wikileaks posts. Here are links to a few of them.

• Wikileaks will make the world a safer place.
• Wikileaks is good for the Third World
• Wikileaks is Good for You and Me

(This appears in today’s Hyderabad edition of Deccan Chronicle)

Please read the comments thread also.. Nilesh makes an interesting observation..

MIND OVER MATTER- STOCK TAKING

 

 

As the markets keep getting more expensive, the brokerage house analysts ensure that they keep revising the ‘earnings estimates’ upwards. Similarly, all comparisons now become selective and one expensive stock will be compared to a more expensive stock.

 

However, the market is in a blind zone- all heads are turned north and every bit of news is interpreted with a positive bias. Every stock keeps moving up just as you hear some recommendation and you think to yourself “Missed it this time. Next recommendation from XXX and let me put some money in to it”. This is the classical story that happens every few years.

 

Forget our valuations. Now the mood is that the US Markets are leading the way. Since they have fought of all worries and the Dow is chasing new highs, we also follow them. We will of course ‘de-couple’ when it is convenient for the analysts to do so.

 

It is very likely that in this phase of the market, most of us would be buying and selling stocks with a view to take advantage of the momentum and the bullishness rather than reasoned out investments. Valuations are rich, but our minds are more receptive when the noise is all around us. Most of us are happy to make a quick buck and get out. There will be plays where we think we will make upwards of fifty percent in double quick time. Your success or otherwise is dependent on actions of others, including manipulators. Volumes are suddenly happening in stocks that the world seemed to have forgotten.

 

There are many of us who would own stocks for the only reason that they fell far below our buying price. The present market conditions are the typical one in which we acquire such stocks. We simply start chasing ‘relative’ affordability or valuations and end up owning stocks that would not make it to any good investment short list. Financial and fundamental analysis takes a back seat in these happy market conditions.

 

I will just remind you of a simple math. If you buy a stock at, say, Rs.20/- expecting to exit at, say, Rs.25/- you are playing for a 25% gain. Ideally you want this to happen in a couple of weeks or less. Let us forget the brokerage and other transaction costs. You ‘spotted’ this stock or a friend told you about it. If you look at the price chart, it was probably closer to Rs.10 less than three months ago. However, your sources are reliable. You buy the stock at Rs.20 and keep holding it. You watch it go to, say 24 in a week or ten days. You still want one more rupee. The stock then starts to fall and in the next three months it stays in this range between 20 and 25. You lose interest and then suddenly six months down the road, you see the stock is trading at Rs.10. Now, you have lost 50% on the stock. You now think that you will sell it once it goes back to Rs.20/- so that at least you are not ‘out of pocket’. In other words, you are now looking at this stock ‘doubling’ or giving you a return of 100%. Now step back and think. If you are so sure about this happening, should you not be raising your bet manifold? Or is it that you are not sure, but your mind refuses to accept the loss and this stock becomes part of your long-term holding?

 

The key to surviving in this market is to follow strict rules. Keep a stop loss and a maximum holding time limit for these kind of ‘punts’ in the market. Learn to accept losses as a part of the game you are playing. You are now in the realm of pure speculation. You are banking on someone following up on your buying so that you can get your exit. You will find that you also seem ‘wise’. Enough noises about positive happenings, sector changes etc are flowing. No one will ring a bell at the exact top. After all, it is your money. You have to make choices. Understand where you are at each stage as you lay bets in the stock markets.

 

 

R Balakrishnan

 

Sanjeev Sanyal has a superb piece on how 1991 has not changed India’s thinking on urban development. It remains socialist and centralised: A quarter of a century ago, India threw off the shackles of Nehruvian socialism and embarked on economic liberalization. Since 1991, socialist-era thinking has been steadily discarded in a growing number of areas […]

The good life has to be a happy life. I am much in favor of Bertrand Russell’s view on the good life: “The good life, as I conceive it, is a happy life. I do not mean that if you are good you will be happy – I mean that if you are happy you will be good.” The good life also has to be the successful life. But what is a successful life? The definition must vary from person to person. I like the simplicity of Ralph Waldo Emerson’s operational definition: 

What is Success?

To laugh often and much;

To win the respect of intelligent people
and the affection of children;

To earn the appreciation of honest critics
and endure the betrayal of false friends;

To appreciate beauty;
To find the best in others;

To leave the world a bit better, whether by
a healthy child, a garden patch
or a redeemed social condition;

To know even one life has breathed
easier because you have lived;

This is to have succeeded.

Here are some bits about Ralph Waldo Emerson (1803 -1882) excerpted from the wiki entry.

