Monday, August 21, 2017

The biggest con - Bitcoin

As I write this post, its Aug 16th, 2017 the US market is open and trading mid-day and one bitcoin is trading around $4300. What a run it has had so far. The market share of bitcoin is around $70 billion USD. With the Dow and S&P hitting all time highs - giving handsome returns, wonder why investors would ride the bitcoin speculative wave, as everyone knows - it might be very risky. So far - the investor have been handsomely rewarded. How long could this last? Frankly no one knows!

There was a time long long ago - carts were pulled by horses or bulls. Some people contemplated the idea of operating a cart without an animal tied to it. The idea was stupid, it was thought then. The common sense was the cart wouldn't run without an animal in front of it, given what was reality at that time. History turned a new page, with the invention of mechanical motors that would operate a wheel rolling over again and again to cause forward motion. The automobile replaced carts/animals. Even though it was considered dumb at one point of time - humans then conceived that it could happen.

Is Bitcoin such a revolutionary idea that would change the world we live in on how people use money as medium of exchange?

Before we get into what it is going to be, lets see what it is now. Bitcoin as they say it is a "Digital currency". There are thousands of digital currencies on the internet.Not sure if bitcoin is any superior or inferior compared to others. There is also no guarantee this bitcoin is the best digital currency for next few years. They are being traded actively though. Bitcoin stands-out from the rest as most popular of the crypto-currencies. Even after you read multiple articles on digital currencies - it is very hard to get your head around it. Lot of things are more confusing. It is complex to the core. Something like currency should be lot simpler than that.

The biggest characteristics of bitcoin (or any digital currency for that matter) is its finite availability. It could rival to any fiat currency - that the government can print at will.

If there is an unlimited supply of bitcoin - there wouldn't be a market for it. Even though it sounds promising with respect to that fact - there is infinite number of digital currencies available over the same medium. With market forces determining the value or worth of each of them, its quite unstable.

Bitcoin is not used in day-to-day trade. Smart people would call it a financial asset rather than a currency. For now even people who own bitcoin do not consider/think them as as store of value that they plan to keep for their retirement. They think it just like any stock. They want to hold it until they think its a right price to sell. Unlike companies that have factories and machinery- bitcoin has nothing to back itself except the confidence of the bitcoin buyer. It is really a risky speculative trade. People are speculating the price of bitcoin and pushing it higher as more buyers step in than sellers.

Digital currencies would go down in history as the most successful marketing campaign that created lot of hype that would only result in an eventual and complete collapse.

In the 2000 dotcom bubble - many companies that were valued very heavily went to zero. In my opinion - bitcoin and other digital currency are no different. They will and have to go to zero. Investors would lose every bit in this speculative bubble. Of course some would make money. But the concept of digital money is fundamentally flawed.

The bitcoin endorsers use the word "Mining" that is intentionally distracting. I just checked the dictionary meaning of mining. It is digging up the earth for coal or other minerals like gold. Mining of minerals has always been an occupation since human beings first arrived on this earth. Some people took the effort to get some thing out the ground that was rare and attractive, sold it to someone who is willing to pay the price of it. This has happened generations after generations for centuries. Since the bitcoin community wants to equate the process of creating a new bitcoin - they smartly enough, borrowed a word from the real money - gold. Put in a word mining - to get the feeling to the public as though this is being "mined". They apparently "mine" bitcoins from multiple computers and by solving difficult mathematical problems - that is what they say. This is no replacement for mining something that is tangible like precious metals. Using the word mining is completely illogical for crypto assets.

The mere fact that its not being accepted to buy any significant purchase of merchandise like grocery, furniture or a hair-cut proves that its not a currency - at least yet. People exchange the bitcoins for dollar or Euro. Rather than the bitcoin itself - the dollar value behind the currency is what makes it attractive. There might be some one who is selling drugs online and would want to accept bitcoin for the convenience of being anonymous - that would at this stage be an exception and not an example. So far, the universal acceptance is not there. None of the central bankers have really backed this so far. With a large population in Africa, Asia and Latin America completely unaware of technology - a platform that offers digital currency is no where in the picture.

