Across the Universe - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
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The Beatles, musicians immortal on earth, have now become immortal in space.

On Monday, February 4, NASA - the US space agency - beamed their song, "Across the Universe" to Polaris, the Pole Star.

But Polaris will have to wait a while to hear the wonderful melody. A long while.
NASA estimates that Polaris is more than 2.5 quadrillion miles away. That is 2,500,000,000,000,000 miles. Even though the
"Words are flying out like
endless rain into a paper cup
They slither while they pass
They slip away across the universe"

alas, the beauty of the lyrics has hit a road block: they cannot break the speed of light; which is 187,370 miles per second.

So the inhabitants of Polaris, if there are any out there, will not hear the song for another 431 years.
If they clap or cry, we won't know their reaction for another 431 years, I guess.

But, since I like the Beatles a lot, whatever the folks on Polaris (or any tourists along the way) say about the song, it doesn't matter much to me.

But by beaming this song, NASA may be sending an even more subtle message, not to Polaris, but to the American consumer.

And why do I say that?
Well, there must be many Indian scientists working in NASA.
And they are all mathematical geniuses.
And they are all well-versed in the ancient Indian scriptures written in Sanskrit.
And they all know the story of Dhruva, the 5 year old child who fasted for 6 months to know the Lord.
Dhruva's commitment to his penance in search of the Lord earned him the title of Dhruva Nakshatra, the Pole Star.
Polaris is the Pole Star.

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NASA could have chosen to send the song anywhere in the galaxy: but they chose to send it to Polaris, the Pole Star.

And, as further proof of who really runs NASA, the song they have chosen has a Sanskrit chant: "Jai Guru Deva Om".
This means: Victory to the Divine God - followed by "Om" the sound that represents the vibration of the universe.

NASA could have chosen to send any song, any other Beatles song, but they chose to send this one.

Although immersed in other-worldly matters, the people at NASA are still human beings.
The mathematical geniuses at NASA may be of Indian origin, but they are now living the American Dream.
Like many of the lesser mortals in America, they eat food, they shop, they invest, and they travel.
And they probably borrow to live their lifestyles.
They probably have credit cards Many credit cards.
And mortgages on their home.
On their two homes.

And just like any other American, the NASA employee may not be seeing any dramatic increase in their pay checks. In fact, the US government is reducing expenditures on many projects at NASA.

Less money for Star Wars, more money for the Oil Wars.

Which leaves the NASA employee of Indian origin in the same plight as any other US consumer: Hobbled by debt; weighed down by an excessive intake of hamburgers, french fries, and coke; brain-washed by inhuman TV shows; and now faced with job insecurity.
Like many US consumers, the Indians at NASA need divine intervention.

But, unlike the young Dhruva, the American consumer does not seem to have the will to change. NASA knows that for sure.
The mathematical geniuses at NASA have done their probability calculations well. They know the likelihood of change in consumption habits is "zero" - another Made-in-India concept.
So they selected a song which states this zero probability of change. The Beatles song sent to Polaris acknowledges that: "Nothing's going to change my world".

So 431 years from now, when Across the Universe makes it to Polaris, not much will have changed in the USA, says NASA.
The USA will still be a consumption society and the US government will print money and issue debt to maintain a lifestyle it cannot afford to.

Of course, the folks at Polaris who hear the song in the year 2439 will only know the debt level of the American government as of calendar year 2008 - a delay of 431 years.
Let's see...punching in some numbers here...the outstanding government debt in USA today is USD 9.2 trillion (about 9x India's GDP).

By the time Polaris gets the message in the year 2439, a 5% annual interest on the existing government debt in USA would have taken the total debt to 1.4 billion times what the debt is today.
The distance to Polaris is 2.5 quadrillion miles: 276 times the existing debt level.
By the year 2439, the distance to Polaris can be expressed as 0.000002% of the existing debt with that assumed 5% annual interest for the next 431 years.
To flip it, the debt level will be 4.9 million times the distance to Polaris.

And we are not even factoring the debt at the individual level of the US consumer, just the government debt in USA.

So, the US government has a debt of USD 9.2 trillion today.
And foreigners own USD 2.3 trillion, 25% of that debt.
Maybe the aliens on Polaris will start lending money to the US government.
The Chinese and the Japanese know that this Polaris cash inflow is bound to happen: they heard it from the Indian punters who know for sure that every day the P-Note buyers have to buy India shares. They just have to.
Aliens love doing alien things.
So the Chinese and Japanese are still holding on to their worthless US Dollars and will offload their US currency holdings to the government of Polaris. Just like the punters in India offload their holdings in worthless small cap and mid cap shares to the starry-eyed foreign buyers.

