Is this why your paycheck fails to beat inflation? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is this why your paycheck fails to beat inflation? 

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In this issue:
» You're better off holding index funds, feels Bogle
» Indian financial system safe for now
» Bonuses come down at big investment banks
» Subbarao may not oblige yet again
» ...and more!


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00:00
 
US may be the most prosperous country in the world. But it suffers from one serious problem. Its rich- poor disparity. And the last few years have made it even worse we believe. Naturally, efforts are underway to find the real reason behind the same. And the one that has gained immense popularity in recent times has something to do with robots. You read that right. Apparently, a few popular economists seem to be pinning the blame for slow rise or rather the stagnation in US wages on robots. In other words, technology seems to be making us humans obsolete.

Well, the argument seems to be similar to the one we are having here in India. Except in India it is not so much about the robots but things like FDI in retail. But the reasoning is the same. Better technology and superior inputs will render Indian workforce obsolete. And hence make the rich poor divide in India even worse.

We will use the genius of Einstein to demonstrate why we think these people are wrong. The maverick scientist once quoted that no amount of experimentation will ever prove me right but a single experiment can prove me wrong. In our real world though, numerous experiments since time immemorial have been conducted on how technology affects our lives. And every time the overwhelming evidence has been that technology has only improved the lot of us humans. Thus, to say that robots are responsible for wage stagnation is way off the mark.

Thus, as highlighted by a blog on economics, we will be better off focusing less on robots and more on the financial and regulatory landscape in the US in recent times. And it is here that we are more likely to see the true reason behind low rise in wages in real terms. Wages have grown at a lower rate than GDP because much of the economic activity in recent years has been a result of obnoxious levels of leverage and trillion dollar injections into the economy. It has been a result of reckless printing of money that has made only a handful filthy rich while heaping misery on the rest of the populace.

It is of course true that India suffers from none of the excesses mentioned above. Why then even here pay checks are not rising as fast as inflation? Well, here too the answer lies not in more technology. The fact is that India also has a few problems of its own. The biggest of them all are its endemic corruption and poor infrastructure. While the former puts money into the hands of a select few at the expense of the vast majority thus increasing disparity, the latter leads to inefficient production and transport of even the basic necessities. Little wonder, these shortcomings lead to routine bouts of high inflation and squeeze the common man from all sides. Thus, there is overwhelming evidence in favour of the fact that technology does not destroy jobs. Nor does it make people obsolete. On the contrary it only advances civilisation. What really hurts is the deficit in governance and financial manipulation.

Do you think technology can be blamed for low rise in wages? Share your comments with us or post your views on Facebook page / Google+ page

01:38  Chart of the day
 
In a development that created huge flutters in the gold market, German central bank is pulling some of its gold reserves out of the foreign banks. However, it will do it slowly, relocating 300 tonnes of gold from New York to Frankfurt and an additional 374 tonnes from Paris to Frankfurt by 2020. This amounts to around 1/5th of its official gold holdings as identified by the World Gold Council. As today's chart shows, in US$ terms, Germany's gold holdings stood at a little over US$ 200 bn. While India is way behind at US$ 33 bn, unofficially, it is easily one of the largest holders of gold.

Data Source: World Gold Council


02:08
 
A common perception is that fund managers are all-knowing stock market experts. So, it is best to allow them to take the right investment decisions on your behalf. Don't you believe that? But a certain gentleman by the name of John Bogle has a different point of view. The co-founder of the mutual fund company Vanguard and pioneer of low-cost index funds opines that investors should avoid actively managed funds. He has his reasons. One, they have too many costs. Apart from managing and operating costs, they also have trading costs.

It must be noted that the cost of speculative trading is high. In fact, certain funds trade over 100% a year. The other thing is that several actively managed funds have become so huge in size that they cannot outperform the market. These funds have become as large as 50-55% of the entire market. After accounting for all their costs, their performance tends to be below average. For instance, the Standard & Poor's 500 has outperformed over 65% of actively managed funds.

Apparently, US investors are losing faith in actively managed funds. In 2012, investors withdrew about US$ 119 bn from actively managed funds. At the same time, low-cost exchange-traded funds (ETFs) witnessed additional investments of US$ 30 bn. What does this say? The passive index is outperforming active fund managers in the US.

02:48
 
The Indian banks have become more and more risky in recent times. The threat of deteriorating asset quality has become more and more prominent. The slowing economic conditions have led some sectors to become highly unprofitable. As a result, banks that have higher exposure to such sectors have seen asset quality come under pressure. There is also a risk for banks having higher exposure to corporate houses that have come under the scanner for questionable governance practices. But despite these pressures and increased risks, the International Monetary Fund (IMF) feels that the risks to Indian financial system are 'manageable'. This inference is based on the IMF's joint study with the Reserve Bank of India (RBI). The two have conducted stress tests on the Indian banks. These tests indicate that the Indian banks can withstand asset quality as well as liquidity shocks.