Gold has been a commodity all along human history. It has been elevated to money for centuries for its unique properties unlike any other metal on the periodic table. During the last bull run - it touched a high of $ 1900 for an ounce. If bitcoin can go until $4300 and possibly even more - When this bubble finally burst spectacularly- this money would flow back to the ultimate safe haven asset which is gold. It bitcoin can hit the numbers what it is now - there isn't an upper limit for gold. It could go up multiple times with ease from its current level of $1300/ounce.

Tuesday, February 28, 2017

What a mess?

Alan Greenspan, very famously told this about quantitative easing and zero percentage interest rate that - It was like urinating in the bed in the night. Until you wake up in the morning you don't realize what a mess you have created.

After the 2008 financial crisis - the US Fed announced to the world of the extra-ordinary measures needed to save the global economy from a 1930s style great depression by bringing down the federal funds rate to zero and buying back trillions in treasuries and mortgage bonds to support an ailing economy. We are almost nine years since and have not reached the 1% mark yet. The other Central banks of the world were no different and followed the US Fed with its quantitative easing programs.

If you can recollect what happened in 2007 - this is just before the bursting of the  US housing bubble - everything seems to be going great until one thing happened. The Fed started rising the funds rate aggressively.

It is no different now.

Its like an ailing patient on a ventilator. The patient is just fine until he is on the ventilator. The moment it is taken away - the patient is going to have complications. In medical terms - its called weaning. The patient is taken off the ventilator and the hope is he can live without it. But as soon as there is a complication - which includes unable to breathe and possibility of instant death, the patient is hooked back to the ventilator. That would be a apt description of how the US economic state is now. The 0.25% federal funds rate increase in December of 2015 and then again in December of 2016 were just token increases for the Fed to save its faces rather than for economic tightening. The patient being on ventilator for too long had become the biggest ailment than the initial disease.

With the employment numbers well under the Fed's target and inflation now creeping well above the 2% mark - also with the Dow Jones index hitting 21K - with historic consecutive winning sessions - an act not seen in last 30 years, it can be agreed that the economy is heating enough and warrants a rate hike.

If the Fed reacts, it will burst the monster bubble it created.

If the Fed doesn't react - the bubble would only get bigger and bigger, to cause a 1930 style great depression - which exactly the Fed is taking credit for saving the world from.

The bubble in the silicon valley is very obvious. If the Nasdaq 5k was a bubble in year 2000 - it is a bubble now too with Nasdaq lingering around the 6k mark. The fundamentals have not changed. The start-up environment in the silicon valley is so much heated up - it just doesn't make monetary sense. Recently Snapchat published what it thinks was its valuation of 24 billion dollars - and admitted that it may never be profitable. Any investor that is in sound mental health knows - not to throw a penny to it. If this is not a bubble what else is? Why would you want to invest money on a company which themselves say - it will only take in more money than giving it back. Who would take the loses from those transactions?

Company valuations, particularly start-up companies are simply ridiculous. There is no way - they are worth what they say they are. Investors are going to rush out of the silicon valley and no one will be spared. The party might just be over.

It is very striking that the Snapchat IPO and Dow hitting 21K on the same day - would be recollected in history as the peak moment for the whole big bubble.

For anyone who has lived through the 2003-2008, can easily re-collect the pain from the crash in the US housing prices. Proxy-government entities like Fannie Mae and Freddie Mac had loaded toxic mortgage backed securities with AAA ratings on unsure investors. It was the biggest piece of odourless crap ever assembled as investment material. When everything started collapsing the US government and treasury had to step in to save the market by buying these mortgage bonds - that no one would buy. In the process - the government only managed to increase its own debt. What wasn't good for the investor - was not good for the government. Except that it was left out in the open as the only buyer in the market. The house prices have retraced their path to the top now, thanks to the low lending rates. Now there are lot of hedge funds that have bought in to the real-estate hype and the result would be no different than what happened in 2007/2008. The mere scale of it might be much larger than 2008.

With the government and global Central banks stepping in to the bond market - the whole market is artificially priced. With all the risks mitigated by the policy makers, there isn't a free market for bonds. Why do you want to hold bonds when you could make a lot of money on a stock market running on steroids? In that case - the yields on the bonds fall dramatically and as is the case - the price of bond increases. Sovereign debt funds are squashed with bonds. What is really not priced in is the serious consequence of inflation that could have a lasting effect on bonds sold already. Just imagine the inflation reaches a 4% mark - why would you want to hold to a 10-year US treasury bond that yields 2.5 % or less.  Already the spread between the CPI and yield on the 10-year is bad. So whatever bursts the bubble - one market that is sure to get ruined is the bond market. With the patient in a ventilator for a decade- the bond market was never in fair play.