"Houston", said Tom Hanks, enacting an astronaut in the movie Apollo 13, "we have a problem."

A big one.

How do countries go bankrupt?
How do currencies issued by governments lose their value - like the USD which has lost 35% over the past 7 years?
Like the Indian Rupee which has lost 80% of its value over the past 30 years?

In the next few weeks, we will be obsessed with the budget to be presented by Finance Minister Palaniappan Chidambaram.
The world economy looks shaky.
India looks great.
India looks like a winning cricket team on a good day.

But India has issues, some big issues, to sort out. Huge poverty, distorted government policies, a real estate mafia, restless neighbours, and policy making machinery that has yet to understand the need for capital versus need for money. This is a short list.

And there are many state elections and a national election around the corner.
We know that elections can influence a politician's budgetary exercise.
And when that happens, countries can go from "sound" to "bankrupt" pretty quickly.

Just like in cricket. Pay a cricketer some money and the bookies can control the outcome. Even without a monetary incentive, a rational batsman can make some very wild strokes in the heat of the moment.

It took President Bush eight years to complete the destruction of the modern US economy. His father started it in 1990, and then President Bill Clinton continued it for another 8 years, before he passed the baton on to George.

The US national debt was USD 5.7 trillion when Bush was appointed President in January 2001 and will double to USD 10.4 billion by the time he leaves in one year.
Eight years is a long time in economic history.
The US has made a big mistake of not controlling debt. And they will pay a price for it. The aliens in Polaris will not be able to rescue them. It would be too late to wait those 862 years for the Polaris wire transfer to come in. The Chinese and the Japanese will lose their patience.
But the USA may still export its way out of trouble. America is very innovative. And it is a land of optimism. To enable NASA to beam the song to Polaris, Martin Lewis, a Beatles historian, reportedly got permission from Paul McCartney, Yoko Ono, and two music companies that own the rights to "Across the Universe".
According to Lewis, Apple Records supported the effort because it was "always looking for new markets".
Maybe royalties from the sale of Beatles' music to the musically-inclined inhabitants of Polaris will save the US Dollar. Maybe.
Maybe all those small caps and mid caps that the P-Note folks are buying really have some intrinsic value. Don't get me wrong, there will be some winners in small caps, but not every small cap will be a winner. You need to know what businesses the companies are in - and the risks they face. As always, an informed investment is half the battle won.

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But while the Chinese and the Japanese wait for the Polaris folks to start buying USD and while Apple Records prepares its marketing budget for further penetration of the unlimited galactic market, we have our own excitement in India: the budget.
Another big non-event in a string of non-events (like sub-prime crisis, USD collapse) that can make the Indian stock markets surge to the moon or swoon to the depths of the ocean.

This budget will be watched by a new generation of punters perched on their trading terminals, itching to hit their buttons - but no one knows whether it will be the "buy" button or the "sell" button.
Like the gambler at the roulette table deciding to bet on red or white, with no logic to either selection - they are waiting to roll the dice.

The markets will move with their own logic - actually, lack of logic.
Markets move - and then we try to put some logic around the movement.

The BSE-30 Index can gain 2,000 points on any given day.
Or the Index can decline by 2,000 points on any day.

Foreign speculators hiding behind their P-Note shelter can buy USD 5 billion of stocks in a 2 week period as they did in September, 2007.
Or they can sell USD 3.5 billion, as they just did in the month of January 2008.

The Beatles wrote their galactically famous song 40 year ago, but the words could be a comment on the state of mind of our hyperactive daily punters:
"Pools of sorrow waves of joy
are drifting thorough my open mind
Possessing and caressing me"

Traders move on emotions.
And emotions change - constantly.
Like Dhruva, there is only one rule: stay focused on the fundamentals.
Let there be noise around you, let there be movement.
Don't be possessed by these non-events.
They are random.
Good investment advice is never random, it is reliable.

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But look over the horizon, across the universe, and see if there are any trends and worrisome signs that could imbalance the Indian economy.
The budget is only one statement of intent of the government's policies. Over the years it has lost its focal point. In general, though, any government that spends with no matching source of revenues is directing the economy to trouble.
A government that modifies land laws so that land is stolen from farmers and presented to a handful of well connected people cannot be building a solid foundation for sustainable economic growth. And banks that lend you money on the phone have yet to understand how to price risk. But none of these are good signs.

