Chaitanya Patel

To break the grip of corruption and black money, we have decided that the 500 rupee and 1000 currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016, announced PM Modi on 8 Nov 2016 . This article talks about the Ban on 500 Rs and 1000 Rs note, when such demotization was done earlier? Video of PM Narendra Modi speech,Excerpts from PM speech , new 500 and Rs 2000 note, how many 500 Rs and 1000 Rs notes are out in circulation, the reaction to Indians to ban .

500 rupee and 1000 currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016 Please note There is no restriction of any kind on non-cash payments by cheques, demand drafts, debit or credit cards and electronic fund transfer. Your money is yours. The current 500, Rs 1000 notes are not useless.  You can deposit your 500 Rs , 1000 Rs note in your own account. After depositing your money in your account, you can draw it when you need it. Five hundred and thousand rupee notes will not be legal tender from midnight of 8 Nov 2016. Details in Finance Ministry press release

• Persons holding old notes of five hundred or one thousand rupees can deposit these notes in their bank or post office accounts from 10th November till close of banking hours on 30th December 2016 without any limit.  Thus you will have 50 days to deposit your notes and there is no need for panic.
• There may be some who, for some reason, are not able to deposit their old five hundred or thousand rupee notes by 30th December 2016. They can go to specified offices of the Reserve Bank of India up to 31st March 2017 and deposit the notes after submitting a declaration form.
• On 9th November and in some places on 10th November also, ATMs will not work.
• Withdrawal from ATMs would be restricted to Rs.2,000 per day per card up to November 18, 2016. The limit will be raised to Rs 4,000 per day per card from November 19, 2016 onwards.
• Cash withdrawal from a bank account, over the counter will be restricted to Rs.10,000 subject to an overall limit of Rs. 20,000 in a week for the first fortnight, i.e., until the end of business hours on November 24, 2016
• From 25th November till 30th December, the limit will be increased.
• Old High Denomination Bank Notes of aggregate value of Rs.4,000 only or below held by a person can be exchanged by him/her at any bank branch or Issue Office of Reserve Bank of India for any denomination of bank notes having legal tender character, provided a Requisition Slip as per format to be specified by RBI is presented with proof of identity and along with the Old High Denomination Bank Notes. Similar facilities will also be made available in Post Offices.
• New notes of Rs 500 and Rs 2,000 would be released and circulated soon.

From 8 Nov to midnight of 14 Nov

However for humanitarian reasons, to reduce hardship to citizens, some special arrangements have been made for the first 72 hours, that is till midnight on 11th November. It has been extended for another 72 hours till 14 Nov.

• During this period, government hospitals will continue to accept five hundred and thousand rupee notes for payment.This is for the benefit of those families whose members may be unwell.
• Pharmacies in government hospitals will also accept these notes for buying medicines with doctors’ prescription.
• For 72 hours, till midnight on 14th November, railway ticket booking counters, ticket counters of government buses and airline ticket counters at airports will accept the old notes for purchase of tickets. This is for the benefit of those who may be travelling at this time. These outlets will have to keep proper records of stock and collections.
• For 72 hours, five hundred and thousand rupee notes will be accepted also at
  • Petrol, diesel and CNG gas stations authorised by public sector oil companies
  • Consumer co-operative stores authorised by State or Central Government
  • Milk booths authorised by State governments
  • Crematoria and burial grounds.

For Foreign Tourists

• Arrangements will be made at international airports for arriving and departing passengers who have five hundred or thousand rupee notes of not more than five thousand rupees, to exchange them for new notes or other legal tender.
• Foreign tourists will be able to exchange foreign currency or old notes of not more than Rs 5000 into legal tender.

What should you do with old Rs 500 and Rs 1000 notes

As per the Government of India , suggestion is given below. Our article How to Exchange Rs 500 and Rs 1000 Notes ? discusses it in detail.

Has something similar or Demontization done earlier?

It the third time that it has been done in India  in 1946, in 1978 and now in 2016.  Demonetization, as explained by Investopedia, is the act of stripping a currency unit of its status as legal tender. Demonetization is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit.

1946: Rs 1,000 and Rs 10,000 banknotes, which were in circulation, were demonetized in January 1946, primarily to curb unaccounted money. The higher denomination banknotes in Rs 1,000, Rs 5,000 and Rs 10,000 were reintroduced in the year 1954

In 1978, when the Janata government headed by Morarji Desai came to power, defeating the Congress after the emergency, the rationale for doing away with high denomination notes — of Rs 1,000, Rs 5,000 and Rs 10,000 was that it could help curb check illicit transfer of financing which was harmful to the national economy or for other illegal purposes. On January 16, 1978, the government said that high value notes would cease to be legal tender at the close of banking hours on that day and that all banks and treasuries of governments would remain closed for transactions — the next day on January 17. The High Denomination Bank Notes (Demonetisation) Act, 1978, kicked in which barred the transfer and receipt of high denomination bank notes. That law made any contravention including false declaration by depositors and others punishable — with a fine or a three year prison term. At that time  gold and commodity prices fell sharply. But the impact was limited. Yet, ironically, a government committee headed by the chairman of CBDT, had in 2012 said in a report that demonetisation may not be a solution for tacking black money in the economy which it said was largely held in the form of benami properties, billion and jewellery. It would only increase the cost as more currency notes may have to be printed for disbursing the same amount. It could also have an adverse impact on the banking logistics.

How many Rs 500 and Rs 1000 rupee notes have to be replaced?

Short ans: Roughly around 2,300 crore pieces of Rs 500 and Rs 1,000 notes

Prime Minister Narendra Modi’s announcement to disallow use of existing Rs 500 and Rs 1,000 notes from  midnight of 8 caught everyone by surprise.

According to Reserve Bank of India data, the total outstanding currency in circulation in the Indian economy as on October 28 stood at Rs 17.77 lakh crore. We don’t know how much of this comprises Rs 500 and Rs 1,000 notes.

But an indicator of what it could be can be seen from the RBI’s latest Annual Report. This data shows that out of the total Rs 16.42 lakh crore value of bank notes in circulation as on March 31, 2016, as much as Rs 14.18 lakh crore, i.e over 86 per cent, consisted of Rs 500 and Rs 1,000 notes. In terms of volumes, out of the total 9026.6 crore banknote pieces, 2,203 crore or 24 per cent-plus were of Rs 500 and Rs 1,000 denomination.

New Rs 2000 and 500 Rs notes

New Rs 500 and Rs 2000 notes will be introduced by RBI. The images released by RBI for Rs 500 and Rs 2000 rupee note are as follows. Our article New Rs 500 and Rs 2000 notes :  Features,Comparison discusses these in detail.

New 2000 rs note

PM Narendra Modi Speech

Excerpt of PM Speech of why 500 Rs and 1000 Rs note were stopped as legal tender is given below. You can read full text of PM Speech on Narendra Modi’s site and view  YouTube video,given below here.

The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways. The poor have to bear the brunt of this. It has a direct effect on the purchasing power of the poor and the middle class. You may yourself have experienced when buying land or a house, that apart from the amount paid by cheque, a large amount is demanded in cash. This creates problems for an honest person in buying property. The misuse of cash has led to artificial increase in the cost of goods and services like houses, land, higher education, health care and so on.

High circulation of cash also strengthens the hawala trade which is directly connected to black money and illegal trade in weapons. Debate on the role of black money in elections has been going on for years.

 To break the grip of corruption and black money, we have decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016. This means that these notes will not be acceptable for transactions from midnight onwards. The five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. The rights and the interests of honest, hard-working people will be fully protected. Let me assure you that notes of one hundred, fifty, twenty, ten, five, two and one rupee and all coins will remain legal tender and will not be affected.

So, in this fight against corruption, black money, fake notes and terrorism, in this movement for purifying our country, will our people not put up with difficulties for some days? I have full confidence that every citizen will stand up and participate in this ‘mahayagna’. My dear countrymen, after the festivity of Diwali, now join the nation and extend your hand in this Imandaari ka Utsav, this Pramanikta ka Parv, this celebration of integrity, this festival of credibility.

This step will strengthen the hands of the common man in the fight against corruption, black money and fake currency. To minimise the difficulties of citizens in the coming days, several steps are being taken.

How Indians have reacted to Scrapping of Rs 500 and Rs 1000 note?

The announcement was met with widespread shock and confusion as people try to make sense of how it will impact their transactions of all kinds. Some are calling it a surgical strike of a different kind. Still others, an example of Modi ‘Trump’ing over one of the biggest roadblocks in India’s path to prosperity.

President Pranab Mukherjee called upon people not to panic and follow Govt guidelines for exchange of Rs 1000/500 notes. He welcomed bold step of Government of India which will help unearth unaccounted money & counterfeit currency

West Bengal Chief Minister Mamata Banerjee called it “a drama”. “The PM could not get back the promised black money from abroad from the rich so a drama to divert his failure…” she tweeted. “I want to know from PM how my poorest brothers sisters, who’ve received their week’s hard earned wage in one 500 rupee note will buy atta, chai tomorrow? Heartless and ill- conceived blow on the common people and the middle class in the fake name of anti-corruption,” Ms. Banerjee tweeted.

• @SrBachchan Amitabh Bachchan T 2435 – the new 2000 rs note is PINK in colour … the PINK effect ..!!
• @Paytm We have got two words for you: Paytm Karo.
• @ashoo_k America counting votes, India counting notes
• @AdityaRajKaul Best news of the day: Just found my wallet is empty. No currency notes.
• @hankypanty Value of Rs. 100 will be more than value of Rs. 500 for two days. This is inflation!#BlackMoney

Demonetisation of Rs 500 and Rs 1000 note and black money,Elections,Terrorists?

