Ten interesting things we read last week

At Ambit we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across have relevance for Indian stocks and the Indian economy. In that context, this report contains the ten most interesting pieces that we read this week.

Here are the ten most interesting pieces that we read this week, ended October 07, 2016.

1) How corrupt are our bankers? [Source: LiveMint]
Tamal Bandyopadhyay, India’s best banking journalist, rips into India’s bankers in this piece. He digs out the cases of senior executives at public sector banks who have used their official position to make money for themselves and their kin. He highlights the rampant bribery in the banking system and shows how corrupt senior bankers earn anywhere between 0.5% to 3% of the loan amount given to undeserving borrowers. The money could be paid in cash or in an overseas bank account. Money is not the only way to pay such bankers - these days, many prefer “skin” (women) to cash for fear of being caught by investigative agencies. Other ways include picking up the tab for wedding reception of the daughter, honeymoon at Bali or child’s overseas education. Huge discounts on purchased flats and “annuities” are some more ways to show gratitude to such bankers.

2) Obituary: Robert Louis Genillard- bond market pioneer (1929-2016) [Source: Financial Times]
Robert Genillard created the international bond market as we know it. He began his career at White Weld, a midsized New York investment bank, when he was sent to Caracas, Venezuela to head a directionless joint venture. However, his ingenuity combined with a string of oil concessions granted by Marcos Pérez Jiménez, the country’s business minded dictator, helped him create a structure of promissory notes backed by an aval, or guarantee, and reinsured through the Lloyd’s of London market, to fund the boom in construction and property sectors. The success of this ingenious operation resulted in Genillard becoming a partner back in New York. He repeated this success in Switzerland where he was sent to build a European operation for the firm. Emergence of the eurobond market combined with his ingenuity helped firms like SG Warburg place a landmark $15m bond paper.

3) What separates Champions from ‘Almost Champions’? [Source: nymag.com]
The difference between the greats and the almost-greats appears to come from an attribute often overlooked — how each group responds to adversity. The greats rise to the challenge and put in persistent effort; the almost-greats lose steam and regress. A recent study examined the differences between athletes who overcame adversity and went on to become world-class (what they call super champions) and those who struggled in the face of hardship (the heartbreakingly named “almost champions”). Whereas super champions were playing in premiere leagues and/or competing on national teams (think: Olympics), almost champions had achieved well at the youth level but were playing in less prestigious leagues as adults. It provides a set of parameters that determine such an attitude:- 1) Practice: Super champions enjoyed not only competing in matches, but also practicing and training while almost champions loved the thrill of competition, but had an aversion toward practice. 2) Intrinsic motivation: Super champions held themselves to high standards, but judged themselves against prior versions of themselves, not against others while almost champions were focused on external benchmarks. 3) Empowering and lasting mentorship. The coaches of super champions were empowering and “mostly seemed to take a longer-term perspective”. This differs from the experience of almost champions, who remember their coaches as more focused on immediate results.

4) Varanasi villages in bad shape despite PM’s adoption? [Source: Economic Times]
Varanasi is PM Narendra Modi’s Lok Sabha constituency and Sharat Pradhan, UP’s top journalist, cannot see how it has benefited from having the PM as its MP. The author focuses on two villages “adopted” by the PM - Jayapur and Nagepur - under his novel Sansad Adarsh Gram Yojana (SAGY) and points out that the picture isn’t pretty. Shortly after the PM declared the villages “adopted”, the first task to be taken up was roads. But the first monsoon shower exposed the sub-standard quality of the work done. Similarly, a primary school is without a boundary wall posing a threat to students from the traffic on the adjoining main road. Toilets installed in the school campus and at other places in the village under the PM’s Swachh Bharat Abhiyan are there only for namesake and far from usable. Of the two deep boring pumps installed for providing drinking water to the 800-odd homes, one has been “under repair” for almost a year now. The condition of poverty stricken weavers in Nagepur is yet under tale of woe as they increased prices and absence of easily available loans to procure yarn has driven many weavers out of business and today there are barely 75 families left out of 500 not so long ago in the traditional source of livelihood.

5) Computer code neglect costs organizations dear [Source: Financial Times]
Citing the example of the US Government where public agencies continue to use the computer coding language ‘Cobol’ that was designed almost 50 years ago, the author, Lisa Pollack asks the question - how many managers, especially outside tech departments, would know if their company is using Cobol? According to her, those who don’t know should take an interest, not least because getting support on systems designed using such languages will become interestingly difficult. In the US, the Social Security Administration had to rehire retired employees to keep its systems written in Cobol ticking over! Apparently, the Pentagon uses code written in Cobol on 8 inch floppy disks to co-ordinate ballistic missiles and nuclear bombers. That’s bad news especially considering that good programmers will take a big pay cut to work on something that they like. In fact some programmers are hesitant to work even for Facebook, he says, as the company uses PHP, a programming language that is probably past its peak.

