Maverick's World

The coming crisis in US agricultural markets

For those in love with real "corn porn" - I give you - the Market Journal. Very reminiscent of "Aamchi Maati Aamchi Manse" on Doordarshan-1 back in the day.

As things stand reports today morning suggest oil is due to rise after OPEC nears an agreement that will effectively cap the production at lower levels.

As Donald Trump talks about bringing down the TPP and NAFTA, US agriculture faces the prospect of disruptions to trade with the biggest purchasers of US corn, hog and steer - Canada, Mexico and Japan.

Most people who voted for Trump probably don't know that the oil, corn, dairy, beef, pork and chicken markets are all linked. You break one link in that chain and pandemonium reigns.

In March - South American producers are likely to bring added volume to the markets.  March basically closes out the seasonal high that US corn (and hence pork and beef) enjoys.

Prices today for corn are roughly half of what they were last December.

Will Donald Trump give some new kind of subsidy to keep corn prices high?  (He should do something like that - after all these people voted for him).

Or will he simply let his trade-tariffs-trumpeting screw them six-ways-to-Sunday? (Well, he is kind of known in the real estate business for screwing over small investors without big legal support.)

The price of corn essentially is deeply tied to the price of Beef and Pork. Beef and Pork production  deeply affect the price of poultry - the livestock markets are interlinked.

As the price of oil rises - the low price of corn cuts into net farm income as operating costs. This deeply affects the ability of farmers to make any profit off the farming.

In a perfect market, the farmers would cut back on production in those scenarios and the price would go up. However in a global economy, if the US farmer lowers production, producers elsewhere (China, Australia, South America etc...) will step up to fill the gap created.

If most of the US market was only domestic - then a tariff would work well, it would insulate the domestic price of corn in the US from these international pressures.

But the bulk of the US market is international - almost 45% of all US agricultural production is sent to foreign markets.

Any move to raise tariffs on agricultural foreign trade (or any other foreign trade) would result in trade partners targeting agricultural imports from the US.

This would catastrophically hit states like Nebraska that voted for Donald Trump.

What is the saying? -  Fool me once, shame on you... Fool me twice .. shame on .. err.. won't get fooled again.

posted by maverick @ 4:53 AM 8 comments

Demonetization does nothing to end "Black Money"

I know that demonetization has been projected as a moral project that seeks to "clean up" Indian society and cure its addiction to "Black Money" but this demonetization plan does exactly nothing towards that apparently noble purpose.

Leaving aside my libertarian leanings (which prompt me to say "why should a poor Indian who works her/is ass off and gets next to nothing from her/is government directly pay taxes or bank fees so that the GoI can track their income etc...")  - we all have to accept that even in its most awesome ideal form - the demonetization does exactly nothing to prevent the accrual of "Black Money".

People are still going to break laws. This defiance is rooted in India's deeply libertarian social thought. Unlike the American Libertarian consciousness which is largely a vehicle for certain members of the billionaires club to seduce useful idiots - the Indian libertarian ideology is the byproduct of centuries of mistrust of government.

One of my early mentors in the ACRE labs at IITB - Dr. Venkatramani once said something that has stuck with me for my entire life. He said to me -

"Look at people at a road crossing in India and in Germany or US. In US or Germany - if the crossing light is red - the people will stand there until they become skeletons. In India - people will cross even if the crossing light is red and the traffic is flowing at 100 kph. You could say we are just fundamentally different from these other nations. We do not like rules or to follow laws." 

In honor of its creator - I call this "Venkatramani's Postulate".

As long as Indians remain like that - they will break the rules and laws of the land.

As long as they break the rules and laws of the land - they will need to bribe the enforcement agencies to prevent accountability.

That is where the bribery will kick back in. If you change the notes - the denominations of the bribe will change, it will not go away.

A much better way to think about the demonetization (instead of this moral project bullshit) is to compare it to an interest rate hike in a credit based economy like the US.

When the Federal Reserve wants to dampen speculation in the markets, it raises the interest rates. This deflates speculatory impulses in critical markets like commodities, bonds etc... The Fed does not have a choice in this matter (despite what you hear on YouTube about a Rothschild conspiracy). If the Fed does not do this - you will see major fluctuations in the price of critical commodities and you will risk a collapse of the foundational elements of the economy itself.