The common understanding is that “black money” consists of loads of cash which are stored in trunks or pillowcases or buried under the earth. It is then proposed that if Rs 500 and Rs 1,000 notes are demonetised, or, in other words, discontinued, then people going to banks to exchange large amounts of cash for the new legal currency would make the banks suspicious; and banks would in turn pass on their doubts to the tax authorities who might then catch the offenders. In this way, “black money” would get uncovered, and this would discourage corruption in the future.

Wouldn’t the Rs 2,000 note pace up corruption at the double rate? People who were capable of hiding Rs 200 crore will now be able to stash Rs 400 crore more conveniently?

Just within hours of the announcement made by Modi on November 8, many rushed to the jewellery store. The price of gold surged. Previously, it was Rs 30,000 for 10gm but ended at Rs 34,000. This shows how quickly black money can be converted into “golden money”.

Banning the Rs 500/1,000 note will tackle black money in the form of hard cold cash, but won’t have any effect on other forms of illicit money. The declaration of a Rs 2,000 note alongside another Rs 500 note does not prevent future possible circulation of counterfeit cash. We are living in a technologically advanced world where counterfeiting Rs 2,000 denomination notes wouldn’t be a great deal.

By the PM’s own confirmation, the main part of black money generation and storage is in foreign bank accounts. Counterfeit money can be produced for any denomination. The recently leaked Panama Papers revealed that a number of high net worth individuals in India have large sums of money stashed abroad, taking advantages of legal loopholes outside the country.

The demonetisation move is also made on suppositions that Pakistan prints a considerable measure of counterfeit money and funds terrorist activities in India. There are no figures accessible about this amount, regardless of the possibility that it is valid. Even if it is true, the amount is probably going to be meagre. Nobody would expect terrorrists to carry a trunk full of Indian currency for surviving in India. It is a known fact that terrorist reserves move through electronic exchange and not cash exchange.

BJP supporters are under the impression that scrapping Rs 500 and Rs 1,000 notes will cause trouble for the Congress, Samajwadi Party and Bahujan Samaj Party in the upcoming UP elections.  This was exactly the stand Morarji Desai took in 1979 when he demonetised Rs 1,000, 5,000 and 10,000 denomination notes. But Indira Gandhi was re-elected in a massive victory in 1980. The main failure of the Janata Party government was the economic failure.

Government wants to drive citizens into a cashless economy. is India prepared for a cashless world?

Related articles:

• New Rs 500 and Rs 2000 notes : Features,Comparison
• How to Exchange Rs 500 and Rs 1000 Notes ?
• Withdrawal of Pre 2005 Indian Currency Notes
• Indian Currency
• Currency

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

What do you think about the ban on Rs 500 and Rs 1000 note? Should it been handled better?

The post Ban on 500 and 1000 rupee notes fight against corruption, PM speech appeared first on Be Money Aware Blog.

You would have heard, read and discussed a lot over last 24 hours on demonetisation and destruction of black money.

I want to just share few points I understood from reading and watching television.

The total currency in circulation is about Rs.17 lakh crores.

Out of this 86% (around Rs.14 lakh crores) consist of high denomination notes (HDN) or Rs.500 & Rs.1000 notes.

Out of this, around Rs.4 lakh crores is considered as unaccounted or black money.

This black money is not going to come back to the system. Any deposit over and above Rs.2 lakh for a PAN may be scrutinised by Income Tax department.

This 4 lakhs crore simply vanishes into thin air. Government can print a similar amount without raising inflation and can say use it for developing infrastructure. There may not be even need to print; it may even simply be a credit entry in government books. By this, the black money of Rs.4 lakh crores is transferred from corrupt people to Government of  India. It is one of the greatest transfers of ill-gotten wealth.

Manish Chokani explained in detail about this and said it would lead to softening of interest rates, strengthening of INR, reduction of fiscal deficit, controlling of inflation and adding few percentage points to GDP.

Already real estate has been sluggish for last few years. This move would further choke the lifeline of real estate and can result in property prices correcting significantly. Also real estate regulatory bill and benami transaction act would further streamline real estate sector. So it is going to be very difficult to use real estate for parking black money.

If anyone still suspects this government intention to root out black money, wait to see some future steps (which are under discussion) like a legal ceiling on cash a person can hold, limited and channelized supply of high denomination notes etc.

This action against black money would strengthen the economy, reduce slippages, cut down parallel economy and improve GDP. Financial assets, especially equity markets, would do very well in the long run because of this. Softening of interest rates would be good for bond markets as well. We need to go through short term pain for long term gain.

So far, honest tax payers were always mocked at. Cheating the government was considered the smart thing to do. This is going to change. It has just begun.

Modi is really a great leader. My respect for him has gone up. He has the guts to take on his own tribe, politicians. They are in the top of corruption food chain.

Lakhs of crores of black money lying in lockers, godowns and farm houses have become worthless papers.

Clean India!

“From a biological perspective, nothing is unnatural.
Whatever is possible is by definition also natural.”
— Yuval Harari

***

We get a little confused when deciding if a particular human behavior is cultural or biological. Is homosexuality a natural act or unnatural? How about Facebook? Is it unnatural human behavior? Abortion? Non-procreative sex? Slavery? Mixing of races?

Many of these are either explicitly or certainly border on being taboo subjects. As in, they may not be discussed in polite company, even when encouraged.

Yet, for for those of us seeking to understand reality as it is, to understand deeply the most important buckets of knowledge, taboo is no reason to avoid the hard subjects.

So how should we think about this?

Professor Yuval Harari, who has previously taught us why humans dominate the earth and the false natural state of man, has an interesting take, discussed in his book Sapiens: A Brief History of Humankind. The chapter is aptly titled “There is No Justice in History.”

Professor Harari’s well-informed heuristic boils down to: Biology Enables. Culture Forbids.

How can we distinguish what is biologically determined from what people merely try to justify through biological myths? A good rule of thumb is ‘Biology enables, culture forbids.’ Biology is willing to tolerate a very wide spectrum of possibilities. It’s culture that obligates people to realize some possibilities while forbidding others. Biology enables women to have children — some cultures oblige women to realize this possibility. Biology enables men to enjoy sex with one another — some cultures forbid them to realize this possibility.

Culture tends to argue that it forbids only that which is unnatural. But from a biological perspective, nothing is unnatural. Whatever is possible is by definition also natural. A truly unnatural behavior, one that goes against the laws of nature, simply cannot exist, so it would need no prohibition.

[…]

…Evolution has no purpose. Organs have not evolved with a purpose, and the way they are used is in constant flux. There is not a single organ in the human body that only does the job its prototype did when it first appeared hundreds of millions of years ago. Organs evolve to perform a particular function, but once they exist, they can be adapted for other usages as well. Mouths, for example, appeared because the earliest multicellular organisms needed a way to take nutrients into their bodies. We still use our mouths for that purpose, but we also use them to kiss, speak, and, if we are Rambo, to pull the pins out of hand grenades. Are any of these uses unnatural simply because our worm-like ancestors 600 million years ago didn’t do those things with their mouths?

Our biology gives us a very wide playground and a lot of berth. We’re capable of a wide variety of activities and forms of organization, while other species generally fall into far more fixed and predictable hierarchies.

Over the course of history, humans have taken advantage of this wide range in a variety of positive and negative ways by creating and sustaining myths not supported by biological reality.

Take slavery, once a common practice throughout the world and now thankfully considered a scourge (and illegal) on all parts of the planet. Or the caste system, still in place in some in certain areas of the world, although perhaps less strictly than in the past.

Both slavery and the castes were carried out through a series of pseudoscientific rationalizations about the “natural order” of things, stories strong enough to believed (in part) by all constituents of the hierarchy. This “forbidding” aspect of culture was not supported by biological differences, but that didn’t make the stories any less powerful or believable.

Even the American political system, ostensibly founded on a bedrock of “liberty and equality”, only provided those things to certain small groups. The Founders used cultural myths to rationalize a deeply divided society in which men had dominion over women, European whites had dominion over blacks and the native people, and the historically rich had dominion over the historically poor. Any other order would have been “unnatural”:

The American order consecrated the hierarchy between the rich and poor. Most Americans at that time had little problem with the inequality caused by wealthy parents passing their money and businesses onto their children. In their view, equality meant simply that the same laws applied to rich and poor. It had nothing to do with unemployment benefits, integrated education or health insurance. Liberty, too, carried very different connotations than it does today. In 1776, it did not mean that the disempowered (certainly not blacks or Indians or, God forbid, women) could gain and exercise power. It meant simply that the state could not, except in unusual circumstances, confiscate a citizen’s private property or tell him what to do with it. The American order thereby upheld the hierarchy of wealth, which some thought was mandated by God and others viewed representing the immutable laws of nature. Nature, it was claimed, rewarded merit with wealth while penalizing indolence.

All the above-mentioned distinctions — between free persons and slaves, between whites and blacks, between rich and poor — are rooted in fictions…Yet it is an iron rule of history that every imagined hierarchy disavows its fictional origins and claims to be natural and inevitable. For instance, many people who have viewed the hierarchy of free persons and slaves as natural and correct have argued that slavery is not a human invention. Hammurabi saw it as ordained by the gods. Aristotle argued that slaves have a ‘slavish nature’ whereas free people have a ‘free nature’. Their status in society is merely a reflection of their innate nature.

This isn’t to argue that there aren’t biological differences between certain groups of people, including men and women. There are. But history has shown our tendency to exaggerate those differences and to create stories around our exaggerations, stories that uphold a certain desired hierarchy. These stories have a way of creating their own reality.

Just as frequently, we commit the opposite sin by restricting certain behavior based on some idea of what’s “natural” or “unnatural”, confusing biology with religious or cultural taboos. (And these myths die hard: It’s hard to fathom, but homosexuality wasn’t even legal in the United Kingdom until 1967.) As Harari rightly points out, anything we can do is perfectly natural in the biological sense. We come well-equipped for a variety of behavior.

