Friday, August 23, 2013

Currency Trading: The next scam in the making?

I am seeing of late a lot of material flooding my inbox on Currency Trading. It looks like that is the next thing that the banks are on to, to make suckers out of all of us.

In the old days when things were much better, the banks were quite laid back, and in our economy, almost like a cartel of oligopolists, controlling access to capital, and being controlled by politicians who benevolently distributed largesse from their kitty to expand their constituency. They all got their salaries on time, did  little work and prospered. Opening of branches was controlled (it still is), and there was no competition worth the name. Listed or not, being virtual public sector entities, they had little incentive to push products or over-exert themselves to get business. In a way, this was good for all of us as consumers since we were not pushed to invest our money in all kinds of unsuitable schemes and products.

Then many private banks entered the scene. The banks started recruiting aggressive young MBA's, and a 'meritocracy' culture took root. They all had to show advancing profits in the interests of advancing their careers. The banks even had their shareholders to answer to, and show increasing profits of course - what else does the shareholder care about? Who does one make the profits from? The customer of course. All in the interests of serving him better.  But then banking is almost a commodity business, and there is very little differentiation when it comes to the non-fee based routine 'collect liabilities create assets' kind of banking. So what do you do?

You of course look around for allies who can help you make money. And the best allies are of course the insurance industry and the mutual funds. The banks became agents for insurance companies and mutual funds, in several cases, companies that were allied to their parent and started peddling their products. All bank managers were expected to 'leverage' their closeness to their customers and 'educate' them about the greatness of these financial products. There were of course targets - remember, we are a meritocracy - and the targets were in terms of sales, skewed towards sales of ULIP's and New Funds. ULIPs were the longest running scams of the insurance industry for a long time, and the maximum commissions were offered for New Funds. Lots of investments were being channelled into ULIP's and lots of customers were constantly exhorted by their trusted bankers to churn their funds, all in the interests of 'financial security' of course. We know what happened to that. IRDA cracked down on ULIPs and SEBI on New Fund commissions. 

So the dalals (oops, I mean bank executives) changed their strategy. Suddenly, it was good for the customers to go in for traditional insurance products. Good for their health, good for their well-being and good for their spiritual upliftment. They of course trust their bankers and start shifting towards these products, which have a long history of not giving their customers more then 5 to 6 percent return, when inflation in the economy has been far above that. 

In the meanwhile, the 'products' departments of the banks were busy 'structuring' new products, all a mix of insurance, mutual funds, risk protection, investments, returns, guaranteed bonds, risky equities, all kinds of kinks, heavy surrender clauses, lots of small print which was never obvious, and glitzy marketing strategies. The commissions to the banks were huge but hidden, and once the customers were hooked, they had to continue to pour good money after bad to ensure a decent exit, since the pre-term surrender clauses were very adverse. It was easy to sell them of course - there were careers waiting to be advanced in the banks - all those MBA's they recruited are of course ambitious young kids and you need to give them opportunities for advancement. So their targets of course included selling these structured products.

When my mother-in-law had just retired and wanted to invest her PF and other proceeds, three executives from this leading private bank landed in my house and started selling her a pension plan! I, being her financial advisor, was with her and almost came under their hypnotic spell myself. My mom-in-law of course had left it all to me, but I could well imagine others in her place listening to those bankers, and coming under their spell; just like they come under the spell of priests and astrologers. The trick, I realised, is to start off with a lot of mumbo jumbo laced with jargon (bhagwan, dosham, rahu, ketu, pariharam in one case - and pension, guaranteed, safety, high return, security, etc. in the other) which brings the victim to a trance-like state, induce a state of panic (you have 'seven year sani' since Saturn is eating into Mars / imagine your old age without pension and no other means of support), meet all queries with arcane jargon (Guru in the eighth house increases risk of death in the family / guaranteed capital protection means with triple cover), and then suggest the way out of all troubles (if you do this pariharam at Rameshwaram you will be ok / if you buy this ULIP/ endowment / pension plan you will ensure a good retirement) - usually, when the victim signs on the dotted line handing over her money to you, she actually feels indebted to you! And what you have sold her is a pension plan (post retirement!) or a 'structured product'!