In a similar fashion - we need to acknowledge some key facts about India's current situation.

Given the unusually large amount of money that Indian expats are sending back to the "home country" - we are seeing a massive speculation bubble in India's real estate sector. This bubble is driven by people who want to buy housing in  India, never occupy it and keep it as a means of wealth storage in a time when everyone agrees that developed world economies are heading for a major depression. The debt crisis in the developed world is so severe, no rational Indian expat wants to plough any real money into these markets. The ROI on a subterranean real estate investment in India is far in excess of anything that even "Value Investing" can bring in the US or UK or Europe.

As this speculative bubble inflates it puts the Indian economy at grave risk of a collapse. When it collapses (and it will given time) unless the GoI is in a position to support people with credit to make up the cash short falls that will inevitably occur with such an event. The Indian economy will suffer the onset of conditions similar to those that led to the Bengal Famine.

The key thing from an economic security perspective is to keep the speculative bubble in India's real estate sector at a manageable level. The size of the bubble has to be kept as small as possible, and in the event it bursts - one should make sure that resources available are able to provide credit to people who lose cash in the process.

Demonetization is one of the tools that one can use to achieve that end. It is an extremely blunt tool. It will do more harm than good.

A much more precise tool would target the specific means by which expats drop money into real estate in India. A simple system of increased fees on real estate purchases by non-residents would lead to significant inflow into the GoI coffers.

Another technique is to declare a certain day of the month as a tax holiday where specific sums of money below a certain cap can be dropped into bank accounts with no questions asked and no back taxes owed. Once deposited the amount will generate interest income that will be taxed appropriately but the depositor will not be asked how they earned the money or if they paid taxes on it earlier.

Carrying out demonetization without appropriate consultation with the relevant departments - specifically without reading the Agriculture Ministry into the process is just wrong.

posted by maverick @ 5:31 AM 0 comments

Why are Trump supporters celebrating the market shifts?

A lot of Trump supporters have heard that the market is booming as a result of his electoral victory and they are cheering that but...

When you actually look at the market - you see two disturbing trends.

1) The dollar is rising against other currencies - This does the opposite of what most Trump supporters say they want - it makes it easier and cheaper to outsource to places like India, China and Mexico.

2) The bond yield rose - A lot of the rise in the market is due to people moving to bonds and the bond yields are rising which usually means inflation is coming. Again this is the opposite of what the Trump supporters

Look at this Trump surrogate talk about the market  - do people just not get it?

These market changes point to shifts that work against the very people that support Trump.

posted by maverick @ 11:00 AM 0 comments

Will the Indian economy enter a recession on account of the demonetization?

I am sure you have all seen this video by Ray Dalio. If you haven't please see it - it will help you understand what I am saying here. I really like it even though it misses a few things (see below):

1) An very important part of the picture i.e. the role of probability in the economic cycles. What I would like to see added to the discussion is an element of random fluctuation on top of the smooth curves. Obviously as this fluctuations reflect the randomness in each transaction, they would occur on much smaller timescales (daily) than the short-term debt cycle (5-8 years). The collective effects of such randomness over longer timescales (like the long term debt cycle - 75-100 years) is harder to anticipate.

2) The productivity line is actually a wiggly curve just like the short or long term debt cycles. It is easiest to see this behavior in agricultural productivity in various regions of the world [1]. The broad curve trends upwards but there are significant wiggles on it that reflect shifts in the land use pattern. In the combined productivity curve (industrial+agricultural+services+financial) the wiggles are basically representative of the age of the average worker, as the working population ages the cost of keeping the workers on the line rises due to health costs [2,3]. Unless this real decline in productivity is matched by new technical advances that improve production efficiency - we see a significant decline in economic growth - something that can easily compare with a short-time debt cycle. One would also have to account for things like great wars which can deplete the population of entire countries, one normalized correctly to the population size - the net curves should reflect the behavior of a real economy up to the collective effects discussed previously.

