A Brief History Of Wind Power

The December Issue of the "Economist" had a great article on Wind Power Industry, its history, the current situation and the future.

Read more:
http://www.economist.com/science/tq/displaystory.cfm?story_id=12673331

Something New to Worry About: Deflation

'Inflation' is something that most people understand quite well. Whenever prices rise, the public, the government, the media work themselves into a frenzy. On the other hand, 'Deflation' i.e. a fall in prices is mostly ignored by the public. It might seem hard to understand what the problem is with falling prices. If all they mean is that we can buy stuff for less this month than we could have a month ago, what’s there to worry about?

A lot. If prices persist in their decline, they could be devastating to the economy. To understand the impact of deflation, we have to understand what it really means.

What Is Deflation?
"Deflation" is a contraction in the volume of money and credit relative to available goods.

The most common misunderstanding about inflation and deflation is the idea that inflation is rising prices and deflation is falling prices. General price changes are simply the effects of inflation and deflation.

During a deflationary phase there is a general decline in prices, with emphasis on the word "general". Sector-specific price declines are generally not a problem for the economy as a whole and do not constitute deflation. Deflation occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.

There are four causes of Deflation are:

1. Decreasing Money Supply
2. Increasing Supply of Goods
3. Decreasing Demand for Goods
4. Increasing Demand for Money

Danger Of Deflation

A sustained drop in prices hurts in two ways.

Impact On Consumer Spending
Because consumers and businesses expect that prices will continue to fall, they would be likely to cut back further on spending and investment. As spending dries up, the economy starts to shrink. As GDP shrinks, so do the companies providing those goods and services for consumers. As companies shrink or go out of business, unemployment rises. Out-of-work consumers have less money to spend, which cuts deeper into the economy. Once the cycle takes hold, it's very difficult to stop. A downward "spiral" begins, feeding on pessimism.

Impact On Debt Servicing
Even more debilitating is the impact on on consumers’ ability to service their debts.
Suppose you have a loan of Rs 10000 and you earn Rs 1000/year. There is heavy deflation, prices and salaries fall. Your salary might go down to Rs 900/year, but your loan would remain the same. Suddenly repaying the loan has gotten a lot tougher.

A deadly mix of falling prices and high leverage could foment a “debt-deflation” of the type first described by Irving Fisher, an American economist, in 1933. In this worst-case scenario, banks concerned about their corporate customers’ indebtedness demand debt liquidation, which forces firms to sell off assets at fire-sale prices to pay them back. Money in circulation declines as banks hoard the dollars, which causes spending to drop and prices to fall, depressing businesses’ net worth and profits and throwing many into bankruptcy. Companies cut production; workers are laid off. This deepens pessimism and leads to more hoarding of money.

The current American Federal Reserve chairman, Ben Bernanke made a presentation before The National Economists Club, Washington, D.C.on November 21, 2002. It is a really good document considering that it was written way back in 2002
(You can read the 2002 speech here)

What China Can Learn From 1929

This article from NewsWeek discusses the similarities between America in 1929 (just before the Great Depression) and China in 2008

http://www.newsweek.com/id/174529/page/1

US T-Bills Giving Zero Return

On 9^th December 2008 the US Government sold $30 billion in four-week Treasury bills at zero percent. In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager to park money in the world’s safest investment, United States Government debt, that they agreed to accept a zero percent rate of return. Investors shaken by the losses in the markets are pouring cash into government bonds from every corner of the globe.

Why is this significant? I will get to that but first some key facts:

• A T-Bill or a Treasury Bill is a short-term debt obligation backed by the U.S. government with a maturity of less than one year.

• T-bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year)

• Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. US Government Treasury bills are regarded as the least risky investment in the world.

The formula for the calculation of the yield on T-Bills is:

Significance Of T-Bill Yields

In itself the zero percent interest rate is no reason to panic. This is good news for American taxpayers in general. Low interest rates on government debt allows the United States to finance its $700 billion bailout of the financial system very cheaply. But it also underlines stubborn anxiety in the financial markets that could keep world economies sluggish for years to come. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments.

High demand for government debt rather than corporate debt could stifle economic growth. Even though Central Banks all over the world have reduced interest rates, borrowing costs for companies remain stubbornly high. Corporate bond rates have been surging to record levels which makes it more expensive for companies to raise money. And when companies can't raise money, they often have to cut costs, sometimes through layoffs.

