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Rates too heavy ?

Every heady bull run has excesses. From stocks being valued on eyeballs, junk bonds being rated AAA or NINJA ( no income no job no assets) loans being distributed by banks, these parties have seen them all. A notable common factor towards the latter phase of all these bull-run periods have been Fed interest rate hikes.


In fact a simplistic view of the situation could make a case that the Federal Reserve prompted the subsequent crashes through the interest rate hikes. Eventually, borrowers could not pay higher interest rates and defaulted or money stopped flowing into stock markets attracted by higher bond yields. It appears that this simplistic view is being taken seriously by none other than the Fed itself. This cannot be dismissed as mistakenly assuming correlation for causation.

The debt levels of today’s world are incomparable to those of earlier eras. Money is literally cheap today. Frighteningly, making it so does not bring inflation and growth. The interest rate hike announcements had been necessary for the Fed to signify that the economic situation was benign as dilly-dallying in the wake of supposedly strong employment and wage data would have been suspicious. Yet, it is impossible for it to deliver on its rate hike promises without precipitating a crash.

Earlier long-term bull-run phases had real earnings pick-ups which allowed the Federal Reserve to raise rates and rein in inflation. The markets did crash but only after years of growth. In any event, stock markets are cyclical. Now we are in an era of tepid growth and tepid inflation in much of the world. Corporate bond defaults are at multi-year highs as are student loan defaults. Yet, the S&P 500 has risen more than 200% since its ‘09 lows and is still rising. It’s a rally whose lifeblood is liquidity, something interest rate hikes are supposed to suck out. This is possible to achieve without immediate negative fallout during strong economic growth periods; this is certainly not the case today.

Regrettably, the Federal Reserve is in a situation where it cannot raise interest rates by more than a percent or thereabouts as it is painfully obvious that the heavily indebted businesses of today would not be able to afford much higher interest rates and neither can it hold firm forever as it would be giving live to its claim of a booming economy and a robust economic environment.


Imagine Janet Yellen trying to lift a big zero shaped boulder towards the sky. You get the picture. She is no Hercules.

P.S: Gordon Gekko said,” Greed is good.” Janet Yellen says, “Debt is good. ” We know how the movie ended.



How zero and negative interest policies are playing with the cost of equity

A lot of things are very different today in the world of finance. However, what has prompted me to write today is the imminent demise in the developed world of something which was at the very foundation of the course on ‘Financial Management’ I studied during my Masters- the concept of the risk free interest rate.

The risk free interest rate is basic opportunity cost. It is traditionally taken as the yield of a long term sovereign bond or some other such asset which is guaranteed by the government. The concept is somewhat ideal as sovereign defaults do happen but it is definitely true that sovereign bonds of first world countries have a good credit history.

The developed world is now a place of either Zero Interest Rate Policy (ZIRP) or Negative Interest Rate Policy (NIRP). In a world having inflation, both policies mean that a person buying a risk free asset would lose money over time. While ZIRP makes its way felt through creeping inflation, NIRP is more direct as a direct debit on your bank account. Effectively though the message is clear, there is no risk free asset that delivers a return. No FD in a sovereign bank or long term sovereign bond that preserves your capital. Even to preserve capital, investors would need to take risk.

The removal of risk free interest rate has far reaching implications, especially on cost of equity. Taking an example, let’s assume that the 10 year Government bond is the risk free interest rate in India. Currently, its yield is approximately 7.5% and an investor’s equity risk premium is also 8%. This means that the cost of equity is 15.5%.

However, in ZIRP, the cost of equity would just be the risk of investing in equity, the equity risk premium i.e 8%. Thus theoretically, it also means a lower expected return from equity.

It is a terrible situation to be in; the inflation indicators are benign in most of the world but the truth is that food, housing, medical bills and education are getting more expensive year on year almost everywhere. If one has to spend in the future on any of these things, one has to save and this means that getting a return is important. However, with no risk free asset, one is literally forced to dabble in the markets. Thus with more demand, equity asset prices go up.