3) In Ray's picture - we only see the behavior of a credit heavy economy. The equivalent processes for a cash-heavy economy are not discussed.

This last point brings me to the real topic of this post.

In a cash-based economy (like India) the equivalent of an interest rate hike in a credit heavy economy (like the US) is demonetization.  That demonetization creates the same kind of inflationary pressures inside the system. In a cash economy, unless demonetization is matched by increase in credit (something the RBI and private banks hope to do with all the deposits that come in from this demonetization) - the spending pattern shifts and a recession occurs.

Now fortunately for India, the age of the average worker is low (~28 years) and the debt to GDP ratio is low (~40%) . The likelihood of a short-term debt cycle coupling to a longer term deleveraging is low.

This means the Indian economy could go into a recession on account of this demonetization.

Unfortunately for the US, the age of the average worker is high (~45 years), the debt to GDP is high (109 %) . The likelihood of a short-term debt cycle coupling to a long term deleveraging is high.

The US economy unfortunately stands perilously close to a depression.

posted by maverick @ 5:41 AM 0 comments

Was the election rigged in favor of Donald Trump using insecure Direct Recording Equipment (DRE) machines?

There is strong evidence to support a shift in the rural white vote in key states like Ohio, Michigan, Wisconsin and Pennsylvania [1].  This trend however is not reflected in other states where similar demographics and economic conditions exist (see Menemonie county in Wisconsin). An interesting question now is whether this shift the loyalty of white voters is enough to explain the distribution of electoral votes? This question is the focus of a very serious debate.

One idea that has gained ground among democratic and progressive opponents of Donald Trump is that the election was rigged and the shift in the white vote is insufficient to achieve electoral victory. A prime candidate for rigging is insecure electronic voting machines.  Specifically DRE equipment without a paper log is much more insecure than the paper ballot with optical scan.

We can easily see why such a claim could be made. We can get the actual voting data at a precinct level  from Dave Leip's site [2]. We can get the exact voting machines used in each country from the election data services website [3] or from Verifier [4] .

When one looks at these numbers one sees strange patterns like this. In three counties that flipped in Pennsylvania,  they used DRE machines ((iVotronic-no-RTAL for Erie and Luzerne and  AVC Advantage for Northhampton).  Similar trends are visible in Wisconsin - particularly among counties with small populations.

Now Nate Silver has recently tweeted that these correlations do not stand up to scrutiny in places like Michigan where there were only optical scan systems. I think this is valid.

Nate has also said that the correlation with insecure voting machines disappears when you correct for demographics. I think he is correct to state that the trend disappears but I don't think it supports what he thinks it does. The loss of trend is simply an indicator that counties with small populations with poor people in Wisconsin (who will be White and uneducated because Wisconsin is largely White) tend to have cheaper insecure voting machines. Since the Donald Trump campaign heavily courted this segment of the population, it is difficult to disentangle the effects of the massive shift in voting patterns of uneducated white voters and a pattern of electoral fraud.

I honestly don't know why Nate bothers getting mixed up in this kind of thing. It is not like he earns any cred with the Breitbart News guys - they are already saying that Hillary's massive lead (estimated at 2 Million more votes than Donald Trump) in the popular vote [5] - is a result of rigging.

A less reliable way of determining the likelihood of electoral fraud is the discrepancy between exit polls and actual votes cast. This is usually seen as a flag for rigged elections. This technique also has its flaws.

Amused as people are to see the whole "the Election/System is rigged" turn around and bite its creator in the rear (I get it Trump spent the whole year talking about how the election was going to be rigged and how the electoral college was bad but now his entire claim to being president relies on the very same institutions he vilified) - I think we should try to resolve this.

Perhaps one way to put the conspiracy about electoral fraud to rest is to publish all security logs from various servers involved in the electoral process. I am sure if there is no anomalous pattern there - there will be no reason to think the result was in any way doctored.

posted by maverick @ 6:32 AM 5 comments

John - the other - Trump

When you look carefully you will always find a physicist in any situation (no matter how dire it looks).

John George Trump - physicist, inventor, and scientific leader in the war against the Nazis.

Rumor has it - he never really got on with this brother and nephew (i.e. our President Elect).

