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2013 Nobel Prize in Economics

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A press release from the Nobel Foundation reads:

There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.

Beginning in the 1960s, Eugene Fama and several collaborators demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example.

If prices are nearly impossible to predict over days or weeks, then shouldn’t they be even harder to predict over several years? The answer is no, as Robert Shiller discovered in the early 1980s. He found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets.

There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.

Beginning in the 1960s, Eugene Fama and several collaborators demonstrated that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices. These findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example.

If prices are nearly impossible to predict over days or weeks, then shouldn’t they be even harder to predict over several years? The answer is no, as Robert Shiller discovered in the early 1980s. He found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low. This pattern holds not only for stocks, but also for bonds and other assets.

One approach interprets these findings in terms of the response by rational investors to uncertainty in prices. High future returns are then viewed as compensation for holding risky assets during unusually risky times. Lars Peter Hansen developed a statistical method that is particularly well suited to testing rational theories of asset pricing. Using this method, Hansen and other researchers have found that modifications of these theories go a long way toward explaining asset prices.

Prizes in 2013: Physiology and medicine, Physics, Chemistry, literature, Peace, and Economics.

Written by Arhopala Bazaloides

October 14, 2013 at 4:37 pm

Have you had this feeling of deja vu before?

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10 headlines today:

  1. Rahul Dravid and Sachin Tendulkar: Fairytale journey for one and dream win for the other at CL T20– old cricketers never fade away, they keep retiring over and over again
  2. Shah Rukh Khan’s strategist defends his JK Rowling ‘inspired’ speech– Bollywood plagiarises is inspired by others
  3. Besharam: Senseless and disastrous– Bollywood copies from is inspired by the tired ghosts of other Bollywood movies
  4. Jayanthi Natarajan slams Narendra Modi– politicians call each other names
  5. BJP claims Nitish sabotaging Modi rally in Patna– politicians accuse each other of trying to be sneakier
  6. Am using Italian so Centre understands, Chandrababu Naidu targets Sonia Gandhi– politicians past their sell-by date attempt comebacks by climbing bandwagons
  7. Fresh sexual assault complaints against Asaram– godmen are, well, bad men
  8. India Successfully Test-Fires Prithivi-II Missile– India has the world’s most well-tested missile
  9. Samsung Galaxy Gear adverts show smartwatch as fictional gadget that’s come to life– newspapers pass off advertisements as news
  10. RBI to relax norms for forex futures after rupee stabilizes– everything will be better after the rupee stabilizes

The gross domestic product

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The gross domestic product is a measure of the productivity of a country in terms of the goods and services produced. This is generally understood to be a more solid measure of the economic strength than stock price indices. It is interesting to see how it has varied in the near past. The short answer is that national politics does not seem to correlate with the growth rate, but wars do.

gdp

The World Bank provides data on the year by year growth of national economies. The figure above summarizes this data, both as rate, and the GDP relative to a base taken in 1980. Also marked in purple are the years of general elections. The most noticeable feature of India’s growth is the steady increase over the last thirty years. In 2012 the actual value of the GDP stood at about INR 52.4 trillion. This is relatively small, being just over 1 rupee per capita per day. Presumably an increase in GDP will require more industrial production, more efficiency in farm production, and more automation all around.

The next most interesting feature is the almost complete independence of the growth rate and politics. The years with Rajiv Gandhi as prime minister saw steady growth of around 5%, and a single spike of nearly 10%. Then there was an incredible dip in 1991, which people older than 30 may remember. The economy stabilized again during the Narasimha Rao government. Contrary to the wisdom from TV pundits, the pace of growth actually increased during the following unstable governments, and reached 8.5% in 1999. Recall that this was a year of utter instability, when the Vajpayee government was repeatedly destabilized by Jayalalitha. The economy fell back to around 5% during the first few years of the NDA government, and did not take off until past the middle of its term. The UPA 1 government saw the longest period of high stable growth. Subsequently, the global economic uncertainty has been reflected in India’s growth rate, except for a single year (2010) in which the pace of growth was the highest ever recorded in India.

rbi

For the record, RBI’s published data indicates that the average growth rate before 1980 was approximately 3.9%, and since then has been about 5.6%. It could be that the trend has accelerated again very recently. This is shown in the figure above. Economic slowdowns are seen as the economy falling below the trend lines. This is clearly so in 1991. But note also the tremendous slowing of the economy after the 1965 and 1972 wars.

Written by Arhopala Bazaloides

October 2, 2013 at 5:50 am

The rebounding rupee

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Inflation remains astronomical. But there was joy in the morning with this news from Reuters:

The rupee and bonds surged to more than one-month highs on Thursday morning as the U.S. Fed refrained from withdrawing monetary stimulus as had been widely expected by global markets.