And this certainly isn’t to argue that all behavior is equally acceptable: We put bumpers on society to reduce murder, rape, slavery, and other vile behavior that is perfectly biologically natural to us, and we should.

But unless we recognize the difference between biology and cultural myth and seek to reduce our unfair taboos wherever possible, we fail in some way to see the world through the eyes of others, and see that our imagined order is not always a fair or just one, a natural or inevitable one. Maybe some of the things we see around us are just a historical accident if we look closely enough.

Even more than that, examining the relationship between biological reality and cultural myth allows us to appreciate our basic storytelling instincts. Human beings are wired for narrative: We’ve been called the Storytelling Animal and for good reason. Our thirst and ready acceptance of narrative is a basic part of our existence; it’s hard-wired into our genetic algorithm.

Much of our narrative superpower can be observed in the structure of human language, which is unique among species in its infinite flexibility and adaptability. It makes us capable of great cooperative accomplishments, but also great evils.

Fortunately, the modern world has done a pretty good job steadily loosening the grip of mythical “natural” realities that only exist in our heads. But a fair inquiry remains: What sustaining myths still exist? Are they for good or for evil?

We leave that for you to ponder.

Check out Harari’s book Sapiens or his new book, Homo Deus.

***

If you liked this, you’ll love:

Why Humans Dominate the Earth: Myth-Making — It is our collected fictions that define us.

Religion and History: Will Durant on the Role of Religion and Morality — Religions ability to shape cultural behavior.

The False Allure of a “Natural State” of Man — The heated debate about Sapiens’ “natural way of life” is missing the point. Ever since the Cognitive Revolution, there hasn’t been a natural way of life for Sapiens.

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I have a saying “Weird begets weird.” Usually I use it during periods in the markets where normal relationships seem to hold no longer. It is usually a sign that something greater is happening that is ill-understood.  In the financial crisis, what was not understood was that multiple areas of the financial economy were simultaneously overleveraged.

Well, we can say the same for many aspects of world affairs, including the US election.  Many people benefit from free trade, more than get hurt.  Those who get hurt vote with greater probability.  Though immigrants are actually a net help to the US economy, because many people think they hurt the economy, they vote accordingly.

After Brexit, there are related effects.  People are less willing to surrender local advantages for matters that would be larger broad advantages.  Who knows?  Maybe the EU will break up next.  Nah.  Nothing good happens to continental Europe.

======================

Tomorrow, I will be a buyer.  I don’t expect anything good out of Trump, but there is nothing worse from him than Clinton.  I have 15% cash on hand for clients and me, and I will buy as the market falls.

Image from clickittefaq.com.

The RBI and the government have removed Rs. 500 and Rs. 1000 notes from the economy … (Read On...)

Immediate Impact: One of utter confusion. There will be rumor mongering saying that the Rs. 1000 and Rs. 500 notes have become useless. Far from it, if you have withdrawn from your bank account – it can go back to your bank account. People with small amounts – all of us keep some cash at […]

by Ajay Shah.

What just happened? New Rs.500 or Rs.2000 notes will replace the role of the old Rs.500 or Rs.1000 notes. Large value notes will not go away. This is a surgical strike against the people who have inventories of the old notes that can't be shown to the authorities. Those people will find ways to fence those suitcases of cash, and suffer monetary loss in the process.

How do we interpret this move?


1. Unaccounted money is not synonymous with cash. Contrary to the depictions in movies, a lot of unaccounted money works through front companies which have bank accounts. It's not correct to equate corruption and tax evasion with physical cash. The impact of this move upon the black economy is smaller than we think.


2. Money is the lubrication that makes the market economy possible. In the short run, this will be a disruption for cash-intensive business models. The Wednesday (9 November) stock market returns of various firms and industries will pick up this disruption. As an example, the real estate business will suffer. Firms which have built a business model which does not involve cash will fare better. If, in the same industry, you have two firms where one uses cash less than the other, this will show up in the stock market returns. Similarly, if this disrupts the working of criminal organisations in the short run, perhaps there may be some impact visible in the crime data.


3. The impact upon corruption will be small. Controlling corruption is not about blocking access to a non-traceable store of value. There will always be precious metals, US dollars, bitcoin, and jars of Tide. The facts on the ground could potentially evolve where women on the street ignore the government and continue to use 500 and 1000 rupee notes as a tool for achieving transactions. As long as people agree to use something as a currency, this suffices at a practical level, even without the State enforcing it as legal tender. Solving the problem of corruption requires deeper changes to institutions.

When the sources of corruption are unchanged, people will require some methods to achieve transactions. To the extent that people in India build business processes and business models that de-emphasise the use of Indian currency, that will increase the cost of doing business, and reduce the seigniorage income of the government..


4. This will not take us closer to the cashless world. This could be viewed as a way of pushing the post-cash electronic payments world forward. However, the institutional foundations of the new world have to be laid, and only at the tail end of that process, a certain use of coercion works okay.

As an example, NSDL was inaugurated in late 1996 and the entire machinery was working, all over India, well before the first mild SEBI coercion pushing people towards dematerialisation took place. The lockstep of those years -- of building good institutions and then gently using some coercion to favour the new world -- is the role model that we should apply on the migration to cashless. With the Indian payments industry, there are basic failures of the reforms, so the institutional infrastructure is not in place.  Today's coercion to push people away from cash will not lead them to electronic payments as the latter is not ready to receive them.


5. What do we know from past experience? India did this in 1978, and there was no disruption in the economy, but at the time, the rupee value of the currency notes which were denotified was small (Rs.160 crore). There are some international experiences where this worked badly. Burma did this in 1987, and got to riots and a coup in 1988.



I acknowledge useful discussions with Ashish Aggarwal, Suyash Rai and Josh Felman.

Photo Credit: MDV || May you live to see many beautiful sunrises!

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Regardless of your political point of view, life will go on after the election.  Truth, given the two leading candidates, I get why many feel bad — they are both personally flawed to the degree that we shouldn’t want to entrust them with power.  We all are sinners, myself included.  That said, those who lead scandalous lives are unfit to lead society.

But under most conditions, cultures, economies, and governments survive bad leaders.  This is true globally.  This has been true in the US historically.

And guess what?  The markets really don’t care that much about current politics.  Markets in aggregate react to changes in the long-term view of economic activity.  The only things that interfere with economic activity to that degree are:

Sudden

• Wars (think of the World Wars, or the Thirty or Hundred Years Wars)
• Plague (think of the Black Death, severe as it was the influenza epidemic of 1918 was just a speed bump in comparison)
• Famine (usually associated with severe Socialism… think of the Ukraine in 1932-33, the Great Leap Forward 1958-61, Pol Pot in Cambodia, present-day North Korea or Venezuela… and there is more)

Gradual

• Changes in human fertility
• Technological change
• Gradual increasing willingness for people to be trusting in economic relationships, leading to investment, lending and trade on a wider scale, leading to lower costs of capital. (That included ending the teaching of Aristotle that money is sterile, which happened among Christians at the Reformation, and among Muslims in the late 20th century in some convoluted workarounds)
• Cultural changes such as the willingness to not engage in subsistence agriculture, and trust the division of labor.  Willingness to educate children (including women) rather than use them for immediate productive purposes.
• Desire of the governing powers to wall off resources for their private use or non-use  (think of governments owning huge amounts of land, and denying use of the land to most.  Same for technologies and resources.)

I’m sure there are things I left out, which could make for a lively conversation in the comments.  But note this: in general, though the sudden events may have severe effects on economies and markets, they tend to be the most transitory.  It’s the gradual changes that have the most effect in the long-run.

Also note that most of these do not get affected much by normal politics.  Yes, the “one child policy” affected human fertility, but look at efforts by governments to get husbands and wives to have children and the effects are tiny at best.  And even the “one child policy” is partially reversed, and I expect that it will be dropped in entire.  (And then the Christians and Muslims can stop hiding their children…)

Governments can intervene in economies lightly or moderately, and people adjust.  Overall productivity doesn’t change much.  At severe levels of intervention, it  changes a lot.  Intelligent people look for the exits, even at the cost of being exiles.

Governments can go to war, and if it is small relative to a country that is involved, the effects are light.  Big wars are different, and can destroy productivity for a generation, or permanently, if the culture doesn’t survive.

The Great Depression, bad it was, and loaded with policy failures of Hoover and FDR, ended in less than a generation.  The markets recovered as if it had never happened, and then some.

Are our government policies, including those of the central bank, lousy?  Yes.  WIll they get worse under Trump or Clinton?  Sure.

Things won’t likely be bad enough to derail the economy and the markets for more than a generation, so invest for the future.  The Sun will rise tomorrow, Lord willing.

But, the Son of God will reign forever.

 

Afterthought

The collapse of debt fueled bubbles can only affect less than a generation.  Why?  They don’t affect productive capital assets, they only affect who owns them, and receives benefits from them.  That is why depressions have far less effect than major wars on your home soil or major plagues.  Eventually a new group of people pick up the pieces at reduced prices, and use the capital to new and better ends.

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

by Pratik Datta, Suyash Rai, Shubho Roy.




The UK has been a member of the EU since 1973. In June 2016 it conducted a referendum under the European Union Referendum Act, 2015 about whether it should withdraw from EU. The majority was in favour of withdrawal - commonly referred to as Brexit.

For many people with a simplistic understanding of democracy, that was that. The people had spoken, and democracy was supposed to reflect the will of the people. Theresa May's government intended to act on this majority will and withdraw from EU.

This would have affected rights of UK citizens (especially the minority anti-Brexit group) under the UK's domestic law - the European Communities Act, 1972 (ECA). Yesterday, the English High Court prevented this. In a major constitutional ruling, the Court held that UK Government (the executive) cannot initiate the formal Brexit process and affect rights of UK citizens under ECA. ECA rights were given to the UK citizens by the UK Parliament and only the UK Parliament can by vote take away those rights. This principle has immense relevance to India in light of the recent police encounters in Bhopal.

