Time to sit on cash?

Volatility is the order of the day today. Markets go up by a few hundred points the day Merkel and Sarkozy meet and make vague promises, when BIg Ben announces US Quantitative Easing with a Twist, when Chidambaram and Pranab grudgingly make up after a meeting with Madam, when inflation data is bad, and on the days it is particularly cloudy. Markets go down by a couple of hundred points when people feel Merkel and Sarkozy's promises are vague, when they feel that Ben's efforts are not yielding any results, when they feel Chidambaram and Pranab are still plotting against each other, when inflation data is bad, and on the days it looks a bit sunny. The whole world seems spooked right now. The sins of the past are reappearing to haunt us; we are afraid in our heart of hearts of the consequences of economic catastrophe that will follow, which we do not want to acknowledge; and everyone is looking at others to see how scared they are. If everyone feels everyone is scared, everyone pulls out money from some assets and puts it into some other assets like US Treasuries; and if everyone feels everyone is confident, everyone pulls out money from US Treasuries and pushes up prices of all other assets by their buying.

At this point in time, it looks there is very little good news on the horizon. Europe is teetering from one promise to another, hoping to stave off the current crisis to some time in the future; the situation will get clearer by end-November. China is not going to get out of its slump in a hurry. The Indian economy seems to be slowing down due to a variety of factors including high inflation, RBI's efforts to fight it by raising interest rates, an ineffective government where paralysis seems to have set in, and of course slowdown of growth across the world. We don't know if the world is going to face a full-blown recession, but it certainly seems like there is going to be prolonged phase of low growth and uncertainty.

So at this point in time, what should be our investment strategy?

Buying stocks in the current situation seems a little risky. A lot of good stocks are available at what appears to be reasonable valuations. However, the benchmark to judge what is a reasonable price is the market itself and the markets seem to be highly uncertain right now. The upside seems to be minimal at this point, and the downside even from current levels could be significant. If you are convinced about any particular stock that you have been tracking for long, or if you are betting on or against specific events like buying stocks that have been affected by the recent mining ban in Karnataka in expectation of the ban not lasting for long, then go ahead and buy. But remember that the broad market is influenced to a high degree on FII and Institutional flows, who are in turn influenced by world trends and who tend to have a follow-the-herd mentality, which magnifies movements either way.

Gold has seen a steady rise in the last few years, with the last couple of years showing very high increase. The current consensus is that given all the uncertainties in the world economy, demand for gold will continue, and there is still scope for significant increase in prices over the next year or two. I would continue buying gold in small quantities.

Silver has dropped steeply in the last couple of months. It now seems to be quoting at attractive levels, and it looks like it may be a good time to buy. Silver is highly volatile, and may even go down further. In case it does, buy more. I am very bullish on the long-term prospects of silver - I think it is good to keep accumulating, especially on declines since the prices are highly volatile. The slowdown in the world economy should keep the prices down for a while, since silver has many industrial uses, but its value as a precious metal (like gold) and the fact that a lot of it gets consumed or used up, should ensure silver's long term value.

Real Estate prices have not dropped in the last few months, in spite of the increasing interest rates and tightening of liquidity by RBI. In fact, in the quarter ended June, real estate prices seem to have firmed up - across India the prices of apartments were twenty percent to forty percent up compared to a year ago. Real Estate prices always lag the economy and stock markets. Prices at these levels may not be sustainable, and the affordability problem of paying EMI's will show effect at some point. Expect real estate prices to decline from now till March.

Having said that, real estate is also about identifying good properties that are set to appreciate due to location, development in the locality, and other factors that could influence demand. If you get the right deal that you are convinced about, you should invest. It is worth looking at Tier 2 cities - in Bangalore check out this new area Budigere that all builders are flocking to.

Cash is good. Interest rates are reasonably high (though of course inflation is high too making real interest rates close to zero) and it is a good idea to park your money in FD's or income funds for a while. Get into cash, and wait for the right opportunities to invest in stocks or in real estate. Good opportunities are bound to come up with all this volatility in the markets.

