Financonomics

 “I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I’ve seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not.” – As a hamburger rises in price, so does the price of the shares of the company that sells the hamburger. Inflation raises the prices of both commodities and assets, and shares in a company represent ownership in the company’s assets. Inflation is the friend of people who own assets. Inflation is also the enemy of the people who own cash or bonds. Why? When the Federal Reserve prints money and circulates it into the economy, interest rates go down. This drives up the prices of financial assets such as stocks and real estate. But the Fed’s printing of more money also means that our dollars buy less and less, which means that things cost more and more. Fifty years ago a hamburger cost $0.40, now it costs $7; and a house that cost $50,000 in 1965 now costs $500,000; and the Dow Jones Industrial Average, whic...

  “I do not think you can trust bankers to control themselves. They are like heroin addicts.”  – Heroin addicts can destroy both an individual and his family. Bankers can destroy themselves and an entire nation’s economy. Bankers are entrusted with an enormous amount of other people’s money and should be conservative in investing it, but what often happens is that they use the money they have been entrusted with to leverage up—borrow more money—and then speculate with it under the guise of “investing.” They do so because if they win the bet they get to pay themselves millions of dollars in salaries and bonuses, all along telling the American public not to worry about the leverage because professional risk managers have it under control (the same professional risk managers who just happen to be the ones who destroyed their Wall Street banks in the subprime mortgage meltdown of 2007–09). The only thing that can stop banks from becoming excessively leveraged is heavy regulation b...

 Random thoughts 1. Wealth can be of two types - physical and financial. Financial wealth is generally in the form of currency, stocks or bonds. Value of financial assets is dependent on underlying future cash flows and discount rates. Value of physical assets though is generally stable , for example, a land remains land forever if not valued in monetary terms but when the same physical asset is valued in monetary terms can see it's value fluctuating.   While in earlier days, people used ro have assets in physical form such as land or gold. But with the introduction of fist currency, people have started investing in financial assets. But ultimately any investment in financial assets is somewhere investment in physical assets only. Suppose you invest in stock or bond. The investee uses the money to invest in building factory or plant & machinery. 

Today just finished reading on Wework titled 'Billion Dollar Loser: The Epic Rise and Fall of Wework'. A very interesting read. My key takeaways are as follows: - Masayoshi Son primarily uses his instincts for due diligence. Masa liked to say that while his team might perform months or diligence on a company, "my first instinct in the first few minutes is sometimes more meaningful. He often compared his deductive powers to another guru: "Yoda says use the force. Don't think, just feel it." - To meet NASA's growth expectations, there was literally not enough real estate in West Coast cities to reach those numbers. - Wework's business model was leveraged bet on flexibility. As compared to traditional real estate business, Wework would take a building on long term lease basis, spend significant amount to upgrade the building to make it desirable office space for GenX and GenY workers and then offer the office space in small units and on short term contra...

  The greater fool theory states that it is possible to make money by buying securities, whether or not they are  overvalued , by selling them for a profit at a later date. This is because there will always be someone (i.e. a bigger or greater fool) who is willing to pay a higher price.  If acting in accordance with the greater fool theory, an investor will purchase questionably priced securities without any regard to their quality. If the theory holds, the investor will still be able to quickly sell them off to another “greater fool,” who could also be hoping to flip them quickly. Unfortunately, speculative bubbles burst eventually, leading to a rapid depreciation in share prices.

 Just a randon thought. In Oct 2020, headline inflation surged to 7.6%, primarily due to food which has increased to 11.1%. Even CPI excluding vegetables rose to 6.4%. Core inflation rose to 5.5% Y-O-Y. On positive side, IIP grew by 0.2% in Sep 20 (Mining which has weight of 14.4% grew by 14.4% and electricity with a weight of 8% grew by 4.9% which manufacturing which has weight of 77.6% declined marginally by 0.6%). Compare the inflation number with yield on 10 year Gsec (6%)  and 91 day t-bills (3.17%) which means that money invested in safest securities will yield negative return. But you have to factor in the fact that economy is expected to degrow by 8%-9% in the current fiscal year and hence on nominal basis, the yield should have been negative territory (inflation plus GDP real growth). From that perspective, return on government securities are much better. 

Kyam Capital, one of the minority shareholders in Vedanta Ltd. has asked the company to recall a $956mn loan to units of its parents (which represent 40% of the market value of Vedanta Ltd. equity held by minority shareholders.  The loan represented an improper transfer of value away from minority shareholders to Agarwal controlled Vedanta Resources.  The unsecured loans were extended mainly as cash management activities for better return, as per company. Vedanta Resources faves combined $1.7 bn in debt maturities next year. Basis this, following were key points raised by Kyma Capital: - Money is being loaned to a near insolvent parent. This has been confirmed by both Vedanta Ltd. as well as Vedanta Resources auditors. - Second, this is a related party transaction with a controlling shareholder which should naturally have a higher level of scrutiny. Instead the Vedanta Board seems to have been asleep at the wheel. - It seems Vedanta was directly or indirectly funding it's own ...

Excerpt from a conversation with S Naren (CIO ICICI Prudential MF) 1. Central Banks across rue globe pumped in more than $28 trillion when debt , equity and commodities markets crashed in March 2020 after the coronavirus outbreak. That gave rise to a "Central Bank Bull cycle" 2. Entire amount so far has gone into assets, leading to asset inflation which makes everyone feel rich and happy. At some point in future, that money will seep into prices and cause price inflation, then the day of reckoning will come. 3. Individual investors can survive this using disciplined asset allocation. Diversified holdings in equity, debt and gold are key in a central bank bull market and investors should not get drunk on leverage and think this bull market will go on forever. If an investor is caught in only one asset class when the inflation turns, they will be in trouble.

Reliance-Amazon-Future Retail saga shows how legal technicalities can stall business transactions in India. Future Group saddled with huge debt of Rs. 15000 crore and cash inflows stalled due to pandemic/ lockdown, had agreed to sell its retail, wholesale, logistics and warehousing business to Reliance Retail at a value of Rs. 27,513 crores. This would Reliance a significant edge in retail business and it was not pleasing to Amazon. The deal has now gone into legal labyrinth and we are not sure how is this going to unfold.  Amazon had last year acquired 49% equity stake in Future Coupons Ltd.- a promoter entity of Future Retail Ltd. and as per shareholders agreement, Amazon was granted call option allowing it to acquire all or part of promoter's shareholding in Future Retail between 3rd and 10th year. Further Amazon's approval was required in case of any transfer of Future Retail's assets, amendment of AOA or issuance of share capital in contravention of Shareholders Agreem...