The return of the Stock Market

It has been argued for long that the selection of asset class is much more important than any particular asset in that class. Thus it is more important whether you invest in property, gold, cash or share rather than what property or which shares. Though not completely true for shares, atleast property prices are seen to rise and fall together. (Fall in property prices? Long time since we saw that happen!)

Another general observation is that when people generally start thinking that a particular asset class cannot fail at all, there is certainly a bubble waiting to burst. It happened to the stock markets in India in 2007 and to gold recently. The same feeling still persists for property prices, especially in cities like Mumbai.

So it has been proved that gold is no longer a safe haven. Property market is too optimistic for its own good and a correction is due sooner or later. Cash is never an option with the inflation rates seen in India.

So the only major asset class which does not seem inflated right now is the Stock Market. Also, there has been a huge drop in the earnings expectations. Mood was generally pessimist till a little while back. However, money has already started flowing in after the gold prices dropped. Inflation seems to be ebbing giving hope for a rate cut by RBI further fueling the rise. 

With the failure (or predicted failure as for property) of other asset classes, the rise in the stock market may sustain well beyond what is currently seen as a 100 meter dash. There is a very high probability that we are standing at the start of a very strong bull run. So better be sure not to miss out on it!

Migration as an indicator of growth

If carefully studied migration data could give the best results possible about the relative growth of geography. It instinctively explains the migration of people from rural areas to cities, migration of people across states and countries. Whenever there is growth, there is job creation and increased demand for people which leads to such migration.

It explains why Bihar and the other BiMaRU states are the biggest exporters of manpower. It explains the migration of individuals to the US and European nations from across the world. One may always argue that migration will also be due to the standard of living and the difference in purchasing power parity leading to increased value of remittances. However, that will only be a part of the reason and such reasons would be balanced by an individual’s inertia to move across geographies. So we may assume that the demand supply equation would be the major reason for migration.

Taking this simple philosophy, we may make many simple conclusions.

Bihar today is one of the fastest growing states. However, the migration has only reduced and not stopped or reversed. Thus the growth story is still not strong enough and may take some time to see a real reversal of trend. Any comment before that may be premature.

Gujarat has seen a huge uptrend in industry and thus a rise in GDP as well as migration to the state. However, it is also a great exporter of people meaning trade opportunities (the core competence of the locals) are growing elsewhere with lesser competition. Thus migration may not only show the growth of geography but also points at growth in sectors. Another example would be how industry migration gives insights on the same; thus people from all industries moved to IT at a given time signifying real experiential growth.

With all the talks of the (once) high growth rate of India, migration to India is still weak. On the other hand, though a relatively closed market, china has seen a better influx of people through manufacturing setups of global players.

India still looks upon US and the European nations as a dream destination. Thus the growth seen by the India is still not strong enough considering its talent pool. Also, it may point that US and European growth stories are still not dead.

The simple point is though numbers may sometimes tell a different story; migration data reveals the real and as-felt growth around us. It not only gives a preview on the growth of a region but also gives pointers on industry and growth of a particular social stratum.

India: The Doomsday Prophecy

It is striking to see how India has degraded so fast from a land of opportunities to a land of opportunist politicians (Is there another kind of politician?)

India grew in the real sense under the leadership of its then prime minister Shri Atal Bihar Vajapayee. On the other hand even his present day party mates seem to lack even a part of the vision that he carried. Point being that there seems to be no solace visible for development politics in India, this party or that.

The contradiction in the government outlook is clear. While the NDA built a strong base of infrastructure for entrepreneurial India to chart its own growth story, the UPA wants growth by doling out benefits (mostly unearned). While NDA provided employment to crores through its projects, UPA believes in providing unproductive employment thus wasting valuable human resource available.

Another addiction of the UPA is to provide everything free (or atleast subsidized). Subsidized fuel, subsidized fertilizers, subsidized food, free employment, free power. The country is like a wasted drunkard who earns little and spends all on his addiction. Rather than giving people opportunity to earn to buy the goods, UPA believes in either giving it free or doling out cash for the purchase.

India has done this before and it is doing it again. It will be of little surprise if India slips back to its Hindu growth rate in the coming years. What the government needs to do is clear. It needs to concentrate on infrastructure. It needs to build a capitalist economic model atleast to some extent. While India is grappling with power shortage, power generation should be encouraged and not held back due to subsidized rates. While Infrastructure is in no way acceptable, the reckless government spending should stop to reduce interest rates to make such investment lucrative for private players.

However, everyone knows that none of these changes are going to happen. The upcoming election will only see the rolling out and implementation of food security bill which will further empty government coffers. The probability of NDA, hopefully led by Narendra Modi, coming to power still seems low. It will be really painful to see the same things that have happened for the past decade repeat for the next five years. Opening up of more sectors for foreign investment is not going to suffice when the entire economic and business environment is stagnant.