Waldo Emerson, was an American essayist, lecturer, and poet who led the Transcendentalist movement of the mid-19th century. He was seen as a champion of individualism . . .

He remains among the linchpins of the American romantic movement, and his work has greatly influenced the thinkers, writers and poets that have followed him. When asked to sum up his work, he said his central doctrine was “the infinitude of the private man.” Emerson is also well known as a mentor and friend of fellow Transcendentalist Henry David Thoreau.

. . . Emerson was introduced to Indian philosophy when reading the works of French philosopher Victor Cousin. In 1845, Emerson’s journals show he was reading the Bhagavad Gita and Henry Thomas Colebrooke’s Essays on the Vedas. Emerson was strongly influenced by Vedanta, and much of his writing has strong shades of nondualism. One of the clearest examples of this can be found in his essay “The Over-soul”:

We live in succession, in division, in parts, in particles. Meantime within man is the soul of the whole; the wise silence; the universal beauty, to which every part and particle is equally related, the eternal ONE. And this deep power in which we exist and whose beatitude is all accessible to us, is not only self-sufficing and perfect in every hour, but the act of seeing and the thing seen, the seer and the spectacle, the subject and the object, are one. We see the world piece by piece, as the sun, the moon, the animal, the tree; but the whole, of which these are shining parts, is the soul.

To me, it is always a source of immense pleasure and comfort to meet a kindred soul across space and time. Some very bright minds, ages ago in India, had insights into the nature of reality. These ideas resonate with other brights minds in distant lands and centuries later. It really is a wonderful world.

There is little doubt that most of us mention about the huge heat factor in India especially during summers. But taking a look at temperatures, one would see near similar temperatures across years. One big factor is our heat toleration has declined considerably thanks to air conditioners everywhere. The second bit could be this construction madness […]

We came across a cool book recently called Logically Fallacious: The Ultimate Collection of Over 300 Logical Fallacies, by a social psychologist named Bo Bennett. We were a bit skeptical at first — lists like that can be lacking thoughtfulness and synthesis — but then were hooked by a sentence in the introduction that brought the book near and dear to our hearts:

This book is a crash course, meant to catapult you into a world where you start to see things how they really are, not how you think they are.

We could use the same tag line for Farnam Street. (What was that thing about great artists stealing?)

Logically Fallacious a fun little reference guide to bad thinking, but let’s try to highlight a few that seem to arise quite often without enough recognition. (To head off any objections at the pass, most of these are not strict logical fallacies in the technical sense, but more so examples of bad reasoning.)

No True Scotsman

This one is a favorite. It arises when someone makes a broad sweeping claim that a “real” or “true” so and so would only do X or would never do Y.

Example: “No true Scotsman would drink an ale like that!”

“I know dyed-in-the-wool Scotsmen who drink many such ales!”

“Well then he’s not a True Scotsman!”

Problem: The problem should be obvious: It’s a circular definition! A True Scotsman is thus defined as anyone who would not drink such ales, which then makes them a True Scotsman, and so on. It’s non-falsifiable. There’s a Puritanical aspect to this line of reasoning that almost always leads to circularity.

Genetic Fallacy

This doesn’t have to do with genetics per se so much as the genetic origin of an argument. The “genetic fallacy” is when you disclaim someone’s argument based solely on some aspect of their background or the motivation of the claim.

Example: “Of course Joe’s arguing that unions are good for the world, he’s the head of the Local 147 Chapter!”

Problem: Whether or not Joe is the head of his local union chapter has nothing to do with whether unions are good or bad. It certainly may influence his argument, but it doesn’t invalidate his argument. You must approach the merits of the argument rather than the merits of Joe to figure out whether it’s true or not.

Failure to Elucidate

This is when someone tries to “explain” something slippery by redefining it in an equally nebulous way, instead of actually explaining it. Hearing something stated this way is usually a strong indicator that the person doesn’t know what they’re talking about.

Example: “The Secret works because of the vibration of sub-lingual frequencies.”

“What the heck are sub-lingual frequencies?”

“They’re waves of energy that exist below the level of our consciousness.”

“…”

Problem: The claimant thinks they have explained the thing in a satisfactory way, but they haven’t — they’ve simply offered another useless definition that does no work in explaining why the claim makes any sense. Too often the challenger will simply accept the follow up, or worse, repeat it to others, without getting a satisfactory explanation. In a Feynman-like way, you must keep probing, and if the probes reveal more failures to elucidate, it’s likely that you can reject the claim, at least until real evidence is presented.

Causal Reductionism

This reflects closely on Nassim Taleb’s work and the concept of the Narrative Fallacy — an undue simplifying of reality to a simple cause–> effect chain.

Example: “Warren Buffett was successful because his dad was a Congressman. He had a leg up I don’t have!”

