Risk of doing nothing

 

Hardly a day goes by without a story that financial markets are in “bubble” territory. Stock markets around the world are at record highs and bond yields are at record lows. The former means that valuations are at the upper end of historic ranges. The latter has meant that many unusual things can be sold to investors anxious for yield. 

• Investors remain nervous and many choose to hold significant amounts of cash. This appears to be a conservative strategy but in fact it is a rather risky one. The obvious problem is that with rates at record lows you receive virtually no interest on your capital.
• The bigger problem is that with inflation running well above the level of interest rates the conservative strategy of putting money in the bank is actually destroying your purchasing power at an alarming rate. As inflation has been higher than the interest you have been receiving, your purchasing power has been declining.
• Bank interest rates are likely take a long time before the bank rate gets above the inflation rate. Consequently this trend of real capital loss from holding cash will continue for years.
• While we are conscious that there are fewer opportunities to find attractively valued investments, we continue to dedicate your resources to finding such opportunities.
• Risks that affect investments are -- doing nothing risk, inflation risk, market risk, specific risk, currency risk, default risk, sector risk, liquidity risk, false confidence risk, duration risk and leverage risk.

A diversified equity portfolio, or a balanced portfolio of equities, corporate credit and government bonds, are expected to continue to provide investors with capital growth in real terms. In fact such portfolios may be less risky to your financial well-being than sticking your money in the bank.

The only certainty is uncertainty. There is no such thing as “risk free”. 

Even government and banks can or have the potential to default. 

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is never guaranteed. Yields on investments may fall or rise on the performance of the investment and the financial markets.  As such no warranty can be given that the yields will consistently attain such levels over any given period.

'Dhoka' Budget 2018

   

   

The fact that, ahead of Budget 2018, market regulator SEBI and stock exchanges have taken precautions by asking brokers to collect higher margins from those with sizeable positions in futures and options i.e. foreign institutions, wealthy investors and proprietary desks anticipating a significant run-up in the equity market indicates that Modi, Jaitley & Co are fully aware of distressed economic condition and their worst budget 2018, and that their talking bluffs on the floor of the house will not go down well on stock market operators. Expectedly,  Sensex lost 1000+ points on Budget Day and aided with global negative indicators lost another 1000+ points on the following day. Investors saw their wealth erosion of nearly Rs.10 lakh crores. 

Ironically, Budget 2018 (a 'Dhoka' Budget) satisfies none and every segment stands aggrieved. 

Moody's recent conditional upgrade of India to 'baa2' may very well get reversed to 'baa3' which is only a notch above 'junk' category.

Today, every economic indicator is worse than that of 2014 (when Sonia Gandhi-Manmohan Singh's Congress led UPA was voted out and Modi's BJP led NDA was voted in) and Modi & Jaitley owe an explanation to the nation where the '3 year low oil bonanza money 2015-2018' of over Rs. 6 lakh crores was squandered away, while our PSU banks are starved of recapitalization funds arising out of mounting NPA's.? 

P.Chidambaram, former FM analyses that the Budget overstates income, understates expenditure the realistic deficit could be 4.15% of GDP and if  National Health Protection Scheme for Rs.5 lakhs health insurance for poor takes off with an estimated expenditure of between Rs.10,000 crores and Rs.1,00,000 crores leaves a very big hole in the budget with run away inflation. If crude oil prices goes up, there will be serious trouble.

Riding on economic distress and unpopularity, Modi's BJP suffered electoral reverses. Extrapolating Gujarat election results (swing of 9%) and Rajasthan bye poll losses (swing of 18%), Modi's BJP may not get even 240/542 LS seats in 2019 general election. Modi's charisma is waning and Rahul Gandhi's popularity rising, sends jitters to Modi and BJP. If NDA allies walk out of alliance, which is quite likely, Modi & BJP will have to sit in opposition benches.

What Sonia Gandhi could't achieve in 10 years, Modi is likely to do it in just 5 years! 

It is not development of India but making Rahul Gandhi as Prime minister!

