Big Brother is Watching You - Straight from the Hip by J Mulraj
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Investing in India - Straight from the Hip by J Mulraj
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30 NOVEMBER 2013


Governments all around the world have messed things up, big time. After the financial crisis of 2008 they have tried, desperately, to shore up their economies by pumping in huge amounts of money through programmes known as quantitative easing, or QE. The US prints $85b. every month for this programme, and buys Government bonds, held by banks; Japan buys some $75b. every month. The purpose of this programme is that the banks, in turn, lend to consumers to spend (consumer spending accounts for 70% of US GDP) and for industry to invest.

That, however, is not happening. The medication, viz. QE, is not achieving its stated purpose, but Governments continue with this medication. They realise, however, that there is a lot of social angst building up. People do not have jobs; without jobs they will not be able to afford healthcare should they fall ill. Obamacare is stuck, and even if it gets unstuck, one is not sure if it will be the desired cure for their healthcare system.

This is the financial system.

In geopolitical systems there are huge issues. For the nonce the Iran nuclear issue has been abated, after an agreement was signed. But China is now a new concern. It has declared an Air Defence Identification Zone (ADIZ) over the South China Sea, and has announced that any aircraft flying through it would need to inform China of the flight path. Japan and South Korea has objected, and the US has flown its bombers through it to indicate its intention to protect its ally, Japan. But China is ready to go on a prolonged military conflict with Japan.

In order to keep a watch over the social tensions building up, Governments have taken to snooping. The US constantly snoops on not only its own citizens but also heads of other countries, such as German Chancellor Angela Merkel. In India a lot of personal freedoms are being constantly eroded, all in the name of 'national security'. Big Brother is waching you. The Orwellian nightmare is coming true.

How does all this affect investors?

Take a few examples. The US has been planning to taper (or gradually reduce) the QE programme. The US Government also plans to reduce the interest it pays to banks on their deposits maintained with the Fed. The TBTF (too big to fail) banks, who effectively control the Government, are protesting. They state that the banks do not make money at current rates. Their solution? To charge interest to depositors on money kept with banks!

This is insane, but it is being seriously considered! (see item at 2:55 on this link).

This indicates that the US Government, prodded by the TBTF banks, are trying to compel people to consume more and save less, since they will be paying, instead of receiving, interest on their bank deposits. How crazy is this thinking! This could easily lead to a run on banks, as savers start withdrawing deposits, refusing to pay interest on moneys which have already been taxed. They would try to find alternatives to keep their savings in. But with Big Brother watching, and plugging alternative avenues, it would be difficult.

In India the Government has stalled opinion polls which indicate the electoral mood. Much like the monkey covering his ears to hear no evil. Now, in the financial sector, SEBI has proposed that those who give out research reports must be registered with, and regulated by, SEBI. This is, again, a withdrawal of freedom of speech and of opinion. An opinion is just that, an opinion. Nobody should be allowed to regulate opinions. Another example of the Big Brother syndrome.

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The misappropriation of freedoms is well brought out in the video contained in this link.

The political class, globally, is concerned only with itself and has no empathy for the people it governs. Why else would the main political parties in India, the Congress and BJP, field candidates who are criminals, as they do?

Finance Minister warns that tax evaders can be traced, in a bid to instil fear in them to pay them. This is because the FM wants to collect taxes which are due to the Government. Yet, when frauds like NSEL occur, the FM does not use this ability to trace evaders, to enforce recovery of the amounts due to the people. They don't care for the people.

It is obvious that the NSEL fraudsters have political protection. The Government sat on NSEL discrepencies for over a year. Even now, months after the scandal erupted, and after several investigating agencies have found enough evidence of fraud, misappropriation, abysmal governance the Government has not yet attached the assets of the main promoter, Jignesh Shah, and is softpedalling declaring him to be not a fit and proper person to run exchanges.