For the US Fed - It is damn if you and damned if you don't moment finally.

If the recessions in 2000 and again in 2008 were painful - the one that is getting formed in the horizon is bigger than both combined. The bigger the bubble, the bigger the consequences.

This cannot end well. Buckle up folks, it just may be dawn!

Tuesday, December 29, 2015

Economic Facts that just doesn't make sense!

If everyone pays taxes, India will be a developed country.

You still in this myth? What a con. The government needs a percentage of your salary every month. They take this money and do some goodies for you - Roads, Water, electricity, law & order. Everyone knows how each one of them is working out now in our country. Not to mention we pay for it individually (as electric bill, water bill) from what is left from our salary. The political establishment in the country gets this taxes and squanders it at will. It is only to ensure their political survival. The more you give them, the more they squander. Just imagine - everyone in India pays taxes. They will happily get it and shower it with their friends and family. Did you ever imagine if  you are sick and you don't get paid for a month - the government doesn't get you any help that month. But it still needs a big chunk of your next month's salary. What a disgrace.

Money is best used by the person who earns it.

India will be a super power if there are "no taxes"

Indian Re is losing value because of "something"

You can see news article every other week to justify the reasons of why the Indian Rupee is going down against the other global currencies this week. Sometimes its the current account deficit, sometimes its the fiscal deficit, sometimes its FII outflows and many times - its the global investor sentiment. No one knows who that guy really is. Experts get away by saying its my pension fund. What you usually don't see is - When current account deficit or the fiscal deficit are well below global standards (meaning good) - the rupee does not appreciate either. Usually you hear that FIIs are withdrawing money and hence rupee is losing value. I would think - the opposite should be true. But what puzzles me, is when the FIIs pumped in those money - the rupee didn't perform any better - it still went down.

A normal Indian would get into a depression state of mind, if he watched how Rupee always goes down - no matter what. At least they can stop saying the various reasons to help this patient.

Bringing back all the black money would make India prosperous

With Narendra Modi government in-place for more than a year now, we as Indians should admit - the black money isn't coming back. Black money is a private person's money. No one would surrender that money - because it was accumulated 'with hard work' in his point of view. This is not the "tax money" - which the government would have used to lift "poor people". Even if the money was "paid in taxes" during those times - it wouldn't make any difference to our poverty level .

Even if its brought in - it wouldn't help others. Distribution of that huge new "uncirculated" currency notes will only increase inflation. The person who worked hard to get it should be allowed to decide on what he wants to do with it. At least his spending would create some new jobs. The government trying to distribute that money would only increase poverty.

Indian Passenger with excess gold is a smuggler

You see this news often. Do you? Someone is "caught" in the airport with more than the allowed quantity of gold is a national criminal. Lets step back a minute and dissect this. Just say, a Indian citizen makes money in a foreign country. He pays his tax due there and has the rest in his pocket. It is his freedom of choice to buy anything with it. He can buy gold or just tissue papers, if he wishes. He can then decide to take it to India because he might need it there. So now this officer in the airport - so called customs is refusing to allow the person to enter with such a quantity of gold. It is unlawful and they demean the traveler in the next day newspaper. Remember, if he brought in the same worth of tissue papers - the customs officer is just fine. It doesn't make a difference if its tissue paper or gold or cow dung. Anyone can buy whatever he wants and can bring it to his permanent place of residence to fund his future consumptions.

Stopping the person from bringing gold is not economics. It is called stealing by the government. If the passenger makes a cut to the government (as taxes), the country is just fine economically.

Oil prices in India are market driven

I just checked the global Brent crude oil price. It is somewhere around $38 USD. Until sometime back a barrel cost more than $120 USD. It is almost a 2/3rd fall in recent prices. So it would be logical for me to assume that the price I pay at the pump has gone down 2/3rd. But actually no. It has only come down from say around Rs. 80/- to Rs. 60/-, a quarter percentage reduction. Anyone with a reasonably sound mind can figure out the part - that the prices of petrol / diesel has not been decontrolled as publicized by the government. In reality what happens is, when the price of oil goes up, the government subsidizes it. When it goes down, the government cashes-in (like now).