The question before the Court

For any EU Member to withdraw from EU, it has to give a notice to the European Council under Article 50 of the Treaty on European Union (TEU). Therefore, for UK to withdraw, it also needs to give a notice. The constitutional question before the Court was whether the Crown (the executive) can give this notice unilaterally, or whether this needed to be voted upon by the UK Parliament.

Basics of UK's constitution

As in any democratic state, in the UK, the State has three wings:

1. Legislature: Which makes laws - UK Parliament
2. Executive: Which implements laws - Crown
3. Judiciary: Which adjudicates disputes regarding implementation of laws - Supreme Court, High Court etc

Unlike most other countries, UK does not have one written constitution. However, for the present purpose, three constitutional principles are well accepted:

1. The UK Parliament is sovereign. It can write whatever law it wants to, unless it itself has restricted its own power to write such a law.
2. The Crown (the executive) has prerogative powers if there is no Parliamentary law on that subject. Prerogative powers cannot be used by the Crown to alter Parliamentary law.
3. The Crown can exercise its prerogative powers to enter into or withdraw from treaties.

When the Crown enters into international treaties, it imposes international obligations on UK. Such obligations could affect the rights given to UK's citizens under UK's Parliamentary laws. But the constitution says that the Crown cannot use its prerogative powers (treaty making powers) to alter UK's Parliamentary laws. Therefore, a treaty entered into by the Crown cannot affect rights given by UK Parliament to UK citizens, unless it is ratified by the UK Parliament.

EU laws v. UK laws

EU laws are of two types:

1. Directives: These require Member States to amend their domestic laws.
2. Regulations: These automatically override the domestic laws of Member States.

Before joining the EU, the UK Parliament was sovereign and UK Parliamentary laws were supreme. But the condition precedent for joining EU was to allow EU laws to override the UK Parliamentary laws. Otherwise, that would be breach of the EU Treaty. Therefore, to allow EU laws to override UK Parliamentary laws, the UK Parliament passed the European Communities Act, 1972 (ECA). The ECA enabled EU laws to be treated as domestic UK laws which could override contrary UK Parliamentary laws.

The issue with Brexit

The ECA is a UK Parliamentary law. It gives UK citizens certain rights by incorporating the EU laws into UK's domestic laws. For example, UK citizens could enjoy reciprocal rights of movement in other EU member states. UK citizens also had the right to seek reference to EU Commission to take regulatory action in relation to a violation of competition law in UK.

If a notice for Brexit is given, the UK will no more be an EU Member and UK citizens will lose the above rights. For example, if UK is no more part of EU, a UK citizen cannot enjoy the reciprocal treatment in another EU member state or to refer a matter to the EU Commission. Now, if the Crown issued this notice initiating Brexit and abolishing the rights of UK citizens, it would effectively amount to the Crown altering the rights given to the UK Citizens by the Parliamentary law - ECA. In other words, if the Crown uses its prerogative power to trigger the Brexit process, it will effectively alter the rights given to British citizens under UK Parliamentary law. And that would be unconstitutional!

Consequences of the judgement

Although the High Court's decision may be challenged, the judgement is well grounded in constitutional law jurisprudence and is very well drafted. There is a high probability that the Brexit issue may now be voted upon by the UK Parliament. And the Parliament will not be bound by the decision in the referendum; it will only be advisory in nature.

On the face of it, the judgement defeats the popular will of the people expressed in the Brexit referendum. But in spirit, it is a major win for rule of law and democratic institutions in UK.

Relevance for India

This cardinal principle of constitutional democracy has much relevance for contemporary India. Too often, in India, people fail to see the concepts of a representative democracy as opposed to a direct democracy.

Recently, the Madhya Pradesh police shot dead eight under-trial prisoners after they allegedly escaped from a jail in Bhopal. Media reports suggest that the policemen had orders to kill the under-trials. There was no intention to arrest them. A section of the Indian population feels such extra-judicial encounters are justified. And legal procedures like CrPC are unnecessarily cumbersome.

What they tend to overlook is that a representative democracy is not the same as rule by majority. In a representative democracy, citizens elect their representatives for every five years or so. The representatives are accountable to their respective constituencies and that shapes their individual decisions. But once in Parliament, they are not mere ambassadors from their constituencies. The Parliament is a deliberative assembly of one nation, with one interest - that of the whole. In Parliament, the representative must apply his own judgement and take a decision not for local purposes but for general good. That is why in a representative democracy, direct referendums on all issues are neither required nor desired.

And once such elected representatives have made a law in Parliament, that law binds every citizen. The majority of citizens may not like a law but they cannot directly vote and override it. Similarly, the executive may not like a law, but it cannot override it either. Both the executive and the majority cannot override a law made in Parliament by the elected representatives. To do so, they have to elect the appropriate representatives who will change the laws in Parliament.

India is a representative democracy with a constitution. The elected representatives in the Indian Parliament chose to enact laws and give certain rights to under-trial prisoners. The executive (including police) acting on majority will cannot take away those rights. For that, the majority has to act through its representatives in the Parliament and get the law amended. The Brexit judgement reiterates this fundamental principle of a representative democracy.

I am convinced that freedom is an acquired taste, somewhat like dietary preferences. People brought up in a vegetarian households are likely to prefer vegetarian food. People brought up free tend to prefer freedom and those brought up under command structures, prefer that. Muslims apparently prefer the stifling, humanity-denying strictures of Islam that non-Muslims generally find horrifying.

Indians are apparently quite comfortable being bullied, bossed, commanded, spoken down to, controlled, etc, and in turn they bully, boss, command, speak rudely, control, etc others. This loosely explains why Indians got ruled by Islamic invaders, why the Europeans could colonize India, and why “higher” caste Indians oppress the “lower” caste Indians. Once you claim superiority compared to some, you have to admit that you are inferior compared to some others. Those who value freedom for themselves can never deny freedom to others.

Good news is that the love of freedom can be inculcated in people. People who love freedom also want others to be free and therefore they are not interested in being in the commanding business. Nehru is a typical example of a person who disliked the idea of freedom. He wanted to be the master. And that made his slavery to the British acceptable to him. A quote from Abraham Lincoln is apt here: “As I would not be a slave, so I would not be a master.”

(Dumping on Nehru is de rigueur at this site. It is strictly required and is not the least gratuitous. Today I will visit Porbandar, the birthplace of another freedom-hating man, M K Gandhi. Bullying and commanding was his stock in trade too.)

If you do not know the philosophy of your investing, I can assure you, you are doing a bad job. Not because you want to but because you are expecting too much from your brain. Investing is a high-energy job. So doing a SIP (systematic investment plan) is a great step. Now if you do […]

Most of the book Simple Rules by Donald Sull and Kathleen Eisenhardt talks about identifying a problem area (or an area ripe for “simple rules”) and then walks you through creating your own set of rules. It’s a useful mental process.

An ideal situation for simple rules is something repetitive, giving you constant feedback so you can course correct as you go. But what if your rules stop working and you need to start over completely?

Simple Rules recounts the well-known Moneyball tale in its examination of this process:

The story begins with Sandy Alderson. Alderson, a former Marine with no baseball background became the A’s general manager in 1983. Unlike baseball traditionalists, Alderson saw scoring runs as a process, not an outcome, and imagined baseball as a factory with a flow of players moving along the bases. This view led Alderson and later his protege and replacement, Billy Beane, to the insight that most teams overvalue batting average (hits only) and miss the relevance of on-base percentage (walks plus hits) to keeping the runners moving. Like many insightful rules, this boundary rule of picking players with a high on base percentage has subtle second – and third-order effects. Hitters with a high on-base percentage are highly disciplined (i.e., patient, with a good eye for strikes). This means they get more walks, and their reputation for discipline encourages pitchers to throw strikes, which are easier to hit. They tire out pitchers by making them throw more pitches overall, and disciplined hitting does not erode much with age. These and other insights are at the heart of what author Michael Lewis famously described as moneyball.

The Oakland A’s did everything right, they had examined the issues, they tried to figure out those areas which would most benefit from a set of simple rules and they had implemented them. The problem was, they were easy rules to copy. 

They were operating in a Red Queen Effect world where everyone around them was co-evolving, where running fast was just enough to get ahead temporarily, but not permanently. The Red Sox were the first and most successful club to copy the A’s:

By 2004, a free-spending team, the Boston Red Sox, co-opted the A’s principles and won the World Series for the first time since 1918. In contrast, the A’s went into decline, and by 2007 the were losing more games than they were winning Moneyball had struck out.

What can we do when the rules stop working? 

We must break them.

***

When the A’s had brought in Sandy Alderson, he was an outsider with no baseball background who could look at the problem in a different and new light. So how could that be replicated?

The team decided to bring in Farhan Zaidi as director of baseball operations in 2009. Zaidi spent most of his life with a pretty healthy obsession for baseball but he had a unique background: a PhD in behavioral economics.

He started on the job of breaking the old rules and crafting new ones. Like Andy Grove did once upon a time with Intel, Zaidi helped the team turn and face a new reality. Sull and Eisenhardt consider this as a key trait:

To respond effectively to major change, it is essential to investigate the new situation actively, and create a reimagined vision that utilizes radically different rules.

The right choice is often to move to the new rules as quickly as possible. Performance will typically decline in the short run, but the transition to the new reality will be faster and more complete in the long run. In contrast, changing slowly often results in an awkward combination of the past and the future with neither fitting the other or working well.

Beane and Zaidi first did some house cleaning: They fired the team’s manager. Then, they began breaking the old Moneyball rules, things like avoiding drafting high-school players. They also decided to pay more attention to physical skills like speed and throwing.

