Value of Money

We value money just because it is perceived to have value by everybody else. 

Money in itself has no intrinsic value, it is just a piece of paper or a number in your digital bank balance. The very allure of having more and more of this commodity without the need of utilizing it for anything is rather strange. People want to have billions and billions of dollars in their bank but have no need or intention to spend them in any way. It is like the tulip mania of the 17th century. People wanted to get more tulips because the value of tulips was perceived as going up, not that they had any need of tulips or they were trading tulips for their needs/luxuries.

Rai stones from Island of Yap          

What if money comes with an expiry date?

If money had an expiry date, say the death of the person who earned it or 100 years, people will be forced to spend it instead of stock it. The fundamental property of money/wealth that it can be stored will be destroyed. It can have earth-shattering ramifications on the way we humans exists.

1. No stocking of money: Money will stop being stocked in the bank accounts. There would be a pressing need to spend it within its lifespan.

2. Fulfilling lives: People will be enjoying more fulfilling lives as the very need to store money would be gone and people would be spending generously.

3. More Charity: People would tend to donate any unspent and going to expire money and/or would be more included towards charity.

4. Less Tax Evasion / Black Economy: Tax is evaded for the sole purpose of stocking more money. With no more need of that extra money, the population would tend to be more honest and find it less useful to evade tax.

5. Having a rich dad or mom would mean much less now.

What if the same concept of expiry is applied to other forms of wealth (real estate, precious metals, etc.)? Say all the properties owned by you will be returned to the society once you are dead.

Union Budget and Economy

The union budget 2008-2009 is out and the newspapers have got ample fodder to keep the nation (and some parts of world concerned with India's economy) busy over the next couple of days. They will be examining each and every word of finance minister's speech from different angles and come out with vastly different conclusions trying to predict the future course of the country. At least one out of these many predictions will turn out to be true which they will call their ability to predict accurately. If at 10 a.m., I predict that it will rain tomorrow and then at 10:10 a.m., I predict it won't rain tomorrow. Now, day after tomorrow, I will tell you "see how good I'm at predicting the behavior of clouds" (note I made both predictions, either of which is bound to be true) and I know you won't ask me questions about the prediction which didn't turn true (do you ask your newspapers). So, the media have been debating whether the FM has pushed India backwards with increased fiscal deficit (how much is again a matter of debate) or ushered into a new era of reduced tax but still higher revenue collection and growth. And this mindless debate will continue as long as there are mindless viewers trying to find out a conclusion and as long as there are advertisers. I haven't gone into the nitty-grity of the bill, but to me one thing is clear that finance minister has tried to achieved three things by doing three things. Three things he tried to achieve: 1. Keep inflation under control. 2. Keep GDP growth intact. 3. Enhance vote bank for the next election. Three things he did: 1. Reduced excise duty (tax levied on locally manufactured goods). 2. Reduced direct income tax. 3. Donated generously Rs 60,000 Cr to garib kisan. The first thing, reduction in excise duty in myriad of manufactured/packaged goods is aimed at keeping inflation in check. This in conjunction with recent decrease in rail freight rates may have some effect on prices of manufactured/packaged goods, but major contributes of inflation are commodities which are on fire due to (may be) huge money moving from equities to commodities. Moreover, it is the agricultural commodities and perishable food items prices of which affect the public in general and prices rise of which are shown on TV, hence affecting the vote bank. I'm uncertain about how far the duty cuts will influence the prices of these sensitive goods. Secondly, the reduction in income tax rates has left anything between Rs 5000 to Rs 45000 in the pockets of Indian middle class, the informed voter. It will have two ramifications: 1. To save Rs X of income tax, on average one has to invest Rs 3X in tax saving instruments. A significant part of this money that the nation invests to save tax will now be available for consumption. So, enforced investment (enforced by the need to save tax) which is probably the only investment most people in India make will be reduced to great extent. Bad time for tax-saving mutual funds, ULIPs, et al. 2. Local consumption will increase hugely. People will spend not only the amount saved in taxes but also which was supposed to be used for investment. Thirdly, the Rs 60,000 Cr. Most analysts and media didn't quite like this since they feel this is unnecessary waste of funds and will make rural borrowers "addicted" to this kind of generosities in the future. I'm assured that most analysts have no connection with the farmers and media is published from urban areas only and hence, they have little insight if any about farmers' plight. Unlike other government generosities, the chances of money being lost in transit is less likely. This is because of the fact that money has already been spent and government is paying back the credit to the financial institutions, who, I suppose, will perform far better in extracting dough from the ministry in comparison to unorganized masses, like tsunami victims, etc. I know lot many borrowers will still be required to pay the loan themselves and many who have paid back partially will be shown on papers as if they didn't. But more or less, farmers will now have renewed ability to borrow and to go farming. Basically, Finance Minister has virtually given gift coupons worth Rs 60,000 Cr to farmers as well as to all those involved in the process of distributing loan wavers, people in the ministry, babus in the bank, the middleman who reads the deed to the borrower, etc. And of course, they are going to buy stuff with these gift coupons hence increasing local consumption. With no credit to pay back, the garib kisan will have a lot more funds (as new credit though) to be deployed in fields in the form of farm input, i.e., fertilizers, seeds, pesticides, tractor. Results. Increased sale of farm inputs (local consumption) leading to better harvest leading to increase in GDP growth rate and stabilization of farm product prices (decrease in inflation). Also, don't forget that it will strengthen the vote bank too. So, the bottom line is that reduction in excise duty and income tax along with the gift to rural janta will ensure that economy gets a boost with hugely increased local consumption but at the cost of decreased savings and investments (are we becoming more like Americans). I'll be expecting better quarterly numbers from the companies serving the local economy in the third and fourth quarters of 2008-2009 since these are months when most of the investment is made and now that amount will now be diverted to mobiles, jeans, shoes, jewelry, and of course, chicken as well as better harvest. Now, you would say what about stock market; since the money is diverted from investment to consumption, stocks must take a dip. No. Investment for tax saving is a very small amount when compared to total domestic investment and tiny if you compare with FII numbers. On the other hand, investors (domestic or foreign) will be more interested in buying stocks with better earnings. Indian growth story (as they say in the media) continues....

