On currencies and commodities

Some times it feels like the surplus of  what we call news has numbed us and made us forget basics of economics and divorced us from our common sense and intuition. 

Why do we need commodities ? For making things and  for daily needs and survival  ! Why do we need  currencies ? To create a medium of exchange for buying and selling the things we actually need. 

Can we do without either ? No. Each has its due place. US thinks currencies and allied systems are all important. Russia thinks commodities are. There is a tug of war. Each of them have weaponized what they have.  If push comes to shove, we may be able to live without a global currency by using primitive techniques such as barter or an ugly currency system but we will definitely need commodities. Hopefully we won’t reach there but there are  many indications of it. 

Commodity industries have been vilified by markets leading to underinvestment for past two decades or perhaps more . Non democracies  or weak democracies export lot of commodities - Russia, China,  Saudi, Iran, Venezuela etc. Brazil is a question mark  and Australia is possibly the exception.  

If commodities are necessary and are getting weaponized, then in coming days they will have to be hoarded like forex reserves for food security and economic safety and stability. 

Thus the coming times will force to ask this question - Are commodities also real currencies ? 

In negative real interest rate scenario in a world underinvested in mining,  aren’t commodities with inflationary price structure possibly better than bonds  and sovereign debt of developed countries yielding very near zero?

Is it better for nations like India to idle some portion of their forex reserves in commodities  they are short of rather than in USD / Euro ? 

Like bitcoin and gold, commodities are also in effect  stores of energy values and capital usage . You need a lot of both to make say Aluminium , wheat or steel ! 

Stocking commodities you actually need is nothing new. Indian house holds stocked grains for whole year purchased after the harvest.

Marc Faber in a recent interview said that commodities such as food can vanish from shelves even whenever they are plentiful  He gives explanation of Argentina which produced plentiful food and was experiencing shortages. He  asked an Argentinian  why was this so and they replied that due to high inflation the farmer preferred to keep his money in the crop harvest form and sell whenever he needed money to buy other things rather than sell and enjoy huge loss of purchasing power by holding currencies. Thus wheat had practically become a currency ! 

In this emerging scenario, will some of central bankers wake up to commodities scenario and diversify out of USD and Euro? India could for example easily keep commodity reserve of copper,  potash,  oil, aluminium, etc. How will this trend affect commodity markets ? Will asset managers launch ETFs of key commodities ? 

How can nations diversify reserves into commodities without losing money in commodities  ? Buy when market prices are below cash costs at which substantial production will be wiped out to restore the price.  This may vary from commodity to commodity but is publicly available data. This will ensure that prices cant stay sustainably below our acquisition price of the stockpile / reserve for long term.

Decades of vilifying commodity industry has had its own results - under investment. Religious fervour in pursuing climate goals through supply side and not demand side have let to under provisioning of capacity for coming years . Just in time has led to lower inventory levels in the quest for investment returns over supply chain resilience. 

As post COVid demand returns and supply chains are disrupted , inflation is rearing its ugly head. Commodities are also getting weaponised as is everything from salads, cats to judo belts and this is further leading to slowing down of production, shipping and payment systems. 

Weaponising currencies by confiscation without due process also has quickly lead to weaponizing commodities in similar style and manner. Once strategically important commodities are weaponized it’s no longer about the cheapest supplier. It’s about self reliance , hoarding , stock piles etc. it’s a new world ! 

The cost of weaponized commodities is no longer it’s cif price. It’s the opportunity cost of of lost production  &/or lost sales. When consumers merely have  availability of commodities  in right time and quantity, they will enjoy huge consumer surpluses ! 

In this scenarios commodities are already showing all signs of becoming  proxy  currencies. Inflation expectations are getting  reset and it will be difficult to put the genie back in the bottle neck without substantial change in attitude to energy production esp fossil fuels and higher interest rates. 