His contributions to the war effort and to the development of various medical technologies were recognized when he was awarded the National Medal of Science by President Reagan.

Thanks to BV for the tip.

posted by maverick @ 10:21 AM 0 comments

A risk associated with investment in the Eastern Mediterranean Levant Basin

I spent a lot of time yesterday viewing this congressional hearing about the Eastern Mediterranean Levant Basin.  The discussion here is about the Leviathan and other fields in the Eastern Med, where Cyprus and Israelis interests converge rapidly.  There is a very forceful case for Israeli energy security from exploitation of the Leviathan deposit.

I am very happy to see Israel become energy independent, but there are a few things to consider

1) Exploitation of Leviathan will be expensive. I feel it will be difficult for Israel to raise money for the exploitation. Israel could finance this with support from our government (and others) but it will be difficult to attract investors without the promise of accessing larger market. The most proximate large market is Europe.

2) That is where I think things will get nasty. I don't Russia will approve of Israeli plans to become a natural gas supplier to Europe. The Turks for their part will want a cut on all things Cypriot and that is something the Cypriots will find unacceptable.

3) The actual field is spread across the economic zone of a several nations with a history of hostility towards Israel. If actual exploitation begins, it will likely be marred by violent attempts to physically control the space. [see here]

So quite frankly even from the USG perspective - this is a very high risk investment that will need risk management at a very high level.

Some work has been done towards mitigating the risks, specifically Gazprom has been given a role in the development of the field. I am a little surprised by this development, but perhaps Moscow Center feels that an unproven unextracted gas field is not a real threat to an established pipeline pumping gas every second into German production centers.

The Turkish aspirations are likely to be resolved similarly. Again the Turkish deep staters will probably think similarly to the Russians - an actual pipeline (BTC) is very different from an unproven unextracted gas field in the middle of the sea.

I am told that Prime Minister Netanyahu attempted to get this kind of support from President Obama but I gather things were not very good between them.  Perhaps the President Trump might be more responsive - from what I hear he is a great fan of PM Netanyahu and they share a common friend with very deep pockets, Sheldon Adelson.

I support any investment in regional security as long as the risks are clearly spelled out and explained to all stakeholders.

It is not clear to me how the Russophiles (a lot of who are openly anti-Semitic) will sit well with supporting an Israel friendly initiative that poses a threat to Russia's dominance over the natural gas markets in Europe.

This looks like a massive faultline here and though it appears things have been papered over for now, it isn't clear to me that this won't open up. That risk is quite serious (even if it is a low probability event), and given how much money has to put into this upfront - it cannot be ignored.

That said - if the US can help the Israelis secure their national energy sources, then there will be significant progress in regional stability.

posted by maverick @ 8:07 AM 0 comments

The EM drive produces thrust (or does it? really...)

The paper that was much awaited has been published [1].

To summarize why people find this fascinating -

1) All propulsion systems are based off Newton's third law. In order to generate thrust you have to shoot something out the back. Usually this stuff-that-flies-out-the-back is called the "propellant". And you have to have enough of this stuff to continue to produce thrust. The quantum cavity drives are supposed to  get around that issue making the entire process of space travel a much lighter affair.

2) An enduring mystery in known physics is the mystery of "mass". We know how to "measure" it by comparing the force acting on various objects - but we really have no idea where it comes from. Since it is tied to several other conserved quantities (Energy, Momentum, etc...) - it is fundamental to all known physics yet very little is actually understood about it. When one gets around the the core ideas of Newton's third law, we have to ask ourselves what is mass really.

3) Photons bouncing around a cavity should impart random momentum kicks to the walls. In any system which is in equilibrium, these momentum kicks should average to zero otherwise we have a Szilard engine where Maxwell's Demon is somehow sorting all the momentum kicks and only allowing kicks in one direction to act on the walls. There are competing ideas for Maxwell's Zombies, which people find interesting also. Is such a creature active in a quantum cavity drive?

Now before (or after) you run down the street naked holding you I-pad and shouting "President Elect Donald Trump made Free Energy Happen!!!!"

You should look at this graph

Not that it will matter to most who read this article - but error bars tell a story.