In the short term, the team performed quite poorly as fan attendance showed a steady decline. Yet, once again, against all odds, the A’s finished first in their division in 2012. Their change worked. 

With a new set of Simple Rules, they became a dominant force in their division once again. 

Reflecting their formidable analytic skills, the A’s brass had a new mindset that portrayed baseball as a financial market rife with arbitrage possibilities and simple rules to match.

One was a how-to rule that dictated exploiting players with splits. Simply put, players with splits have substantially different performances in two seemingly similar situations. A common split is when a player hits very well against right-handed pitchers and poorly against left-handed pitchers, or vice versa. Players with spits are mediocre when they play every game, and are low paid. In contrast, most superstars play well regardless of the situation, and are paid handsomely for their versatility. The A’s insight was that when a team has a player who can perform one side of the split well and a different player who excels at the opposite split, the two positives can create a cheap composite player. So the A’s started using a boundary rule to pick players with splits and how-to rule to exploit those splits with platooning – putting different players at the same position to take advantage of their splits against right – or left-handed pitching.

If you’re reading this as a baseball fan, you’re probably thinking that exploiting splits isn’t anything new. So why did it have such an effect on their season? Well, no one had pushed it this hard before, which had some nuanced effects that might not have been immediately apparent.

For example, exploiting these splits keeps players healthier during the long 162-game season because they don’t play every day. The rule keeps everyone motivated because everyone has a role and plays often. It provides versatility when players are injured since players can fill in for each other.

They didn’t stop there. Zaidi and Beane looked at the data and kept rolling out new simple rules that broke with their highly successful Moneyball past.

In 2013 they added a new boundary rule to the player-selection activity: pick fly-ball hitters, meaning hitters who tend to hit the ball in the air and out of the infield (in contrast with ground-ball hitters). Sixty percent of the A’s at-bat were by fly-ball hitters in 2013, the highest percentage in major-league baseball in almost a decade, and the A’s had the highest ratio of fly ball to ground balls, by far. Why fly-ball hitters?

Since one of ten fly balls is a home run, fly-ball hitters hit more home runs: an important factor in winning games. Fly-ball hitters also avoid ground-ball double plays, a rally killer if ever there as one. They are particularly effective against ground-ball pitches because they tend to swing underneath the ball, taking way the advantage of those pitchers. In fact, the A’s fly-ball hitters batted an all-star caliber .302 against ground-ball pitchers in 2013 on their way to their second consecutive division title despite having the fourth-lowest payroll in major-league baseball.

Unfortunately, the new rules had a short-lived effectiveness: In 2014 the A’s fell to 2nd place and have been struggling the last two seasons. Two Cinderella stories is a great achievement, but it’s hard to maintain that edge. 

This wonderful demonstration of the Red Queen Effect in sports can be described as an “arms race.’” As everyone tries to get ahead, a strange equilibrium is created by the simultaneous continual improvement, and those with more limited resources must work even harder as the pack moves ahead one at a time.

Even though they have adapted and created some wonderful “Simple Rules” in the past, the A’s (and all of their competitors) must stay in the race in order to return to the top: No “rule” will allow them to rest on their laurels. Second Level Thinking and a little real world experience shows this to be true: Those that prosper consistently will think deeply, reevaluate, adapt, and continually evolve. That is the nature of a competitive world. 

--
Sponsored by: Slack - Making teamwork simpler, more pleasant, and more productive.

(A free flowing Q&A with Ms Shobha Warrier for Rediff.  On economy and the outlook)

Will you buy a Made in India product?

November 03, 2016 09:15 IST

‘Will people who buy iPhones stop buying iPhones to help swadeshi models?’
‘There should be some advantage for the consumer to make them buy a Made in India product.’
‘Patriotism and nationalism are good words, but in business, it won’t work.’

R Balakrishnan, an independent financial consultant for over three decades, started his career as a banker.

After he became the co-founder of Crisil, he also helped set up Malaysia’s first credit rating agency.

He was head of equity research at DSP Financial Consultants and CEO and CIO of a couple of mutual funds.

Other than a financial consultant, columnist and public speaker, he is an entrepreneur and has co-founded the Lawrencedale Agroprocessing India Pvt Ltd, an organic agro farm, with his friend Palat Vijayaraghavan. He is also the CFO of the firm.

R Balakrishnan spoke to Rediff.com‘s Shobha Warrier.

According to the data released by the Central Statistics Organisation, the Indian economy grew at 7.3% in the first quarter of 2016 and 7.1% in the second quarter.
But some economists feel the exuberance associated with 7.1% growth is not visible in the market.

If you look at consumer spending, it is going on at record levels.

If you look at the automobile sector, which is a very good indicator of how the economy behaves, it is also registering record high growth.

The services sector is growing at 10 per cent today.

The stock market is at record levels; in fact, stocks are booming.

Every IPO is getting record subscription.

Definitely, the base is getting ready for a bigger boom.

If this is not growth, what is?

The problem is our expectations have become so high that we are not satisfied with 7.1% growth.

Growth is happening, but, at the same time, the disparity also is widening.

That is why many people are discontent.

We have seen globally that growth need not be associated with additional jobs because of productivity gains and improvement in technology.

It is a cause for worry for a country like India, as everything was labour oriented here.

We had 10 people doing a job which two are doing today.

The advantage we have is that 90 per cent of our economy is inward driven. Because of that, our base is low.

But when the world contracts, we don’t contract.

Above all, the government spending on infrastructure has just started.

IMAGE: R Balakrishnan. Image: Kind courtesy R Balakrishnan/Twitter

Do you attribute government spending to the 7.1% growth we witness today?

There is a difference between the growth we saw in 1991 and what see now.

The confidence at the corporate level is not as high because of the global meltdown.

Every capitalist wants to conserve capital as he is not sure about the future.

Industrial growth is struggling and services is driving growth.

The push this time is coming from the government side on infrastructure which will provide more jobs and business.

Make in India is a good slogan, but when infrastructure is not there to drive the slogan, it is tough to encourage manufacturing to make a shift to India.

Does that mean the import of cheap Chinese goods will continue for a very long time?

With the kind of prices at which they can export, it will continue.

In the 5 to 10 years of opening up with China, our imports went up to $60 billion, but our exports have come down. The only exports are things like iron ore.

Undoubtedly, China dominates the world by becoming the factory to the world.

The criticism is that the government is allowing the import of Chinese goods and letting the MSME sector die.

It is easy to be critical and say that the MSMEs died because of the import of cheap Chinese goods.

I would like people to look at the situation from the consumer’s perspective.

The consumer has benefitted more from this while an inefficient MSME could not compete with the world.

What is inefficient will not survive in today’s world.

It is not right to ask the consumers to sacrifice their choices for the MSMEs to survive.

It is a natural order that only efficiency survives.

You are not going to buy a Made in India product to show that you are patriotic.

As a consumer, you will buy a good product that is cost effective.

So, to compete with China, you have to think of setting up a factory that can make 10 crore (100 million) mobile phones a month rather than 10,000 mobile phones a month.

The thinking has to change this way.

So, the slogan of ‘Boycott Chinese goods and buy swadeshi goods’ will not work?

Why should it work?

Will people who buy iPhones stop buying iPhones to help swadeshi models?

There should be some advantage for the consumer to make them buy a Made in India product.

Patriotism and nationalism are good words, but in business, it won’t work.

Free trade is what made all the changes in Indian economy from 1991.

If you want to go back to protectionism and bullock carts, it is fine.

The criticism against the Modi government is that it caters to the Ambanis and the Adanis.
When I interviewed the BJP’s Kisan Mazdoor Sangh leader, K C Mishra, he said the Modi government is pro-capitalism.
What do you say?

The Ambanis and Adanis survived all governments.

It is a worldwide phenomenon that capitalists survive all governments.

The trade union leaders should realise that if you relax labour laws, more jobs will be created here which will only benefit them.

Today, you cannot have the guarantee that your job will be lifelong.

You cannot say you should not be dismissed.

That is why Communism and Socialism failed all over.

I will say capitalism is the only way you can grow at 7% or more.

I am very happy if a government is described as pro-capitalist.

If we do not get people to work in our farms in Ooty, it is because they have a choice.

What is anti-labour is the old labour laws that prevent people from creating more jobs.

You need to create more pro-capital policies than pro-labour.

The government has deleted more than 1,200 Acts, but not enough publicity has been given to it.

I am not a big fan of the prime minister or his party. I am critical of their politics, but I feel that, on the economic front, they are doing a lot of good things, the effect of which will be seen later.

They have just completed two years. Give them more time.

IMAGE: Prime Minister Narendra Modi and Reliance Industries Chairman Mukesh Ambani at the Vibrant Gujarat Global Investors Summit in 2011. Photograph: Amit Dave/Reuters

Is the Modi government not following the economic policies of earlier governments?

The Congress started everything, but did not have the courage to carry it forward.

They started rolling back many policies last time before the elections.

I see more determination in this government to do things at the policy level.

You mean the Modi government is doing better than the earlier governments on the economic front?

I would think so. This government is creating a much better platform for economic growth by changing the laws, the legal framework, facilitating things, etc.

They have embraced technology in a big way.

A change is happening.

This prime minister has the courage to push things forward without caring too much about public opinion.

You also can see that more noise against their policies is coming from the Communists and liberals.

Today, the man on the street is more concerned about his job than about policies.

Everybody has become ambitious and that is the way forward.

We don’t hear much about the economic reforms they have initiated. The noises are only about beef, cow slaughter, etc.

That is the tragedy of this government.

It is as if there is a pent up anger in the RSS (Rashtriya Swayamsevak Sangh) and the VHP (Vishwa Hindu Parishad) camp that they let loose.

Their actions are taking the attention away from economics. The media is very happy to pick up these noises.

It is not sensational at the 9 o’clock news to say that 13 km of road was laid today!

