Archive for June 20th, 2008

Inflation at 11.05%, highest since 1995

June 20, 2008

Inflation based on WPI touched 11.05%, as per week ended 7 June 2008. This is the highest inflation since 6 May 1995. Infact, on doing further analysis, from 1995-2008, there have been 9 instances when inflation has been above 10% and 3 instances above 11% and all these are noted in April/May 1995.  

So, it is as high as that. Inflation has been surging worldwide and India is no different. However, unlike other countries India’s case is better. With developed countries, we are seeing high inflation and falling growth and it puts policymakers into a problem.  India has high growth (9%) and high inflation. This leads to easier choice for the policymakers as they need to focus on inflation. Growth would moderate, but it has to be accepted. Inflation impacts all, growth doesn’t impact all. 

The policymakers need to focus on inflation and is going to be the utmost priority.

Shortselling – why is it only limited to books?

June 20, 2008

I have been thinking about posting my comments on this short-selling for a while. But kept forgetting. This recent Economist story reminded me to write on short-selling.

You often read this in press or see on TV (this is an imaginative case):

Q: People believe that speculation has a role to play in financial markets? What is your take on it?

Economist: Speculation is good for market. And if prices are rising and are beyond fundamentals, there are short-sellers who can lead to correction in asset prices

I wish all this was true. The short-selling activity isn’t anything what we read in finance books.  After all it is central to efficient markets. However, it is lied as long as it is in books but not in practice. Short-sellers are not just in a poor minority but are often despised. Infact, in the language of Alvin Roth it is a repugnance activity and no one likes it. It is often banned in crisis times and is then revisted later.

Mostly, the blame lies on regulation for not letting short-selling flourish but even the various market participants don’t like it. Infact, in times of declining asset prices, most would like short-selling to be banned.  All like long-buyers (opposite of short-sell) but no one likes the short-sellers. After all financial markets flourish on the basis of being positive and short-sellers are anything but positive.

Just think of two scenarios- when prices are rising and when prices are falling. In first you have long-buyers and in second you should have short-sellers. However, you do see long-buyers being extremely active in the first stage but hardly see any short-sellers with all kinds of interventions. The interventions are not just because regulators feel the need but they are pushed by other stake-holders amidst cries of despair and hopelessness – small investors, market participants etc.

This is what even the Economist story says

IT IS difficult being a short-seller. Most shareholders and managers agree that you are an important part of an efficient stockmarket—until you dump shares in their company. Then things can turn nasty. “We appreciate that, ****” barked Enron’s chief executive, on a public conference call, to a suspected short-seller who had complained about the lack of a published balance sheet. Sometimes bears need even thicker skins. In 1995 Malaysia’s finance ministry reportedly proposed caning as a punishment for abusive shorting.

I don’t really know the solution. It is human nature to be proud of gains and be extremely averse to losses/declines. May be behavioral economics can provide some solutions. Because, unless we have effective short-selling mechanism in place,  you can hardly expect markets to be efficient.

Yet another search of Holy Grail

June 20, 2008

I wrote an article in Mint which summarises my thoughts over the recently released Growth Commission report. Understanding growth for economists is like understanding Holy Grail for the historians. And in both cases we see wide diverse views.

Hence, the search continues and you keep seeing newer papers/reports to understand what leads to growth and development with more new reasons. Some reasons are also recycled from the earlier dumped reasons and the search continues. So, what to expect in future:

Development economics is still a very fertile subject and, despite wide-scale efforts, we still do not know much. It is much like the Dan Brown best-seller—The Da Vinci Code—where we have lots of clues and codes (the growth factors) to lead us to the Holy Grail (what leads to growth). We will surely need a Robert Langdon to put the entire story together. But let us first have the clues and codes together.


Assorted Links

June 20, 2008

1. PSD Blog points microfinance is the new subprime. I agree with this. Need to write a separate post on the subject.

2. WSJ Blog says take a bow to the Potato

3. WSJ Blog points Fedspeak- Donald Kohn 

4. WSJ Blog points Easterly has developed an index ranking aid agencies. He ranks World Bank agencies as best. This is actually a surprise. Easterly is the last person you would expect to rate the agencies.

5. TTR points to recent CMIE Indian economy forecast.

6. MR points Who is the modern-day greatest thinker? It also continues 

7. NB points which labels have an impact on buying

8. Frankel revisits recession. After Mankiw, even Frankel switches off the comments section.

9. Fin Prof points to recent Bear Stearns hedge fund managers arrests

10. FC Blog points to Google stock screener. Anything Google touches turns to gold

11. DB Blog points another reason leading to commodity boom- poor infrastructure 

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