In coming years, outsourcing in food and fertilisers will look like Marie Antoinette designed the policy 

If the two sides don’t see the value in each other the nations with the currencies won’t have the commodities for daily life and the nations with commodities won’t be able to exchange them for other things they need.  The makings of a very large recession !

India's contribution to Efficient Markets Hypothesis

"The efficient market hypothesis (EMH) or theory states that share prices reflect all information. The EMH hypothesises that stocks trade at their fair market value on exchanges. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information."

There  two sides - broadly the academics  and the active investors who vehemently disagree on this hypothesis. The former  who have indeed proved that most of the market participants can't beat the stock market and hence go on to say that market is efficient. Businessmen and thought leader like John Bogle went a step further and built on this idea in his thesis on the topic of investment performance  and went on to make a hugely successful venture Vanguard which now manages about USD 6 trillion and counting on the basis of his thesis thus validating it an a way no one can really deny it.  On the other hand,  we have people like  Benjamin Graham and his students like Warren E Buffett ( one among many of his students but possibly the foremost) who made it their life time goal of exploring every inefficiency in the market to create superlative returns over such a  long period that it cannot be said that the market is efficient.

The people who propagated both sides of these ideas  are not fools. They are highly intelligent people who have gone on to produce great value out of their idea. But the issue is that the academia is still at loggerheads and this issue is still  largely unresolved leading to confusing things being taught in MBA  classrooms to future practitioners. Academia did try to reconcile  successes of the polar opposite approaches of Bogle and Warren Buffett by coming up with strong, weak and semi-strong  efficient market hypotheses but there needs to be a better explanation.

What can India add to the EMH ?

India is an old civilisation. It reached its earlier zenith much before the industrial revolution and evolution of the stock markets and has been playing catch up with the West in thinking on industrialisation and capital markets. 

However Indian logic is old, more complex and well established and has stood the test of  time and it can explain complex things significantly better than Aristotelian logic. In this blog, I shall be applying this to a highly debated issue  among academics, researchers, economists, investors and businessmen. 

This is unresolved in my opinion not because of lack of evidence because of shortcomings of Aristotelian logic.  In that logic, either something is true or it is untrue. It states that there are only two possibilities- white or black, excluding both or neither.

"Figure 1: Venn diagram illustrating binary logic

"

What India can bring to  improve the Efficient markets hypothesis is not more evidence for or against, the West has already done enough of that, but superlative logic and logical systems which can explain more complex phenomenon 

The four sided negation - Chatuskoti can explain Bogle and Buffett and give a better, richer and nuanced  understanding of stock markets and Efficient Markets Hypothesis. Here is an excerpt from a very good post on this  topic and you can read more here on  Chatuskoti

"

Figure 3: Venn diagram illustrating Chatuskoti, or the 4-sided negation.

This 4-sided negation creates four distinct zones in the universe Ω. With increasing knowledge, our understanding of all these 4 zones increases, but the zone of “Neither A nor Not A” may remain forever. This is because we may predict that we don’t know something about the universe, but we may not be able to express exactly what it is that we don’t know.  Please note that this limitation is due to two things: (1) our understanding of the world and (2) the limited expressibility of language. Even if we allow humans to be omniscient (in whatever finite context for Ω specified by our problem), the ambiguity in the language may never be resolved."

If we apply Chatuskoti  and use the data already available, we will come to the conclusion that the market is thus both inefficient and efficient at the same time. Let me explain.

The Market is inefficient for two categories of people - those who can identify reasons why some stocks are seriously wrongly valued - arising from industrial, economic , behavioural, legal or policy  reasons and find  ways of making super normal returns from it, in a fully legal manner. Not surprisingly, it is the largely the collective effect of the actions of these people  that make the market efficient. 

Another is those who can access such people and retain their services at such a fee that a portion of the returns arising from market inefficiency is still left for them after paying their fees. It should be kept in mind that in any society such people are a very small minority and not too many people can indeed beat the market because as the number of active investors who set out to reduce the inefficacy increase the inefficacy reduces drastically. 