There are a lot of things happening on the economic front.

I am not worried about the economy. I will not say we will grow at 10%.

The biggest worry is that the disparity will continue to grow.

IMAGE: Prime Minister Modi promotes Make In India. Photograph: Reuters

Is removing hindrances for economic growth the Modi sarkar’s biggest achievement?

Yes, removing the hindrances is the biggest achievement of this government.

Look at the PSUs. I thought nobody would touch them, but things are changing.

(Then Resereve Bank of India governor) Raghuram Rajan started the cleaning up of the banks.

The next big step should be to reduce the number of public sector banks.

At present, so much of resources have been wasted.

Maybe we will see the results in 10 years.

Today, there is a fear of lending and that has to go away.

Was it a good decision on Raghuram Rajan’s part to ask banks to reveal their non performing assets, which resulted in panic in the banking sector?

It was an excellent decision.

If you have cancer, you should be able to say, it is cancer. You can’t say I have a slight fever which will go away with aspirin.

If somebody is sick, you have to recognise it and give the proper treatment.

The prime minister is also building bridges with countries and businessmen and that has resulted in more FDI coming in.

The criticism against foreign direct investment is that for every rupee coming in, more money is going out?

I don’t think so. Where is it going out?

After so many years, our current account deficit is just about a billion dollars or so.

The low oil prices might have helped, but I think the government has a good platform now. They are building on it slowly and steadily.

Another criticism against the Modi government is that the unemployment rate has not come down though the country is growing at 7.1%.
Unemployment is said to be 1.7% in the rural areas and 3.4% in the urban areas.

It is a part of growing up. I don’t think any country can escape this, more so in India.

When you have the freedom to evolve, there will be two sets of people.

One set will grab the opportunities and another set will say the government owes me a living and I won’t do anything.

These are the people who will be left behind.

For the embedded value of the life insurance company, asset management company and others..including the market value of the investments ….the Hdfc Ltd. share should be quoting at Rs. 3000 at least. Why is there such a 50% discount? or even more? I actually do not know and keep wondering whether it is because of […]

All online businesses are highly vulnerable to hacking, but the business response to this threat ranges from paranoia to complacency. Banks are among those that are most complacent, and there is a lot that regulators can and should do to change that.

Let me start with an example of a paranoid online business – online pornography. A few days ago a distributed denial of service attack on a large DNS server took down several major websites including Twitter, Spotify, Reddit, Etsy, Wired, and PayPal. While these giants tottered, adult entertainment sites like pornhub.com withstood the attack. The secret was DNS redundancy; to bring pornhub.com down, you would have to take down several DNS servers, not just one. Or consider another example: Wikileaks whose total security budget might be a rounding error for many large banks. Wikileaks has angered some of the most powerful nation states in the world, but the only disruption that Wikileaks has suffered is Ecuador cutting off the internet lines to its founder Julian Assange who is holed up in the Ecuadorian embassy for several years now. Wikileaks claims to have activated contingency plans and its twitter feed has continued to be very active.

Compared to these organizations that run their websites as a serious activity, banks come across as utterly complacent and casual about computer security. Let me give a few examples:

1. My internet banking passwords are among my weaker passwords not because I am careless, but because most banks do not allow me to use high quality passwords. To combat Moore’s law, I have been increasing my default password length every year or so, and now this default length exceeds the maximum allowed by most banking sites in India. Most banks also disallow various special characters that my random password generator produces by default.

2. A few days ago it was reported that over three million Indian debit cards had been compromised but the breach was not detected for several weeks. Many banks have tried to turn this into a business opportunity by discouraging their customers from using ATMs of other banks. If some banks are running vulnerable ATMs, they must be publicly identified and their ATMs must be shut down promptly and ruthlessly. A general discouragement of other bank ATMs only helps each bank to save on interconnect charges.

3. Anecdotal evidence suggests that banks are extremely reluctant to disclose or correct vulnerabilities detected by their own security audits due to fear that it might hurt their business. They find it cheaper to compensate the few customers who do complain loudly enough. Most customers are neither knowledgeable enough to complain, or vociferous enough to succeed.

In banking regulation, there has been a progressive shift towards considering systemic (also called macro-prudential) risks rather than the idiosyncratic risk of failure of a single bank. This lesson has to be applied to cyber risks as well. A breach in any bank opens up a threat surface for the entire interconnected financial system. The regulatory response to the breach must not be based on the loss to the bank in question; it must consider the risks posed to the entire system.

This means that failure to disclose breaches must be punished a lot more severely than the actual breach itself. Undisclosed breaches pose huge systemic risks because of the difficulty of defending against the unknown enemy. For India, I would think that an appropriate calibration of the penalty would require that the fine for unreasonable delay in disclosing a breach affecting a million customers should amount to approximately one year’s cyclically adjusted profits of the entire banking system.

A couple of such large fines would shake the banks out of their complacency and induce a healthy dose of paranoia in the banks. It would also shift the cost benefit analysis towards investing more in security. Perhaps they will hire some personnel from organizations like pornhub.com who are demonstrably better at running an online business. As Andy Gove wrote in Only the Paranoid Survive:

You need to plan the way a fire department plans: It cannot anticipate where the next fire will be, so it has to shape an energetic and efficient team that is capable of responding to the unanticipated as well as to any ordinary event.

From the description of the book “Politics by Principle, not Interest” (1998) by James Buchanan and Roger Congleton.

“The very logic of majority rule implies unequal treatment or discrimination. If left unconstrained, majority coalitions will promote the interests of their own members at the expense of other persons. This book focuses on the effects of applying a generality constraint on the political process. Under this requirement, majorities would be constitutionally prohibited from treating different persons and groups differently. The generality principle is familiar in that all persons are to be treated equally. In summary, this book extends the generality norm to politics.

“Several defences of equal treatment or generality are developed and applied. These include the familiar intuition that invokes fairness. But the primary argument here is centred on political efficiency, which is increased when governments are constrained to treat persons or groups generally rather than differentially. The political efficiency defence of the generality constraint is based on a public choice analysis of the implication of majoritarian discrimination.”

The book description also explains that the idea is an extension of Hayek’s argument.

“In his treatise, The Constitution of Liberty (1960), F. A. Hayek emphasized the central role of the generality principle, as embodied in the rule of law, for the maintenance of a free society. This book extends Hayek’s argument by applying the generality principle to politics. Several important policy implications emerge. There are no direct implications to suggest how much governments should do. The argument suggests strongly however, that, whatever is done politically, must be done generally rather than discriminatorily.”

A book worth reading for anyone with an interest in democracy, freedom and other related bits.

This morning, on the occasion of Naraka Chaturdashi, I was telling my daughter the story of how Krishna killed Narakasura in an aerial battle. The story, for those who are interested, has been articulated extremely well by V Vinay here:

0. Today is Naraka Chaturdashi, the day Narakasura was killed.

— V Vinay (@ainvvy) November 10, 2015

So while I was narrating the story, I realised how similar the plotlines of so many Hindu myth stories are. The plot goes like this:

1. There’s this guy who does a lot of tapas (meditation, not Spanish small eats) and prayers, and manages to impress some gods
2. The said gods, impressed with our guy, grant him some boon that he asks for
3. Usually this boon offers some kind of immortality. Rather, it guarantees that certain methods of death won’t work on our anti-hero
4. Now that he’s received the boon, he becomes arrogant, and soon starts misusing this boon
5. The world comes to despair, and one set of gods take a delegation to another set of gods, asking for help
6. The other set of gods (usually a subset of those that had granted our anti-hero the boon in the first place) realise their blunder, but a boon once granted can’t be taken away
7. They figure that the only way to defeat the superpower they’ve already granted is to create a superior power, which will be granted to one of the gods themselves (just so that it won’t get misused. So our gods had trust issues it seems)
8. And so this god takes this superior power, and then confronts the anti-hero with the superpower, and since the superior power defeats the superpower (like how paper covers rock, or rock breaks scissors), annihilates the hero. The hero usually dies in this process (the concept of “resignation” isn’t there in Hindu myth).
9. In order to commemorate the occasion of the annihilation of evil, which was created by gods in the first place (by the grant of the boon), a festival is celebrated.

And so we have Naraka Chaturdashi on the day Narakasura was killed. Onam on the day Bali was sent to the netherlands (no, not Holland Netherlands). Dasara on the day Durgi outwitted Mahishasura, and so forth.

I’m usually a big fan of Hindu myth, and am proud of our heritage for having created such a rich set of stories. After having identified this pattern, though, I’m not so sure. The only creativity comes in the different powers that the anti-hero is granted, and the superior powers that are created to defeat this.

I wonder why we ended up creating so many stories that are so similar, or rather why so many similar stories (memes) survived while the other memes fell by the wayside in our cultural evolution.

 

Corporate Governance and good behavior by senior executives is not so easy find. The number of sexual abuse cases in corporate India has not been brought to light, ever. RNT’s personal behavior in case of Air Asia, Nano, Corus, is now being questioned. The real question to ask is what was the Board doing? What […]

Imagine a sprinter running an Olympic race. He’s competing in the 1600 meter run.

The first two laps he runs at a steady but hard pace, trying to keep himself consistently near the head, or at least the middle, of the pack, hoping not to fall too far behind while also conserving energy for the whole race.

About 800 meters in, he feels himself start to fatigue and slow. At 1000 meters, he feels himself consciously expending less energy. At 1200, he’s convinced that he didn’t train enough.

Now watch him approach the last 100 meters, the “mad dash” for the finish. He’s been running what would be an all-out sprint to us mortals for 1500 meters, and yet what happens now, as he feels himself neck and neck with his competitors, the finish line in sight?

He speeds up. That energy drag is done. The goal is right there, and all he needs is one last push. So he pushes.

This is called the Goal Gradient Effect, or more precisely, the Goal Gradient Hypothesis. Its effect on biological creatures is not just a feeling, but a real and measurable thing.