A real decontrol would be to leave it alone. Heavy taxation is heavily affecting productivity. An oil a liter is probably around Rs. 30/-. Just imagine how much stimulus that would give to our slowing economy.

Petroleum products are heavily taxed in our country. This is where it gets bulk of its money. India has a vast population that doesn't pay taxes on salaries or income. So the government is left with no option but to heavily tax a commonly used commodity - that is where oil perfectly fits in. For me, I do not want the government to subsidize when prices go up and at the same time, want the complete advantage when the prices go down.

One thing that always happen in India : Prices of a commodity go up significantly in a hype. but NEVER comes down to the same levels ever again.


Thursday, October 1, 2015

PM Modi - India's frequent flyer

The Indian Prime minister has been going around the world quite a lot since he took over. In general, the Indian media portray him positively. There is an illusion that the country cannot prosper without the foreign investments, and they can come in only if the PM reaches out to them in their country and shook their hands, convince them to invest in India.

The recent one is Prime Minister Narendra Modi's US visit particularly to the bay area. Rubbing shoulders with the top silicon valley CEOs. and maintaining huge optimism for the future. This also highlights how far the country has moved on from a socialist democracy to a corporate democracy. Few years back - an Indian politician wouldn't like to be pictured with really rich corporate CEOs. Not sure, if things has changed recently. May be the people are just watching out without a voice. In classic CEO style, the PM was optimistic. Have you ever heard a CEO being pessimistic ? Dick Fuld was optimistic about Lehman brothers until the last day, it went belly-up. Optimism about the future is particularly not a bad thing. But being publicly very optimistic just before a big crisis would be na├»ve on a world leader. Probably if its just a bad timing. Only time will say, if its a PR flop for the Prime minister's himself.

With the cheap money flowing in all directions around the world, thanks to the Fed which maintains zero percent interest rate and the ECB that is doing QEs. Things are really hot than what it ought to be. Almost seven years of ultra loose monetary policy with at least 3 QEs has created huge bubbles not only in the western world but also in Emerging markets. Market are addicted to this easy money right now. The Fed confirmed its fear by not raising the interest rate to 0.25 basis points  this month - which most market watchers expected. This raises the question - Do they know something that the rest doesn't?
The whole so called recovery would come down crashing when interest rates start to rise. The Fed knows it. It is impossible to believe - the US economy is not in a bubble. The most obvious indicators
  1. Tech-centric NASDAQ hovering around the 5000 mark
  2. Housing prices at historic highs even though home ownership is at its multi-decade lows
  3. Stock Market - Dow and the broader S&P at its historic highs.
Previously the NASDAQ was at the 5000 mark just before the dotcom burst in 2000.
Housing prices hit the peak in the US, in late 2006 before the house prices crashed that created the great recession in 2008.
Stock Market highs has historically been signs of downturn. The more it rose, the bigger the fall.

There is ample evidence the air might come out of the bubble anytime.

India is no exception to this crisis. Valuations of start-ups are mind boggling. Recent example is OLA running into few thousands of crores. You really have to be a fool to believe OLA is worth that much. All they have is a mobile App and a network of drivers. It is not hard for anyone to compete with them. I am sure the taxi service industry would be diluted. Do they add value to the society? Of course they do. Are they really worth so much money. Definitely not.

The cheap western money is flooding markets in India. The start-up valuations are just a reflection of that. When the easy money tap is closed, the flow dries out gradually. The reality would set-in, and bad business ideas would be very hurt. Businesses cannot be run on valuations. They always have run on value addition for customers and their resulting profits.

With these gloom and doom hanging over the world economy, the PM probably choose a bad time to go with the silicon valley crowd. It looks he himself is probably in a bubble. Real growth comes from within. Foreign money should flow in based on growth and confidence in our country. Not by pep talks. What matters is the nuts and bolts of what is happening in the country and how to improve that. The audience in San Jose - is probably the persons with different aspirations who will not get us there.