The worry is that the government will become the most attractive lender and borrower in the market — crowding out others in the private sector.

PS: Daily Treasury Yield Rates are available at the following website:

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

Audacity Of Terror

In the past two decades terrorists have blown up trains and buses, bombed crowded markets, hijacked planes and attacked places of worship. In every instance the outcome was similar - a flicker of anger followed by big claims of retribution for the guilty followed by NOTHING. The so-called 'Spirit of Mumbai' is sadly just a demonstration of callous indifference bordering on denial.

The pattern is similar - Pakistan "condemns" the terrorist attacks. The Government promises "swift" action against those who peddle death. Leaders from all corners of the planet spout platitudes about the world standing united against terror. As usual nothing happens.

India can and should lead the war against terrorism. In case of acts of terrorism there is no middle ground, no scope of being neutral, there cannot be any ambivalence; You are either with us against us. 'Enough is enough' happened many years ago.

Mumbai Targetted, Again

Mumbai was targeted by terrorists yet again. This is "26/11", India's "9/11" they say. Hold on though. What about the following:

"25/8" - Aug 25, 2003: 46 people killed in two blasts including one near the Gateway of India.

"11/7" - July 11, 2006: More than 200 people killed in seven blasts on suburban trains and stations.

This is just the latest in a series of terrorist attacks. And sadly, I have a fair idea of what is going to happen next.

The whole rigmarole of post terror attacks events will play out over the next few days. Public sentiment will go from shock to anger to callously indifferent. Politicians will "condemn" the "heinous act of terror". Gurus, Sadhus, Priests, Maulavis and other religious figures will say that these terrorists have no religion and that no religion condones terror. There will be calls for the Prime Minister and/or The Home Minister to resign. Stock Market analysts and Business Leaders will say the the terror attacks though unfortunate, will have no long-term impact on the Indian economy. Bollywood will simple say, "The show must go on". The Government will award compensation at he rate of Rs x/dead and Rs y/injured. Claims of a "breakthrough" in the investigation will be made, some suspects will be rounded up and paraded before the media to assuage public anger. In a few weeks and months the incident will drop out public memory and things will be back to "normal" till the next attack.

Do I seem too cynical? I don't think so. I am just being realistic. I am angry and disgusted at the state of affairs. The Central Government Cabinet will meet to take stock of the situation. What they will actually discuss is how badly this terror attack will impact them during the ongoing state elections. The opposition will gleefully campaign on this during the next Lok Sabha elections which are due in the next 6 months. The Police will arrest some people and many years later most of them will be acquitted due to lack of evidence.

I am sick and tired of this. I want to see terrorists being convicted, better yet I would like to see terrorist attacks foiled and the terrorists apprehended BEFORE the attack. I don't want brave security personnel to lose their lives simply because the Government was unable to equip them with bullet-proof jackets. I find it hard to understand why so many bomb blasts and terrorists attacks later the security of Mumbai is still not as stringent as it could be. The media glosses over the "spirit of Mumbai" that rises up the day after every senseless attack and then ... NOTHING. Life goes on like nothing happened for those of us who don't lose someone we love.

I would like some one to answer this simple question - How are such large-scale, multi-location, coordinated attacks carried out with military precision right under the nose of the Police and the Indian Intelligence Agencies? If terrorists can arrive in boats through Gateway Of India and launch such a large-scale attack in the commercial capital of the nation, it really says abysmal things about the nation's homeland security.

Mumbai and its citizens are resilient, but we are not and don't want to be sitting-ducks. Jai Hind !!

Funny Take On The Stock Market

I received this cartoon via a forwarded mail some time back. Check it out, it's quite witty.



PS: I am not sure who owns the copyrights of this picture. In case of any issues, please let me know.

Keep An Eye On The Baltic Dry Index

The Baltic Dry Index (BDI) or the "Baldry" is a measure of what it costs to ship raw materials — like iron ore, steel, cement, coal and so on — around the world. The BDI is compiled daily by London's Baltic Exchange, whose members are buyers and sellers of shipping contracts. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different shipping routes around the globe. The information from a variety of categories like shipping routes, types of cargo and ship sizes is collected and amalgamated into the BDI.

In a nut-shell: The BDI shows how much people are willing to pay to ship certain raw materials around the world.

Why Watch The Baltic Dry Index?