Desi Versus Videsi Credit

AMERICANS are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come. The country’s largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears..... At the same time, defaults — when lenders essentially give up hope of ever being repaid and write off the debt — rose 18% to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission...... Around 325 million individuals accounts are held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45% of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.

Source: Americans Tripping on Credit Card Payments, Economic Times American banks distributed credit cards to all the Toms, Dicks, and Harrys just as they did with mortgage loans and of course, all those Toms, Dicks, and Harrys weren't hesitating to make merry. The good thing about subprime mortgage is that at least there is something material to back those loans, the property. Foreclosures can fetch the banks some money though substantially less than the actual loan amount (given they can get buyer for the property in a falling market). On the other hand, there isn't much value left in products bought by means of plastic money, i.e., burnt gasoline, beer and ham burger that went down the gastric tract, iPhones, those made in India Jeans and cotton shirts bought at high premium, etc. I don't see banks running behind customers with a portable commode in their hand to recover credit card dues from excreta. With that said, the total money at risk is $920 bn out of which 45% has been securitized. That is around $414 bn has been taken out of banks books and no one knows (not me at least) in whose books they are lying. Now, the subprime crisis happened because people were not able to service mortgage when the interest rate climbed up to around 8%. The question is will those same consumers be able to service credit card loans at the interest rate of 36%. I don't know. May be Fed will come and baby feed them with some dollar bills. But if that doesn't happen, surely there will be defaults. Lets assume a conservative default rate of say 10% to 12%. With that in mind, the total bad credit card loan will be around $100 bn. You may add this figure to the present estimates of bad subprime loans of $500 to $700 bn and that's another 14% to 20% increase in irrecoverable loans in United States' book. Err... Not United States' book, rather world's book because yet no one is sure who owns how much of these dollars. May be your favorite Jaunpur National Bank of India owns some. Note: The above have been written about in another blogs I read, calculated risk. Now, the Indian story.