Problem: This form of argument is used pretty frequently because the claimant wishes it was true or is otherwise comfortable with the narrative. It resolves reality into a neat little box, when actual reality is complicated. To address this particular example, extreme success on the level of a Buffett clearly would have multiple causes acting in the same direction. His father’s political affiliation is probably way down the list.

This fallacy is common in conspiracy theory-type arguments, where the proponent is convinced that because they have some inarguable facts — Howard Buffett was a congressman; being politically connected offers some advantages — their conclusion must also be correct. They ignore other explanations that are likely to be more correct, or refuse to admit that we don’t quite know the answer. Reductionism leads to a lot of wrong thinking — the antidote is learning to think more broadly and be skeptical of narratives.

“Fallacy of Composition/Fallacy of Division”

These two fallacies are two sides of the same coin: The first problem is thinking that if some part of a greater whole has certain properties, that the whole must share the same properties. The second is the reverse: Thinking that because a whole is judged to have certain properties, that its constituent parts must necessarily share those properties.

Examples: “Your brain is made of molecules, and molecules are not conscious, so your brain must not be the source of consciousness.”

“Wall Street is a dishonest place, and so my neighbor Steve, who works at Goldman Sachs, must be a crook.”

Problem: In the first example, stolen directly from the book, we’re ignoring emergent properties: Qualities that emerge upon the combination of various elements with more mundane innate qualities. (Like a great corporate culture.) In the second example, we make the same mistake in a mirrored way: We forget that greed may be emergent in the system itself, even from a group of otherwise fairly honest people. The other mistake is assuming that each constituent part of the system must necessarily share the traits of the whole system. (i.e., because Wall St. is a dishonest system, your neighbor must be dishonest.)

***

Still Interested? Check out the whole book. It’s fun to pick up regularly and see which fallacies you can start recognizing all around you.

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There is a move by the Fadnavis Government to remove the APMC and allow the farmers to sell directly to the end customer. The MSM says this will increase inflation – because of the TRADER’S STRIKE and the internet media says that the farmer’s income will go up 300 to 400%. The truth obviously lies […]

I am not a fan of the Modi government’s “Make in India” advertising drive. My view is certainly unpopular. I think that advertising cannot (and must not) replace real changes in policies that could make India attractive to domestic and foreign manufacturers. As it happens, the prevailing sentiment, even among many domestic manufacturers, is that India is really a very hard place to make things. Which partly explains why so much of what’s consumed in India is made in China. So trying to woo foreign manufacturers through advertising slogans is pointless.

I wrote this piece for the July edition of India Currents. Here it is, for the record.

India’s Prosperity is Made in India.

Many superlatives have been applied to India. Some are laudatory—the largest democracy;  some are appalling—home to the largest number of illiterates; and some whose overall value is hard to assess. In that last category must be the designation of India’s prime minister Narendra Modi as the most foreign-traveled Prime Minister (PM) in world history. He is, as some have remarked, India’s first non-resident Indian (NRI) prime minister.

Globe Trotting Prime Minister
Since becoming the PM, Modi has visited 38 countries. Between June 2014 and June 2016, Modi has traveled abroad 42 times, or close to two foreign trips per month, including four visits to the United States, and two visits each to Afghanistan, France, Nepal, Russia and Singapore. Compared to him, his predecessors preferred to stay home. Vajpayee had only six foreign visits during his first two years, and during his entire tenure as PM from 1999 to 2004, he went abroad only 19 times, including just twice to the United States.

All this globetrotting would have earned Modi an enviable truckload of frequent flyer miles had he been flying commercial. Unfortunately since he takes the state owned and taxpayer funded Air India, he does not get miles credit. The taxpayers, instead, get saddled with the cost of his travels, an informed estimate of which, to date, is around US $400 million at an approximate average of $10 million per trip.

Selling India Abroad
One could object to that kind of bean counting by noting that the expenditure is investment into India’s economic growth. With his foreign visits, so the argument would go, Modi has elevated India’s image globally and cemented vital relationships. This enables significant investment flows into India, it would seem.

There are two reasons why this argument is problematic. The first is that it is basically an advertising and sales job. The second is that India is a large economy and therefore its prosperity is internally driven and cannot be predicated on external factors.

Not Easy to Make in India
The “Make in India” initiative is a marketing job. Bombastic rhetorical claims that India is the prime destination for global investment sound hollow and tired when the facts on the ground speak differently. The World Bank ranks economies on the ease of doing business (www.doingbusiness.org) in 189 countries. Methodological and precision issues of the ranking aside, it does reflect an underlying reality.

