Britney and Ben... - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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24 JANUARY 2008

Britney Spears continues to make a mockery of herself, of motherhood, and apple pie.

There used to be neighbourhoods in America.
Families sat in their wooden porches and verandahs.
Grandchildren had grandparents to talk to. Sitting on grandparents' knees, a child would learn about life, love, and respect for the community.
Mother was always there to help and cuddle up to.
Father worked at a store around the corner, came home for lunch, spent time with the family and whistled off to work again.
Children went to school with the neighbours, bags slugged across their shoulders. Parents knew that no one in school had any guns and their kids would get back home unharmed.
And in the night there was apple pie for dessert.

Life was simple. Life was predictable. Life was good.
And as American as apple pie.

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But there is something about human nature where we push the envelope to see how far over the edge we can go.
So Britney is born. A star is born. But that is not enough.
There must be new challenges, new frontiers.
New levels of speed. New highs.
Rapid marriages, equally rapid divorces.
Children abandoned, then reclaimed.

The porches have vanished.
The grandparents are in old age homes.
Fathers work in different continents 3 weeks in a month.
The Mother remains the backbone of comfort for the children. She may work or she may be an "at home" Mother but she is the foundation.
Mother remains the pillar in the shifting sands of human evolution, of globalisation.
Until Britney comes along and challenges the very qualities of Motherhood.
Suddenly we all ask: where is the apple pie? Where is the comfort of knowing that Mother is our Hope? Our Joy. Our Pillar of Strength.

Indeed, in these times of evolution, in this endless pool of shifting sands, we ask ourselves: what is the role of central bankers?
If Mother was the foundation of our family, central bankers are the solid foundations of our modern economy.
For thousands of years economic activity was transacted in gold.
Then we invented the concept of a paper currency - but it was backed by gold. Every time a central bank tried to change the gold-backing behind the paper currency, that currency entered into oblivion. It did a Britney.

In 1971, the world went off the gold standard adopted in the years after World War II. But that was fine.
We were a more rational race.
We would learn from our mistakes.
Governments and central banks may not have a gold-standard currency anymore, we thought, but market forces would ensure that they would tread carefully and not blow up their currencies by printing more and spending more. Spending would be limited to the extent that governments earned revenues to pay for all the promised expenses.
Tell that to the people in Brazil.
Or Argentina.
Or Mexico.
Or Indonesia.
Or India.

Each of these countries have had excessive periods of wealth destruction - where governments spent more than they could afford to and ended up devaluing their currencies.

And now this disease has landed on the shores of America: the land of the free is now enslaved in debt.

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In 1998 the guru of all central bankers, Alan Greenspan, fed the global economy with a dose of free money.
Like Britney having her first drink and getting drunk. Knowing the negative effects of excessive alcohol, Britney could have done a bit of introspection and said, "Never again".

But the next chance to open the bar to the drunkards was presented in the days of the tech bubble and the aftermath of 9/11.
One more time, said Britney, and this time I will have more fun.
Yes, said, Alan - let's do it!
And everyone did.

Now the housing crisis is blowing a hole in the equity of the big financial groups. They are the best customers of the bar tenders. They are the TBTF crowd.
So the new chairman of the Federal Reserve System, Ben Bernanke, slashes interest rates from 4.25% to 3.50%.
Drinks are on the house.
The drunks are back at the bar, lining up for their next financial scandal.
The policeman is behind the bar serving them the drinks.

What America needs, said the informed gentleman on the seat next to me, is pain.

Just like Britney needs to be in some sort of ashram cleansing her system from years of garbage. Reminding her of the concept of Motherhood and the fragrance of Apple Pie.
But rehabilitation is a painful process. It involves sacrifice.
One has to stop doing the enjoyable but bad things and start trying to do the good things and seeking a deeper satisfaction in that. Not easy.
When was the last time I exercised to get my body in some shape so that I can live longer to enjoy being with my family? Like I said, not easy.

People love a good thing while the going is good.
Even when it is a bad thing.
And when it stops getting good, people find ways to keep it going and getting it back to look like it was good.
Even if it was bad.

Take P-Notes - that synthetic instrument that allows a foreign investor a "participating" right in the Indian stock market.
The P-Notes remain this pool of money shrouded in secrecy. No one knows who owns them. No one knows what these owners of P Notes want - are they invested for one day, one month, one year, ten years? What risks are they willing to live with? What rewards do they want in return?

In May 2004, the Indian markets tanked because the holders of these P-Notes sold out - there was a new government and the communists were part of the coalition.
There was some study done to prove that P-Notes were not the cause of that fall.

In May 2006, another whack to the Indian markets because of fears that US interest rates would start increasing. The holders of the P Notes sold. Another study came out in defence of these secret pools of capital. They are harmless.

