How long will current crisis last?

A good analogy to understand the current financial and economic crisis, that started in 2008, would be to consider a person who falls seriously ill. One option to treat the patient would be to perform an operation, but there are huge risks with this option. The other option would be to gives the patient steroids. This will make the patient will feel better, but only temporarily. Unless the underlying medical issues are corrected, the patient will not recover fully.

The US had these two options in 2008, let the economy fall freely and go into a depression (to correct the underlying structural issues), or to use steroids. The US government took the second option of giving a lot of steroids - rapidly reduced interest rated from 5.25% to almost zero, started income tax rebate program, stimulus package, quantitative easing (QE), etc. Thus the economy got better but did not fully recover. Hence the steroids were required again and again (e.g. QE II and now there is a talk of QE III). While all this is happening the underlying structural issues are slowly being fixed (like the huge debt in the system is getting reduced) which will eventually help the economy recover.

So coming back to the original question - the current process may take another year or two. But after that we should start seeing signs of a sustained recovery... well, at least until the next big crisis!

Rupee at 45 - The Impact (Part II)

Continuing from the previous post; if the Rupee does indeed go to 45 per Dollar, it will have a negative impact on the Indian propery market.

The Rupee had a free fall in the second half of 2011, going from about 44 to a Dollar in June to almost 54 in December. What this meant was that the Rupee lost almost 20% of its value against the Dollar in 6 months!

Now it is well known that Indians abroad are big investors in the domestic housing market. What happened in the last six months was that houses suddenly became very cheap for NRIs. A house that was costing 50 lakhs initially, would now effectively cost around 40 lakhs (almost 20% less)!

This increased buying from Indians abroad was a lifeline for the troubled housing market. Now if the Rupee does go to 45 to a Dollar, it will mean more bad news for the property developers..

Rupee at 45 - The Impact (Part I)

One of the predictions for 2012 has been the rise in the value of the Rupee, the most recent being from First Global's Shankar Sharma. While this blog will not try to analyze if it will happen or not, we will take a look at some interesting impacts of such an appreciation.


Apart from the effect on imports and exports, a rising Rupee impacts several other things. One of them is the stock market.


Foreign investors are big beneficiaries of a rising rupee. Let us see what happens if the Rupee actually goes from being 50 to a Dollar to 45 to a Dollar. Let us take the case of an investor who invests $100 in Indian stock market when the exchange rate is at 50 (thus investing 5,000 Rupees). When the Rupee appreciates and the exchange rate becomes 45, the investor can get back $111 (5,000 / 45). Thus the investor actually makes a return of 11% over and above any stock market returns that he is making!!


As more foreign investors try to take advantage of the rising Rupee they will have to buy Rupees (to buy shares of Indian companies). As demand for Rupees increases, it will lead to further appreciation in the Rupee (which will further increase the effective stock market returns for the investors)!!


Thus appreciating Rupee increases the effective returns for foreigners and as they invest more money in India the Rupee goes up further - leading to a cycle.


There are some other interesting impacts of the Rupee appreciation, which we will see in the next post..
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Apple iBooks - a long shot, unless...

As with any Apple product, the newly unveiled iBooks has generated a lot of interest and excitement. However, looking through the hype, it is clear that this could be a long shot even for Apple!


Although iBooks will have all kinds of books, Apple's primary target is textbooks (which is a $8 billion market). Getting school books on iPad will save students the effort of carrying around heavy bags! Also the price of electronic books is expected to be much less than their paper copies. And the books will be interactive with videos, animation, etc.


Although this all seems great, cost is a major issue that will hinder adoption:
1. Firstly, all of this is tied to the Apple ecosystem - which means that students will have to buy an iPad to use iBooks. Given the cost of an iPad (~500$) this will be a huge deterrent.
2. Schools are schools! iPads will get lost, broken, or someone will spill ketchup on them. That increases the cost further.


As computing and internet evolve, ecosystems and network effects will matter more than ever. Imagine the Apple ecosystem if every school child is using an iPad right from kindergarten! Apple has great incentive to make this work, so how to get over the cost issue??


One way to make this work would be for Apple to subsidize the iPad for schools. Another, far more interesting gambit, would be to launch an Apple book reader priced at less than $100! After Amazon's foray into the iPad market, it may be time for Apple to enter the Kindle market..

Unintended Consequences of Regulation

The recent financial crisis has led to a spate of regulation in the US. As with any major change - the question remains: will this solve what it was meant to solve or will it create other unforeseen problems?


One of the key focus of regulation is to reduce risk in the financial system. Reducing risk will likely help reduce future busts. Risk can be reduced by many ways like forcing banks to give less risker loans, making sure traders make less riskier trades, etc. Now there are two broad sets of financial firms - regulated companies like the banks, capital market firms, insurers, etc. The other type are the unregulated players like private equity firms, hedge funds, etc. also known as the shadow banking system.


Regulation will ensure that risk will be reduced – but only for the regulated companies. Now what happens if a trader at an investment bank is told to take less risk? It reduces his/her chances of getting higher returns (Risk-Return tradeoff). How long will it take for the trader to try to find another job at an unregulated company like a hedge fund? Similarly when banks deny loans to risky businesses, the businesses have to turn to private equity players or hedge funds for money.


Thus risk may not be getting reduced. It may just be getting moved from the regulated firms to shadow banking! The shadow banking system is not regulated so by definition things can go very bad very soon. So will regulation end up making the financial system more risky??

Is buying a house a good investment?

Buying a house in India is generally considered a great decision because prices seem to always go up. However, most Indians buy a house by taking a home loan. Let us see if this makes financial sense..



Consider a simple scenario of Mr. A who buys a house, for 50 lakhs by taking a 20 year loan. By the end of 20 years he will have paid the bank more than 1 crore (assuming a 20% down payment and an EMI per lakh of one thousand).


Now, average property appreciation in India over the last four years has been about 12% (Source: National Housing Bank). But given that effective cost of the house for Mr. A is one crore (and not 50 lakhs) his resulting appreciation is just 8%! Now that is a very poor return for a risky asset like property - especially since State Bank of India will give you more than 9%, virtually risk free.


The above calculations do not factor in the extra costs (over and above the one crore) due to expenses like setting up the house (e.g., furniture), house maintenance and repair, costs like amenities, car parking, association fees, property taxes, etc. It also does not factor in savings due to rentals. However, what is interesting to see is that given the huge costs associated with home loans and the higher risk of owning an asset like property, the resulting appreciation has to be high enough for it to make financial sense. That certainly does not seem to have happened in the last 4 years..

Improving Indian cricket..

After the sound thrashing in England and now an encore in Australia, I naturally started thinking about what would a consultant do if he were allowed to run Indian cricket?

The best thing to do would be to establish a system of churning out players who can play well overseas. Well, it may be easier to end corruption in India than to achieve this!! So why not turn the tables?


Here is what can be done:
1. Don't play overseas: There is a LOT more money to be made playing in India (more attendance in stadiums, higher sponsorship rates, more ads, etc.) than overseas. So why have many / long overseas tours? Just play in India!


2. Improve perception: There is nothing wrong about winning in your own backyard. Look at England who won comprehensively in England and then lost comprehensively in India! Improve people's perception that it does not matter where you win – as long as you win!


3. Invite everyone else to play in India: Given the amount of money to be made playing with India this should be easy - all cricket boards will want to play with India, and since India will not play overseas - they will be forced to play in India.


4. Ensure India wins local matches: Given the pitches we have and the spinners and sloggers in our team - this should be easy.


After losing a couple of big series in India the other boards will start making flat / turning tracks in their countries to help train their teams. Once this happens we can start touring overseas again!!!