We see in the news today, that a man is killed in a mob attack for storing beef meat at home. This has happened few miles from Delhi, and this is exactly what the PM should be fixing. Some people of his own affiliations are involved in this presumably. This is a criminal act and it needs punishment for murder. With ridiculous things like this happening in our backyard - wonder what is the PM doing in San Jose entertaining a crowd with intangible talks. I am not sure how his party or himself can sell this to the ordinary Indian out there who is yet to get sufficient drinking water, electricity in his home that sits on a bad, dusty road.

It is possible, the Modi bubble would burst before the monetary bubble the world central banks has created. With this time in history - the PM has to be articulate and clear hurdles in how India works. Only those will make this country prosperous. All he needs to do is deliver on his promises here. I really wish he succeeds., but the performances so far since June 14' is just simply pathetic.  Just like in a bubble - there is more hot air than real substance in governance.

Wednesday, April 29, 2015

The political alliance of the Executive and Judiciary

A lot of things annoys us about India. The close nexus between the politicians in power and the court systems are one such. I just read a news, saying the Mumbai high court has ruled that the decision by the Maharashtra government to ban beef is valid. I am pretty sure, the litigation will be moved to higher courts and would be struck down.

Bottom line, it makes no sense for the government to dictate what its citizens have to eat. It would be individual liberty. If there is a market for it - so be it. Passing a legislation to ban a particular kind of meat doesn't sound a rational decision. The government has no role to play in this, with sufficient other things to do, on its plate. Would it ban a particular vegetable next? How to enforce that? The police in the vicinity should go around the city to make sure - there is no one out there slaughtering cows? And make sure, the place that slaughters goats is not slaughtering cows ? Can this be done daily, 24 x 7 for the rest of the foreseeable future? Cops have to go around looking for beef-eaters?  There are many states in our country that sells alcohol. Lately we don't hear bans on them.

This is a classic example of government trying to do needless things. Why do they pass legislation like this, if it cannot be enforced. This is to please a section of the party or its followers. Just that. In reality - nothing would change. There will definitely be a black market for beef.  Local heavy weights and unlawful but powerful big-shots make a dishonest living of this. Only in our country people make a 30-40 year career doing "unlawful" petty stuffs. The mere existence of insane laws help them. The corrupt policemen and government officials exploit the situation.

Law - is a serious doctrine that people of a country or a region should abide by. They are gospel like. Making such "unenforceable" laws make the rest of the laws look bad too. Why would you abide by some of it and not abide by some of it. There is no "weightage" of any kind around them. They all should be "equally enforced" in real world.

When a particular party is in power, the courts and the government seem to be in the same page. Cases against ruling party men suddenly go cold. There is no word of it in the media. But cases against its political rivals speed up. We read this in newspapers daily. This is very confusing. We were all taught in schools, that judiciary and executive are two separate pillars in democracy. In reality, both the government and the courts are in same line at any given time. An independent and authoritative court system is what India needs. If they are hand-in-glove with the current government - the reason they exists do not hold good. What is funny - people just cope with it. They are willing to wait for another five years, to see the other side. When the congress is in power, lot of BJP MPs/MLAs are dealing with courts. When the BJP comes to power, all congress leaders are involved in fighting cases against them. Naveen Jindal is charge sheeted for his role in obtaining coal blocks in Jharkhand. Why is he being charge sheeted now? Why not when Manmohan Singh was the Prime minister? Where were the courts then? We don't hear an explanation about that ever.

This is very obvious in the southern state of Tamil Nadu. The DMK and the AIADMK have rotated being in power alternatively for 25-years. As soon as the DMK comes to power - all cases against AIADMK politicians come to the forefront. Media pages are filled with this entertainment. When the AIADMK is voted to power after 5-years, you don't hear about those cases anymore. Instead it will be about the court cases against the DMK politicians. Media pages are filled with this entertainment now. All along this entertainment creates a false feeling among the people that - the judiciary is working and doing its job. But it isn't for anyone - who can think!