It is estimated that about 50% of all money flows into India are via P Notes. That is 50% of some USD 52 billion - at cost. Another way to look at it: the foreign investors own about 20% of India's share market. So, 10% is owned by P-Note holders.
And we don't know who they are.
Not to worry, the brokers verify who they are.
Right!
These are the same folks who told their home country regulators in USA that their lending norms for giving home loans were prudent. These are the same folks who have got the bar tenders to keep their bar open. Wide open.
And we take their word on P-Note holders as gospel truth?
I stay at home every night with my children, says Britney, I am a good mother.
Okay, next in line…..

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But we are lucky to have the RBI. They don't like these bar nights and 2-for-1 free drinks. They want to see the ID cards and wish to confirm that everyone is a fit and proper person. Since December 2003, they have been writing dissent after dissent note.
Stop the P-Notes, they wrote. Who are these P-Note people? What do they want?

But a rising stock market is a sign of prosperity. India has arrived on the global stage. We are at Davos - toasted by the world.

Just like how a rising housing market was seen as a sign of prosperity in USA.
And the American consumer was toasted as the king.
China has made monuments to honour the power of the American consumer. Their factories churn out furniture, clothes, TV sets, laptops, mobile phones, plastic slippers, leather shoes, soft cuddly bears - you name it, they make it.
For the king.
But now the king has no money to spend.
President Bush just gave them USD 500 each. That will cover one visit to the mall, one day of shopping.
Now Helicopter Ben is doing his rescue operation: making money so cheap that the American consumers can borrow again to spend.
So that China will build more monuments.
Here, Britney, take my jet and fly to New York for a weekend. Enjoy yourself.

But not all the blame lies on P-Notes and our inability to say "no" to this unknown pool of money.

Remember greed? It was back in full form again.
We created something called futures and options.
Our stock markets will be more efficient.
More people will buy and sell.
More people will pay less to buy and sell.
The more people trade, the more "correct" the price.
So that explains why Tata Power was around Rs 500 in May, 2007 and Rs 1,500 in January 2008, and then went to Rs 1,000 in the recent market crunch?
How silly of me to question this assumption. Each of these price points for Tata Power is correct prices.
Just like how P Note flows are a good endorsement of India's economic reforms.

I guess it is not possible that people are driven by greed.
These futures are not tools of mass speculation but serve an important function of "price discovery". That true price of Tata Power. Rs 500, then Rs. 1,500 then Rs 1,000 - all in a span of 8 months. All while Tata Power has not added any significant power generating capacity.

You recall the Morgan Stanley fund in 1994? The long lines and the grey market.
And what happened after that?

So now what of the recent Reliance Power IPO?

Please don't get me wrong here. I think the fund managers at Morgan Stanley are good at their work.
I think Reliance Power will get the projects executed over the next decade.
But what did you greedy folks pay for those units and those shares?
What is your likely rate of return?
For what risk?

Britney wants to go out and have fun - at what cost?
Ben wants to drop dollar bills from a helicopter to rescue America - at what cost?
The stock exchanges create instruments for price discovery - at what cost?
P-Notes flood the Indian market - at what cost?

In all this madness, I seek an answer.

I seek an anchor.

I will pick stocks based on valuations - not greed. The India story has just begun. In a recent interview, DNA described me as a "bear". They mistook my continuous calculation of risk as a "bear" characteristic.

The RBI says "No" to P-Notes, they are called "backward".

Now when I talk of gold, people say I am a "gold bug". They misunderstand my fear of the bartenders giving free drinks to the drunkards and the possibility that paper currencies are in for some earth-shattering movements.
When I buy gold, I am buying insurance. I am calling for the taxi to take me home safely to my family, just in case I have drunk too much at the bar.

When the markets fall to levels like they did recently, we go shopping and look for bargains.
Indian equity markets will do well, over the long term.
I have no idea what they will do today, tomorrow, next month, next year.

I cannot tell you whether futures and options encourage price discovery or they are just another way to exhibit greed. But I can tell you that when Britney stops having fun from excessive alcohol, she may try and find some fun from excessive drugs.

I cannot tell you whether P Notes are good for price discovery or bad for price discovery. But I can tell you that being in the presence of an unknown animal in a small wrestling ring in a dark night is not my idea of fun.

The messages we have for all investors are tested by time.
And these lessons have survived.

In many ways, I wish the world gets simpler.
That Britney becomes a good mother, not a lost young lady.
That Ben becomes a central banker, not a bartender.
That P-Notes are stripped of their stealth.
That grandparents live forever to share their wisdom with their grandchildren.

In the meantime, I will live my life.

I will buy stocks based on analysis - not on greed.
I will buy gold.
And I will love my wife for being my wife and a wonderful mother to my children.


Other Views on News:

» Ajit Dayal's View on the Market Crash
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