Whoever said investment is a passive activity? "Invest in SIP's a given amount every month, don't worry about price movements, and in the long run you will emerge the winner!" I don't know if that is the right strategy any more, given this kind of volatility and greater positive correlation among all asset classes. Perhaps we need to get more savvy about the investment options available, keep track of them, and be ready to capitalize on opportunities when they arise.

Happy Investing!

And then the chickens come home to roost

The US has still not come out of its recession. Europe is teetering on the brink. There is political turmoil in the Arab states. India is caught in a mire induced by corruption and mis-governance scandals. The Chinese growth engine is sputtering. Unemployment onshore is increasing everywhere as jobs are being offshored. Offshore jobs too are going away or being relocated too even more lower cost locations. Stock markets, commodity markets and all other kind of markets are yo-yoing wildly for the last four years, swinging from intense bouts of pessimism to uncertain optimism. 

In Europe, the PIIGS countries are still wallowing in the muck of their own creation. The protected welfare state structures of the past are not going to survive – there has to be a fundamental shift in the way the population lives and the transition is not going to be easy. Transitioning from a life of unsustainable luxury to living within one's means never is.  If Greece defaults, it could take the rest of Europe along for a very bumpy ride, since the lenders to Greece are banks from other European nations, led by Germany. So they will find a way to bail it out, but not without pain all around. Italy will have to tighten its belt and face tough times ahead. Ditto with some of the other countries in the EU. Some of the weaker nations may have to pull out of the EU – it is unlikely that sugar daddy Germany can keep subsidizing them for long. The Euro, which for a while held out promise of being an alternative currency to the dollar, is on its deathbed or at the very least, extremely sick.

 

China, whose economic might is only rivaled by its political ambitions for influence in the world, is facing its own set of problems. Exports are sputtering because the world cannot afford to buy more and more and is battling its own demons at the moment. Inflation at home is high and interest rates have been raised, just like in India. Wages are rising making exports less competitive. The housing bubble and infrastructure bubble fueled by excess borrowing and unsustainable creation of capital is showing signs of collapsing.

 

The Arab countries have always been run by the sheikhs, propped up by powerful "friendly" superpowers, in return for favors that oil can bestow. For all their sanctimonious posturing about democracy and human rights, the US is the country most responsible for propping up regimes without any legitimacy for economic and political gain. Some of those cozy equations are being shaken with current developments, and new ones will take time to form.

 

India is caught in its own web of corruption and mis-governance. We have several versions of the TINA (there is no alternative) syndrome, one of them being "There is no alternative" to corrupt governments! Confidence in the government is low. The economy has slowed down considerably. The common man is facing the pinch after years of sustained inflation, and lower wage increases. The poor are facing it even more since food inflation has been even higher.  A lot of the growth that was in the past led by housing and infrastructure is slowing due to the current high interest rates. In spite of the RBI raising interest rates a dozen times in the last year and a half, inflation shows no signs of abating, while growth certainly is. The stock market is teetering at 17,000 levels, not very sure which direction to head in; in the meanwhile, it swings wildly either way.

 

The US is yet to emerge from its troubles. The cheap money policy with QE1 and QE2 does not seem to have effected its magic. Growth has stagnated, there are no jobs, the housing market is still in the dumps, politics is in a mess, confidence is at a low, and it seems like the country is running out of options. The irony is that the dollar still continues to be the reserve currency of the world (and will be for some time to come) since There is No Alternative! US budget deficits are unsustainable, which they have been, for a long time. Decades of unsustainably high standards of living fueled by borrowing from the rest of the world is having its impact. Like the proverbial ostrich, the US continues to bury its head in the sand and expects that the problems will go away.

The world over, the chickens are coming home to roost. None of these developments should come totally as a surprise – they are the inevitable consequences of self-induced flow of events. However, the current times seem to be exceptionally uncertain since too many of these things are happening at the same time.