For rest of all market participants who fall in neither of these categories, the market is efficient and they are better off by not trying to beat it.

So if some one asks you "Is the market efficient ? "- it  really depends on the person asking. For example , if you are John Doe or the Common Man from RK Laxman cartoon it is efficient but if you are student of value investing and possibly were lucky enough to study in Heilbrunn Center  or under Prof Sanjay Bakshi and can put to practise what you learnt  it definitely isn't ! 

Thus the stated position should be that EMH is both true and untrue.  It is inefficient for some kind of players with the requisite skills/competences or for people with access to such skills/competences at a right price and highly efficient for the rest of those who are really in one way outsiders to the game. The highest value to society from this nuanced understanding is that EMH should neither be discarded nor taken blindly and players should take actions appropriate to their circumstances.

It should not be discarded, as discarding it will mean you are giving very wrong ideas to a numeric majority who have no access to those who can beat the market up a garden path.

It should not be accepted blindly as it will mean you are dissuading people with real skills whose work can a long way in actually reducing the inefficiency in markets on a continuous basis  and keeping it efficient by telling them it can’t be done.

This nuanced understanding will also help us understand the role of active and passive investing in markets. Paradoxically the parts of the active investing universe that make supra-market returns by constantly exploiting inefficiencies go towards making the markets more and more efficient and make passive investing work ! 

In my opinion, it is not either or but a right combination of active and passive investing that will make markets efficient. 

In one way to can be said that sensible active investors are really the ones keeping the stock in check by constantly following process of selling overvalued assets and buying undervalued ones and ensuring that bubbles don't build in pockets of stock markets and may-allocation of capital doesn't occur.

Lastly the role of such active  investors and their social relevance is probably in making it more and more efficient. This can go long way in ensuring that  people without requisite skills don't waste their talent and time seeking their fortune  in the stock market and actually spend the time producing the things of value in society instead of speculating  without any understating of the social, economic, or business rationale and relevance of what they are doing in the hope of getting rich quick. 

Before you go, here is a sculpture which is said to be a pictorial representation of Chatuskoti. You can decide it if a bull or an elephant. Is it neither or both?

Bull and Elephant statue at Thanjavur Airavatesvara Temple

A new Pune

Pune is a city with lot of land which is being used the same manner as it was more than half a century ago. The city has grown and become a modern metropolis and many villages which were the edge  city of now become the centre of the city. Pune is now getting a transportation infrastructure of metros ring roads  befitting metropolitan area with perhaps more than 5-6 million people. There is an opportunity in this transformation to envision the future of the city for the next 50 years and reuse some of the land also accordingly. 

Agricultural College as a Central Business District 

Very prime land near the nerve centre of the the metro network where almost three metro lines Criss cross is being used for an agricultural college. 

The Proposed Pune Metro Rail Network

There is no ecosystem for agriculture in Pune city. There is hardly enough water even for its residents.  It will be difficult even for the students to practice what they learn or to interact with agriculturalist or farmers. What was once the right place place for agricultural university is perhaps now a misfit. Areas like Solapur on Marathwada or Vidarbha  which face challenges in creating a strong agricultural economy for which there is an a viable market and which is sustainable environmently. Need this college more than Shivaji Nagar Pune.  There is a strong case to to shift this university to the epicenter of areas which require speedy thinking and solutions for creating the second green revolution for Maharashtra. 

Maybe one idea may be to shift it to Baramati !