Foisting cases on political rivals after coming to power - is a ritual in our country. It makes sense, court cases are initiated when a new government comes to power. However what doesn't make sense is, when these people come back to power again - the cases go cold from there. The notion of independent judiciary is just imaginative. Instead of trying to fix the rule book better - it would be wise to throw it out and write a small rule book - that is clear and unambiguous. There has to be clear distinction between bailable and non-bailable offences. Right now - everything is at the discretion of the judge. Lets get that word out from the rule book. Some people are stuck in jail for a murder, but some are out there on bail for the same kind of offense. It just doesn't add up.
Make the rule book simple - so that the common man can understand. Do not make it such that only the lawyers can interpret.

Tuesday, April 28, 2015

Land acquisition - Government as a land broker

If you had a chance to venture into the suburbs of major cities looking for a piece of land - you would have had an opportunity to see that anyone without a "proper job" is a land broker. With no proper livelihood or savings to depend-on and the lucrativeness to make easy money by connecting the buyer and seller - this unskilled worker has moved from a productive human being (as an agriculture laborer or a factory worker) to a land broker who just hopes the luck favors him with huge commissions. (Some people make money doing this. But most lose)

Looks now the government is trying to do the same. Believe me - the government isn't smart.

Land acquisition bill tabled in parliament is a hot topic in India right now. The subject has gathered momentum after a farmer hangs himself in a tree, at the venue of an opposition rally to oppose the bill. Ever wonder why the government is involved in Land acquisition? It doesn't have to. It shouldn't. Most of the discussion around this topic has been abstract. We usually don't hear specifics.

Land, labour and capital are primary requirements for a business. The government has to create an ecosystem where these are available in "plenty" for the business to be viable. It helps itself by building ample infrastructure "through out" the country and effectively helping the private local employers to unleash their potential by setting "for profit" industries and factories utilizing them.

India is a vast country with abundant natural resources including land. It is the seventh biggest country in the world in terms of area. The optimum climatic conditions assures most lands are habitable and usable to its full potential unlike countries like Russia or Canada whose vast land masses are ice-cold most of the year. In terms of availability of land, we are no Singapore or Israel either. Then why the fuzz? However what is missing is most of the land mass is underdeveloped - meaning lack of access to roads, portable water, electricity, sanitation and security. For the limited availability of quality land - there is a conflict to get it. The government is trying to get itself involved in the process of "resource allocation". A free market would itself allot the right land, labor and capital. Government intervention just tweaks the natural flow - causing failures. Government is the last entity - that can do efficient allotments. What should instead be happening is - make efforts to make the entire land to be "high-quality" land - by providing the necessary infrastructure like roads, electricity and water. Instead of fighting the disease - the Indian government is fighting the symptoms of the problem.

Land can be acquired for public service or a private service. If roads need to expand or new roads to be laid - the government has to acquire the land for the private sector to construct a road. Public would eventually benefit from this labour. Not many people oppose this including those individuals who give up their land. The private contractor collects toll on the road. That is to only compensate for his contribution to the construction of the highway. There cannot be much difference of opinion. With rapid economic development of the country, a viable and a modern infrastructure is very essential. Roads need to expand to become express ways, railway lines need to quadruple. New water pipelines might need pathways and tunnels. A well planned long term government plan will definitely get cooperation from the people who eventually benefit from this new infrastructure. Compensation for these lands are to be fair and at least the market price, so that individual citizens do not lose a lot because of the acquisition. Acquisitions should be in overall national interest for a common good. It should be planned such that - there wouldn't be "more" expansion that would once again need acquisition for say the next 100 years or so. It should be one time - long term solution. This "can be" enforced by the government.

Some common source of conflicts in land acquisition for roads, is a farmer loses his livelihood by giving up his land. But the neighbour to the property sells the land for astronomical price by citing the existence of the new road. This leads to social problems in the local society. What should instead happen is - just like any expressway in the world - the road needs to be fenced. Access needs to be restricted only to pre-determined points and not all along the highway. This would reduce the property boom caused by these expanding roads. The booms would be restricted to only the authorised points which is relatively better. Even though projects are designed at the top bureaucratic level, during implementation the local politicians or heavyweights can adjust plans based on preferred interest. Some would get preferential treatment over others. These conflicts have to be taken care of humanely and in the right spirit.

Expansion in railways is not that complicated as they already own a significant portion of the land on either side of the tracks. Similarly laying of tunnels for movement of essentials (water, fuel etc) need to be developed without any effect on the farmer's livelihood. Things need to be implemented better and sooner without affecting crop cultivation.

