For a few dollars less - Straight from the Hip by J Mulraj

For a few dollars less

21 JUNE 2014

Post the 2008 global financial crisis, the US Government has flooded the world with dollars, in attempts to print its way out of its economic morass. It is able to do so only because the US Dollar enjoys the status of the world's reserve currency, since almost all international deals are priced in $. So, e.g., if India buys gas from Qatar, it is priced in $, boosting the demand for the currency.

Now countries like Russia are trying to de-dollarise the world, and countries like China and Iran are agreeable to sign agreements not denominated in US Dollars. Russia's recently concluded deal to supply gas for 30 years with China, for example, is not a $ denominated one. Russia, of course, is doing this as a counter to the US attempt to use its dominance of global share markets, and the strength of the US $, to punish Russia for its Crimean adventure. De-dollarisation would impact USA's ability to print its way out of trouble, and would, in an environment where new job creation is not happening, (one in five families have not a single earning member), exacerbate social tensions.

The flooding of the world with fiat currency has had some nasty consequences. It has not helped in getting companies to invest more, nor in consumers to spend more (US household savings rate has, rightly, gone up, as consumers become more fearful of the future), nor in creating jobs. The fiat money has gone to push up prices of assets, such as global stock markets, and expensive real estate prices (which always goes up as the top 1% increase their share of the pie and are willing to spend).

The flooding has led to a low interest rate policy (negative interest rate policy, or NIRP in the EU), which penalises savers. Given that unemployment is rising, and the future uncertain, this bodes ill for the future. Those who have jobs are having to work harder, thereby disrupting their work-life balance.

All this also enhances inequality, as brought out by Piketty in his latest book. On a global scale, such inequality creates revolts, and terrorism, as is now being witenessed in Iraq, where ISIS has swiftly overrun a large part of the country, has captured its largest refinery which supplies most of Iraq's domestic needs of petro products, and is within an hour of the capital Baghdad. Iraq produces 3 m. barrels/day and exports 2.5 m. and should this supply be disrupted, prices of crude oil will shoot up perhaps another $ 15-20 /barrel. They have already hit $ 115. For countries like India, hugely dependent on imported crude oil, this poses a major problem for the Modi Government.

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Modi also faces another challenge thanks to recalcitrant weather. The monsoons were forecast to be 7% below normal but are, at present, running around 50% below. In some parts, the shortfall is over 80%, such as Gujarat, East UP and Punjab.

If monsoons do not pick up, inflationary pressures will rise and, combined with the fiscal pressures of higher oil prices thanks to ISIS, would make life difficult for Modi and for India. This has not been fully factored in by the Indian stockmarket, but will be.

The excess money is being used by companies, not for investing, but for stock buy back! Only 44% CEOs in a US roundtable mentioned that they are going to invest more, as they expect the economy to revive, compared to 48% one quarter ago. But the funny thing is that share buy back schemes are higher now, when the market is at a peak and, funnily enough, such schemes are at the lowest when the market is at a low. It ought to be the other way around! So this becomes a contrarian indicator.

So in the chart, observe that in early '09, when the S&P 500 (red line) was the lowest, so were the quarterly buy backs (blue bar) and the companies repurchasing shares (green line).

Mr Modi also has to correct a lot of the mistakes of omission and commission made by the UPA Government. It has started on this. It is trying to tackle inflation by banning exports of things like onions, whose high prices, instead of their pungency, are making consumers shed tears.

It has boldly increased railway fares for both passengers and for freight. It is phasing out petro product subsidy, and is expected to raise diesel prices, to remove its subsidy altogether, although subsidy may remain for kerosene and LPG.

It is pursuing with greater serious intent those in Government who defrauded the exchequer, e.g. in the 2G telecom scam and may even investigate the role of Manmohan Singh, after A Raja stated that the former PM was consulted.

As per this must read article by A K Arun, there is an inefficient use of spectrum thanks to faulty allocation, which must be corrected. The more efficient technologies, like 4G, ought to be allocated spectrum most suited to it, which is now inefficiently deployed in 2G voice. He encourages 'assisted suicide' of 2G.

Inflexible labour laws are, actually, protecting only the small sliver of labour covered under it but not the large swathe of labour in the unorganised sector. Yet, because organised labour is a vocal vote bank, Governments have not dared to tackle this issue. Inflexible labour laws prevent companies from expanding, thus creating job crisis for the youth. The Modi Government has advocated more flexible labour laws in national investment and manufacturing zones. In a global environment which changes by the minute, tying up an entrepreneur with inflexible labour laws does not encourage him to invest, and thus provide jobs. Given a bit of flexibility, combined with an assurance of fairness, will spur more investment and job creation, and is to be welcomed. This is well expressed by Dr Subir Gokarn, former Deputy Governor of RBI.

