Mining for coins..and passing the parcel..

In the olden days many made their fortunes in mining for precious metals. In the past decade a new kind of mining has taken the world by storm to create a brave new world of pioneers willing to risk aplenty in search of their holy grail in hitting the motherlode. This mining is called "crypto currency".

So what is this and how does it work?

Crypto currencies are digital codes resulting from a mathematical formulae which not only limits the number of codes that can be "mined" BUT also provides three layers of security so that the ownership of the person through a complete recording of all the transactions on each code is done. Hence it is with a bit of trepidation one wondered how some hacked pieces of code can be "transacted" away in future as the last transacted owner will not be the "seller" hence invalidating the sale. Unless of course it was a direct theft where the uninitiated owner was "conned" into "parting" with his "code" not being aware of the importance of the application of his password.

So how does this work actually? A mathematical formulae creates the pieces of code and the creator of this then releases the same through a token (similar to a pre-ipo sale) sale. Once enough noise is created, then the same are allowed to be bought and sold and the price being a direct function of demand and supply, the price of the piece of code varies. The most famous of these cryto currencies is "Bitcoin".

So is this a good thing? Well if governments were to replace all their cash with crypto currencies, then they would no longer be able to print fiat money as they deem fit, the run up or down of a currency will be magnified and this would destroy economies faster then you can say "hey". For eg., if the government has to restrict money supply, then they will have to "transact" the currency which due to their large buys/ sells will directly impact the price of the currency itself. Also the USD as the defacto global currency will be hoarded leaving hardly anything for the people within the country to transact with!!

Coming to the present, no country has legalised crypto currency as "legal tender" - hence the author is amazed at the concept of people buying something which is nothing more than a piece of digital code, which cannot be used to pay your property taxes or your medical bill!! The chinese government levied a transaction tax, made a bunch of money and then when they had their fill, outlawed the same. This is the fate that is going to befall all crypto currencies.

So you may trade and make money BUT make sure you are not holding the can when the music stops.. also dont forget the last time the financial markets fell in love with a mathematical formulae, (gaussian formula) we had the 2008 crisis.

Bail in, bail out and bail bonds... is there a difference?

Recently i got a couple of forwards on whatsapp regarding a proposed bill by the GOI based on an article here http://www.thehindu.com/opinion/op-ed/banking-on-legislation/article20005363.ece .

The whatsapp article is reproduced below:

*This Tsunami will wipe out your money lying in the Banks*

I now get on with my "banking Armageddon amendment" that is under way. Read the post and all the links that I have provided here and you will understand as to how the "kitchen sink" is thrown at you by this Govt. 

1. Banks, the world over, get into problems, when the loans advanced by them are not repaid on time, by the borrowers. When the economy is in a slow-down, many of these borrowers go belly up and become NPAs. 

2. Normal banking prudence suggests that the banks should auction the assets given by the borrower as security, at the time of taking loans. Generally banks insist on 150% security of the loan amount. For example, if a borrower wants Rs.100 as loan, he has to provide security worth Rs.150 before availing the loan.

3. However, for big borrowers, every norm is flouted and when they become NPAs like that of Anil Ambani in Telecom, you are talking of outstanding dues worth Rs.45,000 Cr. Now the question is, who will replace the funds, that were loaned to him.

4. Today the NPAs of Indian Banks, amount to over Rs.10 Lac- Cr. Jaitly or Urjit Patel do not give the actual figures. To resue these banks, the Govt. has 2 options. They are called "bail-out", which means the Govt. uses the taxpayers' money to fund the bank. This is very wrong but it has now been happening, quite regularly in India,

5. The other monstrous option is called "bail-in". The is the term that forms the very pivot of this post and has never been resorted to, in our country earlier. Now what is "bail-in". The dictionary meaning of "bail-in" is - "rescuing a financial institution on the brink of failure "by making its creditors and depositors" take a loss on their holdings". A bail-in is an internal process and is the opposite of a bail-out, which is external and handled by Govt. with budgetary allocation. 

6. You just deposit your money in a bank as a "Savings Deposit or Fixed Deposit" to use it whenever you want. You have no clue as to how well the bank is managed. Now Modi & Jaitely have got a bill approved by the Cabinet called "The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017" and this has now been referred to a Joint Parliamentary Committee before getting it passed in the Parliament.