That is theory. In real life too, the US markets have enjoyed a speculative rally fuelled by debt. However, something is seriously wrong when the Dow and S&P 500 reach lifetime highs without any meaningful increase in economic indicators and investors have to bet our life’s savings on the hope that this continues because they simply have nowhere else to go. This is bad because if there are no savings, one can only borrow. Borrowing is based on the premise that one would earn more in the future. Is that really guaranteed when wages have been stagnating in the developed world for decades? Don’t take my word for it, read Michael Lewis’ ‘Liar’s Poker’ that mentions starting 1980s salaries in the USA in Wall Street and it is difficult to believe how little the salaries have changed even in nominal terms. Yet, cars, houses and tuition are phenomenally more expensive now than then.

How do central banks tackle the crisis? They try to remove the ‘risk’ from the equity risk premium by playing to the market. Witness the efforts of the central banks of China, Japan, the Euro zone and of course the US. It is working so far: basic concepts of Financial Management be damned.

I sincerely hope that the rate easing cycle in India never reaches ZIRP in my lifetime but I am afraid the odds are against me.

My PreciousZIRP

The ring is too precious to let go


February renaissance

February, a month that has been special for me over the past few years( no, it is not Valentine’s Day). This year, the month marks my return to more serious cycling. Can’t help it, the weather in February is just perfect for cycling. In Surat, this especially holds true as February is the later part of its very short and mild winter and the rest of the year is hot, really hot. My profuse sweating is not much of an issue at this time and that’s just the motivation I needed for me to make a resolution to ride my cycle to work on at least 50% of all days.

An interesting observation is that there is only a difference of one to two minutes between the gross time needed for me to reach office on my cycle(Firefox Roadpro 2200) or my petrol guzzling Vespa. You see, the slow, agonizing bumper to bumper traffic which I have to encounter daily does not need to exist for the cycle. I simply clamber onto the footpath and it is a fast ride sans any traffic.

The ride home is the tougher one. I may or may not have eaten during the day and so the energy for the ride is drawn from reserves. My bag seems so much heavier than in the morning on my arched back and this is the time when the natural riding position of the Roadpro is not very comfortable. Having said that, the aerodynamic position does help maintain good speeds with relatively little pedaling effort during periods of tiredness.

In all, in spite of the arched back riding position, the Roadpro doesn’t tire all that much. The gears work well and all one has to do is to find the gear appropriate for the rhythm. As I have not been cycling all that much lately, I am cycling at an average speed of 30 kmph for the journey as a whole, rarely going above 45 kmph. The Roadpro is no Trek and not for very high speeds anyway, though it is great for cruising in the late 30s or early to mid 40s. Fast on the climbs and nippy on the descents, I would still take the roadie rather than the more comfortable hybrids on the flyovers in this city.

I have decided to extend my experiment onto the coming summer months.

Flood Panic sets in Surat

The Tapti licks the Adajan-Hazira Road; the white visible through the trees is the main river body(10 a.m)

The Tapti licks the Adajan-Hazira Road; the white visible through the trees is the main river body(10 a.m)

It is 5.30 a.m when suddenly the phone rings, waking me. I do not pick up on the first call believing it to be a false call as my name is alphabetically usually at the top of the phone-book. However, the caller is insistent;he calls again. I pick up.

“It is flooding in Surat. If you want to run to Baroda to your relatives, you still can.”

“Are you serious?” I ask, as there have already been two flood scares this year.

” Shop-owners have already started started shifting their stuff elsewhere.I have personally shifted stuff for two houses.” This makes me sit upright on my bed.

This sets my pulse racing. I live in Adajan which is low lying as compared to the rest of the city and the river is just two and a half kilometres from my home. The duplex house I am living in had gone underwater in 2006. If a flood actually came, I would have to shift all my stuff downstairs to the first floor, and it is a lot of stuff I am talking of.