The same thing happened recently with my mother - when all she wanted to open was an FD for a couple of lakhs, was the time when the 'trusted banker' cornered her and started pushing some structured product which would have given her at best a return of 7 percent (if she kept contributing for the full term, 15 years), or less (if she 'surrendered' any time in between). And this recommendation of a 15-year product, to a seventy-year old!  It of course had a heavy insurance component - it is usually lost on these bankers if you tell them that a seventy-year old with no dependents does not need any life insurance.

In the meanwhile, commodity markets took off in India. MCX, NCX, and all kinds of X were set up to facilitate 'trade' in commodities. They appointed brokers, who of course started to induce common folks (people like and you and me that is) to 'invest' in commodities with a 'sure' return of 12-13%, 'risk free' and 'guaranteed' by the exchange. All kinds of marketing gimmicks were of course used to induce people to undertake margin trading in commodities, a very risky game even if undertaken by those in the know. And what did these people understand about sugar, guar gum, cotton, castorseeds? They were told that it was enough to have some basic knowledge, which could of course be given to them in a crash course in the brokers' offices. And there were various software products which would teach them about commodities. And research reports sent by the brokerages themselves!! And the 'common public' piled on into commodity speculation. And then NSEL collapsed. It is almost certain now that there is fraud involved, and many 'investors (suckers?)' will stand to lose their money. The brokers of course are washing their hands off the matter - according to them, they acted in "good faith"!

I don't know why bankers were not peddling commodities - must have been some regulatory issue that came in the way. But how can bankers be far behind? They were looking for the next big thing to peddle, one that will bring in guaranteed commissions and trading fees for them, while the customers would bear all the risk. So I guess they hit upon currency trading! 

There is a spate of such ads (as the one below) from various banks that I receive nowadays, all exhorting me to trade in currencies. The dollar-rupee exchange rate. Even the yen-dollar rate, or the pound or euro. Whatever. So long as I trade in something. And they are offering to 'train' me for free, so that I then get a 'free' online software and indulge in currency trading which will surely make me a fortune! Currency movements are something that involves very big players including central banks and institutions like Goldman Sachs and JP Morgan. It is a sea in which only sharks swim. And they are inviting me, a minnow, to swim along with the sharks. I will of course be trained, and I am sure, helped by 'research reports' that the banks will make me privy to.  How exciting!

That is what the poor fish thought before he swallowed the bait at the end of the fishing line. How exciting!

Attached below is the mail from ICICI Bank (not the only one sending such mails) exhorting me get into currency trading.

---------- Forwarded message ----------
From: <>
Date: Thu, Aug 22, 2013 at 2:25 PM
Subject: Investor education session on Currency Futures by

If you are not able to view this page properly, click here
Greeting from
We are pleased to inform you that has organized investor seminar on Currency Markets for you in your own city.
This training will be on Introduction of Currency Derivatives, through which you can trade in dollar, euro, pound and yen against Indian rupee.
There is no registration fee for this training. Following topics will be covered in this program.
Introduction to Forex Market
Introduction to Currency Futures in India
How to start trading in currency
Currency a hedging tool
Currency - An asset class product to diversify portfolio
Factors influencing currency exchange rate
Product specification
Forwards v/s Futures market comparison
Trading in currency with
Please click here to locate your nearest venue and timings for the upcoming events.
Please walk into the venue at the respective timings.
For have any clarification, please write to us at
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Wednesday, August 14, 2013

Nothing is without risk

Everyone and his uncle wanted to speculate in the commodity markets. Brokerage houses like India Infoline, Anand Rathi, Motilal Oswal, etc. were aggressively pushing their clients to trade in the commodity bourses. The "exchange", in this case National Spot Exchange would ensure fair trade and also there were enough stocks in their godowns to ensure that the contracts were covered with physical stocks at the back end. There was also a settlement fund that was worth more than a thousand crores, or so we were told.