The economy of debt

• Economies work best, generally speaking, when people are making decisions based on economic fundamentals, not on tax considerations.
• Debt magnifies risk. If companies or individuals rely on large amounts of leverage, it’s much easier for bad decisions to lead to insolvency, with significant ripple effects in the wider economy. 
• A debt-ridden economy is inherently more fragile and more volatile. Encouraging people to take on debt qualifies as a genuinely bad idea.
• Subsidizing debt seems harmless simply because we’ve always done it. But the fact that you’ve had a bad habit for a long time doesn’t make it less dangerous. 
• All of the debt-created money has to be spent into the economy so it will be available for paying off debt. If that doesn’t happen then there will be a scarcity of money even if enough new loans are made to keep recreating the money that disappears when debt is paid off.
• Money saved is money held out of the working economy. Savings that earn interest, compound the problem because not only is the saved money held out of the economy, it’s acting as a magnet to draw additional money out of the system. The accumulated interest money is generally added to the savings rather than spent, compounding the interest and drawing more money from the system.
• What is real in the real economy is the people, talent, knowledge, technology, infrastructure, resources, etc., and most importantly the good will, industriousness, and positive intentions of the people.
• The working economy is trying to pay huge debt out of those tiny blocks of money. To avoid default, it pays the interest, and borrows more money. The producing economy is suffering from a severe scarcity of money, and it’s working under a system where the only way to get more money into the system is to borrow it. So we have a vicious circle where the necessity to pay the existing debt creates scarcity of money, and the only way to relieve the scarcity is to borrow more money, which aggravates the scarcity, which is only relieved by borrowing more money.
• Essentially it’s operating like a pyramid scheme. In order to stay alive it has to grow, and the only way it can grow is to cannibalize and destabilize itself further. The more it grows the more and faster it has to grow, and the more unstable it becomes. 
• Exponential growth is when something grows by multiplying itself. If something grows by a percentage, eventually it will double. The numbers are becoming completely disconnected from the real world.
• Debt isn’t the only thing forced to grow in the economic model. To feed the expanding debt, the whole economy has to grow. It has to expand whether the people in it need it to or not. Manufacturing must increase, sales must increase, and consumption must increase. Businesses have to expand to stay afloat. Their marketing departments convince more and more people that they need to buy more and more stuff. Stuff that uses valuable resources to produce and then often gets sent to landfills a few years later.
• Since the money scarcity and debt pressure keeps increasing, economic growth becomes more and more of a squeeze play. Businesses in the working economy must grow, but overall they have less and less money to do it with, so they’re continually trying to get more from less. The trend is to cut the work force, cut wages, cut benefits, cut the quality of the product or service, and of course, outsource the labor to foreign countries with low wages and poor labor protection -- anything that can be done to get more out of less.
• In the process of creating more debt we are also creating more money, yet the scarcity of money gets worse and worse. 

WHERE IS THE MONEY GOING?

• Economy ends up with a two-class society—interest payers and interest receivers. The interest payers would be working hard and scrambling to stay afloat. The general trend would be that they work harder and longer and receive comparatively less and less for it. 
• The interest receivers would be accumulating more and more resources, living more and more lavishly, and inventing new games to play with money.
• Financiers and investors of all sorts are essentially interest receivers. That includes pension funds, insurance funds, charitable trusts, and various institutions in many areas of society. 
• People who are paying on mortgages, student loans, auto loans, and credit cards are obviously payers, but many people in the modern world are both payers and receivers.
• Financial progress in the middle class has generally been to work your way from payer to receiver. You start out buying a house and putting money into a retirement fund. You work your mortgage down and your retirement fund and investments up, and eventually you can retire as a receiver.
• Then there are the people who fall out the bottom of the payer class. Sometimes they become a different type of receiver—receivers of charity or receivers of welfare.
• If you yourself have made the transition from payer to receiver, you might hope that your children and grandchildren will be able to do the same. With relentless exponential debt growth, the transition becomes less and less possible.

All progress is precarious, and the solution of one problem 

brings us face to face with another problem ... Martin Luther King, Jr.

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While debt is unavoidable, it is wise to keep to as minimum as possible. While we all have debts, debt ridden entities must take extra care in prioritizing spending, avoiding extravagance and wastage. Under all circumstances frugal living is best and that generates lasting happiness. Economic progress at the expense of ecology in reality is destructive.