The Government, and its ally, has been complicit in this fraud all along. The NSEL was granted exemptions in 2007 from the FCRA Act "NSEL was on 5 June 2007 given exemption from the operation of FCRA subject to a few conditions for all contracts of one-day duration for the sale and purchase of commodities traded on its platform." The Minister of Consumer Affairs was Mr Sharad Pawar. Has he been questioned on this?

The Congress is trying to lay the blame on investors, instead of admitting the Government's failure. However, a la Lady Machbeth, 'all the perfumes of Arabia will not sweeten this little hand', a very apt analogy given its electoral symbol.

But economic reality cannot be forever hidden. The Government tried doing so, in telecom, setting a reserve price for auction of spectrum that was commercially unviable. It has taken months, and a lot of wasted effort, before the EGoM (Empowered Group of Ministers) to come to a conclusion that a ten year old would have arrived at within minutes. They have agreed to lower the reserve price.

Or take rent control. The freezing of rents has many undesirable consequences, but is retained for political reasons, as the number of tenants far exceeds the number of landlords. However, as a result of these laws, obtaining rental accommodation is difficult and expensive, which means that people lose mobility; they cannot take jobs for want of housing. In a bid to address the shortage of rental housing, the Government is trying to entice the corporate sector to build and rent homes. This will necessitate a re-look at the rent laws.

Last week the BSE-Sensex gained 574 points, to end at 20,791, and the NSE-Nifty added 180 to close at 6,176. The rally was propelled by the likelihood of a continuation of QE (a fresh supply of booze to keep the party going) as job creation has been disappointing, and by a short fall in price of crude oil after the signing of the Iran nuclear deal.

As far as Indian stockmarkets are concerned, a few foreign brokerage houses have issued reports, to the chagrin of the UPA, to state that the current rally is predicated on a change in Government in the forthcoming general elections, and on the subsequent improvement in governance. The UPA has been beset with corruption scandals and a policy paralysis.

So the current levels have been maintained by two factors; easy global liquidity thanks to QE programmes and the belief that the new political dispensation will improve governance.

Both these are tenuous assumptions. QE cannot continue forever, as it debases the currency. When the taper finally commences, the asset bubbles created by QE will start to pop, and there will be a heavy price to pay. When the Cypriot Government was unable to meet its obligations, it made bank depositors pay the price for their folly. Depositors took a 60% haircut; for every Rs 100 kept in the bank as deposit, they got back 40. This can happen in the US too. Perhaps, if India cannot control its fiscal situation, in India as well.

As regards the second factor, the dirty tricks department of all political parties will be very active in the five months remaining, prior to general elections.

So the need for caution is great. Remember, Big Brother is Watching you. It is not Watching Out for you!

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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3 Responses to "Big Brother is Watching You"
Ashok Ahuja
Dec 1, 2013
Very appropriately written Like 
Purnima L. Toolsidass
Dec 1, 2013
Apart from the very objective and penetrating observations, the delighteful references - like the one of Macbeth in this column, makes J.Mulraj a favorite for readers like me, who seek finesse and sophistication in the media. Unfortunately, good English is losing ground to 'smart' phrases these days; it is the same with objective thinking. J.Mulraj gives us both. Like (1)
Sthithapragnja
Nov 30, 2013
With utmost humility fortified with abundant ignorance I comment as under:
Some decades ago in the real estate transactions the term 60:40 (Sixty : Forty) was being commonly used to notify the colour of the Divine incarnations of the most powerful Vitamin "M" (denoting money) as "Krishna" and "Rama"( Money which is currency under the parrallel economy) and the Real Economy:
Now the term has been refabreicated as haircut : In Cyprus and most likely to be introiduced in the Gr8 US as well!!(I read an artcile which states that the US Banks will levy a fees from depositors who wish to safekeep their money as Deposits in the Banks ??

A "Rama" Brand haircut so to say??
I conclude by praying to the two divine incarnations for haing used their holy names for a comparison !!
Like (1)
  
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