The story of the stupid king andÂ his stupid minister
Itâ€™s been a horrific week. October 6th to 10th. And still thereâ€™s no end as markets showed its ugly teeth on 15th – yesterday. The month is half-way through.
I tried my best to protect the small (absolutely small and negligible in all standards, more so for bail-out figures of billions and trillions) money with which I took futures positions.
The figure can be better sensed when I admit that I am yet to buy a car. I promised my son one by taking part of this money off; however now the whole money won’t buy me one. I had lost 90% of my investment in 2006, I got 300% return from balance 10% in last two years, and now 80% ofÂ it hasÂ gone.
Itâ€™s been so since September. I went long â€“ markets went down. I got scared and booked losses by squaring off. I went short sensing the overall sentiment; unfortunately the luck was against my directional call with massive bail-outs rally for a day or two.
Itâ€™s the 2nd time in two years. Traders will trade. I havenâ€™t learned!
However unlike last time, when the capitulation was more within India due to the goof-up of Indian policy-makers (on top of my own!); itâ€™s been global this time.
I made a series of mistakes by trusting the efficiency and effectiveness of global policy-makers, the last of the mistakes were on Friday (3/10). As Indian market was closing for the week, I could not stop the temptation to buy the lowest cost steel producer, Tata Steel (Corus) futures, at a throwaway PE ratio of 2.4. Global markets had the optimism that bail-out bill would be passed in the US Congress/Senate.
The price has since fallen by nearly 30% in 7 trading sessions. The companyÂ had madeÂ equivalent of its m-cap in last two years, and going forwardÂ would do so again inÂ 3-4 years. Lowest cost steel producer in the worldâ€¦I know stock prices are about future and am also aware the unbelievable capacity created in China in all commodities. A recession means catastrophy for commodities, but not the end of steel consumption.
There are hundreds of stories of valuations now, globally. Then I realized that when there is a razing fire and shop-owners areÂ selling assets; no one looks at valuations. People just run with their lives. Global policy-makers tried to give that false sense of normalcy returning. And mayhem returns next day. As it did again on 15th (i.e. yesterday) in the US markets. And I was looking at valuations with 3-4 times leveraged positions for hours of investment horizon to resell it to someone at a higher price! How can I be so stupid?
I donâ€™t feel like writing anymore. Thousands of people, or rather millions have written about it. Paul Krugman also did. Or Prof. Nouriel Roubini who, as per many in main-stream media, sort of predicted this crash but was still long in equities. I believe no one can predict markets – prediction has two dimensions. Both index value and time. It’s something like the Heisenberg’s uncertainty principle – someone can get it right sometimes, but that’s pure coincidence.
My record is in my writings â€“ not in main-stream major media. But in BNN or in similar other Web 2.0 sites. I knew such corrections were long overdue, but timing was the essence. Many did sense it…and still many of them lost money. Even as investors!
In my childhood, we had a story called â€˜Hobuchandra Rajar Gobuchandra Mantriâ€™ in popular folklore in Bengali (Raja means king and Mantri is minister, Hobu and Gobu are the names). Normally we get everything in the web, however while researching for my book, written after I lost all my investments in 2006, I didnâ€™tÂ find much useful online references of the stupid king and his stupid minister.
The storyÂ goes like this. Two simple poor men, from one part of the world, started a journey to look for opportunities elsewhere. In their journey, they moved from kingdom to kingdom and never quite were able to get some decent money to even have two square meals a day on a regular basis. Then they entered the kingdom of Hobu and Gobu.
And they were amazed. Everything was opposite in this state. It was the state of abundance. Milk was cheaper than water, best quality food was cheaper than bread, and gold was cheaper than wood and so on and so forth. The two friends were very happy. They dined and wined to their limits and promised never to get out of this beautiful kingdom.
True, they also knew that everything was not right in that kingdom. However they felt it wonâ€™t affect them.
But as it happened in October 2008 or in 1929, poor luck got these two poor men arrested for a crime they didnâ€™t commit. And the king orderedÂ death penalty, knowing they were innocent as things were rather queer in that state. Somehow, the two poor men managed to escape and vowed never to return to that stupid kingdom again.
Would the Wall Street be the same again?
Wall Street professionals or war time criminals? Not all, but definitely a few. One may say that they didnâ€™t know what they didâ€¦but they did it. Period. They did it with othersâ€™ money and now they are being bailed out with taxpayersâ€™ money.