The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the BDI focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Producers buy raw materials when they want to start building more finished goods and infrastructure—like automobiles, heavy machinery, roads, buildings and so on. People don't hire a ship unless they have cargo to ship.

Typically, demand for commodities and raw goods increases when global economies are growing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting.

Interpreting the Baltic Dry Index

When the BDI is moving UP - Global economies are starting to, or continuing to, grow.
When the BDI is moving DOWN - Global economies are starting to, or continuing to, contract.

Current Status

The BDI was at 11000 plus levels in January; from those levels it fell to 850 in October. The BDI is now trading at levels not seen since 2001.

The Baltic Dry Index's recent plunge:

Source: Bloomberg

The recent plunge has been exaggerated because banks have been reluctant to issue Letters of Credit. “Letter of Credit” (LC) is a guarantee issued by a bank that the buyers funds will be transferred to the seller at the completion of the transaction. Still the BDI started falling in January 2008, much before the crisis erupted, clearly proving its worth a leading economic indicator.

So, keep an eye on the BDI, it will start rising when the downturn ends and economies recover.

For more information visit:

http://www.wikinvest.com/stock/Baltic_Dry_Index_-_BDI_(BALDRY)

For the latest value of the BDI visit:

http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY:IND

The Collapse Of Iceland

Iceland is on the brink of collapse. Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs. The country's banks are practically insolvent and the government has been forced to assume their liabilities. The are reports of people were buying up supplies of olive oil and pasta because supermarkets don't have the foreign currency needed to import more foodstuffs.

Just a year back Iceland’s economy seemed white-hot. It had the fourth-highest gross domestic product per-capita in the world. A 2007 United Nations report measuring life expectancy, real per-capita income and educational levels identified Iceland as the world’s best country in which to live. So, how did this happen? Can an economy crumble overnight? What went wrong in Iceland?

Iceland is an unlikely player on the global financial stage. Iceland had, in a very short period of time, created an internationally active banking sector that was vast relative to the size of its very small economy. Most of the banking system’s assets and liabilities were denominated in foreign currencies like the Euro, the Dollar etc. Money was cheap, so banks, companies borrowed freely. So far so good, but what triggered the collapse? The answer - Lehman Brothers.

Lehman Brothers collapse and the subsequent bankruptcy meant that many money-market funds (funds that invest in short term commercial bonds) who had invested in Lehman's bonds lost money. This led to a loss of trust in the money markets and the interbank market froze. Iceland's Glitnir Bank was among the first casualties. Like fellow Icelandic banks Landsbanki and Kaupthing, Glitnir was solvent, but when foreign short-run credit lines closed, Glitnir had to request a short-term loan from the Central Bank of Iceland, which refused. The government forcibly nationalized the bank. This triggered a sovereign debt downgrade and a sharp further fall in the already depreciated krona. Short-run funding for Glitnir and Landsbanki evaporated. Iceland's currency markets shut down and the krona's value collapsed. The Central Bank tried to peg the value of the krona, but the attempt failed and the peg was abandoned in just a day.

The whole system was basically a house of cards, since long-term loans were being funded by short-term borrowings. When Iceland's lenders refused to roll-over the money they had lent, the banking system collapsed. Iceland built its extraordinary wealth on the crest of the worldwide credit boom and now the crunch is sweeping it away.

President Barack Obama

This is one of those moments in history when it is worth pausing and reflecting on the basic facts - An American of African-American origins with the name Barack Hussein Obama has been elected the 44th president of the United States. Obama swept away the last racial barrier in American politics with ease as the country chose him as its first black chief executive. A once-reluctant nation has finally lived up to its democratic promise.

From far away, this is how it looks: There is a country out there where tens of millions of white Christians, voting freely, select as their leader a black man of modest origin, the son of a Muslim. There is a place on Earth — call it America — where such a thing happens.

From this day forward let every person in the world know: Everything really is possible in America. As Mr. Obama said “If there is anyone out there who still doubts that America is a place where all things are possible, who still wonders if the dream of our founders is alive in our time, who still questions the power of our democracy, tonight is your answer.”

America has just said "We don’t care what your race/religion/caste/creed is. If you can make things better, we’re for you." Countries like China, Russia, the countries in the Middle East have to introspect and ask themselves , "Can something like this happen in our society?"

A Short History Of Modern Finance

The October 16th, 2008 edition of the economist has a great article on how the global financial system evolved.