And then something happened. The exchange was forced to cancel contracts and get the parties to settle. It's a mess of counterparties on both sides, with some of them being merely shell companies with no assets on the balance sheet, owing crores to the exchange. The "settlement fund" suddenly shrank to less than a hundred crores. There are whispers that the stocks in the godown may not even exist, since they may have been created by fake purchase receipts. The brokers, the same people who encouraged their clients to trade in the exchange, in exchange for commissions, now want to file a case against Jignesh Shah and his family. They know very well that nothing will come out of it, but they have to show to their clients who have lost money that they are taking some action. When the whole thing unfolds there will be a few thousand crores still owing, a few thousand investors, or speculators in this case, crying foul since they have lost money, a few hundred articles decrying the whole shameful episode without really coming to grips with the problem, a few cursory enquiries to quiet the many strident voices demanding action, and a collective shrug of the shoulders. Some people will be left nursing their wounds, never to see their money again.

We are repeatedly told that the markets are safe since there are institutional structures to cover for counterparty risk. There will be no default because the exchange mechanism will ensure this, is what we keep hearing. Of course this cannot be true. The moment you give your money, or your commodity or whatever, to someone else to safeguard, there is always a risk. The moment you create instruments out of them, and complicated structures to administer them, there is further risk.  There is no such thing as zero risk.

What about lending to the government? May be as zero risk as you can get? The returns are barely enough to cover inflation, and we are funding the government to cover its deficits. No government has savings that it can dip into to pay you when the time comes. They just rely on the next person in line to lend them money which they can then pay to you. The city of Detroit has just declared bankruptcy, and many cities or municipalities in the US are set to follow. That means that the promised pensions of all those who worked for the city may never come, and all those who invested in supposedly safe municipal bonds may never see their money.  Federal governments don't like to declare bankruptcy, so they just print more notes to cover their debts. Which erodes the money that the rest of us hold.

Lending to the bank? Insured up to Rupees one lakh in India, only one lakh. A lot of banks are actually bleeding, and have highly suspect balance sheets. Politicians need to expand their patronage network, and banks are a good source. Which farmer in India really believes that he has to repay the bank when the time comes? He just waits for the next loan waiver scheme to happen. A lot of small businessmen in India pass a credit entry in the P&L (as revenue!) instead of a liability entry when they take a loan from a bank! Are you sure the NPA's of your bank are what they are stated to be? You can still consider it zero risk, since the banks will be bailed out, and someone else will pay. That someone is usually the taxpayer, which is you wearing a different hat. 

Investing in shares of a company? The risk is that the business may not do well, due to macroeconomic factors outside your control, or due to inefficiency of the management. Both of these you are willing to live with. But what about corrupt managements lining their own pockets? Corrupt promoters diverting money from the company to their own shell companies through various ingenious ways? What about boards who are actually dependent on the management and promoters to retain their board seats, hence are ineffective? In case there are huge losses, you can be sure you as a shareholder will share in it. In case there are very good profits, what are the odds that part of it is siphoned off and never reaches you?

And then of course there are institutional structures on top. You invest in the shares of a company through a mutual fund. The fund has its own fees which have to be recovered by the fund managers by generating an alpha over the benchmark returns. How many funds generate return over the benchmark consistently? And are the funds truly independent researchers and thinkers as they claim to be? Because of the way they are appraised, against a benchmark, and against each other, quarter on quarter, they tend to follow a herd mentality. Herd mentality implies investing in the Anil Ambani power venture's public issue - because everyone else is investing in it! Even a person without any knowledge of business would have found their business plan without any substance. Or it implies investing in the Facebook IPO. No one questioned the 100 billion dollar valuation at the time of the IPO, while any reasonably cautious retail investor would surely have stayed away.

And then there are the ETF's. Gold ETF's are safe we are told. We think it is because there is always physical gold of like amount to back up our units. While in reality, most ETF's say they invest in Gold or in assets (read paper securities) that move with the price of gold! Paper securities have a way of multiplying more than the underlying physical stock. During times of "national crisis" the gold that actually exists in the ETF's vaults is easy prey for any policy wonk who can commandeer it and give you "currency" in return. Just a few months back, Chidambaram permitted ETF's to lend twenty percent of their stock to jewellers, thus introducing counterparty risk to the ETF.  Just goes to show, that the moment something goes out of your hands and is replaced with a piece of paper, there is risk.