Happy sharing on Facebook or Twitter or Gab or Reddit.

posted by maverick @ 7:35 AM 0 comments

Why is Syria such a "YUUUUUGE" deal!

During the campaign - President Elect Donald Trump made a number of statements about Syria. Most of these were highly confusing and he claimed he knew better than most of the US generals and national security leadership.

I don't know what President Elect Trump knows but I can share with you why Syria is important. (Hint Hint - it has nothing to do with the "culturally threatening" refugees as some other might make you want to believe).

All the complaints about coal have largely resulted in awareness of the effects of sulfur pollution from coal use. This is inducing people to shift from coal to natural gas. The effect is highly pronounced in crowded places like Europe and Asia. Given the rising demand for natural gas, a global struggle has broken out over its supply and Syria finds itself in the middle of that conflict.

Two groups of natural gas producers are vying for pipeline access across Syria. Known popularly as the Iran backed Shia-Gas and the Saudi/Qatari backed Sunni Gas [1] , these guys are the main players in the actual conflict. The Russians and the Turks want to see the transit through Syria blocked or at-least gated by people receptive to their points of view. This is because both Russia and Turkey have their own plans to supply natural gas to the European region.

An related/unrelated conflict is over the Eastern Mediterranean Levant Basin [2]. A variety of groups want to control the exploitation of gas reserves in that region. Specifically the Turks and Israelis see this as a window of opportunity for energy independence. The Russians want to be gatekeepers to this region and prevent it from becoming an unacceptable threat to their northern access routes to Europe. The Egyptians and other Mediterranean states see this region as a possible revenue generator.

A number of US, Chinese and Indian investors have gotten mixed up in this highly complex picture.

As every such transaction is filled with the potential for a very big return. People are getting aggressive and desperate.

That is why the violence levels are escalating.

That is why I think Syria is important.

I really don't know what President Elect Donald Trump wants to do there. I guess it depends on his actual exposure in any investments he has in the region.

Personally I feel there is nothing to do but help the refugees, but I think President Elect Trump promised his mid-western voters that he was not going to accept any refugees and that all those refugees were terrorists, so I think he is going to have to backpedal from that if the US policy is to make any sense in the region. I guess he could do that - but then it would upset Ann Coulter and I don't know if he can afford that politically.

I suppose he could just "bomb the sh*t out of them" as he told his supporters, but  firstly the Russians are kind of doing that already and all that seems to do is increasing the level of refugees - not reducing them.

posted by maverick @ 9:14 AM 0 comments

Key dynamics underlying US-Russia ties.

A lot has been said about the Russian support to the Trump campaign. Perhaps the best summary of the details has been put out by Mike Lofgren [1].  The Lofgren article is worth reading because it gives us a sense of what Russia is doing by floating a new "Comintern" (composed of "Trump faithful", Alt-Right illuminati and Russian PR-Line operators), but is also gives us a sense of why Russia would do such a thing.

It is however worthwhile to recall a few facts about Russia. Even if you dislike Putin and hate the S-directorate - you may want to remember this.

Russia is the largest country on earth. It is three times the size of the US. It  possesses unimaginable levels of mineral wealth. It has an enormous industrious and cultured population. It is a natural bridge between Asia and Europe. It has - is - and - will -always - be a great Eurasian power.  You may fault the Russian for drinking too much Vodka, but you have to admit without the Russian standing up to Hitler - the world would be a very different place. Russia can easily become a pivot on which the world order changes.

Some of you may already know that Saudi Arabia and Russia are today vying for dominance over the global energy market. The Russians have recovered from their collapse in the 90s and they have managed to expand production and now match Saudi volumes if need be. The Russians are also now able to bring sizable oil refining resources - again matching anything the Saudis can pull together.

The Russians are the biggest single supplier of natural gas to Europe. Russia's interests in Syria are also very transparent. Apart from blocking any Saudi backed pipelines through the region, Russia wants to explore the Eastern Mediterranean Levant Basin [2] - whoever knows where to drill - is in a position of supreme leverage. In this fashion Russia could keep its stranglehold on the European  market. (Incidentally - I believe a faction inside Israel also believes that EMLB could provide a long term sense of energy security to Israel, and that may explain how people like the Kushner scion and Steve Bannon are able to stand next to each other).

