India's mission creep

Last year ended on a very dismal note for India's ruling Congress Party after its defeat in the state elections. This isn't the first time in the history of Indian Politics that the voter has exhibited decisiveness. The man on the street, perhaps, first demonstrated the power of a vote (and responded to an open palm of the hand with his fists clenched in fury) in the General Election of 1977. Public anger, at the Indira Gandhi led government's attempt in 1975 to override Democracy, catalyzed by the stirring idealism of Jayaprakash Narayan propelled the Janata Party to power in 1977 making it the first non-Congress party to form a government at the center.

Another instance of the voter's decisiveness that comes to mind is N.T.Rama Rao's meteoric rise to power in 1984, after his party, the Telegu Desam Party (TDP), formed a mere nine months earlier, won an absolute majority in state elections in the Southern Indian state of Andhra Pradesh. 

These are compelling instances of the Indian Voter not being unduly swayed by the sense of entitlement that the Indian National Congress has had over the politics of post-Independent India.

Cut to present day and we see, in Delhi, yet another instance of the voter bestowing power upon a party that has so far made earnest and insistent claims about how they are going to redefine politics in the country. In the wake of its stunning debut in the state elections at Delhi and months before the 2014 General Elections are due, the Aam Aadmi Party (AAP) has, unquestionably, fired the imagination of the entire nation.

AAP, formally launched on November 26, 2012, lists Swaraj and Anti-Corruption among its key ideologies on the party's website www.aamaadmiparty.org. The party expands the premise of Swaraj to include a government's direct accountability to people. Other actions taken by the AAP that have struck a chord among its proponents include their shunning the usual trappings associated with an elected representative of the people. Retinue. Coterie. Syndicate. Sirens. A shocking reliance on Public Transport instead of motorcades. Eschewing bungalows provided for by the state. And an absolute insistence that the party comprises of only common men.

This may well be the beginning of India's exhilarating tryst with a change that will continue to widen in its scope. What started out only as a India Against Corruption movement could soon encompass all aspects of governance. There could, for instance, be a more pronounced tilt towards Technocracy - a form of governance where key decision makers are selected based upon how knowledgeable and skillful they are in their chosen field. The party has also decried dynastic politics and is fiercely passionate about implementing the Right to Recall law - a proposed law that would allow citizens to replace elected representatives midway through their term if found corrupt or for reasons of non-performance. 

And therein lies the risk of the party getting sucked ever deeper by "mission creep". 

Mission creep is the expansion of a project or mission beyond its original goals, often after initial successes. Mission creep is usually considered undesirable due to the dangerous path of each success breeding more ambitious attempts, only stopping when a final, often catastrophic, failure occurs. The term was originally applied exclusively to military operations, but has recently been applied to many different fields (Source : www.wikipedia.com)

Some nasty examples of mission creep that immediately come to mind are the US Military's bungled operations in Vietnam during the war. Closer home, I find the UIDAI an example of a project that veered off its rails as the scope of that project started to widen beyond it initial mission statement. 

As the fledgling party now diverts its energies towards the looming national polls, AAP increasingly risks getting sidetracked from their core plank of Anti-Corruption. On the very first day of this new year, after first being introduced on the floor of the parliament in 1968, the President of India signed the the Jan Lokpal bill into a law. However, the notion of Jan Lokpal still remains exceedingly hazy and the institutions of Jan Lokpal and Lok Ayukta's remain as phantom-like as ever. It still isn't clear how the Jan Lokpal intends to fight corruption. In the early stages of the India Against Corruption movement in 2011, there were fleeting comparisons made with Hong Kong's battle with corruption. In the early seventies, Hong Kong won its long drawn battle against graft after the government created a highly empowered Anti-Corruption body to crack down on corruption, especially in their police force. Their sense of urgency was unmistakably clear. Also remarkable was the average Hong Kongers determination to never tolerate corruption again. 

You wouldn't want your favorite prizefighter walk out of the ring, due to a new found interest in tap-dancing, after having a very formidable opponent on the ropes. This still remains India's most opportune moment in time to root out corruption forever. One hopes that the AAP remains as closely aligned as possible to its primary goal of fighting corruption.

Other problems that face the nation can wait. For the time being. 

(c) Avinash Menon. Views expressed in my blog are my own and do not represent the policies or views of any political establishment or the Government of India 

Adieu Sachin!

In Greek mythology, Atlas was described as a giant who held the planet on his shoulders. The legend is that 'he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength. The greater his effort the heavier the world bore down upon his shoulders'. Until, one day, he simply shrugged his shoulders and walked into a golden sunset.

 

After an unparalleled 24 years in international cricket during which he, unflinchingly, carried the hopes of a billion strong nation on his shoulders, India's greatest sporting icon, Sachin Tendulkar, announced his retirement from the game on Nov 16th, 2013. Adieu Sachin!