So what is the solution? Where do we get a real risk free asset to invest in? No such thing as risk free exists. Right from the time the caveman lent his tool to his neighbor on a promise that he would get it back, there was always risk that he would not. You can create instrument on instrument, structure on structure, on top of basic transactions like these, cloud them with jargon, insure them for all they are worth, and create complex derivatives out of them and claim they are risk free, but the risk always exists so long as the underlying risk exists. 

Someone finally has to pay.

Friday, August 2, 2013

The Food that destroys life...

Plants are created with the interaction of sun, wind and soil, and ooze with vital energy that gives life to animals in the food chain above. The same goes up through the food chain - the vital energy is transmitted along with active nutrients as animals consume other animals and so on. And then the need to increase production was felt due to increase in populations and people started cultivating crops in fields rather than just hunting / gathering. This was bound to reduce the life-giving properties of the soil, but all ancient communities had developed their indigenous ways of managing the soil and the crops that gave back to the soil, through natural and organic methods. The fertilizers they used were organic, like cowdung; the soil was kept healthy by living things like earthworms; and the insects were kept at bay by using natural insecticides like neem.

Then along came the scientists and isolated the 'active' ingredients of the sun, the soil, and nature. Modern science (and medicine) is one of "reductionism" where we isolate one compound from a mix that nature created for a reason, and think that we can use it in isolation - thus doing the job better. How can the part take the place of the whole? Where is the synergy in this, that nature had created over millions of years? Where is the interconnectedness with all other systems on the planet? All that is lost when you follow the reductionist approach. The so-called active ingredients were packaged into chemical fertilizers and we started poisoning the soil with them. Ditto with insecticides, deadly poisons sprayed on the crops. The resultant produce is not what nature intended and we still insist on calling it food. 

And then the modern transportation system takes over. It transports mangoes to arctic regions, and carts arctic produce to tropical climes. We thus end up eating out of season, and not of the region. Certainly not what nature intended. We still call it food. The industry that transports it needs to reach it to the consumers in good shape, so they start doing things that will preserve it and enhance its appeal. They coat apples with wax in factories so that they won't get spoilt. They pluck food before they are ripened on the tree, as nature intended, and ripen them chemically at the destination - raw fruits are obviously easier to transport than ripe ones. The food needs to look good on supermarket shelves, so they start interfering with them while they grow - apparently it is not only humans that need to be cosmetically enhanced to appeal to us, we demand that of our food as well. So we get uniform-looking produce on the shelves - tomatoes that are perfectly red and perfectly round, and bananas that look like they have come out of factory, which, in effect, they have. In Japan they even produce watermelons which are square in shape so that they stack better. And we still insist on calling it food.

And then comes the process of converting the food into forms that we can use. Like the seeds into oil. Obviously the extraction has to be 'efficient', so they apply chemicals and heat to the oilseeds to increase the yield, destroying all the vital enzymes in the oil in the process. But what about the smell? The oil still smells and, being a living food, is likely to turn rancid faster. So they 'refine' it by using all kinds of detergents to remove all the smells and stuff, and add 'preservatives' to make it last. The wordsmiths have given it the word "refining" which makes us feel that it is actually something better that we are buying, the kind of conditioning that takes place all the time. But we still insist on calling it food. 