7. This bill covers "bankruptcy of businesses such as banks and insurance". Financial resolution includes solutions for banks facing ‘imminent’ risk to their viability & their very existence, depending on their capital, asset worth and quantum of NPAs.

8. Now comes the wily Jaitley into the picture. This Bill also introduces the provision for a “bail-in”, whose purpose is to provide capital to absorb the losses of a bank and ensure its survival. Here, survival does not mean safety of depositors’ money, but restoration of capital of the bank. The bail-in empowers the bank to cancel a liability owed by the bank or change the form of an existing liability to another security.

9. In simple words, it means that your savings account balance of Rs.15 lacs, can be reduced to Rs.1 lac, which is mandatory by law. Or they can convert your savings account balance of Rs.15 lacs to a Fixed Deposit, repayable after 5 years, giving you of 5% annual interest. 

And you can nothing about it. If you had kept that money for your daughter's marriage, it is bad luck and you cannot access your money for the next 5 years. View this link, to know more. http://www.thehindu.com/opinion/op-ed/banking-on-legislation/article20005363.ece

10. A question may arise in your mind, if such things happen abroad. Certainly yes and in a big way. Cyprus was the first country to the face "bail-in" in 2013. The depositors lost 47.5% of their savings in phase-1. They also had a phase -2. See the report from Cyprus Mail, which screams "Lenders set Bank of Cyprus bail-in at 47.5%" View the link. http://cyprus-mail.com/2013/07/28/lenders-set-bank-of-cyprus-bail-in-at-475/

11. After this, the G-20 Nations, comprised of Nations that include US, UK, Japan, Germany, France, China, Australia, Canada and others have officially approved this process. Incidentally India is also a part of G-20. View the link. https://www.nestmann.com/its-official-the-worldwide-bail-ins-are-coming

12. When the banks make hefty profit, you don't get anything but when they are into losses, "suppliers & depositors have to lose their money. And the heartless duo of Modi & Jaitley have come up with yet another brutal aspect. Just unbelievable. 

13. To recover the money from the defaulters, there is no attempt so far by the Reserve Bank of India to blacklist these entities from getting further loans or prevent their managements from retaining a majority equity stake, as penalty for the huge haircuts (writing off loans) being taken by banks. Ambanis & Essars can go away scott free and we depositors have to clean the toilet. 

14. In a nut-shell they are now trying to shift the responsibility of rescuing the "sinking banks" from the Govt. to the Suppliers & Depositors of the Bank. The borrowers can go on a fishing trip. Trust in Banking Industry would be decimated. People would gradually close all their bank accounts and keep their cash under the bed. Bloody madness. 

Share this extensively thru' every social media. This bill should not be allowed to become an act.  

FB link :https://www.facebook.com/b.r.muralidharan/posts/1615181888538789

LETS NOW look at the article in detail and see if the fear generated is real or just political drivel.. (after all the writer is a AAP supporter)
Points 1-4 talk about the process of crony capitalism which has been the bane of Indian economy ever since the Congress took charge in '47. So tying in this history with the Modi-Jaitley combo is just hilarious.

Points 5-9 is about the FRDI bill - A detailed analysis of this bill is a point for a separate blog, BUT suffice to say this is a bill for tackling insolvency in the Financial sector. (Non-financial insolvency is covered by the 2016 insolvency code). This is a very responsible bill and has been trivialised with some fear mongering as a result of the 2008 financial crisis. For eg., let us understand what happened in Cyprus. It was an economy possibly the size of east delhi which made it its business to compete with other tax havens and hence ended up with huge amounts of foreign money which needed to be deployed to give handsome TAX FREE returns to the worlds rich who are allergic to giving taxes in their respective countries. That the only known case of "Bail-in" happened here was possibly aided by the fact that the majority of the money in cypriot banks belonged to russian oligarchs. If one really applies ones mind, all insolvencies result in total loss, a bail in gives you an option to recover your losses BUT over a period of time. The GOI used a bail in for the UTI fiasco and the SUUTI has given positive returns in this case to the person who wrote the cheque to cover the losses ie the GOI. To cut a long story short there was a lot of hue and cry when the 47.5% haircut was applied on deposits over 1,00,000Euro BECAUSE there was no law in place to tackle such an eventuality. This government wants to educate the public that such an eventuality is possible and hence there is an ever present risk of loss of money in case of insolvency of a bank, insurance company etc etc. In a sense one should be happy for such fear mongers as without them this education of the public would be incomplete.