Similarly there is a need to re envision Pune and create a city in which the traffic flows and people movements are balanced. Having two three pockets like Hinjewadi or Kharadi where few lakh people commute everyday in one direction is not a recipe for a balanced development. No transport system can take skewed loads. The mistake of creating Nariman Point at one edge of the city should not be repeated. It simply destroys the life of one generation of people by eating up all their personal time in commute. It is necessary in Pune to create a central district where lots of work can be done by just walking around or by simply sitting on a small bus or an electric vehicle. Perhaps it's time for Pune to learn from what Kuala Lumpur did it and create a  City centre.  There was a racing track in the middle of Kuala Lumpur rather the city grow so much that the racing track came to be located centrally. When Kuala Lumpur wanted to reinvent itself it took up this racing track and converted into the Kuala Lumpur City Centre  with modern amenities.

The interests of entire KL was put ahead of just the Selangor  Turf club members and the results are there for the whole world  to see. Selangor Turf Club was an institution of the British Raj in Malaysia meant for the amusements of the British elites. Set up in 1800  it definitely appears to have become  an elitist institution by the time Malaysia decided to use its land for the greater good.

I think it is time to do the same thing with The Agriculture College  at Shivaji Nagar, Pune. It has about 1000 students and  the college and the farm appears to cover an area of about 100-150 acres. The College is between 200 metres to one kilometre from three metro lines- the locations for which have already been decided. With this infrastructure Shivaji Nagar would become the hub of the city and would have very high public transport connectivity.

The Government should  pay fair compensation and take over the Agricultural College and build a very modern city centre on the entire land. If government wishes it will also take over some portion of the military land abutting it and add to this areas. This will create both flow into the City centre and out of City centre using the metro rail network. . For example the line to Hinjewadi will not be like the Virar to Nariman point line,  having traffic only on one direction.  This line can bring in people to the city centre from suburban residential areas and  and can take people from the City centre to Hinjewadi. Utilisation of the metro network and the roads will be high on both directions hereby making life much better for citizens. Viability of the metro network can be substantially altered by such a development as its capacity utilisation will be high along every direction and along every line of the network.

Optimisation techniques such as  theory of constraints also suggest that the greatest benefits to any system arise when the usage of suboptimal resources is increased drastically by removing the constraints that limit their use.

The agriculture University will also benefit tremendously by being shifted to areas in which agriculture is the prime business or occupation.  It will get a place of importance in that area and will be in the right in the middle of problems and can find solutions for these problems.

 If this land parcel is developed as a dense CBD then one could expect at each acre would house 800-1000 employees. This new City centre will be very near to the dense but traditional parts of the Pune city and will be an excellent employment generator for the areas in which a large portion of the people live thereby reducing the load on the transport network. The Bandra Kurla Complex in Mumbai could serve as a precedent and a base upon which Pune could learn and develop this area

Raj Bhavan Pune

The White House which is the official residence of the US President, arguably the most powerful political leader in the world, is only 18 acres.  Pune is not even the capital of Maharashtra.  Raj bhavan occupies very large tracts. It is  obvious that these were created with very different idea of projecting the power of the rulers of those age.  A reading of this (Terraces of the Raj) will make it amply clear of the nature of the disconnect of this building with modern India ! Since no Governor of India is new to its weather and we now have air conditioning in buildings and cars these summer  Raj bhavans have lot all its relevance.

The Raj Bhavan at Mahabaleshwar is even more of an anachronism. It is not relevant to this discussion except to highlight this point ! 

India has progressed a long distance from the British Raj and now there are no rulers and there are now only people representatives who are there to serve The people representatives need to be accessible and not appear  disconnected  to the people they are  elected  to serve . We have to evaluate whether the people representatives need to have such large tracts of land which are hardly used in the centre of the city. This tracts of land today can be used for creating centralised business districts in which public services for which there is a large volume of traffic such as stamp duty registration courts can be housed on this premises. Incidentally Raj Bhavan also falls almost at the edge of one of the metro lines. . This may appear to be a revolutionary idea today but logical one and it should be  evaluated on the merits of the idea rather than it's being a divergent from the past concepts that we have run with so long.