***

The first person to try explaining the goal gradient hypothesis was an early behavioural psychologist named Clark L. Hull.

As with other animals, when it came to humans, Hull was a pretty hardcore “behaviourist”, thinking that human behaviour could eventually be reduced to mathematical prediction based on rewards and conditioning. As insane as this sounds now, he had a neat mathematical formula for human behaviour:

Some of his ideas eventually came to be seen as extremely limiting Procrustean Bed type models of human behavior, but the Goal Gradient Hypothesis was replicated many times over the years.

Hull himself wrote papers with titles like The Goal-Gradient Hypothesis and Maze Learning to explore the effect of the idea in rats. As Hull put it, “...animals in traversing a maze will move at a progressively more rapid pace as the goal is approached.” Just like the runner above.

Most of the work Hull focused on were animals rather than humans, showing somewhat unequivocally that in the context of approaching a reward, the animals did seem to speed up as the goal approached, enticed by the end of the maze. The idea was, however, resurrected in the human realm in 2006 with a paper entitled The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention. (link)

The paper examined consumer behaviour in the “goal gradient” sense and found, alas, it wasn’t just rats that felt the tug of the “end of the race” — we do too. Examining a few different measurable areas of human behaviour, the researchers found that consumers would work harder to earn incentives as the goal came in sight, and that after the reward was earned, they’d slow down their efforts:

We found that members of a café RP accelerated their coffee purchases as they progressed toward earning a free coffee. The goal-gradient effect also generalized to a very different incentive system, in which shorter goal distance led members to visit a song-rating Web site more frequently, rate more songs during each visit, and persist longer in the rating effort. Importantly, in both incentive systems, we observed the phenomenon of post-reward resetting, whereby customers who accelerated toward their first reward exhibited a slowdown in their efforts when they began work (and subsequently accelerated) toward their second reward. To the best of our knowledge, this article is the first to demonstrate unequivocal, systematic behavioural goal gradients in the context of the human psychology of rewards.

Fascinating.

***

If we’re to take the idea seriously, the Goal Gradient Hypothesis has some interesting implications for leaders and decision-makers.

The first and most important is probably that incentive structures should take the idea into account. This is a fairly intuitive (but often unrecognized) idea: Far-away rewards are much less motivating than near term ones. Given the chance to earn $1,000 at the end of this month, and each thereafter, or $12,000 at the end of the year, which would you be more likely to work hard for?

What if I pushed it back even more but gave you some “interest” to compensate: Would you work harder for the potential to earn $90,000 five years from now or to earn $1,000 this month, followed by $1,000 the following month, and so on, every single month during five year period?

Companies like Nucor take the idea seriously: They pay bonuses to lower-level employees based on monthly production, not letting it wait until the end of the year. Essentially, the end of the maze happens every 30 days rather than once per year. The time between doing the work and the reward is shortened.

The other takeaway comes to consumer behaviour, as referenced in the marketing paper. If you’re offering rewards for a specific action from your customer, do you reward them sooner, or later?

The answer is almost always going to be “sooner”. In fact, the effect may be strong enough that you can get away with less total rewards by increasing their velocity.

Lastly, we might be able to harness the Hypothesis in our personal lives.

Let’s say we want to start reading more. Do we set a goal to read 52 books this year and hold ourselves accountable, or to read 1 book a week? What about 25 pages per day?

Not only does moving the goalposts forward tend to increase our motivation, but we repeatedly prove to ourselves that we’re capable of accomplishing them. This is classic behavioural psychology: Instant rewards rather than delayed. (Even if they’re psychological.) Not only that, but it forces us to avoid procrastination — leaving 35 books to be read in the last two months of the year, for example.

Those three seem like useful lessons, but here’s a challenge: Try synthesizing a new rule or idea of your own, combining the Goal Gradient Effect with at least one other psychological principle, and start testing it out in your personal life or in your organization. Don’t let useful nuggets sit around; instead, start eating the broccoli.

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A question from a reader on my recent post Me Too!:

I recently ran across Ed Thorp’s “Beat the Market.” I find reasonable his idea that you can take on risks that (almost / essentially) cancel each other out. Find assets that are negatively correlated to buy one long and the other short (he did it with stock warrants in the 60’s but when I started looking into that, well, I’m late to that party, so nevermind).

I’m uncomfortable with shorting anyway, so what about going long in everything and rebalancing when the assets get out of whack? Aren’t a lot of the price movements of various assets (cash, bonds, stocks, real estate, precious metals) the result of money flowing towards or away from that asset? If people are, on net, selling their stocks, to what type of asset are they sending the proceeds? I can’t predict where people will stash their money next, but if I own a little of everything, I’m both hedged against prolonged depression of one asset class and aware of what’s gotten “expensive” and what’s “cheap” now.

Along these same “indexing” lines, what do you think of using ALL the sector ETFs (Vanguard has 11) to index each sector and then rebalance among them as they change in value? How would that application of your portfolio rule 7 differ than when applied to individual stocks? Also, do you think it would be subject to the same / similar danger as everyone else “indexing” as you wrote about above?

My, but there is a lot here.  Let me try to unpack this.

Paragraph 1: All of the easy arbitrages are gone or occupied to the level where the risks are fairly priced.  Specialists ply those trades now, and for the most part, they earn returns roughly equal to short-term risky debt.  They tend to get hurt during financial crises, because at those points in time, fundamental relationships get disturbed because of illiquidity and defaults amid demands for liquidity and safety.

Paragraph 2: First, rebalancing is almost always a good idea, but it presumes the asset classes/subclasses in question is high quality enough that it will mean-revert, and that your time horizon is long enough to benefit from the mean reversion when it happens.  Also, it presumes that you aren’t headed for an utter disaster like pre-WWII Germany with hyperinflation.  Or confiscation of assets in a variety of ways, etc.

Then again, in really horrible times, no strategy works well, so that is not a criticism of rebalancing — just that it is useful most but not all of the time.

Aren’t a lot of the price movements of various assets [snip] the result of money flowing towards or away from that asset?

Back to the basics.  Money does not flow into or out of assets.  When a stock trade happens, shares flow from one account to another, and money flows the opposite direction, with the brokers raking off a tiny amount of cash in the process.  Prices of assets change based on the relative desire of buyers and sellers to buy or sell shares near the existing prior price level.  In a nutshell, that is how secondary markets work.

Then, there is the primary market for assets, which is when they were originally sold to the public.  In this case, corporations offer stocks, bonds, etc. to individuals and institutions in what are called initial public offerings [IPOs].  The securities flow from the companies to the accounts of the buyers, and the money flows from the accounts of the buyers to the companies.  The selling prices of the assets are typically set by syndicates of investment bankers, who rake off a decent-sized chunk of the money going to the companies.  In this case, yes, the amount of money that people are willing to pay for the assets will dictate the initial price, unless the deal is received so poorly that it does not take place.  After that, secondary trading starts.  (Note: this covers 95%+ of all of the ways that assets get to public markets; there are other ways, but I don’t have time for that now.  The same is true for how securities get extinguished, as in the next paragraph.)

The same thing happens in reverse when companies are bought in entire, either fully and partially for cash, and in the process, cease to be publicly traded.  The primary and secondary markets complement each other.  Corporations and syndicates take pricing cues from the levels securities trade at in the secondary markets in order to price new securities, and buy out existing securities.  Value investors often look at primary markets to estimate what the assets of whole companies are worth, and apply those judgments to where they buy and sell in the secondary markets.

Trying to guess where market players will raise their bids for assets in secondary trading is difficult.  There are a few hints:

• Valuation: are asset cheap or rich relative to where normalized valuation levels would be for this class of assets?
• Changes in net supply of assets: i.e., the primary markets.  Streaks in M&A tend to persist.
• Price momentum: in the short-run (3-12 months), things that rise continue to rise, and vice versa for assets with falling prices.
• Mean-reversion: in the intermediate term (3-5 years), things that currently rise will fall, and vice-versa.  This effect is weaker than the momentum effect.
• Changes in operating performance: if you have insight into companies or industries such that you see earnings trends ahead of others, you will have insights into the likely future performance of prices.

All of these effects vary in intensity and reliability, both against each other, and over time.  If you own a little of everything, many of these effects become like that of the market, but noisier.

Paragraph 3: If you want to apply rule 7 to a portfolio of sectors, you can do it, but I would probably decrease the trading band from 20% to 10%.  Ditto for a portfolio of country index ETFs, but size your trading band relative to volatility, and limit your assets to developed and the largest emerging market countries.  With a portfolio of 35 stocks, the 20% band has me trade about 4-5 times a month.  With 11 sectors your band should be sized to trade 1-2 times a month.  20 countries, around 3x/month.  If it is a taxable account set the taxation method to be sell highest tax cost lots first.

Remember that portfolio rule 7 is meant to be used over longer periods of time — 3 years minimum.  There are other rules out there that adjust for volatility and momentum effect that have done better in the past, but those two effects are being more heavily traded on now relative to the past, which may invalidate the analogy from history to the future.

Using portfolio rule 7 overweights smaller companies, industries, sectors, or countries vs larger ones.  It will not be as index-like, but it is still a diversified strategy, so it will still be somewhat like an indexed portfolio.

Finally, even if we get to the point where active management outperforms indexing regularly, remember that indexing is still likely to be a decent strategy — the low cost advantage is significant.

That’s all for now, and as always, comments and questions are welcome.

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I have sometimes said that it is common for many people to imitate the behavior of others, rather than think for themselves.  There are several reasons for that:

• It”s simple.
• It’s fast.
• And so long as you don’t run into a resource constraint it works well.

People generally have a decent idea who their smartest friends are, and who seems to give good advice on simple issues.  If your neighbor says that the new Chinese food place is excellent, and you know he knows his food, there is a very good chance that when you go there that you will get excellent Chinese food as well.