I decide to go on a reconnaissance mission immediately to the Tapti. I wear my raincoat as it is still raining like it did all day yesterday.

The signs of unrest are clear almost immediately. The milk booth has 30 people standing in front of it. Traffic seems unusually high at 6 in the morning.  A hundred metres ahead, there is a mini traffic jam with all vehicles queuing up behind each other. Coming closer, I realize, the vehicles have been purposefully lined up in front of the closed petrol pump so that they can tank up as soon as the pump opens in the morning ( it is still dark outside).

The newly built flyover is littered with vehicles left on it in the night by people who got the news early.It has now been closed by the police. I continue onwards to the bridge; I decide to go to the ‘Makai Pul’ which is the lowest bridge among the river bridges of Surat. The sight is overwhelming. Two days ago, the river was a narrow strip in the centre of the bridge and most of the massive river bank was just black mud pockmarked in portions by rain water. Now, there was only water from end to end with the religious sites at the river banks already under water. The river water is moving underneath at a frightening pace, one that brings to mind the Ganga of Haridwar.

I have uploaded a brief video at Youtube of the water flowing at Makai Pul at http://www.youtube.com/watch?v=KzPOK_QT2bQ (pardon the video quality, it was taken by a basic phone)

The bridge to the other side to of the city is still not affected that much by traffic but jams occur nonetheless as Surti public, true to its kind, is motoring on the ‘wrong side’ on the bridge after witnessing the spectacle of the overflowing river. Making the long U turn is something they simply cannot do( there is something in the Surti air I guess).

An ambulance stands in the water below Sradar Bridge at 0930 hrs

An ambulance stands in the water below Sradar Bridge at 0930 hrs

The road parallel to the river I travelled through at 6:30 am is fully flooded at 0930 hrs

The road parallel to the river I travelled through at 6:30 am is fully flooded at 0930 hrs

A man drags his Activa through the water;nothing unusual for him as this road gets flooded almost every year

A man drags his Activa through the water;nothing unusual for him as this road gets flooded almost every year

I am unable to make the return on the same road on the way back as it has been blocked due to excessive traffic. I thus use the road running parallel to the river.  I keep to the right side of the road as water is pouring onto the road on the left. At current speed, this road will be unmotorable within two hours (the pics show this road. it is called the Bapu Nagar Road)

As I return home at 6:45, I find that the kilometres long traffic jam has begun and milk booths have run out supplies. Neighbours ask me whether I have enough stock of food. Fortunately, I have enough food to survive for several weeks.I curse myself for not filling up additional water yesterday from the municipal supply. I set my mobile immediately on the charger.

Local news reports that around 5 lakh cusecs have been released. This is a lot more than the 2.5 lakh cusec releases that had created the earlier scares of this year or the minor flood of 2012 in which water had entered the city through the gutter. This time, the river itself was entering the city.

One line from the Lord of The Rings:Two Towers seems pertinent: “So it begins.”

Update 10 a.m: I do another hour long reconnaissance. The situation is now truly alarming. Water has flooded Hazira Road in Adajan and the parallel road i talked of earlier has indeed gone underwater 3 hours ago. The river has moved inwards by around half a kilometre from its banks in all areas.

Water situation at 9:45 a.m near Morarji Desai garden, Adajan;  People can be seen carrying gas cylinders

Water situation at 9:45 a.m near Morarji Desai garden, Adajan; People can be seen carrying gas cylinders

Vehicles in houses near the river are standing in water. Police have cut off traffic to major bridges leading to the Adajan area of Surat becoming almost cut off. Many provision shops have run out of supplies.

Adajan Hazira Road: Further along the road, the river had completely overflown the road and I had to wade my cycle across to get home

Adajan Hazira Road: Further along the road, the river had completely overflown the road and I had to wade my cycle across to get home

Let’s hope electricity lasts.