It is very classist and elitist to think that only farmers land can be acquired for alternate uses and only their land can be envisioned for a different way a of land use. To be fair every land should be open for such evaluation and should be available to the service of the society upon payment  of a fair compensation. This should be true of farmers land or the agriculture University or the Raj Bhavan. To say that the right to property of the President or the Governor is different from right to property of  all citizen is to make a mockery of the constitution. The time has come to have an open constructive  debate about these ideas.

I am not an urban planner but as  an user of various city infrastructure and having lived and travelled and seen some amount of cities, I thought that we should learn from the solutions other cities came up with when they faced similar problems.  Intelligent adaptation of good ideas is actually good thing and hence I think this idea needs to be put out in public domain and discussed. Its flaws drawbacks could be looked into and fixed and, if  the idea is found a viable one  may be taken up for implementation.

Banaras and Kumbh my first hand experience

I recently had a chance to visit Banaras and Kumbh for about 6 days. This is a summary of my experiences there. I had gone there to attend the Pravasi Bharatiya Divas  (PBD -2019) and look around Banaras. The visit to the Kumbh Mela happened serendipitously.

I had come to Banaras almost 18 years back to assess if the Taj group should buy the Nadesar palace, a very large piece of land with a small palace on it. At the time I did visit the Ghats and the Vishwanath mandir  and its precincts and was horrified in the way in which this city was being managed. Air connectivity was limited and the airport very basic. Nonetheless it was evident even to  me who was merely an inexperienced 28 year old junior manager then that the time will come for this holy place. So we recommended to Taj to take over the Nadesar palace and maintain it is a boutique hotel and expanded to a very large deluxe hotel when someone will come to give the city its due. So we structured a lease instead of an out right purchase where in the lessor would get share of the revenue for whatever hotel that would come on it for a long time. The local people told me Nadesar Palace is doing very well now and charging upwards of Rs 50,000 per room night on good days ! 

As I landed I found a very modern airport with excellent connectivity to the city  that seemed capable of dealing much much more than the 18 flights that land now  daily (per the local driver). The airport looks good to take as much as 100 flights a day ! 

Although I stayed with some with some friends I did visit the tent city made in Banaras, for the overseas guests who had come to attend the PBD,  to tide over the shortfall in hotel rooms. The arrangement were outstanding and I could not have believe that this is the same Banaras I visited 18 years back.  The locals I stayed with were more astounded with the PBD event, the tent city and the ring roads. 

Banaras has now  many new facilities including a Trade facilitation centre which can hold many trade shows conferences  This is built in the village where Kabir lived (photos below). 

Once the PBD event was over,  I was eager to see Banaras with my own eyes. Banaras has now  uninterrupted power. In localities where the demand exceeds the capacity to distribute power, temporary arrangements have been made supply more power in those areas in short no excuses where tolerated. Here is a photo showing how the transformer capacity has been boosted using jugaad. This is found in many places and is not an isolated instance.

When I spoke to the locals they said that their  diesel bill for generator has come down to zero. The savings for business establishment was quite significant especially for a low cost City such as 

Banaras and it seemed to have improved the air quality also.

The first thing that struck me as I walk around the crowded areas was that there was no stench anymore. Conservancy staff where cleaning the streets at much greater intervals. Large proportion of the cups, kulhads, plates were being thrown properly in their designated areas. 

While Delhi still wondering what to do to reduce, its pollution Banaras is moved on and is using electric vehicles for mobility a very large portion of these vehicles are electric vehicles which more than suffice and  ideally suited for the small lanes and roads of old Banaras. Photos

The Kashi Vishwanath temple is being introduced to using modern temple management techniques. This ensures that there is more order and the revenues reach the temple rather than the middle man. Bank of Baroda has opened  a facilitation centre near the temple where one can go and pay the fees for any of the pooja or for fast darshan of the temple.  There are priests who take you into the temple and complete the Darshan and bring you  back to the facilitation centre. The government has recognise that the temple complex is too small in relation to the number of people who like to visit this temple and has taken cognizance of the risks of pushing through more people into such a crowded areas and also the inability of the elderly and the infirm to be able to get Darshan of  Kashi Vishwanath so they have acquired land around the temple and are in the process of constructing a large temple complex which will make the entry of people into the temple a very organised matter. Once these changes are made Ma Gange can be viewed from Kashi Vishwanath temple and there will be a long corridor from the temple to the river and all facilities will be there inside the temple for the pilgrims.