It is only natural for Russia to want the same level of leverage in Washington DC as the Saudis enjoy.

We know President Elect Donald Trump is neck deep in all things Russian because the man can't give a straight answer when asked about it and he won't release his tax returns which would tell us how much money really came to him from Bayrock and other "channels". And I don't know if you guys noticed - but President Elect Trump comes across as being a little enamored with President Putin. He even thinks that President Putin thinks highly of him, something I really have trouble believing. In the old days (you know like the 50s which President Elect Donald Trump loves) if a political leader talked the way Donald Trump does - we would have called him an "agent provocateur" - possibly even picked him up and questioned extensively. But - we don't do stuff like that anymore.

Given his sizable investments in Russia - President Elect Donald Trump wants to be the guy to bring the Russians in from the cold. There is one particular problem with doing this with the Russians and that is they have traditionally had a very narrow perspective of their relationship with the US.

Specifically - the Russians and the US still have nukes pointed at each other. And Russian missile guidance systems and propulsion systems are still less reliable than their  US counterparts. This gap has narrowed over the last decade or so the Russians lagged the US by several decades to begin with and on this front.

The Russians were slow to move on the Nazi rocketry operation. They arrived at the Wunder Waffen factories after the Allies had already picked them over. The Russians made up some lost ground under the leadership of Kelydsh  and Korolev, but after the death of Sergei Korolev - things just fell apart in Russia.  The Russians are super smart, but everyone  needs time and money they simply have not had enough time and money to focus and get this done. So fundamentally the Russians still view an American attempts at an Anti-Ballistic Missile (ABM) Defense mechanism as a "first strike" threat.  This forces the Russian hand in a peculiar way.

So from an American perspective - I have to say - one cannot distinguish between a completely acceptable expression of Russia's commercial interests and a completely unacceptable provocation aimed at disabling the ability of the US to defend itself.

And I think while President Elect Donald Trump may want to see things go one way with Russia, the deeply held and well motivated suspicion of Russian moves in DC will provide significant pushback.

Alternatively if President Elect Donald Trump is able to push an ill-conceived US-Russia embraced, we will significant blowback - with major losses on the ABM and nuclear security fronts.

Based on the public utterances during the election and the tweets of his national security leadership nominees, I think we are facing an administration that is not capable of understanding the nature of the Russian threat to our nation's security.

posted by maverick @ 8:40 AM 0 comments

Why Asra Nomani is pro-Trump? - Some insights.

Some of you might have noticed Asra Nomani is pro-Trump and actually voted for him.  She has gone to great lengths to tamp down on the negative reaction that talk of the "Muslim Registry" has created in the media.

Most people - even the CAIR types - wouldn't know why Asra would do such a thing.

To understand this we must turn the pages of recent history that we may have forgotten.

A month after 9/11/2001 an American Airlines flight 587 crashed into a neighborhood in Queens NY. The FAA found that the airplane had run into some kind of wake turbulence and the pilot had lost control, but rumors persisted that something quite different had transpired. Khalid Sheikh Mohammed apparently told his subordinates that the flight had been brought down by a suicide bomber Abderraouf Jdey with a "shoe bomb".  A month later Richard Reid's "shoe bombing" attempt to bring down American Airlines Flight 63 was stopped. The advanced design of the Reid's "shoe bomb" made observers wonder if the Jihadis had access to other advanced bomb technologies.

This was an exceedingly difficult time, people wondered what had come of the links between Pakistan's nuclear establishment and the Jihadis. Rumors circulated that the Reid was linked to a Pakistani ISI backed Jihadi group that was declared a terrorist organization in the US - the Jamaat-ul-Fuqra. The members of the Jamaat ul Fuqra were believed to be loyal to one Mubarak Ali Jilani, a man with a very interesting resume. A rumor circulated that Fuqra acolytes had access to Pakistani nuclear weapons.