Invisible Carnage

On 2nd August 2013, the BSE Sensex and the Nifty closed at 19164 and 5678 respectively. These levels are similar to average market levels of the past year. The Sensex has maintained a tight range between 18500 and 20500 from September 2012 in a movement that may have been irritating for recent market participants who wished the indices to move upwards. I have been feeling that 19000+ is actually a dizzy level considering the actual fundamentals of the Indian economy ( refer my previous article: Markets at 16000 again’).

However, a closer look at the actual market today has managed to shake me out of this illusion. The market is nowhere near highs. In fact it is very much competing with the intermediate lows of the bear market.

Decoupling: S&P 500 and the Sensex

You may remember the infamous decoupling theory of 2007-08. The theory suggested that the Indian markets were decoupled from international markets because of the fundamental strength of the Indian economy and so would not be affected even if American and European markets burned. The theory thus argued that the Sensex could be bought even at 20000.

As the events of 2008 bore out, nothing could be further from the truth.

However, since the beginning of 2013, we have witnessed part of the premise of the theory coming true; Indian markets have decoupled from US markets. Look at the chart and you will see how the S&P and the Dow have been steadily climbing up a mountain while Indian markets have been taking a saunter along the beach.

The Sensex loses badly, very badly

The Sensex loses badly, very badly

Mid caps and Small Caps get smaller still

The two year chart of the Small Cap index demonstrates how Midcaps and Small Caps have dropped sharply whenever the Sensex has fallen but by much more and they have also fallen when the Sensex has only been flat.

The bottom has dropped out for small caps

The bottom has dropped out for small caps

The BSE Small Cap Index has fallen from 13400+ in Jan 2008 to 5178 today. This is only 90% higher than March 2009 lows. The Sensex at 19000 is 140% above March 2009 lows. The BSE 200 is 120% above the lows which seems to be a good performance. However, bear in mind that in times of correction, midcaps and small caps fall much faster and so have much lower bases at historical market lows. Midcaps and small caps are supposed to give greater returns over the long term than large caps. How is it then that we see the Sensex beating their returns so spectacularly?

One chart that shows it all

One chart that shows it all

Illusion behind the Sensex

The level of 19000 too is just an illusion that quickly disappears when we see the stocks that are responsible for keeping it at that level. As it turns out, the only heroes of the index have been in FMCG, IT, Auto, Pharma and HDFC (sorry to place sectors and stocks on the same plane but HDFC and HDFC Bank are a class by themselves). From middle to low levels in terms of weightage in the Sensex, they have risen to the top. Having ITC at max weightage in the Sensex was unthinkable two years ago.

Blood on the Trading Floor

Traditional brick and mortar companies are down to multi year lows across the board. Look at SAIL, BHEL, Hindalco, GAIL, ONGC, RIL, HPCL, Tata Power, Power Grid, NTPC, Tata Steel etc. Look at banking: SBI, Bank of Baroda, Bank of India etc. A behemoth like SBI is struggling at its December 2011 support level of 1600 below which it only has the March 2009 bottom of sub 1000 levels to fall to.

SBI 2 year chart

SBI 2 year chart

For midcaps and small caps, pre 2007 levels have returned and many supposedly strong stocks have given up decade long gains. It is almost as if 2004-2007 had never been. The list of stocks is too long and too painful to read out so all I am telling you is to take a look at almost any midcap in the engineering, manufacturing, mining, power, metals, fertilizers, banking, realty, textile, media space. In fact, look at anything other than IT, FMCG and pharma.

The premises of every wealth manager who has talked of investing over the long term for better returns have come to nought.

The FMCG bull run has relied on the strength of India’s consumer based economy but this cannot last forever as consumption in a bear market economy is not the same as consumption in a booming one. The auto sector is already learning this.

The writing on the wall is clear. We are in a horrible, horrible bear market which is better represented by 12000 on the screen, not 19000.