Take another common product, salt. Natural salt, whether sea salt or rock salt, has more than 50 trace minerals in combinations that the body can use. Every animal in the world needs salt, it is essential for survival. Every landlocked civilization from the dawn of time has gone to extreme lengths to obtain salt.  But then modern industry cannot just leave it alone. Their chemists inform us that salt consists of its main ingredients, Sodium and Chloride - NaCl. A lot of different industries need pure NaCl for varous industrial applications, in fact, over 90% of the salt produced in the world today is used for industrial applications. So they of course have to produce pure NaCl. Since it is 'pure' it will be pushed for human consumption as well. And since the word 'pure' gets hammered into us, we as consumers want only the 'pure' salt. What happens to all the trace elements that the body needs? What happens to the magnesium and potassium which is there in natural salt in the right proportions to help the body absorb the sodium in the NaCl? What happens to the minerals that have been lost in the 'refining' process? But then, the resultant salt is "pure". Along the way, they realize that iodene deficiency is a major health problem in the world - what is unsaid is that this is the case only in regions of famine or when people do not get enough to eat, that this happens. But then, why not kill the problem in one clean sweep? What product is used by everyone without fail? Salt. So voila, add iodene to salt, and you will solve this problem once and for all! Anyone who is reading this article does not need this iodene from the salt, since I am sure he or she is already eating well. To add iodene to the salt, it needs to go to the factory and be 'refined' first. So out go all the trace elements. What remains is just 'pure' NaCl enhanced with iodene. The one food that is essential to every life, completely tampered with. In some cases, through laws making it illegal to sell any other kind of salt. And we still insist on calling it food. 

Apart from salt, another food that modern man consumes in almost every item he eats, is sugar. Nature never intended sugar to be consumed separately.  Natural foods have sugar in them that the body can process. It is in small quantities and in a form the body can assimilate. The body produces insulin to help assimilate this sugar. But then, somewhere along the way we managed to make "sugar". We all have a sweet tooth, and we learned to add sugar to everything that we consume. The amount of sugar that we consume per capita in a day is more than the amount of sugar that we used to consume in a month, just a century back. It is not only the sugar that you add to your tea and coffee that is the culprit here, it is all the processed foods that we eat. They contain inordinate amounts of sugar, in extremely harmful forms like 'refined white sugar' and 'high fructose corn syrup'. The body is not designed to cope with this sugar rush. With every food that we consume the body gets into emergency response mode because of all the sugar that we dump in. Over a period of time, the body's natural mechanism for dealing with sugar collapses. We are of course familiar with diabetes - many people we know suffer from it, and the odds are greater than 50% that we are going to get it. Along with associated lifestyle diseases like heart ailments, blood pressure, and kidney problems. But we never wondered why this is the case. We will continue to abuse our bodies by eating all the processed and packaged foods in the world, for the privilege of taking insulin injections later, and worry about why our cholesterol is high and take useless drugs to combat it. We don't ever question the need to do this; we accept diseases like diabetes and heart ailments as inevitable and part of the process of aging.  

What about maida? Try taking wheat to the local chakki, and running the atta through a fine sieve. You will get you own homemade maida which is not so bad, in spite of the loss of some fibre. It is still good to eat. That maida is never pure white like what you buy in the stores. Consumers demand pure white maida, so industry 'bleaches' them with ingredients that are so deadly that some of them are known poisons. What about dalda / hydrogenated vegetable oil? It is a chemically altered substance that is no longer oil, a substance that the body cannot digest. Most of us may not be using it in our homes any more, but most commercial establishments that fry stuff use hydrogenated vegetable oil since it is far cheaper than using oil.

I don't even want to touch upon milk, that other non-food that we have been convinced is so essential for our well being. I shall reserve that for a separate article. 

The unfoodification of food does not stop there, of course. Modern life demands that we need everything processed and packaged. Every processed and packaged food that we buy (read biscuits, breakfast cereals, bakery products, soft drinks, noodles, ready-to-eat foods, refined oils, maida) uses one or more of the ingredients listed above, with many preservatives and chemicals further added to them, the entire process being such that that it no longer remains food - the 'prana' is long gone from it. It is just a bunch of modified food items with a host of chemicals. But then, we still insist on calling it food!

And we lament that whole populations are losing their health, that obesity is an epidemic, and younger and younger people are visiting the heart specialists. We have started defining health as the taking of medicine to control health problems and regular health check-ups to catch problems that are inevitable, not as an absence of disease, far from the real definition of health that means absolute positive radiating vitality, which is the way God intended us to be. And as to the medicines that we take to combat what the food industry pushes down on us, I shall reserve that for another time. 

And we still insist on living like that, and still insist on calling it life!

Dinesh Gopalan
2 August, 2013