The frentic pace of economic growth and of global population has created demands for natural resources that the world cannot meet. Take water. Demand for water will exceed supply by a whopping 40% by 2030. India will be one of the countries which will be badly hit, unless we swiftly take steps to conserve water resources and use it efficiently. For example, providing free electricity to farmers encourages the overuse of water pumps and a flooding of the soil, not good for it, leading to a lowering of the water table. In Gujarat, Modi, as Chief Minister, went around explaining to farmers why they should pay for the electricity and conserve water, for their own good, and was successful in doing so.

China, whose rivers have been badly polluted in its quest for faster growth, is importing more water than the US imports oil.

The general mood has improved, in expectation of strong and sensible action by the Modi Government. The IPO market, which has been dormant, is now expected to boom again, led by PSUs (public sector units). SEBI has tweaked policies to make these more possible, and first off the block could be Coal India with an US $ 11 bn offering.

However, IPOs do not necessarily warrant an investment. And that's because the objectives of both the issuer as well as the investment bankers, who get fees for managing the issue, are aligned, to get the highest possible price. The objective of the investor is to get the lowest possible price. Since the investment bankers also tend to price issues aggressively, investors in 117 of the 201 issues launched since 2009 are losing money.

Here's a suggestion for SEBI to consider. Why not ask investment bankers to provide a table, in the red herring prospectus, to give a record of their five year past performance outlining the name of the company, the issue price, the Nifty or sensex at the time of the issue, the current share price and the current index, and allow investors to judge how fairly they advise in pricing the issues.

Larger companies like Tata Motors or Adani group or RIL, seeking to be within the top 50 Fortune 500 companies are tapping international markets for raising money.

Global demands for capital is also extremely high. It is estimated that the world needs $40 trillion over the next 20 years, to meet its growing energy needs. How will this be met, one wonders?

The BSE Sensex dropped 122 points last week to end at 25,105, and the NSE Nifty lost 30, to end at 7,511.

The Union Budget is around the corner, to be presented in the second week of July. One does not expect too much tinkering with tax rates, as UPA was fond of doing. Tough decisions like rail freight and fare hike have been taken. So the Budget ought not to be a matter of concern.

What is of concern is the developing situation in Iraq, and its impact on oil prices. And the weather, and the impact of a poor monsoon on agri production and on inflation.

A dip ought to present a buying opportunity.

Note: This column will not appear on from next month. I thank my readers for their support and valuable comments. I would request Equitymaster to inform my subscribers as an when the column appears on another platform.

Message from Rahul Goel: On behalf of all the readers, and members of Equitymaster, thank you Jawahir for giving us the opportunity to host this very prestigious column. We wish you the very best of luck! To the readers, don't miss posting your farewell message for Jawahir here!

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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10 Responses to "For a few dollars less"

Sarat Palat

Jun 25, 2014

Dear Mr. Mulraj,

Thank you for your prompt, consistent and valuable article. Really we miss you.



Jun 24, 2014

Dear Jawahir,
It was always wonderful for me to read your articles. The depth and honesty with which you write is unmatched. All the best!



J Mulraj

Jun 24, 2014

Thank you readers, for your very kind comments.



Jun 23, 2014

I have been reading Mr.Jawahir Mullraj since he was writing in th Times of India Monday edition. In a summary of one para, he has been lucidly explaining the happening the world around. I will be missing his comments for ever. Request to give alternate website from where we can read his views. With kind regards and best wishes.



Jun 23, 2014



A.N. Joshi

Jun 22, 2014

I was always looking forward to read your weekly column but from next month I am really going to miss it. Looking forward to read it from alternate site soon.
Thank you and best wishes.


Prasanna Rath

Jun 22, 2014

Straight from the Hip - Informative and Intellectually thought provoking articles. I always read them with interest. I will miss it. Thanks Mulraj


Swaminathan R

Jun 22, 2014

I regularly read and learn from this column. I like the sentence on Onions. The price make one shed tears rather than the pungency. I am not sure of China importing more water than US does for Oil. I live in China and every where there are rains and floods. I can drink straight tap water , the source of which is Huang pu river in Shanghai. It tastes OK too.The source from which the author quotes may need a veracity check. I personally feel the web site which is used appear to be China bashing in nature.While there may be some truth in the topic the figures appear exaggerated like for example 52 million homes unsold.


sultan Fazelbhoy

Jun 21, 2014

Very dear friend of decades: reading ur column has been like meeting u regularly -- ideas,insights, purposeful suggestions and always with a positive approach to achieve a better India. I will miss this intellectual treat sorely and I do hope you will supply us readers with an early alternative, In the meanwhile a big, BIG THANK YOU and best wishes always for fullfiling your sapirations Sultan

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Pankaj Ajmera

Jun 21, 2014

I AM A FAN OF YOUR WEEKLY COLUMN. WE all will miss u sir.

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