Three cities as a cyclist: Bhopal, Delhi and Bangalore


Unlike many of my classmates, I learnt to cycle at what must be considered the ripe old age of 11. Unlike them again, the cycle is still serving as my primary personal mode of transport at twice that age. It has been an enriching experience and I have had many thrills along the way.

I shall write about some of the thrills another day. Today, I would compare the cycle friendliness of the three Indian cities I have cycled in: Bhopal, Delhi and Bangalore, placed in descending order of frequency.


Bhopal does not have the traffic problems of either of the two other cities. Logically, it should be the most comfortable to cycle in. In practice, this is not so. Not because of the traffic which is benign by metro standards though. It is because of road quality. I believe that the best judge of the quality of a road surface is the cyclist. Even a slight reduction in the friction on a surface is grasped by his keen senses. I have my personal favourite stretches of road on all the roads which are my cycling haunts. It is magical how without any change in inclination of the road, the cycle gathers speed at these stretches and suddenly outracing those Marutis does not seem that difficult anymore.

The biggest problem for a cyclist is not traffic, it is bad roads. A couple of stretches of bad road converts your smooth, soundless, efficient machine into a loose, screechy mass of metal that only seems to be held by a few remaining nuts and bolts, a good number of them having fallen along the way . In this respect, I have, jointly with my cycles, suffered tremendously; more so on the Hero Hawk whose thin tyres give it seductive speed but also make it treacherous and injury prone on bad roads.

Bhopal provides ultimate variety in terms of cycling terrain ranging from village dirt tracks to wide world class roads. The hill stretches are extremely challenging

Some roads in Bhopal have improved in recent years but some others which used to be good became awful resulting in no net change in the last seven years. Combined with higher traffic, the equation has slightly worsened for the cyclist. Nonetheless, among the three cities Bhopal is definitely the safest for a cyclist.

South and Central Delhi

I have not cycled in the entire city of Delhi and would not dare attempting the same. I salute the average Delhi cyclewallah who, as far as I am concerned, has the heart of a mountain lion and the doggedness of a Hercules. I am amazed to see people cycling nonchalantly on the busiest of roads In Delhi on the simplest and the cheapest of cycles. They do not think twice about entering lanes with vehicles plying at 60-80 kmph.

Delhi roads, in general, are very good. The roads in south and central Delhi have the additional advantage of being less crowded. Central Delhi, in particular feels like a cyclist’s paradise with broad, beautiful and sparsely populated roads. The ride through The Ridge Road which passes through the Pusa forest and central Ridge Reserve forests is picturesque though the high speed traffic does freak you out.On this route, just like in the rest of Delhi, there are lots of landmarks to visit and gardens to relax in after a hard ride.


I have not cycled very much in Bangalore being restricted in general to Varthur Road, Whitefield and the Old Airport Road. However, I do remember my agonizing uphill climbs on flyovers with bumper to bumper traffic. Bangalore’s roads are not as spotless as south and Central Delhi’s but they are undoubtedly quite good. Firefoxes are quite the rage in the city and Bangalore was one of the first Indian cities to take to the premium cycle segment. However, the city cannot really be termed cycle-friendly. Many roads have large open drains by the side of the road. In case of a traffic snarl the traditional patli gali exit through the sides is not possible.

Fresh coconut water along the road acts as a great morale booster.

Getting a cycle repaired or getting air filled could prove quite a pain as not as many cycle repair shops are available as in Bhopal or Delhi.

In Bangalore the cycling helmet does not draw as many stares as in Delhi and Bhopal. However, Indians still do not grasp the concept of a cycling helmet. I feel this is rather stupid because the cyclist is perhaps at the greatest risk and any accident in his case has much greater chances of being fatal.