The Wall Street Journal dispatched a reporter named Daniel Pearl to look into this. Accompanying him was a new hire who had very little experience in this sort of thing - Asra Nomani. When Asra and Daniel landed in Karachi - they stirred up a hornet's nest. Death threats were made and many people warned them to be extremely careful about who they interacted with. Daniel unfortunately persisted and then one day he disappeared leaving Asra to hold all the pieces.

Asra held the pieces, she literally held Daniel's wife Marianne Pearl (who was then pregnant with their son Adam) as she learned of Daniel's execution. Asra saw first hand what the Islamic Jihadis did to innocents.

Not long after that Asra came back to the US and founded the first mosque led by a woman. She spent her entire time facing death threats from Jihadi groups and she became the face of feminist resistance to the Jihadi agenda.

Against this backdrop it is easy to see why Asra would support a candidate who speaks openly about combating the very people who threatened her life for the past decade. Asra's sentiments (unlike those of many Trump supports) are based on first hand knowledge of the threat posed by Jihadi groups.

In my opinion - Asra Nomani - is was and will always be - a true hero of the resistance against religiously zealotry - even if it turns out she was misled by the Donald Trump Campaign's cleverly crafted marketing.

Also in my opinion Asra needs to think very carefully about what she is supporting. No good will come from someone like her getting mired in US domestic politics.

posted by maverick @ 5:14 AM 0 comments

Macro-economic effects of the Great Event

A lot of people have been talking about macro-economic effects of the Great Event. Some people think these are positive - others disagree.

The thing about macro-economics is that it is easier to track and evaluate progress against. Being composed of hard numbers, macro-economic effects are less woolly than social or empowerment based benefits.  If the macro-economic effects are adverse - bankers everywhere will discard the policies that triggered them like an old shoe.

I want to capture what I feel is the main dynamical aspects here. I am doing this because unless there is a positive movement along these aspects - the entire demonetization will fail in real economic terms.

1) Increase in bank deposits - This was something the various Indian banks were happy about. The demonetization would force cash out of private cash reserves and into bank accounts that are easier to track. This notion received support from both the RBI and private bankers in India. Even some international economists felt this was a likely positive outcome.

A lot of people on the development side also said that if India was "cashless" - people would be able to use their Aadhar number much more effectively to access GoI and state government benefit schemes. Combined with the biometric Aadhar identifier and a secure encryption system - one could really see the core of India's economic reality change rapidly.

That said - as the great poet said - Delhi hanuz dur ast.

On Quora - there was a very interesting thread that people participated in - and the main conclusion was that there isn't going to be a significant shift in the amount of money stored in banks. A number of new accounts are likely to be opened, but it is unlikely that they will be operated with large quantities of cash sitting around in them. The people with piles and piles of money will never go to a bank to store it as that would attract the attention of the tax authorities and the people with small piles of cash don't really like to use bank accounts for the reasons below - so even if they open an account it will just have some nominal amount of money for a few days and then it will be withdrawn once the notes are all exchanged.

The real limiters here stem from the fact that most ordinary people in India (who use cash only) don't go to banks because

1. There are no banks close by. (true for most of India - though this may change as paytm type operations become more common). 
2. When they go to banks - they feel that banks are biased against them (basically a trust issue - "they treat us like dogs because we are poor/low caste", "they make the account in the husband's name" etc...).
3. They spend all their time working and don't have time to go to a bank. (this I feel is really true for the so-called "daily wagers" - who only get paid at the end of a long hard day after the banks have closed). 
4. They are operating at subsistence level and living day to day and do not have any real savings. The money they "save" doesn't even pay for the trip to the bank. 

2) Lowering of interest rates - This trend was anticipated and many were salivating over it. The basic logic here is that if the deposits rise - banks don't want to have money sit around and pay high interest on it. So they lower the interest rate and hope that people will borrow money and the difference between the interest rates for lending and deposits will be sufficient to support the banking operations.

I call this the "Brahmin's Pot" theory - after the famed Panchatantra tale of the Brahmin and his Dream.If the deposits go up and if there are people willing (and able) to take out loans and the new businesses the loans help start do well then there will be enough interest income coming into the banks to allow them to pay interest dividends to the depositors (or central bankers they actually borrow money from)... That is a lot of ifs and buts and a crucial component of this is that the economic slowdown caused by the cash flow problem not impede the growth of businesses created with the newly issued loans - otherwise the banks will simply be saddled with toxic debt and no dividends will ever come back to the people who deposited the money.

