Alice in Financial Wonderland

Some polarisation between equity and debt has happened with start ups and bank crises. Equity has found new ground in the unlisted space and has ceded forts in the listed space. The listed companies now are prone to taking debt both on balance sheet and off balance sheet for various reasons including equity shares buyback. In the unlisted space, equity owners are not passive onlookers, but make effort to evaluate the top tier management all the time.

Between the debt and equity there is no way defined for a temporal distribution in the context of a hypothetical business. The internal rate of return of any business has a temporal distribution and hence should dictate the debt and equity proportion that it must carry. But the way debt and equity are markedly distinct and can be raised from different set of players having differing expectations, it makes it quite difficult to achieve proportionality of debt and equity.

Either there are safeguards and warning lights built into the levels of debt a company can source, leaving equity holders at the mercy of the collective thinking of the equity market, or we can envisage a differential return between equity and debt holders, that allows splitting of rate of return of the business, and hence breaking the gridlock of coupons and tenure of debt. In the latter case, thus the debt and equityholders are tied to the returns generated by the business.

Thus all financing institutions become safer and trustworthy without the stress of stress-test because they would get higher return in good times and lower or even zero returns in bad times. Presto! we have shrunk the cancerous non-performing assets. Automatically the usurious lending to individuals shall vanish as well.

Clearly this is a quixotic idea because the essential characteristics of debt and equity have been compromised. But if we are prepared to look for new solutions, you would say that this is an intermediate step. Ultimately the method of differential returns depending on tenure of the finance, can only suggest that debt and equity are fungible. Depending on the rate of return coming to a business in the next two to three years, the management should take a call of converting debt into equity or equity into debt. Why would any management incur the cost of engaging with the financial markets until and unless it comes with the agenda of growing size or making an acquisition ? Some autonomy in determining the debt to equity ratio should be in-built and hence could be a powerful signals to hare-brained volatility of the markets. 

Can Financiers take a Hippocratic Oath ?

Equity market is a set of balloons (sector-wise) tied to the bedrock of debt. Debt should be flowing easily enough for the balloons to distend a bit more. That is debt should pay from the economy’s cashflows. Debt can choke on itself and clog the economy if it crosses sustainable limit and if it is not paid from the economy’s cashflows. Rarely do analysts believe debt to exist beyond individual balance sheets. But debt exists everywhere and one needs to knock off the excess above the sustainable limits against the entirety of market capitalisation. (If measurement of debt is a problem, banks can be asked to declare the total debt originated and outstanding against each unlisted / listed company and within conglomerates against each individual business. This is a measure that will help banks to become self-prudential.)

To carry the argument to the sectors, even consumption is backed by (government and private) debt although the individual FMCG company balance sheets and automobile corporate balance sheets are mostly free of debt. The lenders and the stock market have a right to know the financial performance of all players in a sector. And they should knock of the excess debt above sustainable levels against the sector’s performance. This penalises the sector where the new entrants are creating the competitive stress by taking on unwarranted debt, and rightly so. The Hindu Shastras say that individual’s tragedy, stress and unhappiness has to be shared socially and so it should be logically carried into the sector’s performance. Then determination of multiples is a matter of regression. Cannot say what McKinsey thinks on this kind of valuation. Probably if they would concur, they would give us adjustment of capital flows in the economy.

The strangeness of this theory surfaces when we apply it to the banks. They originate the debt, and due to competitive pressure of selling debt are most vulnerable. The central bank should calculate and note the sustainable level of corporate debt in each sector and not allow banks to go beyond it. The market cap of housing sector finance should be adjusted for the excessive mortgage debt, and it is here that the maximum impact is likely to be found. Currently some people think that the banks need to be breaking up, but there is no need if we agree that the exposure can be capped sector wise.

The stock market has a distant / volatile wealth effect compared to the real estate for those who can afford to own it. Especially both stock market and real estate are dependent on the level of debt in the economy. Most likely the sector will end up having zero market cap. So the listing of real estate corporates on the stock market affords some bit of ridicule at the expense of the stock market.

When we read the theorists of the credit market they are heavily dependent on statistics and lightly dependent on the macro-prudential framework. They pretend like the five blind men of Hindoostan feeling an elephant because they are directly / indirectly paid by the banks themselves. When the central banks are targeting inflation and inflation is seen helping loosen/ shrink the millstones of debt, the fact is that they are know about the macro-prudential theory in private but do not bring it out in public domain.

