At the onset, apologies to all
readers for the recent silence on this blog. My excuse is that I have been
grappling with various ideas and have still not connected the dots to my
satisfaction but I think an discussion could help. So please feel free to post
your opinions and comments on this blog and help make the discussions multifaceted. I will flag off with some recent musings.
Capitalism : Seth Klarman’s
letter quotes Pew Research Centre’s finding that 50% of Americans aged between
18 to 29 view capitalism negatively. Who can blame them after the post Lehman
crisis? Logically this set of people would have directly or vicariously
experienced the strains of the great fall in employment. Then it’s natural to extrapolate
that the youth in PIIGS countries would share the same feelings on this
subject. What with Spain registering almost 50% unemployment among people aged
under 30. The Economist, a good barometer of opinion, also ran extensive
coverage on capitalism v/s state sponsored capitalism with conclusions
favouring the latter.
For investors, these opinions
should evoke serious thought. Capital markets (Stocks, bonds currency and
commodities, along with their various derivatives) are the penultimate expression
of capitalism, which is, efficient allocation of capital towards productive
resources, and therefore will bear the brunt of a change in ideology.
Today’s youth is disillusioned with
capitalism. These decision makers of tomorrow will surely clamour for sociopolitical
changes. Revolution in Egypt, and the Arab Spring, the civil war in Syria,
overthrow of Libya’s dictator are examples. But what do democracies evolve into?
Plato’s five regimes, describe
the cycle of political (d)evolution starting with Aristocracy, Timocracy,
Oligarchy, Democracy and Tyranny. All five forms of government are easily
available for study in today’s world. So by natural evolution, democracies will
become chaotic before they degenerate into dictatorships, as it happened in
ancient Rome.
Does political structure have an
impact on economic growth and capital markets ?
Ruchir Sharma, in his new book,
effectively argues that democracy is not a pre requisite for economic growth.
Authoritarian regimes like China have achieved higher growth rates for much
longer periods. Real life observation suggests that in any controlled regime,
incentives and disincentives are created to conform to the ruler’s philosophy
and not to laws of economics. This disparity tends to stifle capital market
growth but high GDP growth can be achieved. Capital markets truly flourish when
they have the freedom to allocate capital. Accordingly, New York and London
remain the biggest financial centres today and have not been over taken by Hong
Kong or Singapore or Moscow more than 5 years after the financial crisis.
Today’s beliefs will shape tomorrow’s
decisions. The shift in ideologies will have widespread repercussions on
society itself and the manner in which society reshapes its views on wealth and
welfare. Let’s take an example.
If there was a single statistic
to track economic health, then it would be debt. The US government debt has
increased from USD 6 trillion in 2009 to USD 16 trillion now. This debt has
been used to bail out failed enterprises including banks. Despite its colossal
size, this liquidity has had a meagre effect on the real economy. It has
revived speculative positions and resulted in asset price inflation. Naturally
asset owners have benefited. The rich tend to own the most assets and they
effectively received the bail out while the not so well off lost their jobs and
even faced penury. The funds have not been used for social goods such as public
health, infrastructure assets or education. Hence what obligation will today’s
disillusioned youth feel for carrying this debt burden and service it? What
will convince the next generation to toil and repay the previous generation’s
debt obligations? Expecting future generations to pay for today’s decadence
marks a return of feudal era slavery.
Imagine the consequences of such
default. What will be the fate of bond holders especially pension funds who
hold these long term bonds? How will pensioners make do?
Will these obligations lead to
chaos and then as Plato predicts, democracies will degenerate into a
dictatorships?
Food for thought : A famous
dictator, Adolf Hitler, reneged of paying reparation for the damages of
World War 1 to external parties (France and England primarily) upon assuming
power.
Many dots remain unconnected and
your thoughts are welcome.
Incomplete as the framework is,
as an exercise for the grey cells, let’s attempt to apply it to our domestic
framework
Indian Context : The entrenched
feeling of despondency across all strata of people is something that I have
never witnessed before. Will this lead to a regime change ? For the past 20
years, we have had governments of all hues and stripes in Delhi. Currently, the
government seems to be fighting the judiciary, the regulatory bodies, the
central bank, the armed forces, investigative agencies, itself, the industry
and terrorists and Maoists whenever possible and elections soon. Indefatigable
!!!
In this chaos, sometimes even the
numbers don’t add up. 16th August’s Business Standard shows very
interesting statistics. The top 30 companies (Sensex) have reported sales
growth of under 2 %. This posits a question. If the top 30 companies which
account for about 50% of the India’s total market capitalisation are reporting
nominal sales growth rate of under 2 %, how can the Indian economy report a real
GDP growth rate of 5%?
http://www.business-standard.com/article/companies/past-imperfect-future-tense-for-india-inc-113081500524_1.html
Perhaps the market is also
pondering the same. As I write the BSE Sensex is 749 points in the red. Noted
economist Hyman Minsky wrote that stability leads to instability. In India, No
Action has resulted in a Reaction. Would you agree ?