Little wonder that the most probable/popular growth opportunity seen by youngsters today is a stint abroad, or better still a lifetime abroad.

Economics - A humanitarian perspective

Economics is a complicated subject. The attempt by economists to put it in the form of equations has further complicated things for the simple minded like me. Having read (the summaries of) works of great economists like John Maynard Keynes, Milton Friedman and Paul Krugman, I can’t help but be impressed at the foresight of these people. No doubt that many of the thoughts put forth by such economist have averted major crisis the world over, time and again.

But for a change, I thought, why not take a simplistic view of the whole thing. Combine the simple thought processes with the theories and knowledge of economics and try to look at the present economic conditions. Many of the points may be simple facts that we may have forgotten in the barrage of jargons.

The Premise

What is the aim of all theories in economics?

The aim is sustained economic activity and growth, a natural rate of employment, contained inflation etc. In short, economics aims at overall well being of humanity. 

What does the money spent represent?

It represents the use of limited resources of the world. Mostly it represents use of human efforts, fuel and energy lost forever. 

Keynes vs. Friedman

John Maynard Keynes suggested government impetus while Milton Friedman wanted free market economy. Disagreeing with neither Keynes nor Friedman, I believe free markets drive efficiency leading to progress while government regulations are required to ensure effective free market and play the saviour during troughs in the business cycles. So in combination, regulations to ensure fair play and efficient utilization of resources should lead to the said aim.

Where did we fail?

In recent times, the world has failed on both accounts. And the epicentre of these mistakes was the US and other developed nations on most counts.

Immediate precursors

Crisis of 2008

In some way it was the lack of regulations which lead to the events of 2008. In the upheaval, some capitalized on the crest in 2007 while many got stuck in the trough of 2008. Wealth was neither created nor destroyed. It was simply transferred from one hand to another. Keynesian economics followed with great investments by government leading to huge unmanageable debts.

War against terror

A report in June estimated that the American cost of the war at 3.2 to 4 trillion USD. The US government debt stands at a little less than 15 trillion USD. To put things in perspective, world’s GDP is 58.26 trillion. So by conservative estimates 20% of the debt money was used not for development but for destruction albeit in a different country. Let’s not forget that US is not the only country who incurred expenses in the war. So the overall cost of war is much more for the world, though US was the major spender.

Use of such valuable resources and in such huge amounts for the purpose of destroying more resources and properties is what it means to a simple mind. I am not even counting the lives lost in the whole war! The US was foolish enough to follow Afghanistan with Iraq, and the world was timid enough to watch. Power flew from the barrel of the gun and bodies such as UN yet again proved their worthlessness.

This single event was a failure on both counts of resource utilization and international regulations.

Long term Issues leading to the day

The problem may not just be episodic. Just as World War I was not just caused by the assassination of the Archduke of Austria alone but a series of factors, the present economic war is a manifestation of systemic decisions taken by the societies of the world over time.

Supply vs. Demand – a really macro view

Here the demand signifies what the entire human population requires while the supply signifies what this world can offer. The world today carries around 7 billion people and it has a limited set of resources such as fuel and metals. With limited supply and increasing demand, the cost of living is bound to increase. 

Consumerism

Consumer demand is essential to keep the economy alive. But how do you know when it is overdone? Take for example the consumption of energy. The per capita consumption of electricity in US is 1460 watts/ year while India stands at 50.5 watts/year. With the power cuts in India, people know that our consumption supply is less than optimal. But how do we tell if 1460 is too big a figure or not? The western world has indulged in excessive splurging for almost a century. It part of the reason of their growing economies. But it somehow doesn’t feel right from this simplistic framework of ours. It makes me wonder whether the west is in a way splurging at the expense of others.

GDP growth as a parameter

GDP of the world (in real terms) is constantly increasing. It has to, with the increasing population of the world. GDP growth is seen as a success parameter for nations. But ideally, we would want to have a situation such as Japan. Its economy is in constant recession. With lesser population, they need lesser goods to be produced. Even if the population were to stabilize, reduction in GDP of the world should be the aim as increased efficiencies should lead to lesser costs and prices for the same or even improved products.

Rich-poor divide

More than growth what we require is equitable distribution of what is already available. The topic of inequitable distribution finds place in political discussion (with little actual effect) but rarely in economic ones. A success of the economy is determined by the status of the bottom of the pyramid rather than the top. However, the capitalist philosophy been followed the world over has done little to solve the problem. The trickle down effect is hardly seen. Socialism on the other hand, drives down efficiencies and just makes everyone poorer. 

Conclusion

While the economists take care of our business cycles, it is these simple fundamentals discussed that will drive our economies in the long term. There is no simple answer to the complex problems. We need a series of great minds to focus on these issues and show us a way. If we focus our attention on just the short term economics, then as Keynes said, we may actually be all dead in the long term.