https://timesofindia.indiatimes.com/city/varanasi/soon-access-kashi-vishwanath-temple-directly-from-ghats/articleshow/64072869.cms

It struck me that we need an institute of temple management in India today along the lines of IRMA which was setup to create specific management knowledge in the realm of rural and agricultural management. Pilgrimage and temple economy maybe equal in size to the dairy economy of India or even larger despite the neglect, benign or otherwise for the past 70 years, and requires a specialised body of knowledge for managing the same. There is a serious anomaly in the way in which tourism statistics are computed in India due to the fact that India is practically a continent masquerading as a country (more in this blog).

Expansion of the temple complex may seem like a small matter but the addition of the few acres and superior  management of the movement  of pilgrims and their requirements could double the economy of Varanasi along with the additional infrastructure of the airport and road connectivity.   

I went round the ghats to see for myself if indeed the river is clean in most regards. There is no floating  debris  and no odour and at the Dashashwamedh ghat you could even see the stones in the river during such a crowded season. 

You can see that the waters are getting cleaner. Here is a photo of water collected from middle of the Ganga.

I also visited the Manikarnika ghats where the funerals take place and found that arrangements have been made for proper funerals at these Ghats. Nothing is thrown into the river and seeing this I was surprised that how no one had done this before considering it was such an obvious and simple thing to do. There is something at the funeral ghats of Banaras that makes you realise how transient life is!   Visiting these Ghats was one of the best experiences of my visit to Banaras.

s

At the end of my trip I did get a chance to attend the Kumbh Mela and decide to extend my trip by one day. The road from Banaras to Prayagraj is being made into 4 lane divided highway which  will perhaps cut the commute time from 3 hours to one and half hours when completed. Work is going on at a frenetic place for its completion ! 

Arrangements at the Kumbh were simply outstanding. Law and order, electricity,  roads and signages,  water and waste management and connectivity was planned and executed very well.  Indrapastham tent city by UP tourism has well appointed tents with very good facilities to ensure that Kumbh attracts high end visitors also !

In the years to come the Kumbh will drive the economy of the places where it is held  and in the year it is held economists will say that the Kumbh economy cannot be compared to non Kumbh years  and will want to remove the Kumbh effect on the economy of that region ! Some visuals ..

The morale and the effectiveness of the Uttar Pradesh police force has gone up a lot among their own citizenry and more so among the tourist and visitors to the state. This to my mind is a very deep transformation. 

During my many interactions with the the ordinary people it was clear that they now understood the difference between governance and lack of it, leaders who could deliver and those who can't, and between lip service and walking the talk. In fact many of the common people were cribbing that government was insisting on correcting many of the anomalies and implementing the laws in letter and spirit very strictly.  It seemed to me that change in this society was now limited to the pace at which society will adapt to moving to rule of law...

It seemed that this society was now collectively introspecting as to price paid for their past choices as a collective and whether they needed the rule of law or the rule of "their man" having  evidenced the latter for better part of last thirty years ... 

In conclusion  I found a new Uttar Pradesh which is confident  and capable of finding solutions to problems which had kept them behind.  No doubts there are lot of problems and it is a long road ahead but the society seemed to have found the appetite to handle  what's ahead ... as a person who has observed Indian economy for last two and half decades and a participant in India stock market it seem to me that the road to India's social, political, and economic future clearly nows run through Uttar Pradesh ! 

Before you go I leave you with more visuals of the beautiful ghats ! Ganga maiyya ki Jai