We do not know how each of these events will pan out but can only guess that will all eventually settle into some kind of uncertain equilibrium. Each of these events has the ability to swing markets wildly and none of them has settled into any kind of stable state.   In such a situation, it is perhaps time to re-evaluate investment options and strategies.  The usual mantra of buy and hold for the long term, do SIP, diversify across asset classes including foreign assets, may still hold good but perhaps with a twist. It is time to look at some strategies that are defensive while at the same time being ready to grab opportunities that will inevitably arise in wildly swinging markets like these.

 

More on that in the next.

On Steve Jobs leaving Apple

The world gasps in collective horror,

When one man rides into the sunset.
Why should one man make such a difference,
or his leaving generate such interest?

Some men come to define an age,
embodying all that it stands for.
Some men create and rule the stage,
Where only they play the leading part.

Some men create things that are new,
Changing the way that people live,
And some, they build institutions,
Monuments, conjured from the air.

A few there are who make it rich,
Starting from a place of nothing.
Enriching others are fewer still,
Creating gold by their passing.

Very very few, do it all,
Magicians passing through face of earth.
We wonder at such miracle men,
Who, through their lives, defy even death.

The tyranny of numbers

Yesterday India lost the first test of the current England Test series by 196 runs. Indian fans are of course disappointed, but there are three more games to go and they hope that India will claw its way back. Our team certainly has the ability to do so.

 

Anyway, the intent of this piece is not to talk about cricket. It is to talk about metrics. Metrics as in measurements, numbers, ratings, rankings, and how we are all slaves to them. The front page of the Mint newspaper has a photograph of Sachin Tendulkar with the following caption "Sachin Tendulkar missed out on his 100^th international hundred as India faltered while trying to stave off defeat in the first Test against England at Lord's on Monday. The 196-run loss puts India's No. 1 Test ranking in jeopardy."  

 

What is more important in our scheme of things? The fact that it is after all a game and wins and losses are part of it? Or that it is a disappointing loss in a test match where we played badly and England played well? Or the fact that we are waiting for Sachin's hundredth international ton – what is his hundredth ton but a statistic, an eagerly awaited and welcome one of course, but a statistic nevertheless? Sachin made only 12 runs yesterday, it's not even that he got out in the 90's! Or is India's No.1 Test ranking more important?  A No. 1 ranking is a cumulative effect of many matches –maintaining the ranking is important, but is it more important than the game that just took place?

 

Also, the fact that it was the world's two thousandth test match, and the hundredth India-England test match, and Duncan Fletcher's 100^th Test as coach, got a lot of mileage. The combination of all these important factors makes it a landmark test!

 

When it comes to measuring anything, there comes a point beyond which the focus is merely on the measurement; on the collection, compilation, collation, reporting and discussion of statistics. Everyone talks about these numbers, what they mean  and how significant they are. It is very likely that many of these numbers are converted to graphs and charts, preferably dual axis and in 3D. After some time, someone comes up with a metric indicating how many metrics there are. This is compared to another setup which tracks more metrics, of course followed by an effort to increase the number of metrics. The number of metrics itself becomes a metric and a target to be exceeded. Cricket of course lends itself to metrics generation much more than any other game, so it is not possible to compare cricket with other games. If it were, there would be comparisons, based on metrics of course, of how many and what kind of metrics cricket has in comparison to, say hockey, and there would be tomes and tomes of analysis on that. There would be consultancy organizations offering to take the learnings from cricket (meaning the metrics, not the game itself) and apply it to other games like hockey. There would be conferences with the theme "Metrics and their measurement, in pursuit of excellence" which would be attended by all the cricketers, presumably to improve their game.

 

And so on it will go… somewhere in this whole process, the fact that we are talking about cricket in the first place is forgotten. We focus on the numbers, create our own interpretation of them, bring them to life in different contexts, weave stories around them, and bask in the resultant insights. After some time, it ceases to matter whether it is cricket we are discussing or some other game.  It is reduced to a play of numbers, and in the process the spirit is lost! If it sounds familiar, it is t because the same thing happens in many other contexts as well.