In both Delhi and Bangalore, the main roads cannot really be termed cycleable. Cars and buses could not care less about the cyclist. Buses or cars irritate by suddenly and routinely pulling into the left lane which used by cyclists. The cyclist has no choice but to wait for the bus to move. Moving into the lane to the right of the bus is rarely a choice as the high speed traffic in that lane does not give a chance. A fast car passing close by a cycle sends shivers not just down the spine of the cyclist but down the entire body of the cycle temporarily unbalancing the vehicle. There is always an undercurrent of fear that makes it hard to concentrate.

Given a choice, I would choose Chanakyapuri, Delhi as the ideal place to cycle in.

Tiny Roommate(s)

First Blood
It started with a squeak and the sound of moving polyethylene. I moved towards the source of the sound to investigate. The result was mutually startling. Both of us did not like each other. The mouse leapt out from the sill and disappeared into the neighbour’s room through a crack under the door.
Now, my room in Delhi shares a common door with the neighbouring room. I immediately began constructing a newspaper fortress under the door. It consumed a lot of paper but by the end of it, I was confident of thwarting this new challenger.The fortress served its purpose for some time. At least I thought so.  How wrong I was, was proved one night a month later, when I saw the creature poking its head in some utensils. I ran to scare it away and it took the now familiar route under the refrigerator and out of the door.Sure enough, the paper fortress had gaps. I began plugging these with the determination of an engineer doing urgent repair work. The enthusiasm wore off soon enough. It became apparent that this mouse was so tiny that it only needed the tiniest of gaps. Besides this, it knew how to cut through paper. At 1 a.m., here I was, having digested my first defeat at the hands of a mouse.
Cat and Mouse

I decided to take a hands on approach to the menace. So on its next intrusion, I began attacking it with a long ladle. The cunning mouse kept out of harm’s way behind the gas and I gave up after  some time. It was jumping up the gas pipe to climb up and reach the otherwise unattainable sill. I have to concede, the mouse is really gifted at the art of jumping.

Another time, the mouse hid so smartly behind some utensils that I began doubting my eys at having seen it at all. Even drum beats on the utensils did not make it reveal its presence. The moment I moved back to the computer, voilà, swishing sounds.

The next night, there were some grains of rice that had been spilt near the burner. Sure enough, the mouse began to nibble the savoury snacks. This time, I did not do anything but just observed its movements. I couldn’t have done anything either because by the time I would have grabbed anything, the thing would have fled.

The entry of the tiny roommate made me change my habit of keeping half eaten snacks around the room. Now everything was kept secure. When I left for my home in Bhopal, I made sure I had kept everything in the fridge or the almirah.

On my return, I found things as I had left them and began self congratulating myself on this victory. Little did I know that I had stupidly kept one cardboard box with packets of noodles and other crunchy snacks at the mercy of the mouse. I was scared to open the box, knowing not what to expect. It turned out to be nothing more than empty wrappers of Maggi and Haldirams. The mouse had determined me to have a healthy diet and had thus had nobly sacrificed its six packs by eating all of the junk stuff.

Discretionary tastes

The mouse, who is growing fast, now has a tiny brother whom it chases whenever it is bored. The two of them spend sleepless nights looking for food and education. They have been ingenious enough to climb to the almirah top and access their favourite food: annual reports of infrastructure and realty companies. It also digests Business Standard in full beating MBA students to the task. This chewing gum I have placed at various locations as I do not approve of computer wires serving the same purpose. I now wash every unused utensil every day and keep no important books lying around.

I have allowed a cat to transgress into the room a couple of times so that it can scare away the mice or better but it has not worked. I have been tempted by ads of Mortein Rat kill and have even kept some in the room but somehow have not been able to bring myself to using it. I blame Warner Bros, Hollywood and National Geographic. By making ‘Mickey Mouse’, ‘Ratatouille’, ‘Tom and Jerry’ and countless documentaries on the lives of smaller creatures, they have forestalled my offense.The sound of moving polyethylene and a obscure scratching sound confirms that it approves.