Emerging Asian currencies rallied with most Southeast Asian units up around 2 percent after the U.S. Federal Reserve surprised investors by postponing the start of reductions to its stimulus programme.

The partially convertible rupee was at 61.88/89 per dollar by 0908 India time (0338 GMT) compared to its close of 63.38/39 on Wednesday. The unit rose as high as 61.65, its strongest since August 16.

BT does not think much of the rupee’s rebound:

Late last night the US Federal Reserve said no to taper and decided to maintain its bond buying program of $85 billion per month. This has come as a sweet surprise as markets across the globe with expectations that the Fed would taper quantitative easing (QE), as the programme to pump in money cheaply into a battered economy is called, by $10-15 billion a month.

The reason for not tapering the QE was it felt that the unemployment rate in the US is still high. Though the unemployment rate in US has come down from 8.1 per cent in June 2013 to 7.3 per cent in August, it is still higher than expectation. In fact, the US Fed is not expected to hike rates until the jobless rate does not come below 6.5 per cent.

For India, the news of zero taper is positive and this may also have a positive reaction with the financial market rising on Thursday.

However, overall it doesn’t make much difference to India. In the last four years and nine months since QE started in the US on 25 November 2008 till date, the Fed has pumped slightly over $3 trillion to boost its battered economy. In the same period, close to $105 billion foreign institutional investors (FIIs) inflows came into the Indian equity and debt market. Even if one assumes that the entire FII inflows into India came from US, it this will not be over 3.5 per cent of the overall infusion of money by the Fed.

Arun Maira, a member of the planning commission, writing in the Hindu also is not upbeat about the medium term:

Economic reforms unveiled in 1991 have brought about a structural shift enabling the private sector to assume a much larger role in the economy. GDP growth has largely been enabled by growth of the services sector. The worry is that India’s manufacturing sector has stagnated at about 16 per cent of GDP, with India’s share in global manufacturing at only 1.8 per cent. This is in stark contrast to the experience of other Asian nations at similar stages of economic development, particularly China where manufacturing constitutes 34 per cent of GDP and 13.7 per cent of world manufacturing — up from 2.9 per cent in 1991.

The Institute of Applied Manpower Research estimates that 8 to 9 million additional young persons will join the labour force annually, between 2012 and 2022. Additionally, with productivity improvement jobs in agriculture are declining. Therefore, India must create over 200 million jobs outside agriculture by 2025. A large burden of this job creation must fall on the manufacturing sector which has so far been a laggard. Failure to create the jobs required will have serious socio-political consequences.

Besides the employment imperative, growth of the manufacturing sector is also critical for ensuring that India’s trade balance is corrected. The country has been happily importing large volumes of manufactured goods as its economy has grown, which has pleased citizens no doubt. But it has not been able to develop a large, competitive manufacturing base to dampen the need for imports and to export.

One single sentence I heard recently captured the problem with the RBI’s policy through the year: If I have a crore to invest, I can now just keep it in the bank and collect 9% interest on it, instead of putting it into a factory.

There is mixed news from property markets. Trade watcher WPC has the upbeat prediction:

Asia Pacific office rents will outpace Europe and the U.S. from the end of 2013 through 2017, real estate research firm DTZ reports. The highest growth is expected in India, with Bengaluru forecast to record an annual growth of 8.5 percent.

Verification comes from fashion trade watcher Fashion United:

With rising high street rentals and delays in mall development in many cities, prominent apparel and fashion accessories brands and retailers are finding it difficult to sustain growth on high streets owing to low footfalls. The profit compared to the rents they have to pay is low. For instance, Globus’ store in Mumbai’s upmarket Bandra area, which had been a landmark for the past 12 years, has now closed down because of high rentals. The company followed this up by shutting a store in New Delhi’s Saket area. The upmarket 30,000 square foot store would soon be leased by Marks & Spencers.

Mixed signals are reported by BS:

In a capitulation that speaks to the depth of the slump in India’s economy, usually tight-fisted retail landlords have become uncharacteristically flexible on rents, as Lacoste India CEO Rajesh Jain knows well.

The French brand name has been offered space at a mall in the north Indian city of Jalandhar. But rather than seeking a fixed rent, the landlord is willing to take a cut of Lacoste’s revenue, a concession to the tenant to help it protect its sales margins.

“Discounts for a foreign lifestyle brand in a premium property were unheard of even a few months back, but now developers are coming to the table and are offering revenue share instead of rentals,” Jain said, adding the landlord had also offered to furnish the store to secure Lacoste’s tenancy.