The link to the article is:
http://www.economist.com/displaystory.cfm?story_id=12415730

The Demise Of The "Yen Carry-Trade"

The Japanese Yen surged as much as 10 percent against the dollar last week. In the last month, it has gained an astounding 34 percent against the euro. I am sure you might be wondering "So what? How does that affect me?" Let me try and explain.

The Yen's rise suggests that the pace of "financial de-leveraging" is accelerating. The global financial crisis seems to have brought a sudden end of one of the world’s biggest easy-money schemes, the so-called yen-carry trade.

The Japanese economy never really recovered after the collapse 20 years ago. To stimulate the economy the Bank Of Japan lowered interest to the point that effectively interest rate in Japan went to zero. Also, the Japanese are a frugal lot, amassing savings to the tune of trillions of dollars.

For much of this decade, Japanese and foreigners alike borrowed money in Japan and invested that money in higher yielding assets across the world, from home loans in America to equities in Mumbai. This turned Japan, with its $15 trillion in personal savings built into a provider of low-cost capital for the rest of the world.

No one knows for sure how large this outflow was. Much of the yen-carry trade took place beyond public scrutiny, in the form of currency options or other types of derivatives trading. Its size is believed to have been to the tune of hundreds of billions of dollars per year. Some of the biggest players in the carry trade were American and European hedge funds and banks. But Japanese individuals also fed the outflow of yen by pouring their savings into overseas investments, like emerging markets funds, in search of higher returns.

A simple example of the yen-carry trade is:

1. Borrow Japanese Yen at the rate of say 1%pa and convert the money into US Dollar.
   
2. Invest that money in a fund operated by a Singapore/ Hong-Kong based FII(Foreign Institutional Investor) who is allowed to buy/sell shares in India. The FII converts the dollars to rupees and buys shares of companies listed on the Bombay Stock Exchange. Assume that in 1 years time, the shares have increased in value by 20%.
3. Sell the shares, convert the rupees to dollars and the dollars to Yen. Repay the borrowed money with interest. Pocket the difference of 19%.
   

Main risks involved that the investor has to face are the stock market risk and the currency risk. This works perfectly when the markets are rising, but when the market turns, the gains turn into losses. This leads to a stampede for the exit causing a further fall in the market. The process feeds on itself, a sort of positive feedback loop. The results are visible on the screen. Huge falls in stock prices all over the world, massive sell-offs in the commodities market(oil, base metals, agricultural commodities etc), collapse of currencies(Indian Rupee, Korean Won etc).

I don't know how/when the crisis will be resolved. However one thing is clear: Huge currency speculation of the kind that made the currency carry trade a cornerstone of global finance in recent years is highly destabilizing. When this crisis is over, the authorities should aim to reduce it.

Launch Of Chandrayaan 1

At 06:22 Hrs October 22, 2008 Indian Standard Time (IST) the Indian Space Research Organisation’s (ISRO’s) Polar Satellite Launch Vehicle, PSLV-C11, successfully launched the 1380 kg Chandrayaan-1 spacecraft into space. PSLV-C11 is the uprated version of ISRO’s Polar Satellite Launch Vehicle in its standard configuration.

The mission is scheduled to last two years, prepare a three-dimensional atlas of the moon and prospect the lunar surface for natural resources. The 11 payloads (scientific instruments) carried by Chandrayaan-1 include five instruments designed and developed in India, three instruments from European Space Agency (one of which is developed jointly with India and the other with Indian contribution), one from Bulgaria and two from the United States.

The moon mission, in addition to demonstrating technological capacity, can potentially yield commercial gains for India’s space program. India’s ability to put satellites into orbit has already resulted in lucrative deals; for example, Israel has sent up a satellite by means of an Indian launcher.

Considering NASA's multi-billion dollar budget, this indigenous effort by ISRO achieved in the face of budget constraints deserves praise.

Ban On Short-Selling Is Short-Sighted

Short-selling or "shorting" is the practice of selling a financial instrument that the seller does not own at the time of the sale. Short selling is done with intent of later purchasing the financial instrument at a lower price. Short-sellers attempt to profit from an expected decline in the price of a financial instrument. In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. Shorting is the opposite: an investor makes money only when a shorted security falls in value.

Short sellers are widely regarded with suspicion because, in the views of many people, they are profiting from the misfortune of others. Some businesses campaign against short sellers who target them, sometimes resulting in litigation.