6) Pride – A blessing or curse? [Source: nymag.com]
In ‘Take Pride’- a forthcoming book by University of British Columbia (UBC) psychologist Jessica Tracy – she discusses the importance of Pride in our life. According to her, the feeling (of Pride) — or, more specifically, the absence of the feeling — is an important key to motivation. In a study she conducted on Paralympic athletes she found that the sighted and blind athletes behaved the same way after a defeat (pumped chest/hand waving) or loss (slouched shoulders), despite the fact that the athletes who were born blind would never have seen anyone else reacting to pride in this way. That suggests that these behaviors are likely not learned, and that they probably do not arise from culture — which means, in turn, that pride (and its sadder sister, shame) may be a primary emotion. Consequently, that means it must serve a purpose like the other emotions – happiness, sadness, anger and fear. To her, the function of pride is that it’s an intoxicating feeling; it pushes you to work harder so that you can once again have that lovely sense of being proud of yourself. She does caution though that pride becomes poisonous when the feeling becomes less about how you see yourself, and more about how others see you; that’s when pride turns to hubris.

7) The rise of India’s neo middle class [Source: LiveMint]
An interesting piece that highlights how consumption patterns have changed in India and are likely to change going ahead. While consumption spend by Indians has increased more than 3x in the past 10 years and is poised for similar growth in the next decade leading to a tenfold increase in 20 years, this article argues that a full discussion on this topic should not only look at the size of the opportunity but also the shape of this opportunity. Multiple factors including rise of "affluent" consumer segment, expenditure outside of basis necessities (roti, kapda and makaan), rise of tier-1 and tier- 2 cities and rise of nuclear families and single individuals can drive the consumption growth higher.

8) Is the Fed playing politics? [Source: Project Syndicate]
Ken Rogoff in this piece argues against the notion that Fed has been politicized. He say that if Yellen is so determined to keep interest rates in a deep freeze, why has she been trying in recent months to talk up longer-term rates by insisting that the Fed is likely to hike rates faster than the market currently believes? Further he argues that the notion that Yellen would re-launch the bad old 1970s, when US inflation hit double digits holds no merit either. Inflation in the US has been consistently below target for last six years and, even today, bond yields reflect deep skepticism about whether the Fed has the will or the capacity to sustain price growth at the official 2% target on a consistent basis.

9) Larry Summers on America’s hidden unemployment [Source: Financial Times]
Larry Summers discusses a book by Nicholas Eberstadt, a political economist, called ‘Men Without Work’. Eberstadt highlights that the share of the American male population who are neither working, looking for work, in school or old enough to retire has more than doubled over the past 50 years, even though the population has become much healthier and more educated. Today, even with a low overall unemployment rate, roughly one in six men between the ages of 25 and 54 is out of work.Non-work is a larger issue for those with less education, without spouses or dependent children, for African-Americans and for those who have been convicted of crimes. He argues that diminution in attractive work opportunities is a key causal factor in explaining the rise of men’s labour force withdrawal. Technology and the rise of international competition are both reducing the demand for less skilled labour. He also says that a society where large numbers of adults in the prime of life are without vocation is unlikely to provide opportunity for all its children, unlikely to maintain strong communities or have happy, cohesive families. In fact, such a society is prone to embrace toxic populist politics.

10) The health effects of youth unemployment [Source: HBR]
How bad an effect can unemployment have on the health of youth in high-income countries? In the US, unemployed youth have a worse physical well-being compared with employed older adults — 23% vs. 31% thriving (“thriving” physical well-being is defined as consistently having good health and enough energy to get things done each day.) Interestingly, the same phenomenon is not observed in many lower-income to upper-middle-income economies, where unemployed youth on average enjoy higher physical well-being compared with employed older adults. It also says that unemployed youth with the most education in high-income economies have worse physical well-being than those with less education. Two hypotheses presented to explain this phenomenon are - 1) sharing the burden with a peer group lessens the health effects of unemployment. Spain is used as an example to explain this hypothesis given that the country has 50% unemployment rate among youth, and 2) unemployment may be harder to bear when family support is absent. The study draws its conclusion basis a contrast between India – where a majority of the unemployed youth live with families and have higher well- being – and the US where they are often on their own.

- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.