Retailers in India say they can now negotiate revenue sharing deals or discounts on rent of up to 20% and many are jumping at the chance, not necessarily because they see a bottom to the economic downturn but because the supply of new retail space is expected to tighten sharply from 2015.

September 20, 2013

HT reports a rise in bank rates:

India’s new Reserve Bank governor Raghuram Rajan marked his first policy meeting Friday with a bold decision to hike interest rates, wrong-footing analysts and leading to sharp falls on the stock market.

Rajan, who had warned he was prepared to be unpopular, ordered a rise in the benchmark interest rate from 7.25 to 7.50% at a mid-quarter policy review in Mumbai.

The Bombay Stock Exchange Sensex index fell 2.16% afterwards to 20,199.79 points and the rupee fell to 62.39 against the dollar from its previous close of 61.77.

NDTV disapproves, but its analysis supports the anti-inflationary intent of the move:

The RBI rate hike has not only disappointed the banking industry, but will affect millions of consumers who are struggling under the burden of high Equated Monthly Installments or EMIs. It would also dampen sentiments ahead of the peak festival season, when banks expect demand for loans to go up.

Written by Arhopala Bazaloides

September 19, 2013 at 4:46 am

Stagflation strikes

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Since March 2013 food inflation has risen much faster than the long term trend (gray line in the figure).

Since March 2013 food inflation has risen much faster than the long term trend (gray line in the figure).

BS reports:

India’s wholesale price based inflation surged to 6.1 percent in August, the sharpest pace in six months, driven by 245 percent jump in onion prices, making it difficult for the central bank to cut rates in the policy review due later this week.

According to official data released Monday, the headline inflation, measured in terms of the Wholesale Price Index (WPI), accelerated to 6.1 percent in August as against 5.79 percent in July.

Inflation was recorded at 8.01 percent during the corresponding month of the previous year, according to data released here by the ministry of commerce and industry.

There was a steep rise in food prices. Food inflation jumped to 18.18 percent in August as compared to 9.34 percent recorded in the corresponding month of last year. Food inflation was 11.9 percent in July this year.

“The revival of inflation especially that of food prices, calls for urgent steps to address supply side bottlenecks which have been plaguing the sector,” said Chandrajit Banerjee, director general, Confederation of Indian Industry (CII).

However, he said the rise in inflation should not come in the way of cutting rates by the central bank in the forthcoming monetary policy.

The Reserve Bank of India (RBI) is scheduled to announce its monetary policy Sep 20.

“While keeping inflation under check has to be a priority, it is imperative that we continue efforts to rekindle investor sentiment and push for higher growth,” said FICCI secretary general A. Didar Singh, emphasizing on the need for rate cuts in the forthcoming policy review.

A wide cross section of people seem to believe that controlling money supply is unlikely to affect this inflation.

Written by Arhopala Bazaloides

September 16, 2013 at 2:28 pm

Is the economy tanking?

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IBN Live adds to the daily chorus of hand-wringers over the state of the Indian currency:

Indian stocks on Tuesday dropped for the first time in five days with S&P BSE benchmark Sensex plunging over 651 points, its biggest fall in over a fortnight, on massive selling as the rupee breached 68-mark versus the US dollar on fresh signs of trouble in Syria.

That bastion of right-wing thought, the Economist has this to say:

If the rupee still looks vulnerable, India has three options, none very palatable. One is to let the currency fall further. In most countries a cheaper currency would boost exports and help close the current-account deficit. But India’s manufacturing industry is too small and too bound in red tape to ramp up quickly. So a turn-around in the balance of payments may take time during which investors could panic. Meanwhile the weaker currency may destabilise the domestic economy by adding to inflation and increasing the government’s subsidies on fuel and thus its borrowing.

The second option is to do the opposite and increase interest rates to attract more foreign money in, following the path of Indonesia and Brazil. But this would further hammer Indian industry, which is already in poor shape, and probably increase bad debts at banks too. If the economy slowed further as a result, equity investors might begin to worry about corporate earnings declining and pull out their roughly $200 billion of investments in listed shares. Inducing a credit crunch in India might make things even worse.

The last option is to lower government borrowing. It is running at 7% of GDP (including India’s states) and has stoked excess demand in the last few years, widening the current-account deficit.

The article nails the issue: the government is caught between an industry which thrives on imports and government sops, and a populace which would (and does) starve without government subsidy. Since I am bang in the middle, I would prefer the second option: increase interest rates to at least match inflation.

Written by Arhopala Bazaloides

September 3, 2013 at 12:25 pm

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