Do we still need financial intermediaries like banks, commercial banks or investment banks or mutual funds? Why not the Central Banks start lending money to the people directly when our society canâ€™t accept large bank failures? Why reward them with the interest rate arbitrage and also with the tax-payers money on top of the rate arbitrage?
Why canâ€™t the OPECÂ accept few other currencies? Why canâ€™t global trade happen without one single strong currency as has been the practice since the WWII? Why should Japan and Europe toe the American way of capitalism and market economy when they know itâ€™s a no winnersâ€™ game? How much more price are the JapaneseÂ willing to pay?
Do we need the S&P and Moodyâ€™s credit rating that downgraded certain Korean banks this morning again? Who rates the credibility of these credit rating institutes?
As many have been discussing, is it the beginning of the end or the end of the beginning? Just to protect American economy, the rest of the world is bleeding. Good that Europe and others are now talking about a new system. Back to Bretton Woods II? It’s surprising that the call for a change is emanating from Europe, and not from China. How would China, OPEC, Russia, Brazil, India, South Africa and Japan accept the alternative?
Does it present an opportunity to solve the long standing issue of economic imbalances? Or to solve it first, as many (including me) said earlier that let the fire be first doused. But the fire does not stop even when Bernanke et al. literallyÂ rain downÂ money from the helicopter. The same dollar, which gets its support from emerging economies as they buy US treasuries, is now recapitalizing Wall Street banks -Â who again are mostly long in US assets and are short in emerging assets!
The cost of the bail-out so far? Nearly $3 trillion or even more. On a per capita basis, it comes to $10,000/American citizens. And for a family of 3, itâ€™s $30,000.
If one takes the poverty rate in the US to be around 10-15%, it means nearlyÂ 200,000 to 300,000 dollars per poor family in the US.Â
How much of the world lives below $ 1 a day as the World Bank keeps reminding us lately?
Even on a global per capita basis, its $500/capita and $1500/per family. And taking global underprivileged population to be around 25%, it comes to $6000/underprivileged family. I know millions of families in India can get out of the poverty line with that money, as the Grameen Bank hadÂ shown.
Opponents may say that it’s not a bail-out. Government will recover the money (as Brown now cites the example of Northern Rock). Grameen Bank of Bangladesh is also not in charity, it’s in a business. One could have used same $3 trillion as a loan for the nearly 2 billion underprivileged globally. It would have generated sustainable demand, could lead to productive growth, and China would not have faced same uncertainties as it does now.
I know, and many have pointed out, that itâ€™s prematured to say that American way of capitalism and consumerism is coming to an end. They point out that it will be an end of the Dubai or Shanghai story as well.
IÂ admit it will be painful for not only Dubai or Shanghai, but around the entire world. And I am not least anti-American. Itâ€™s been the greatest of the society who has been most vocal of their own wrongs, time and again. They gifted the world with their innovations and ideology.
The United States of America – and its spirit – isn’t limited to the Wall Street alone.
Do we return back to the kingdom of the stupid king and its equally stupid minister again?
I quoted Schumpeter few times earlier. Here it comes againâ€¦
‘Can capitalism survive? No. I do not think it can.â€ Thus opens Schumpeterâ€™s prologue to a section of his 1942 book, Capitalism, Socialism and Democracy. One might think, on the basis of the quote, that Schumpeter was a Marxist. But the analysis that led Schumpeter to his conclusion differed totally from Karl Marxâ€™s. Marx believed that capitalism would be destroyed by its enemies (the proletariat), whom capitalism had purportedly exploited. Marx relished the prospect. Schumpeter believed that capitalism would be destroyed by its successes. Capitalism would spawn, he believed, a large intellectual class that made its living by attacking the very bourgeois system of private property and freedom so necessary for the intellectual classâ€™s existence. And unlike Marx, Schumpeter did not relish the destruction of capitalism. He wrote: â€œIf a doctor predicts that his patient will die presently, this does not mean that he desires it.â€â€˜
Did we senseÂ itÂ when policy-makers globally struggled hard to paint the Wall Street bail-out as the main-street bail-out? Where were those $3 trillion for the have nots of the world so long? I am very much part of both the main street and the Indian Dalal Street (Wall Street of India).
These are indeed unprecendented times.
Disclosure: I have long position in Tata Steel.