(c) Avinash Menon

Ashes to ashes ...

The little guy with the square jaw strode into the arena. He walked briskly, his body betraying no signs of the growing tempest within. A large rowdy group of spectators greeted the squat foreigner with loud jeers. A visibly large section of the crowd were up on their feet and making a really strange gesture with their arms. As one group and in perfect unison, they collectively bent low to their right, pulled their right hand back and with clenched fists, swung up hard at a phantom figure.               

They were mocking him for an earlier misdemeanor. Reflexively, the squat man grinned. As he continued his brisk trot out to the middle, in his mind's eye, he replayed the grisly scene that he was about to orchestrate. This is how he saw it panning out - He would take guard in the middle and then against the backdrop of an angry mob baying for his blood, he would slay the Home Lions. One by One. Until all eleven Home Lions lay lifeless in the arena. He would then rip off his armour, wipe the bloody entrails off his brow, hold his arms aloft and scream at the crowds - "Are you not entertained? Is that not why you are here"

David Warner did not do any of these.

Far from it. After playing an inspiring knock that raised hopes of a rare Aussie win in the fourth Ashes Test at Durham, Warner's post match press-conference was as pathetic as it can get. This is what he said. "When I first came back and I got booed walking out at Manchester I felt real nervy. I felt real small. I felt that everything was against me.". He also added, "We were talking about it just before, what goes through our minds when we walk out there and how rowdy the crowd was. It does help having the home [crowd] behind you ...."

That pretty much sums up the current state of Cricket Australia.

The whining has now reached a crescendo. The masters of sledging now no longer greet rival batsmen with imaginatively thought through barbs. The once trademark swagger has morphed into an ungainly stagger. You can now say with certainty that the Aussie rout is complete. Alas! How the mighty have fallen.

Wait a moment! Did you hear that? Did that sound like a yelp?

Is that you Pup?

(c) Avinash Menon

The Curious Case of Messrs Gross and Fink

The story so far ..

The Fed has so far purchased $ 2.5 trillion in assets since December 2008 and its balancesheet continues to rapidly balloon in size as, in the third round of bond purchases under the quantitative-easing stimulus strategy, it continues its $ 85 billion monthly purchase of Treasuries and Mortgage-backed bonds. The Fed isnt acting in isolation. Policy makers around the world (including the Fed) have pumped in more than $ 6 trillion into the global economy through asset purchases, increasing their balance sheet assets to $ 14.09 trillion as of June 2012. This is up from $ 4.99 trillion in May 2006!

These asset purchases were largely driven by the Fed’s policies. All policy moves by the Fed so far, ZIRP, QE1, QE2, Operation Twist and ‘Infinite’ QE3, were aimed at stimulating  a sluggish economy.  In the initial phases, fears were rife that the first two rounds of Quantitative Easing were nothing but the Fed trying to ‘monetize its debt’ (Central banks in most developed nations,  like UK, US and Japan for instance, are forbidden by law to buy government debt directly from the government and must instead buy it from the secondary market. Thus a two-step process, where the government sells bonds to private entities which the central bank then buys).  Bernanke has been earnest in his appeals however that the easing was to stimulate the economy and not to finance government spending (and I guess, we will have to take his word for that!).

...Operation Twist

This was followed by Operation Twist - A attempt to flatten the yield curve by selling short term debt and using the proceeds to finance the purchase of longer dated treasuries. While this may be just what the doctor ordered to keeping the balance sheet from ballooning any further, Operation Twist has a severe limitation. To finance the purchase of longer dated securities you need to have an inventory of short dated securities to sell. Unfortunately, the Fed will soon run out of short term bonds to sell. What then?  What do you do when you no longer have 0-3 year bonds to sell? Simple, you start selling the longer dated bonds from your portfolio. The Fed had until now indicated that the plan was to keep the Federal Funds rate at the zero range atleast until mid 2015. Its very likely that the ZIRP will be further extended in time.

The objective of ‘unlimited’ QE3 (While continuing its purchase of $ 40 billion per month of MBS, the Fed will also buy $ 45 billion of Treasury Debt every month; The second part of the plan replaces Operation Twist) was to put downward pressure on long-term interest rates. Much like the two phases of easing announced earlier. On September 7, 2012, the Friday before QE3 was announced, the yield on the 10-year Treasuries was 1.67%. On September 14, the day after the QE3 announcement, it had surged up to 1.88%. This was not the desired effect and it is possible that this may have been due to investors flocking to riskier assets like equities and high yield debt from treasuries.  

Bernanke may rest easy in the fact that the 10 year yield averaged 1.79 percent in 2012. The average in 2011 was 2.77 per cent!The average yield registered in 2012 is still significantly greater than the record low of 1.379 percent on July 25, 2012 at the height of Europe’s sovereign debt crisis.