The banks have too much access to data for any non-bank to compete effectively. Hence the banks have to be banned from the stock market. One with stricter moral standards can even ask the banks to de-list because listing of debt originators is tantamount to having your cake and eating it too.

In developing countries, governments have there are two liabilities, infrastructure and pensions. Infrastructure is something that can be mostly done by the state government and local government provided the population has an appetite for it. Technically pensions is part of government’s debt and hence has to be knocked off the total market cap in case it is above the sustainable level.

Holy Pigs, Incredulous Pleasures and such Pixelated Fixations in Flatland

Diggers of rigour, toil their vigour and ex-pale the warm daylights

Foiled by the foibles of Human Capital, that double crosses forever 

Herding about the ticker, a fireplace to exchange technical tricks
Air dry the data to crispen, the tipsters deep fry to make it tastier

Porous reporting galore, the faithful cannot read good from bad 

Nudging forecasts to consensus, they torque the language a-wear

Amid media glower, galleries of wealth-makers bask and brighten

For investing is a pantheon and the legion of analysts its worshipper.  

Epitomising Oracles, Parroting Bigots and all other Omniscient Orders

The current model of doing research inside universities is flawed.

If research itself becomes a fort of citationers, going around the topic without making it relevant to the real world, without investigating any context, it is dead wrong. Paid or commissioned research fails easily if it does not address a heroic assumption, a logical failure or a painful inflammation of ill-fitting results. If start ups are devices to build entrepreneurs, we even need vehicles to do  meaningful research.

The guide of the person who enrols into research is often the weakest link.  His knowledge of the latest developments is suspect. He has neither written enough research nor experimented with ideas after his own initial foray into research. This model is supplanted by the model of presenting papers and citations. Papers rarely elucidate methodologies to guarantee reproducibility and mostly talk about results. It forces a new researcher to investigate whatever is trending, but research that way is nettled by groupthink. Neither by the guide, nor by the peer group, do we pose large, challenging questions.

Western companies are smart to cherry-pick best ideas from government funded research and build it into saleable goods and services. Oriental companies just reverse engineer or imitate, and even then mostly the product of the previous generation. Western companies now know it better that world markets are divided mongst those which are willing to pay for innovation and those which aren't. Hence when FB comes to India it makes Free Basics its agenda.

Mostly companies want to keep a boiler room atmosphere of securing short term results. This is not conducive to research. Research needs a focus group approach to find a way forward. It has to churn history of achievements and failures and see which can be cornerstone for another. It even requires some time to shut the white noise. Thanks to data mining and computational methods, a lot of work can be done without hit and trial.

The government bodies or 1% mandatory funding by corporates should enable us to do the following. We have draw up a canvas of cross disciplinary agenda. There should be a body to handle knowledge management (unlike the idea of museums) that critically runs the gauntlet and points out what was the past, what is the present and what is trending. There should be another body to hold public seminars on the questions to be investigated as the way forward. Yet another public body of scientists should verify and reproduce results before publishing. Research can be motivated by recognition and ample reward. That way we can weed out irrelevant topics and drive focus on building an equitable and secure future.

Obviously those from finance would like to clinch achievements ideas and turn them into saleable companies. Nothing objectionable there but that then it should carry a reverse patent protection. For the first ten years the royalty should accrue to the public / government bodies. In some cases the public good should prevail and pricing should be low enough for everyone to benefit.

Tethered Time versus Kitsch Infraordinary

Rarely has time been eulogised and barely even culture has been disparaged. Culture has been invented from kitsch to make generations' behaviour beautiful but time-invariant. Culture does not celebrate the unsettled dregs of intuiting individuals that ferment and spout unexpected florid expressions. There is a genre called horror for such people.

We raise hullabaloo when one culture throws bait at another. Look into how radical and rebellious are our stories and movies, and mostly you would find the un-tame-able protagonist turns into a tamed hero. One movie (Albert Pinto ko Gussa Kyon Aata Hai) where the protagonist is bent upon taunting everything he sees and owns, ends in losing his objectivity. Another example would be the poet Oliver Goldsmith ranting against depravity of capitalism and carpetbaggers in "The Deserted Village". Yet we see bespoke individuals who are not mis-directed and who make prolonged dedicated effort to enrich and grow science, art and business. These people including the iconic Silicon Valley gods puff airs but then they are galloping astride a steed called time.