A central bank led by Helicopter Ben is not good news. A central bank like the Reserve Bank of India is very good news. Dr Reddy has a tough job cut out for him: to react to the budget with his action or inaction. What the government spends, the RBI must counter by making money more expensive and less freely available.

There will be pressures and pulls and clamour for faster growth. Some of it justified, most of it a fake flag to grow faster than what the Indian economy can afford to. Borrow now, repent later. Live life king size. Live the American Dream.

While the US has their Bernanke put option (the knowledge that Ben will always save the speculators), ready to lead the US to possible economic oblivion, India has the Reddy call option: a central banker who is willing to look boring, boorish, dinosaur-like, and old fashioned. And to do what it takes to protect the economy over the long term.

But what if I am wrong? What if the RBI cannot counter the higher spending by the government? And the government debt levels start to surge, a la USA? What will happen, then? Aha, someone in the government has already prepared for the eventuality.

On February 1st, the Indian Space Research Organisation (ISRO) and National Aeronautical Space Agency (NASA) signed a milestone cooperation agreement. While the press statements went on about NASA's assistance on the planned India trips to the moon and mars, the real reason for the collaboration is obvious.

The willingness by some asset-hungry banks in India to grant loans over the phone is evenly matched by the willingness of the Indian consumer to buy a home, a car, a holiday - or anything else they don't need, but want. This could result in India being a highly indebted country. Like the USA. The US consumers have now sent their song to Polaris. In two years, India may have to send its own song to Polaris.

India has no shortage of skill set on the music part: the Bollywood songs are likely to evoke a better response than the Beatles song. A reverse book-building exercise, coupled with an IPO loan facility will ensure that any paper issued by any Indian entity to investors in Polaris is over-subscribed by 100x.

I can picture it - the residents of Polaris stand in long lines waiting to buy into the India story. All the wedding halls in Polaris are booked by Indian brokers who beam their power points via skype. You cannot really travel there, but when travel to Polaris becomes a reality some of the mutual fund distributors would take Polaris as an option for their vacation, paid for by the mis-selling of mutual funds - but that is another journey.

But you get the idea. Indians have the skill set to sell anything.

But the delivery platform is an issue, and NASA has the hardware. Here again, working in the background, the Indians in NASA arranged this marriage of convenience between ISRO and NASA. Just like the UPA.

NASA has a potential software problem. The lawyers in the USA may sue NASA for discrimination for not selecting a song written by an Afro-American, Asian American, Latino American, or Native American - instead selecting a song written by a British group only because the British supported the Iraq invasion. Such a legal eventuality would shut down the Polaris beaming effort. But a collaboration would ISRO would give NASA access to an unlimited supply of Indian songs. In exchange, India gets the hardware - the delivery platform. Truly, a marriage made in space.

There could still be a practical problem, though.

The FII policy would need to be amended to allow an investment from Polaris.

Luckily, given that a Polaris FII application is still some 862 years away, there is hope that India will indeed recognise the difference between long term capital and short term money. And that the FII rules will have opened the front door wide enough by then to providers of long term capital, as opposed to having a wide open back door for P-Note owners and short-term money.

Hopefully, by the year 2870 there will be a recognition that there is nothing like a "FII broker" and there is more to life than sending delegations to meet holders of P-Notes at conferences in Tokyo, Hong Kong, Singapore, Dubai, London, and New York.

But despite all these "issues", India looks good. Very good.

Being a long term investor, I don't know what the BSE-30 Index will be on budget day 3 weeks from now, but I can try to forecast the Index over longer term horizons.

The BSE 30 Index could be 110,000 in 10 years; 289,000 in 20 years; and it could cross 147,847,000,000,000 (0.1 quadrillion) by the time the Beatles make it to Polaris.

And since I made this forecast of what the Indian stock market would look like in the year 2439 (431 years from now, when Polaris grooves to the Beatles - but 431 years before the Polaris FII approved money makes it back to India), I went back to see what the stock market looked like 862 years ago - in the year 1146.

Well, there was no stock market.

In India, or anywhere in the world.

So maybe there is some survivability risk there. Maybe these hyper active punters and P-Note folks will blow themselves - and the Index - up before the year 2439. Before the first Polaris money starts its 431 year journey to India.

But, surprisingly, there was a currency in existence in the year 1146.

It was not the USD. Neither was it the Chinese yuan. Nor the Indian rupee.

The currency that did exist was gold.

Across the universe: as timeless as ever.

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