By late 2012, unprecedented stimulus by the ECB had tempered the sovereign crisis in Europe and curtailed the demand for safe haven assets like Gold and Treasuries.  10 year yields seem to have plateaued at sub-2 levels, so is there really a case for purchasing treasuries at the moment?

.. and onto Messrs Gross and Fink

That brings us to the two gentlemen in the subject of this post. One of them is pugnaciously long on treasuries. Bill Gross, who runs the world’s largest bond fund, raised the percentage of Treasuries held in his flagship Total Return Fund to 26 per cent in December 2012, up from 23 per cent of assets in November. MBS still remains the flagship fund’s largest holding, though its proportion has reduced to 42 percent from 44 percent since October 2011. Gross has stated that he would steer clear from longer-dated treasuries as inflationary effects of the Fed’s massive scale of Quantitative Easing will be felt many years later. PIMCO, with $1.92 trillion in assets under management, is primarily a fixed income manager. So this is one really monstrous bet on treasuries by Gross, who co-founded the firm in 1971 (Gross incidentally is one of the rare few fixed income managers to have got in, more than thirty years ago,  on the ground floor of this spectacular bond rally). But even best laid plans can sometimes go wrong.

Gross had apologized to his investors in 2011 after, earlier in that year, he had sold all his treasury holdings.  Yep. He had reduced his holdings in treasuries to zero by March 2011! Why? It was because he believed then that the Fed would stop buying bonds at the end of June 2011 as its QE2 program wound down. Gross watched his worst nightmare come true as the Fed announced a continuation of its quantitative easing program. A few months later, an extraordinary tail risk emerged, sending shock-waves across the world. The US had lost its prized AAA rating! However, amidst the shock-and-awe, the world didnt end as we thought it would and far from triggering an exodus from Treasuries, investors piled into US Treasuries. As equity markets worldwide crumbled, the US treasuries were perceived as the ultimate safe haven by stunned investors seeking refuge from wealth destruction and increased volatility. Yields tumbled swiftly and Gross was left to rue his short treasury postion. With an approach that can best be categorized as extreme risk-averseness, will things turn out differently for him this time around?

The answer to that question may well lie in the world of extreme risk. In February 2012, Larry Fink, the CEO of BlackRock, made a statement that sounded ludicrous then. He said ‘investors should have 100 percent of investments in equities because of valuations and higher returns than bonds’.

(c) Avinash Menon

Nothing much has changed since Little Red Riding Hood faced the Big Bad Wolf!

You read about extreme acts of violence all the time. Killing is either premeditated or driven by passion. Most of the times atleast. And then every once-a-while along comes a random, mindless act of violence that numbs you because you just cannot figure it out. Why would anyone want to pull a gun on a child?

What could be a more pleasant sound to the ears than the soft-breathing of a sleeping child. It takes little for these guys to know pure joy; A struggling dragonfly held by its tail between their thumb and pointer. Tom and Jerry. Snakes and Ladders. Monopoly. Jigsaw Puzzles. Hop-Skip-Jump. Watch them dream with their eyes open when you read out a story. They are an extremely rare combination of a beautiful mind and an unprejudiced heart. While we may pretend that we are teaching them about life, the truth is a child teaches us what life is all about. Why would anyone want to pull a gun on someone like that?

But this ship cannot sink!

An ill-conceived moniker 

The legend of the ill-fated ship now, quite literally, has another dimension to it . Its been a month since Titanic in 3D’s release and its evident that this disaster, in its centenary year now, still remains the planet’s favorite shipwreck story. I haven’t yet seen the 3D version of the movie but recall seeing the 1997 release and being awestruck by the dramatic reconstruction of a tragedy that never should have been.  When you look at a faithful re-enactment of some of the planet’s greatest catastrophes on celluloid, you actively seek the key events that had the largest impact on the outcome. As a finance professional, insights from the ship’s misadventure often forms the basis of my investment related discussions with members of my fraternity. Its my firm belief that the Titanic’s unfortunate end was inevitable. It lay in its monstrously flawed origin. Why was it ever called ‘The Unsinkable Ship?’

The Incorrigible Twins

Over the last couple of years, I have seen denial at close quarters. It creeps in like an unwanted visitor when the talk inevitably veers towards India. The Indian Rupee has been spectacularly routed. It is periliously close to breaching the 54 per dollar mark again - a level it last saw in December 2011. The hapless Deficit Twins, Current Account and Fiscal, are experiencing growth spurts like never before. Estimated at 3.8 per cent of GDP for the fiscal year 2011—12, India’s Current Account Deficit is far worse than what it was in the crisis of 1991. India’s Fiscal Deficit jumped to 5.9% of GDP for FY 2011-12 compared to the earlier target of 4.6% and the Government has set the FY2012-13 fiscal deficit target at 5.1% of GDP which is very high. Now you may think an Indian Ultra High Networth Individual would treat a fact like this with a lot more respect. Not really! Any mention of the yawning Deficit’s only elicits a yawn in return. I am coldly asked to cut out the sarcasm when I say that I hope to see the twins walk down the aisle someday and take on the more coveted name – Surplus!