Such comments and studies do provide some level of comfort. However, one needs to look at the bigger picture. Banks have been lending to the so-called risky sectors because most of them have been given the tag of priority sectors by the government. The reason why these sectors have become risky is lack of policy reforms, something we have all been talking about for quite some time. Exposure to the corporate with questionable reputation is another thing that banks need to address. If these issues are not handled then at some point of time in the not so distant future, the stress tests would start giving horrifying results.

03:33
 
Once again all eyes are on Dr Subbarao. Despite several calls for the independence of India's central bank, Dr Subbarao's role is far from it. In fact the governor is the focus of speculation once every three months. This is when the monetary policies or a review of the same is around the corner. And the speculation is by the government, bankers, economists and investors alike on the direction of the policy. More so on whether the policy will toe in line with the government's wishes to stoke growth. Now, India's fiscal condition offers no room for generosity. A burgeoning deficit on the contrary calls for austerity.

Hence the government has its hands tied in terms of offering fiscal sops to support growth. Reducing subsidies and re-allocation of capital to productive measures is something that policy makers have avoided for long. For such measures are politically sensitive. Hence the easiest way out is to influence a monetary policy that facilitates cheap liquidity. Had Dr Subbarao not stood by his conviction, the RBI would have by now become the government's money printing machinery. A role central banks in the US and Japan have got accustomed to.

04:08
 
Gone are the days of guaranteed big bonuses for investment bankers. Since the global financial crisis in 2008, pay checks of investment banks had come under the scanner especially when these banks were considered as one of the main culprits behind the crisis. Since then bonuses have not surged the way they did in the heydays of 2006 and 2007. What is more, in a very subdued economic environment, lower bonuses are actually being doled out by investment banks to bolster profits.

Goldman Sachs is one such example. In the fourth quarter result season, Goldman Sachs not only put the brakes on bonuses but also cut pay by 11%. This has led the bank to report profits which are at the highest level in 3 years. Same has been the case with JP Morgan's investment bank where the CEO's bonus was halved. As a result of which this bank was also able to report a growth in profits. While business sentiments appear to be improving gradually, most of these investment banks are increasingly focusing on managing expenses through reducing pay or going in for job cuts. Whether this trend will sustain in the coming years remains to be seen though.

04:44
 
Meanwhile, indices in the Indian stock market are trading buoyant today with the Sensex higher by around 140 points at the time of writing. Oil & gas and tech stocks were seen providing the maximum support. While Asian stocks closed mostly in the red today, Europe has opened on a positive note.

04:54  Today's Investing Mantra
"Brilliance is the ability to simplify a mass of information into a simple yes-no decision." - Warren Buffett

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    5 Responses to "Is this why your paycheck fails to beat inflation?"

    M.R.Borkar

    Jan 18, 2013

    Dear Sir,
    (1) I donot believe in MFs. The 1st MF I subscribed was Master Share and Master+. Thereafter I have gone for direct investment in Stock Market - since 1965 and still in the field. If MF Managers are experts then why there are so many closes n switchovers? My thinking is simple " if I lose money, it is my folly. If I make money, it is my efforts. Why should I paY SOME ONE ELSE who is equally knowledgeable/ignorant like me.
    (2) It is good that RBI has stood firm on its ground. This country has been sent on the down hill by the Ps & Bs for the last 60 years and if the RBI has not stood firm probably by this time we would have been resting at the bottom of Hind Sagar. - Borkar

    Like 

    Manoj

    Jan 18, 2013

    Well, some of these problems are because of blind allegiance to economic theories - a country's government needs to apply theories appropriate at the TIME. Free markets only can solve problems - how many times do we hear this? By this logic, India, which has traditionally had freer markets than China should have done better, but it did'nt.

    US made markets and capitalism into a religious crusade, and did not respond to warnings starting 25 yeara ago- now it's paying the price.

    So shall we pay the price, for being wedded to socialism, ignoring huge leakages from a corrupt government for 50 years now,once the commodity prices hit bottom. India must have not been poor, but incredibly rich to survive 50 years of economic destruction.

    Like 

    G Darad

    Jan 17, 2013

    We tend to gloss over conveniently the stark reality that our paycheques and our economic woes are the handiwork of the same political elite which has been fooling around the people for centuries by raising one set of bogies after another rather than focussing on the job of governance. But then, are we not the greedy and submissive participants in the very process of this fooling around and do we not yearn for our share in the pie of this contract-commission raj? The genie of technology carries out only your orders and cannot do anything on its own. In our context it has been deployed only to facilitate this contract-commission process.Just look around to see who has benefitted the most!

    Like 

    San

    Jan 17, 2013

    The write up from 00:00 to 1:38 is very well written and thought provoking. My personal wishes to your thoughts. Keep your good work.

    Like 

    Ramamurthy

    Jan 17, 2013

    At one time I remember when computerising the operations of Banks and Insurance were first thought of there was immense opposition from the employees.Lot of Bundhs and strikes happened.The slogan was COMPUTER MAN EATER.

    Like (3)
      
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