You might even tell your friends about it; after all, you want to look bright as well, and its neighborly to share good information.  That works quite well until the day that Yogi Berra’s dictum kicks in:

Nobody goes there anymore. It’s too crowded.

The information indeed was free, but space inside the restaurant was not, even if patrons weren’t paying to get in.  And even if they have carryout, the line could go around the block… a hardship for many even if you are getting the famous Ocean Broccoli Beef.  (Warning: Hot in every way.)

Readers of my blog know that the same thing happens in markets.  Imitation was a large part of the dot-com bubble and the housing bubble.  When a less knowledgeable friend is making what is seemingly free money, it is very difficult for many people to resist the temptation to imitate, because if it works for him, it ought to work better for the more knowledgeable.

As such, prices can get overbid, and the overshoot above the intrinsic value of the assets can be considerable.  It all ends when the cost of capital to finance the asset is considerably higher than the cash flow that the asset throws off.  And as with all bubbles, the end is pretty ugly and rapid.

But what if you had a really big and liquid strategy, one that threw off decent cash flow.  Could that ever be a bubble?  The odds are low but the answer is yes.  It is possible for any strategy to distort relative prices such that the assets inside a strategy get significantly above intrinsic value — to the point where they discount negative future returns over a 5-10 year horizon.  (As an aside, negative interest rates are by definition a bubble, and the instruments traded there are in big liquid markets.  The severity of that bubble collapsing is likely to be limited, though, unless there is some sort of payments crisis.  The relative amount of overvaluation is small, and has to be small.)

Indexing as Imitation

Today, indexing is a form of imitation in two ways.  The first way is not new — it is a way of saying “I want the average result, and very low fees.”  It’s a powerful idea and generally a good idea.  If used for long-term investment, and not short-term speculation, it allows capital to compound over long periods of time, and keeps people from making subpar investment decisions through panic and greed.

Then there is the second way of imitation: indexing because it is now the received wisdom — all your friends are doing it.  This is a momentum effect, and at some point even indexing through a large index like the S&P 500 or Wilshire 5000 could become overdone.  The effects could vary, though.

• You could see more larger private corporations go public because the advantage of cheap capital overwhelms the informational and other advantages of remaining private.
• You could see corporations reverse financial engineering, and issue more cheap stock to retire expensive debt.  On the other hand, it would be more likely that credit spreads would tighten significantly, leaving debt and equity balanced.
• You would see pressure on corporations with odd capital structures like multiple share classes to simplify, so that all of the equity would trade at high multiples.
• Corporations could dilute their stock to pay for resources — labor, land, intellectual capital and physical capital.  Or, buy up competitors.  If you think that is farfetched, I remember the late ’90s where it was cool for executives to say, “Let the stock market pay your employees.”
• People could borrow against their homes to buy more stock, or just margin up.

If you see what I am doing — I’m trying to show what a distorted price for publicly traded stocks in an big index could do — and I haven’t even suggested the obvious — that an unsustainable price will correct eventually, and maybe, in a dramatic way.

I’m not saying that indexing is a bubble presently.  I’m only saying it could be one day.  Like the imitation illustrations given above, when a lot of people want to do the same thing without bringing additional information to the process, shortages develop, and in some cases prices rise as a result.

One final note: active management would get more punch at some point, because informationless index investing would lead to some degree of mispricing that active managers would take advantage of.  At the rate money is currently exiting active management and going into indexing, that could be five years from now (just a guess).

As with all things in investing, the proof will be seen only in hindsight, so take this with a saltshaker of salt.  As for me, I will continue to pick stocks.  It has worked well for me.

Adair Turner has a piece which one is beginning to realise. Higher education is hardly bringing the kind of rewards it brought earlier. Everybody agrees that better education and improved skills, for as many people as possible, is crucial to increasing productivity and living standards and to tackling rising inequality. But what if everybody is wrong? […]

The post Video Series: Investing Lessons From Occam’s Razor appeared first on Safal Niveshak.

If you switch on any channel today you hear shrill voices. It could be just the market going down or going up. And the anchors talk like they know perfectly why the market went up or went down. It is amazing to see people going wrong everyday coming the next day with similar views. Apart […]

I wrote this note to all of my subscribers. Hope you will find it useful too

Let me state this again – My approach is to buy good quality companies at a reasonable price. There is nothing magical or new about this. Every other value investor professes to do this and I am no different. There is no secret sauceand I make it a point to share my thought process and analysis as much as feasible.

I have practiced a value based philosophy for the last 15+ years and it has served me well. I have no plans of changing a sound and logical approach for something else in the future. As long as I continue to do follow it rationally and with discipline, I think the long term results will be good even with occasional spells of under-performance.

One the first comments I get from a new subscriber after joining is this – I had a look at the model portfolio and I cannot buy more than 2-3 positions for now. I have a stock response for that – please be patient and give it some time. I have usually seen that most new subscribers are able match the model portfolio over a span of 2-3 years as some stocks drop below the buy level and new positions are added.

If you look at the price action of our 17 odd positions for the last two years – you will find that at least 14 hit the buy point and even went lower for a few days or more. So in effect, it’s quite possible to be 80% matched to the model portfolio for those who joined the subscription in the middle of 2014. I do not have the statistics of how many have done that, but my point is that over a 1-2 year time frame, one will get enough opportunities to buy and build your portfolio. One needs to have the patience to do that and not get swayed by short term events.

We started the model portfolio in Jan 2011. We have had several actual and imagined events such as Grexit (did not happen), Chinese hard landing (cannot say if that has occurred), Brexit (did happen), oil crash (occurred in 2014) and mismanagement of the Indian economy by the previous government.

Now someone could counter this logic by pointing the risk of 2008/09 collapse when mid and small caps crashed by 60%. What if one of these events had snowballed into a similar crisis?

-           For starters, one cannot invest based on the low probability, high impact macro events. One can diversify against black swan risks at an individual company level, but not at the country level. To give an extreme and silly example – how will you protect yourself from the risk of an asteroid crashing into a major city in India and causing a major economic crisis? Can one really diversify against such an extreme risk?

-           My second argument is that one needs to invest based on the higher probability risks (such as inflation) and insure against the low probability, but extreme ones. In other words, invest to beat inflation or secure your retirement and buy life/ health insurance to hedge the other extreme kind of risks. Finally there are some kind of risks, where one can only hope and pray that they don’t occur and we can do nothing about it.

If a 10-15% drop in the portfolio is going to scare you (as it may have in Feb of this year) and cause you to lose sleep, then equities are not for you. I can share my analysis and thought process, but cannot fix your temperament. You will have to bring a steady and calm mind of your own to the table.

Looking for trends

Some of you may have noticed that the model portfolio generally does not have a specific theme or view. One will often hear from investors that they have positioned their portfolio to benefit from better monsoon or revival in capex or some such factor.

One needs to keep in mind that a good monsoon or lower inflation is not a long term trend, but only specific events which play out for a small period of time. A long term trend would be something like demand for housing/ housing loans which leads to a growth of 2-3X of the average GDP growth rate.

Why am I discussing this point now? I think there is a lot of value in identifying such trends early and investing based on it, provided one does not overpay for it. As a result, I have now started looking at some of the current ideas from a trend point of view. We will however not know if the trend was real or a mirage, till a few years pass.

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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

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Industries come and industries go. Jobs come and go, and they morph.  Perhaps we should take heart that politicians don’t change.  Most still think that certain types of jobs need to be preserved and protected.  Also, politics doesn’t ever seem to have productivity improvements, such that the same things could get done (or not) with fewer people.

Looking at the history of the past 200 years, and the jobs that existed then and exist now, you would conclude that less than 10% of people working in the US today occupy jobs remotely similar to what was done 200 years ago.  (I exclude homemakers who do valuable work for their households that is blissfully untaxed.)

There are places that had prosperity for a time because an industry grew large, and then that industry went into decline, or at least, increased labor productivity reduced employment in that industry.  I’ll toss out a few:

• Agriculture generally
• Coal mining
• Iron ore mining
• Steel
• Auto production
• Construction
• Newspapers
• Magazines
• Bookstores
• Textiles
• Telephones
• Apparel
• Family farms
• Many industrial jobs

The last two are notable for the passion that they generate.  Politicians will say that family farms have to be protected and that we need more good industrial jobs.  Both are hopeless causes.  Farms benefit from scale in general, though small farms can do well if they have a specialty where people are willing to pay up to gain the quality of the product.

Industrial employment is going down globally.  The application of information technology to industrial processes allows as much or more to be made, while hiring fewer workers.

The politicians may as well beg that we could stop time or reverse it.  Absent some astounding catastrophe it is hard to see how productivity would decline such that more workers  are needed in industrial jobs.  “Ned Ludd” lost that war over 200 years ago.

Politicians might be able to shift where jobs are located, but not the total amount that gets produced or the number hired globally.  Anytime you hear them say that they will increase the quantity, quality or pay of jobs, it is best to ignore the politicians.  They are promising something that they can’t control.  The same is true of central bankers; if they can do anything about the number of jobs, it is highly transitory, as policy loosens and tightens; jobs flow and ebb.

Anyone looking seriously over the last 200 years should conclude that in this modern world with the extended division of labor that jobs will continue to morph, appear, and disappear.  The internet has led to the disappearance and creation of many jobs, and I don’t think that that trend is complete yet.

My best advice to you is this: learn, grow, be flexible, and be willing to work in ways that you never imagined.  The clock will not be turned back on technology, which is the main factor affecting employment.  You must be your own defender, because the factors affecting employment are bigger than that which governments can control.  Finally, as an aside, don’t trust the politicians (from any party) who say they will improve your economic prospects.  Aside from reducing what the government does, they haven’t succeeded in the past; they will not succeed in the present.