As one would expect, the high ranks go to open, free enterprise economies like Singapore (#1), Hong Kong, United States, Taiwan, Germany, etc. Bringing up the rear are South Sudan, Libya and Eritrea (#189). India comes in at #130, a solid 46 places behind China (#84). That’s a terrible place to be for a country that has delusions of becoming a giant in world commerce.

Marketing and sales jobs, though valuable, are ultimately futile if the product doesn’t work as advertised. Like all of us, multinational corportations are rationally self-interested. Their investment decisions depend entirely on how easy it is to do business in India and have practically nothing to do with PM Modi’s sincere entreaties to “make in India.” A nice paint job may draw in the curious buyer but the car ultimately gets sold based on what’s under the hood, not on the shiny hood ornament.

Is the United States an Indispensable Partner?
The second problem with the view that Modi is attracting investment into India by frequently selling India abroad is that India’s prosperity, like that of any large economy, depends on what Indians and Indian firms do, which in turn depends on government policies. Certainly, a few tens of billions of foreign investment could not hurt but that all amounts to rounding errors in the spreadsheet of real growth.

In his speech to the U.S. Congress, Modi said, “In every sector of India’s forward march, I see the United States as an indispensable partner.” That mindset is not that of winners. Given that India is clearly not indispensable to United States’ prosperity, that attitude reflects a reliance on an unhealthy relationship of asymmetric power. Did Modi really mean, for instance, that India’s domestic affairs are now open for U.S. administrations to interfere in? Does that “partnership” extend to the United States making interventions in Indian rural and urban administration, labor laws, agricultural and industrial policies, law and order, banking and finance —all sectors that are critically important to India’s “forward march?”

His assertion to the Congress about non-resident Indians in the United States speaks volumes:  “Today, they are among your best CEOs, academics, astronauts, scientists, economists, doctors, even spelling bee champions. They are your strength. They are also the pride of India. They symbolize the best of both our societies.”

Mr Modi’s pride is misplaced and frankly pathetic. With all due respect to him, those facts actually speak to what’s wrong with India and symbolize the worst failures of Indian governments. Talented people were forced to migrate abroad because they could not do in India what they were evidently good at. India embraced socialism and is paying heavily for that by seeing human capital flight. That’s nothing for India to crow about. At the very least Mr. Modi should get better speech writers.

The Answer is at Home, Not Abroad
The United States did not become what it is by partnering with some large industrialized nation or dancing to foreign tunes. It marched to its own drumbeat of freedom and free enterprise that created unprecedented prosperity. It crafted its own constitution—not its colonial master’s rules—which guaranteed freedom of speech and private property rights to its citizens and which was (note the past tense) implacably opposed to socialism. Thus the United States attracted talented people from all across the world, not just from India, in the recent decades. Modi needs to ask what it is that compels so many highly productive people to leave at the first opportunity they can.

An honest answer to that could easily form the backbone of the structural reforms that are urgently needed for India to succeed. The key to India’s development is freedom. No country whose citizenry are bound by the arbitrary will of government functionaries empowered to implement needless, incomprehensible, vitality-sapping, senseless rules and regulations that inhibit enterprise—in short socialist policies—has ever escaped poverty.

Indians have had the utter misfortune of being forced to live in virtual serfdom under the licence-control-permit-quota-inspector raj, a legacy of the British Raj that impoverished India, for nearly seven decades. There was some hope that Modi would dismantle the horror that imprisons India because he did talk loudly about “minimum government.” After two years, that hope is vanishing fast. Government is not only becoming more intrusive but it is expanding its vice-like grip on Indian entrepreneurship and enterprise.

United States prosperity was built in the United States, not abroad. That’s par for the course, not some outlandish exception. India’s progress does not depend on the United States or any other external entity. India is an independent, sovereign nation and that fact places its destiny within it, and only within it. Mr Modi needs to demonstrate that understanding and act accordingly.

Genghis Khan, the great Khagan, reportedly said, “Conquering the world on horseback is easy; it is dismounting and governing that is hard.” Flying around the world on state-owned Air India promoting India is easy; it is disembarking and staying at home to free India from the controls of an oppressive government that is hard.

Two people played a huge role in Indian stock markets – Harshad Mehta and Ketan Parikh – albeit for all the wrong reasons. They became catalysts for huge changes we have seen in Indian capital markets. Indian capital market is one heck of a story which is hardly given the attention. Post 1991, this is one […]

The Madoff’s scam happened in 2009..when I wrote a piece for Reuters.in. This article is based on that piece. Madoff scam was really big and took the 2009 Christmas look terrible…the lessons are important..and VALID even in 2016. Once in a while a man comes along and takes people for a ride. What is amazing […]