A bespoke individual is ensnared by a dire possessive calling to tether - mind your own mind by your leave - and summon all internal forces upon a cause, and angrily distance from the circumstantial to find a mooring. Time is the only natural element - an adhesive if you will - that helps such individuals to re-inforce, variegate, synthesise and deliver an experience. It can be strong enough to bring lasting recogntion. These bespoke individuals accuse other individuals of failures and show strength to control the inputs and the output, regardless of who or what they sacrifice. Obviously they cannot sacrifice themselves. We can externally observe the pain of giving birth to an experience but not all such experiments succeed. Somewhere we are too much held back by our time-invariant culture to enter into the process of creativity and lighten the individual's burdening possessive call. There are therapies and medicines if you can afford it after failure.

Culture wants to worship its ownself through its followers. If you start behaving like a CEO and join the group of wannabe CEO s then you shall certainly become one. But if you want to discover bots and widgets, you have to unsheath your relationships and unbutton your behaviour, See the movie Birdman on how to do it.  Till such time that you succeed the people can call you an emperor without a kingdom, who is flaunting some exquisite concept.

Diffident Death-Eaters versus Dredging Dragoons

India's comic book equivalent of a Marvel hero is long absent. Earlier there was a contender called Chacha Chaudhury. He and his bosom pal were saviours of the distressed. The duo were extroverts, grinning from ear to ear and did not wear the burdening guilt of hero unlike their contemporaries Phantom and Mandrake,
Marvel comic book heroes wear a masochistic attitude like villains, do not seek help, complicate matters by not explaining anything to anyone, and are engaged in self-gratifying pursuit. Their female consorts are equally tortured, secretive and imprudent.
Not just the Marvel heroes, even Chacha and his friend from Jupiter forgot to say Wow ! for what God bestowed (bountiful Earth, misery of the individual mind and determination to overcome) and what the human society upholds (the enduring achievements that act as beacons for overcoming an individual's misery).
The branding of comic book heroes isolates the individual. Even the exclusivity tagged to cowboy consumer brands of FMCG / Auto MNC s, allows an individual to swagger in public and feel omnipotent. Nature has laid out a journey before us and while we travel, we cannot afford to lose the equanimity of the equilibrium between Nature and ourselves.
Just like air for lungs, the mind has to be fed on information and knowledge to meet challenges. The concepts and theories have to be owned like a precious stones before we collectively understand the true import and validate it as extension of existing knowledge. Then after assimilation obviously we can pass them like cooking recipes into textbooks.
We have to re-organise knowledge based on solving an activity. For example a hands-on study of tools, their materials and their contextual solutions in the first year of an engineering degree course,  Another one on adhesives, drills and fasteners. If the students and governments knew how much emissions come from a diesel engine, then the market could have rationed gasoline and priced diesel far higher than gasoline.
Surely one has to  invent comic books to create the chilled miasma of research. We need to showcase that many average IQ minds working in sync are better than solo brilliance. It is OK to understand late than never understand at all. 

Tyrannical Love, Conformist Logic and other Parasitic Paradigms

When we want status quo, we shall unwittingly parade greed and fear. Many people have realised that markets function in silos, particularly when these fail to address the issues of deprivation and sustainability. But there is a more pressing issue. The emergence of credit risk in a flat world (where import duties are very low and capital can move freely) has overwhelmed all large players, namely, governments and banks. Although banks will own their country's credit rating, we have not seen governments taking cognisance of conflict of interest between the activities carried out by banks and the broader multiple objectives of the government. Governments and hence taxpayers seem to be owning the one-sided responsibility of cleaning up the fallout of the systemic build-up (called economic growth) created by banks and now the "too-big-to-fail" banks.

Governments are using a behind- the- scene approach to monitor and regulate banks. As if the agents of economic growth need not be alerted by public suasion. The government has tied its own hands by not bringing in law because free markets do not expect heavy handed regulation. That way the government has officially refused to filter the good and the bad and mostly waits until a crisis engulfing the entire system is precipitated. A law would bring the bourgeois to know that some growth is unwanted, and it would ask for early alarms in the system. It would de-couple the nexus between governments, banks and businesses. That is to say that the balance sheets of the businesses do not tell the entire story. Their promoters are using the tax havens and funny named vehicles to subvert the legitimate tax share of the country they reside / do business in. Otherwise the promoters stash a lot of wealth into the trusts and societies which have fig leaf signature of social development.

We have seen the emergence of arcane risk management paradigms which are based on sparse data and just the price data. We are made to believe that risk shall reveal itself in the price series which is the only observable truth in the market. We are asked to depend on models that carry model risk. All merely to hide the practices and the products that spew risk in the first place.