Point 10-13 - Talks all about the issues that caused the 2008 financial meltdown - is even one responsible person in the financial and political world willing to say that the same situation exists today. IF so then the central banker of that country is to be taken to task asap.

Point 14 - talks about drumming up support against the bill. If not this then what? as usual whether it is the leader of the AAP or its followers, they just shoot and scoot and are prime contenders for bail bonds..

For some other news on the FRDI - The unions of Public sector banks/ insurance companies are upset as they believe this bill will put an end to their monopoly on inefficiency and hence are against this bill.

Will leave you with a footnote to ponder over - would you rather know what would happen to your money in the event of a financial tsunami OR find out like the poor depositors in Cyprus found out AFTER the said event. I am sure we all know the answers to that one..

Shinkashen .. all aboard..

Mr Modi's dream project of the bullet train is finally here. Though personally I would have been happier if the existing network got faster, from the average speed of 49kmph across the various varieties of trains, and if they ran on time and without accidents.

Anyways coming to the Bullet train. Its critics have the following to say:
1. The debt will be huge and will sink the future generations of India in a Debt trap as the Yen strengthens and the Rupee Depreciates.
2. 4-5 more such projects across the country and we will be in a certified debt trap right now and not later.
3. Finally, the cost of 110000 crores for the project is the amount of money allocated in the rail budget towards expansion and safety by the NDA govt!!

Now for some numbers:
Current trains...
On an average the cost recovery from ticket sales is only 57%. What it means is that if today it costs 850 from chennai to delhi ie 2127kms, (0.4 Rs/Km) it should be raised to 0.7 Rs. km or Rs.1,491/- to recover just the cost!! - Average speed of train - 65kmph. (ie 30% premium fast train on the national average!!)

Proposed Bullet train:
Total cost - 110000000000
assuming 10:1 debt:equity we have:
INR equity -                    1,10,00,00,00,000
INR Debt -                      1,10,00,00,00,000
JPY Debt (INR Equiv) - 8,80,00,00,00,000

28 year historical Yen-INR movement shows a 5.85% per year CAGR depreciation of the INR. But the JPY has depreciated from .6693(aug'13) to .5786(sept'17) ever since Modi was announced as the PM candidate. This is very significant.

So the capital cost increase and the interest payment increase due to this is priced in and over the 5 year construction period the increased costs are 22,470 Cr. (It will less than half of this as i have assumed the entire JPY is drawn on day one).

Now each train can have a minimum of 8 cars and a maximum of 16 cars with 78 people or thereabouts in each car. Assuming we start with 15 trains in each direction per day and a 90% capacity utilisation we have a total of 33696 seats sold per day.

The increase due to the rupee depreciation at historical levels will require a 1.5 to 2% increase in prices every year for 50 years, which means the ticket price will double from the government launch estimate of 3300/- to 6600/-. If one adds the general price rise to this, this ticket cost will have to add another 100% ie taking it to 9900/- +

Working out the above we arrive at 2200 per seat with a 9% ROI on total cost which includes the equity, INR debt, JPY debt with interest and the expected fall in the INR vis vis the Yen. To the above we add 50% of the above cost as the cost of maintanence, staff etc etc. this results in a ticket price of 3300/- to start with for a distance of 500kms. cost per km is Rs.6.6/-

Road Comparison
Toll road costs are today at 1.25 per km. (you still have to add the cost of running the car ie 5-7/km)
comparing with the current network

Train comparison:
Chennai - delhi - Ist Ac ticket cost  (current)- 6000/-
                                                     (Shinkasen)- 2127*6.6 = 14,038/-
Time current - 32hrs
Shinkasen     -  13 hrs

Extra trips by shinkasen - 1 on the same asset. As asset cost is 67% of the ticket cost, the extra runs will give me a saving of 50% on the ticket costs on the same asset on the same route. so possibly this can be priced at 14038*.67*.5 = 4702 ie 9,335/-

The yearly expected increase in ticket costs will have to be 3.5% to keep up with the exchange changes and inflation costs, which may or may not happen.

So the GOI can reduce the debt burden by issuing 5% tax free bonds in India to its citizens and also issue shares on the shinkasen assets and routes. In my calculations I havent taken any income towards the 10% slack in capacity which can be exploited for carrying cargo!