The tussle however is doing land acquisition for the private sector and in already thickly populated urban cities. The plan would require few individuals to give up their land, so that a private entrepreneur can construct a industry/transportation with the motivation for profit. This is not necessarily a government's job. Just like the government is not involved in procuring raw materials for private businesses, it should not be involved in procuring land for private businesses.
This passing of the bill could definitely bring favouritism in allotting land for private people. This will eventually lead to crony capitalism. Going by past performance of our politicians and bureaucrats- there is no trust it will work out. I recently read an article where few houses need ten to twelve thousand acres of land for industrial development. Really wonder what sort of industry is that - how much jobs they can provide the society. There is also a notion that lands can be better utilized than doing agriculture and the farmer is under utilizing the resource, but an industrialist can put it to more use. There is no truth to this whatsoever. It is the small bank of quality land that everyone is behind.

Instead of the government becoming land brokers, it should try to become land developers. It should concentrate on big infrastructure projects in the entire country. It should provide new roads and make nook and corner of the country connected by expressways. We need more roads and lot broader roads. We need water pipelines reach the new areas and become habitable. The landscape of the country would change. Right now - everyone is dumped in cities that gets congested, polluted and exploited environmentally. We need to interlink prominent rivers to fully utilize its water. Only those high-value investments would reap major benefits in the long term.

Ask any entrepreneur who wants to start a business in this country. Is his problem - non availability of land? He might not get it or afford it close to his house. But drive 50-75 kilometers on any direction - he can buy just plenty of land for affordable prices. Getting the machine / workers / produce to that place is his problem. The government should fix that. A viable infrastructure will ensure that people can commute any significant distance to get to work. That is what is needed. It is not uncommon in developed nation for people to commute to work for 100 miles a day. We are just talking about half of it here. In Japan - the shinkansen (bullet train) hits 300 miles per hour. Just imagine these trains crisscrosses our country. You could easily commute between Bangalore and Chennai for work daily.

An RTI petition found out that 80% percent of the projects that are "stuck" in India has reasons other than land. It is lack of funds / infrastructure / confidence or other factors. Lack of land - you should be kidding, aren't you? What really insults people's intelligence is - the government (politicians and babus) would decide who takes what!

Tuesday, April 7, 2015

Real Estate prices

Recently I was having a conversation with few of my friends on the topic of real estate prices in India particularly in major cities. In the Indian context, real estate, either refer to a piece of land to construct a house or an apartment in a housing community. The prices of them particularly in the metros are stunningly high. It all points to properties that are astronomically priced, such as a 3-bedroom flat would cost more like a crore or more. If you don’t want to get stuck with others in an apartment complex, people plan to buy a ground (usually 5-6 cents) so that they can construct a house. The land cost alone could exceed lot more than a crore. Of course, if you want to construct a house – that would need an equal amount. Wonder how a salaried family can afford it. Does the price really match the comfort the families expect?

For a nice residence, a typical family would like to have a home with a reasonably good plinth area,  unlimited portable water available through the city corporation. It would need 24x7 power supply, with back-up generators in case of any outages. It also needs a perfect sanitation set-up without open ditches. A perfect greenery around with play grounds in the vicinity for kids and to go for a walking during the evenings. Ample wide roads with walking pavements in the entire community. It should be close to public transportation and also have designated parking places for residents, so that cars don’t pile up on the road-sides within the community. Other facilities like schools, colleges should be in reachable distance and approachable. More than that, an atmosphere of calmness without dusts or pollution and a community with bullet-proof security. An unsecure neighborhood are nightmares. Finally a more ambient place to raise a family and kids.  Unfortunately these highly-priced real-estates have absolutely none of them.

Except very few real-estates that are often in completely out-of-reach prices – most have some or all of the below problems.

  • Bare-minimum water supply
  • Erratic power supply 
  • Open ditches and poor sanitation 
  • No designated parking lots for cars except on roads that interfere with traffic 
  • Narrow lanes within community 
  • Dusty roads without proper pavements 
  • Noisy crowd with no security

But the problem is – THEY still cost a lot.