Bank gross NPA down to 2.5% of loans and advances in 2006-07 ... The asset quality of banks has improved further last year and is reflected in the decline in their gross and net non-performing assets (NPA). An ET survey of 77 commercial banks finds that their aggregate gross NPA has declined by 1.2% in 2006-07 over 2005-06. The gross NPA as percentage of loans and advances has declined from 3.35% in 2005-06 to 2.52% last year....

Source: Bank gross NPA down to 2.5% of loans and advances in 2006-07, Economic Times And that happened in the backdrop of hardening interest rate and increasing credit card spend. Surely, Indian banks are managing their risks much better than their American counterparts.

Is the uptrend over?

In India, people are really very enthusiastic now and very busy, counting returns they would get in future and that too not in terms of percentage but how many folds their money would grow. That's pretty understandable specially in such times of boom (read bubble). Actually, I feel this is extension of that bubble, the last run before things collapse. I know there is great possibility that I am wrong and it would be one of those rare instances when you are proved wrong and yet it feels great to be proved so. But there are a few things that would make you worried.

The riskiest economies, all with current-account deficits and relatively high consumer-price inflation, are India, Turkey and Hungary. Those with current-account deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. Economies where inflation and credit growth are already high and budget deficits large, such as India, have less room to ease monetary or fiscal policy if the economy weakens.

Source: The Economist

US Housing Bubble: The worst thing in US housing bubble is yet to happen. Here is what fed says.

First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house.

Source: The Federal Reserve

So by 2008, mortgage thing should come out in full color.

The Expert Phenomenon: But the "great minds" must be correct in predicting whether there is a problem in the economy or not, at least partially. So, it must be better to listen to the "experts" rather than trust your own logic. Or we are wrong? Here are some Greenspan quotes from the '90/'91 recession: (recession started in July, 1990)

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” - Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.” - Greenspan, August 1990

“... the economy has not yet slipped into recession.” - Greenspan, October 1990

Japanese Money: Yen-carry-trade is another story. As dollar depreciates against most currencies and yen is one of those currencies, those who borrowed in japan will definitely like to pull their money out of markets and pay back their yen loans.


How Much is Too Much, How Long is Too Long: Now one would say how far can Indian markets fall, may be 15000 in extreme conditions and that would be a great time to enter. So, even if the markets fall we have a reason to enjoy since it gives you an opportunity to make even more profit by entering at low levels. Well, think again. In 1989, Nikkei was trading at 38,000. In 1996, it dove to 22,000 and people called it long-term buying opportunities. It continued its downward journey to 7600 in 2003. Today, its trading at 15,000. Same happened with Korea and other Asian economies too and it won't be a surprise if India joins the list in the near future.


Human Behavior: People are making beeline to buy companies trading at huge premium (read high PE) counting in how many days their million will turn billion. The two basic problems with such people are greed and sluggishness. They are sluggish to enter the market and often enter when the stock has already appreciated quite a bit and if the party continues, they gain, but when things turn the other way round, they are even more sluggish to get out of the market. They wait for the market to return which never happens. So, be prepared to collect your booty and run before the building collapses.


History shows that, mankind have predicted 9 out of last 3 recessions. The problem with a crash is that it presents a catch 22 situation to you. No one knows when its gonna crash and if its not a crash, then no one wants to miss the ride too. Sitting with cash and seeing the markets skyrocketing is painful as is investing and seeing them reduced to half or even less. A correction may be a buying opportunity as well as start of a recession that's gonna last 3 years or so. This is really critical to those individuals (read naive) investors who have missed out the previous rally and want to get in now or entered the markets in 2007.


Clouds are there in the sky, but whether it rains or not is just a possibility and whether to carry an umbrella or not is your decision. It is a known fact that it is always better to react to the situation then predict future. But here I'm clueless as to what must be the strategy in case market turns bearish. I am unable to figure out what to do in such a situation. 


Finally, here is a pictorial representation of amateur investors' psyche (including me). The credit goes to Saint for creating this piece of billion-dollar art.