However, the people advocating a ban on short selling ignore that fact markets by defination go up and down. Markets are not "meant" to always go higher. Thus, short-selling is an integral part of any market. Also, securities that have been sold short have to be "covered" i.e. bought back. Thus, in rapidly falling markets one of the most important "buyers" are short sellers who are trying the buy back the securities they have short-sold.

Importance Of Short Selling

1. Restrictions on short-selling disturbs the markets price discovery mechanism. Analysis of market data has proved that shocks in which short positions were present had lower impact cost(defined by the difference between the bid and offer prices) compared to similar stocks with no short positions.
   
2. Many trading strategies like "convertible arbitrage", "statistical arbitrage" (or "stat arb") or the typical "long-short" strategies depend on having the ability to short-sell. Noted investor Warren Buffett believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies.
3. Viability of the options market (without shorting, an options desk cannot run a delta neutral book - it has nothing to do with being bearish or bullish on the stock in question)
4. Mutual Funds, Pension Funds and other institutional investors have stock loan desks which lend stock to short-sellers to earn return on idle securities
   

Anyone who seriously thinks that the cause of the current crisis is the actions of evil and manipulative speculators lacks the insight and knowledge to be allowed anywhere near the regulation of financial markets. Short selling may well exacerbate existing problems, but it certainly was not the cause.

Worry About The Credit Crisis

What is the most important part of a house? Is it the garden, the living room? Maybe it's the kitchen. Actually, it is the electrical wiring and the plumbing - the bits you cannot see. So it is with financial markets. The stockmarkets are the most visible part of the system. The money markets, however, are the plumbing of the system. Normally, they function efficiently, allowing investment institutions, companies and banks to lend and borrow trillions of dollars. They are only noticed when they go wrong. And, like plumbing, when they do get blocked, they make an almighty mess.

First, the problem. It is widely assumed that central banks (The Reserve Bank of India, for example) set the level of interest rates in their domestic markets. But the rate they announce is the one at which they will lend to the banking system. When banks borrow from anyone else (including other banks), they pay more. Every day, this rate is calculated through a poll of participating banks and published as Libor (London Interbank Offered Rate) or Euribor (Euro Interbank Offered Rate). Normally, these are only a fraction of a percentage point above the official interest rates.

In the last few months the spread between the Libor and the Fed Funds Rate has widened to almost 200 bps(basis points). The width of the margin reflects investors’ worries about the strength of the banks. Three months is now a long time to trust in the health of a bank. In addition, banks are anxious to conserve their own cash, in case depositors make large withdrawals or their money gets tied up in the collapse of another bank, as with Lehman.

Why do these markets matter? First, the rates on loans paid by many consumers (floating rate home-loans, for example) and companies are set with reference to the money markets. Higher rates for banks mean higher rates for everyone. Second, if the markets are blocked for more than a week some companies may find it hard to get any finance at any price. That could mean more bankruptcies and job losses. Third, more banks could go bust if the blockage continues, making investors even more risk-averse. The downward spiral would worsen.

Deprive a person of oxygen and he will turn blue, collapse and eventually die. Deprive economies of credit and a similar process kicks in. So it is safe to say that, until the money markets behave more normally, the financial crisis will not be over. And until the financial crisis is over, the global economy may not recover.

BSE Sensex Falls Below 10000

The stock market witnessed a sell-off on Friday with the BSE Sensex closing below the 10000 point level for the first time since July 24, 2006. It took 484 sessions for the Sensex to climb from 10000 to its all-time high of 21207. However, in just 191 sessions all the gains of the last 2 years were erased.

What can be expected going forward? Is there any respite in sight? During times like these, it helps to look back at previous bear-markets. As they say, those who don't learn from history are destined to repeat it.

Analysis of previous bear-markets suggests that bear-markets take a minimum of 12-18 months to complete. Measured from January 2008, we are just in the 10th month. So, it will be atleast 6 months before stocks start recovering. I guess the price-wise damage is nearing an end. Historically markets bottom-out at 9-10 forward PE multiples. Considering 2009 March Sensex EPS estimate of 900-950, we are near the bottom.

Investors(both old and new) should use the next 6-9 months to build a portfolio of stocks which they should be prepared to hold for 2 years at least. This strategy is sure to yield returns in the long-run.