A home bias that is hard to ignore

There is a conviction bias that is hard to ignore.  Is there a misplaced sense of belief that the country will side step a looming crisis, of a magnitude perhaps greater than the one it faced in 1991? And what could be the basis for this belief? Can strong popular opinion be enough to sustain the India growth story? A year ago, India was boasting 8.4% GDP growth, with experts predicting it would overtake China on the growth charts. Today, growth has slumped to 6.9%! The knives are out for the India story with skeptics going to the extent of saying that the ‘I’ in BRIC was never a reference to India but to Indonesia!

Belated Measures

The government has been struggling to woo foreign investors back with belated measures like the two way fungibility in Indian Depository Receipt’s (IDRs). The implementation  impacts only one company at the moment but may perhaps, in the long run, prompt other companies to float from IDRs, leading to a deepening of the capital markets. Freeing up interest rates on the fully repatriable Non Resident Indian accounts to encourage remittance inflows may not provide immediate solutions. Compared to FDI and FII, remittances are indeed a more stable and sustainable source of foreign currency inflows to the current account but it may be a long time before India (with inward remittances forming only 3% of its GDP) steals a march on countries like Phillipines, where remittances have consistently contributed to more than 10% of its GDP.

Last week, The RBI relaxed the interest rate ceiling on FCNR deposits of banks with maturities of 1 year to less than 3 years to 200 basis points above the LIBOR or swap rate, from 125 basis points now. On 3 to 5-year maturity FCNR deposits, the rate ceiling was relaxed to 300 basis points above LIBOR. Also, banks are now allowed to freely determine the interest rates on export credit in foreign currency. None of these measures seem to have succeeded in bolstering the rupee though.   

A combination of high, sticky oil prices and a fast weakening local currency have made things worse for a country that meets 80% of its energy needs through imports. Fears are rife that government induced fuel price hikes may lead to a massive uptick in the prices of essentials.

Like a punch-drunk boxer, the economy reels and just about manages to stay on its feet.

State of Denial

Not surprisingly, the denial, in its strongest from comes from the government of India. After S & P cut India’s credit outlook to negative late last month, on the back of fast deteriorating fundamentals, and warned of a one-in-three chance of a downgrade to junk status in the next 2 years, all that the finance minister of India, Pranab Mukherjee, had to say was ‘there is no need to panic’.

For me, the most defining moment of James Cameron’s Titanic is a scene from its climax involving two of its fringe characters.Its when Bruce Ismay, the snooty first class passenger confronts Thomas Andrews, the ships designer and incredulously tells him, ‘But this ship cannot sink!’. Thomas Andrews says in response,’She's made of iron, sir! I assure you, she can... and she will. It is a mathematical certainty’

Isn’t that always the key? To differentiate a fact from an opinion!

(The views expressed here are my own and do not necessarily represent the Government of India’s positions, policies or opinions – Avinash Menon)

Ugly is most Beautiful!

The terrain definitely did not have the picture postcard beauty of the Swiss Alps. On the contrary, it was rugged and savage (in one word, ugly, maybe?). Yet some of us would call it very pristine in its beauty. Was the landscape barren? Yes, it was. Yet some of us would like to call it a sun-drenched panorama. There was nobody in sight as far as the eye could see. Wait a moment! Hark! The wind whispers a word in your ears. Did it sound like 'Blondie'?

And then you see a disheveled, delinquent figure strung from the branch of a tree, with a noose around its neck and a wooden prop supporting its trembling legs from below. Now that's a pretty ugly sight in the golden yellow sun-drenched panoramic view that I described earlier, right?

What happens next is a legendary cinematic moment. A bullet whistles through the air and cuts through the noose-chord. The delinquent's body, now free from the noose, plops softly onto the ground. The delinquent is up on his feet immediately and lets out a blood-curdling roar in the general direction of 'Blondie'.


For those of you who have watched 'Wall Street : Money never sleeps' this year, I am sure you would have applauded Eli Wallach's performance as Jules Steinhardt, a top executive and Wall Street patriarch. Eli Wallach turns 95 years old this year and performs in Wall Street with the same energy and enthusiasm that you first saw in his popular role as 'Tuco' in 'The Good, The Bad and The Ugly'. Ugly is ,without a doubt, most beautiful!