So is this a good deal or not? I guess its one of those things that only time will tell. However, if one goes by what Japan and China have experienced with their bullet trains, the economy and its people have only benefited by it!!

Politics of climate, US growth is in coal...

Struggling with jetlag, i had the honour of watching a live telecast of Trump giving a speech from the white house where he basically said that the US was unilaterally withdrawing from an agreement where another 197 countries are parties !!

the main reasons stated are as follows:
1. US was unfairly targetted and that CHINA and INDIA were benefitting!! - well that was the thrust of the agreement in the first place -  that developing nations will be given some slack time to allow them to use that time to get into the developed bracket in the global sweepstakes!!
2. By getting out he can open coal mines and other manufacturing industries like steel, cement etc. which have a potential of 6.55Mn jobs and adding 3T$ GDP to the US economy. Methinks Trump just single handedly  taken the US from developed status to underdeveloped status. He thinks US will be great again with industries where the median wage is less than 30kUSD? Just imagine these 6.5Mn people plus families numbering over 30million people who cant afford medical insurance (O-care would be gone by then) with pollution related diseases in the next decade - thats a hole in the Balance sheet of the US that is being set up today. His fear was apparant in his voice when he mentioned that the US had over 20T$ of debt - and therein lies a tale - are we looking at a US default on its paper - considering Trump this is a distinct possibility!!

Now for some Data:
Cumulative US emissions are estimated at 25% of global emissions, EU (28nations) is 23%, China at 11% and India at 2%. Its a no brainer that the more developed you are , the more your share of global pollution.

So it was a no brainer that the paris climate deal was made on the central pillar of allowing the low emitters to up their emission to allow their populations the same chance to develop and also the transfer of technologies from the developed nations to the underdeveloped so that this process of development can be expedited.

the long and short of the US leaving the climate deal can be used by the remaining 197 countries to come together to levy a carbon tax on all US exports and that would truly set the circle one full round of karma.

Demonestisation - endgame redux

In my first blog on demonetisation ( http://forsec.blogspot.in/2016/11/you-hustle-you-deal-you-steal-from-us.html ) i had said we have to wait for the dec'16 and mar'17 tax numbers to arrive at the conclusion as to whether the parallel economy is finally moving mainstream. this chart shows that at an average growth of 13.5% for the two months of nov-dec, it ties in with my band of 4.6% to 17.6% .

A lot needs to be done and already the banks have shown their true colours by imposing an additional 1% transaction fee on debit/credit cards. Refer  my earlier blog on this ( http://forsec.blogspot.in/2016/11/fight-good-fight-post-demonetisation.html) where i had said that banking fees is one area that needs to be regulated - these should be pass through and not a profit centre for banks - its that simple and i am sure easily implemented by a RBI notification. govt departments can set the tone by making all their digital transactions free for the customers, which still hasnt happened! (update - the govt has started to make their transactions cost neutral)

March'17 tax figures will tell us how far demonetisation has resulted in reducing the parallel economy and also company results will tell us how much they have been impacted. A higher Rabi sowing of 6% has already shown that more of the formal economy has been used this time around to finance agriculture, whether this results really in a higher final production when procurement happens, we will know at the time of harvest.

At the beginning of the demonetisation move i had warned that this was the endgame for the informal economy, as the government will follow it up with more measures to go after those who are happy with an "informal setup". The recent announcement to use CA's to review the banking data to identify people who are potential tax dodgers is but one of many such measures that the government will be employing to end the informal economy, sooner rather than later. (update - the budget for 2017 has taken many measures to disincentive cash - lets see how this plays out in the fullness of time)

a final reminder from the evergreen epic..
"Being a journalist, Hacker had no particular talent for reporting facts" - the press reporting has to be taken with a pinch of salt as it is clear now that a part of them are pro-govt and a part of them against the govt.
"He can't seem to grasp that I don't want the truth, I want something I can tell Parliament.." - a govt pushed to the wall may just select obfuscation rather than the truth and that would be a bigger calamity than the various scams of the previous govt.
"Perhaps the government thinks that a tax is the best form of defence." - the introduction of GST may be the loophole for the govt as an excuse in the event of a sharp decline in growth and in the event there is no fall in growth - trumpet the success of both demonetisation and GST.