 

The fight to take over the world

Google+ is creating quite a buzz. It is still in a restricted-user testing stage but it has created enough interest among the early users and it looks like it will have a good chance of challenging Facebook's dominance. It is almost a desperate final attempt by Google to enter into the social media space – a do or die effort. Its two previous efforts, Wave and Buzz failed, the first because no one could figure it out, and the second due to major privacy concerns. Google looks like it might get third time lucky.

 

The internet battlefield is littered with corpses of companies that were once healthy, growing, and thriving, but grew sickly and died away as quickly as they rose to prominence. In social media, MySpace is an example that comes to mind. And Orkut. All the people gravitated quickly to Facebook – beyond a certain tipping point, more people join Facebook and desert the other sites since more people are already on Facebook. Facebook has long ago exceeded that tipping point – half the world is on it now. The other half is of course excluded from the world – a bunch of weirdoes who don't belong.

 

Google is by far the most successful internet company making huge revenues and profits. And they have achieved this position in just a few years. A large proportion of searches (except in China) is through Google, and since so many people access the net through the Google gateway, the gatekeeper gets to profit from the traffic. In this case, the gatekeeper also acts as their guide for the journey ahead; he knows a few million paths they can take – with his omniscient wisdom and infinite sagacity he prioritizes the options and most people follow his advice. As they proceed they are greeted with banner advertisements that the gatekeeper places in their path, advertisements that are very relevant to the object of their search. What power! What influence! It comes closest to being God.

 

But God is getting jittery. His followers still ask him for advice on which path to take and they follow his advice. They still read the banners placed in their path. But they travel in groups, hang out in groups and spend a lot of time with each other – and the places they hang out in are not owned by this God. That privilege is Facebook's. As people interact more and more on Facebook , posting millions of pictures, having trillions of conversations, and interacting in tons of forums, Facebook gets a deeper and deeper insight into people – how they connect, what they say, what they are interested in – and gets to control the environment in which they spend a lot of their time. The aggregation of information from this has immense potential to profit the person who has it. And this new God knows it. He is already muscling into Google's mail space by getting more and more people to send message s to each other on Facebook. It won't be long before he offers them search options as well – and then Google is in real danger of going the MySpae or Orkut way. Nothing is more sad than a God whose followers have all deserted him. The world is littered with ruins of ancient temples which were once the center of their universe. And for Gods who measure their own worth in market cap, it can be even more heartbreaking.

 

So Google is trying to woo people away from the new God. The task is not easy since they have grown used to worshipping at the Facebook altar. It is very difficult to make them desert – anyone who tears himself away to come over to the altar of the new God, is faced with an unfamiliar terrain, new rituals, new ways of doing things, and is very very lonely at first. And like any new world, this world will take getting used to. After going through the trouble of understanding Facebook, figuring it out, and getting used to it, why would anyone want to switch? The early adopters also have to wait for the entire thing to catch on; it will take time till they get a feeling of real community.

 

This time the chances of success for Google to encourage apostates into its fold seem good. The concept of Circles that Google has introduced is intuitive, easy to understand, and addresses the issue of privacy upfront. Facebook does have its privacy settings, but it is so hidden that most people do not know how to use it and it is not so intuitive. You don't send "friend' requests – you just drag them into your circles. They do the same to you. In that sense, it is a combination of Twitter and Facebook. The "Hangout" where ten people can get into video chat at a time is a great feature. People see that there are other people "hanging out" on video chat and join the group. Very similar to what happens in real life interactions. The early adopters are liking what they see and they are creating a very positive buzz around the product.

 

Whether Google+ will succeed or not remains to be seen. The denouement will not be long in coming. If it succeeds, then it becomes much more powerful than it already is. Google already controls a lot of internet traffic of the world, and knows what people are looking for. If Google+ succeeds, it will also be eavesdropping in the places they hang out, and know more and more about them. Them in this case of course means us. In our lives Google will become more omniscient, more omnipotent, and more omnipresent than ever.  That is a scary thought.

P.S: Link to a poem on Google I wrote a couple of years back:   http://www.dineshgopalan.com/2011/05/google.html