In economic terms, these real-estate entities are called assets. The pricing on them are called asset-pricing. In India, for the past 7-10 years, we have seen many fold increase in asset-pricing. The prices of items that we shop daily like groceries, fruits, vegetables, fuel are noted in the CPI (Consumer Price Index). It grabs attention when they go up. Hence, there is always a check. But asset-price inflation is never tracked in the big picture. The prices of them keep going north without logic. Easy availability of bank credit to the nucleus families has only exaggerated this boom. A lot of buyers chased very few properties. With the interest rate now being held-up high for the past 2-3 years, the credit boom has come down. The correction to the market is underway now. This explains the rise in NPA in banks, and the gross under-performance of many real estate firms. Most real estate firms have enormous debt and are deeply in distress. The sorry state of Sahara India and the plight of its owner is a classic example of how bad things are.

I think, the prices of assets have really hit the roof. The value you pay, is not worth it in current financial terms. Except for a bad government policy like - future devaluation of the Indian rupee could only make these asset purchases a right decision.

Real-estate price distortions can be identified very easily.

The first indication – is the rent, the properties can fetch. In the past decade, we ourselves have experienced that even though the prices of assets have gone up many folds – rents have not kept pace with them. These one-crore properties don’t even fetch Rs.25,000/- on rents. In monetary terms – it would take 34 years to recoup the price of the property with this amount (without interest). There is an argument that the property can be flipped for more for a capital gain on a later date. The argument does not hold well, because the buyer in that transaction – has to deal with the SAME Rs. 25,000/- rent. What would be his incentive to pay more? It would take more years to get back his investment. On top of that it costs to maintain the property. Economically smart people – always rent their houses. This makes sure they have easy payments to make as rents without any long-term commitments. On the sign of first trouble like – insufficient portable water, unsafe neighborhood, they would vacate it to find a better home somewhere else.

The second indication – Banks chip in for inflated prices. The developers lure in the financial institutions to get the ordinary guy “get in”. Without the bank-loan, he would not be a player at all. He just would not be able to afford it. Interestingly, it is a habit among us, to price the property in the selling price. Most of the time, people borrow money from the banks and pay EMIs on them. What is often overlooked is the price on the property is not the selling price, but instead it is the initial payment plus the cumulative amount paid to the bank as EMIs. With high interest rates now – a one crore property would double when paid over a ten-year loan term. So the price of the property is two crores and not one crore, as often described in conversations.

The third indication - the source of funds is always another real estate deal. The money earned to buy the high-priced real estate is obtained by selling another piece of real estate. It is like, selling a rural home or a rural agriculture land, and investing the proceeds in a apartment property in the city. Ideally the money to buy a commodity should be earned through "some other means". The means should be derived from a productive labor of the individual in some other profession - like profit from a business, agriculture income, etc. A debt-based purchase with the anticipated future income is not a smart investment.

The fourth indication - Rapid appreciation of property is predominant goal of the purchase. People consider it investment. The simple rule in home-buying is - If you buy a house and go live in it, then it is NOT an investment. It is consumption.

The fifth indication - the price of the property keeps increasing just “by word of mouth”. The facilities would have all sorts of performance problems, but the price keeps going up artificially. The price to sustain what is “already present” would always increase. The price can improve only as quality of the asset increases, but seldom is the case.

With lagging infrastructure worries in our country – people are being fooled into high-priced assets in the name of modernity. People expect a lot and go for it and then get stuck. Luck plays a role for some, so that they end up with better homes. Unfortunately the whole country can’t be lucky. A viable and performing infrastructure set-up would make the cost of all real-estate prices to go down. This is what would grow the economy. In a real growing economy – prices come down and hence affordability rises creating enhanced quality of living. As of now, there is no real growth in the way real estate is being practiced in India. India is not a land-deficient country. It is a vast country and we need a make-over in the way people live in their homes. Homes should have "all necessities" by default - their location shouldn't matter - if they are in the middle of the city or in the outskirts.

All we need is the work-force of our country work hard (and diligently) to resolve “our” neighborhood problems. Majority of our human resources should be working for professional companies that “solve” these infrastructure issues for us. Instead what we see is a majority of our skilled people who are highly smart, referred to as the cream of the society, working for multinational companies that makes life better for people living in some far-away countries. We need to export stuffs too – but the primary motive should be for development within.