A key limiter here is that people in India don't have credit histories that are easily tracked. This makes lending a very risky affair, everything has to be collateralized in some way and that limits the rate at which people take out loans. Some people have said the system in India favors companies that borrow big sums of money and default on those loans, and this demonetization is actually just a fancy way of pulling wealth from the poor and shoving it into bad loans to the rich.  That may or may not be true - but merely lowering the interest rate does not have the same effect in India as it does in the US where credit-worthiness is a much more transparent affair. India does not have a personal credit scoring system.

3) Other stuff:  A number of other gray areas like "taxation increase" and "inflation" or "deflation" have been bandied about - but I don't see any way to really estimate which of those will actually occur.

Off topic - 

I saw this YouTube video - it really brightened up my day. I can say that things are going in the right direction in some parts of the world. I wish I could say the same about other places.

posted by maverick @ 8:41 AM 2 comments

A tentative plan to cope with the present situation

It is clear that things are not the way they should be and worse things loom on the horizon.

The arrival of the first wave of G-8 enforcers in DC today morning indicates that the world has grown tired of the confusion and the manner in which clearly unqualified people are being allowed to call the shots on critical issues.  A little bit of nepotism is tolerable but beyond a point it is gravely harmful to the Republic.

We are not a banana republic - there is a hard limit to the amount of bullshit we can put up with.

Only the deepest possible call to national unity can save our great nation and the world from certain catastrophe.

I propose that the legislative branches consider an "Extraordinary Measures Act" which seeks to provide much needed relief.

Under the provisions of this act - a council of former presidents should be created and assigned specific responsibilities. As with any other executive organ - this body too would be answerable to the legislative branches. We have five living members right now for the council - I venture they will be more than willing to keep working if the nation desires it. Additional oversight measures can be created as deemed necessary by the respective select committees.

Under this act - all branches of  the national security establishment - including but not limited to the Intelligence Community, the NSC, the HSC, the DHS, the Department of Energy, the Department of Defense, the PSAB, the FIAB, the critical infrastructure protection programs etc... will report to the council of former presidents.  The council be given complete responsibility for all planning, operations and staffing. The NSS/NSCS should be expanded as needed to service the council's needs.

Also under this act - a bipartisan committee in the Congress and Senate would be formed to accept and examine recommendations for all non-national security related senior administrative positions by groups of eminent persons. Once cleared by this committee the nominations would have the same standing as any made by the executive branches,  For example - a council of eminent scientists could recommend candidates for Chief Administrator of the EPA or a council of key economists could recommend candidates for leading the Office of Economic Policy, or the Office of Management and Budget, or even the head of the Consumer Financial Protection Bureau and so on.

Quite naturally the "Extraordinary Measures Act" would have a sunset clause and the legislative branches could de-activate its provisions with a two-thirds majority as needed.

I realize what I ask for is unprecedented - but so are the circumstances we find ourselves in.

We must accept the responsibility that accompanies being a nation founded on immutable principles. We must show the resolve to protect, enforce and preserve them.

As others have said - there is much common ground here.

If sensible people come together - an unimaginable tragedy can be averted.

I am not a constitutional lawyer and I have no experience in the relevant areas - but I implore anyone who does to consider the idea presented here and give it a form that is more aligned with the existing process for getting things done.

posted by maverick @ 5:59 AM 0 comments

Some alternative views on the Great Event

For those of you who care to know what is going on - here are some links.

As I have said earlier on posts here - there is a class of Indians who view the poor to be worthless nobodies to crush under the wheels of their cars  - this "Great Event" (as Sanjay Srivastava calls it), is their creation. If Prime Minister Modi did it - it was to appease this bizarre segment of Indian society which he is convinced is responsible for bringing him to power.

Sanjay Srivastava - The Moral Project. (a great summary of the moral bullshit that covers an otherwise economically disastrous idea)

Mihir Sharma - India's Great Rupee Fail. (a great collection of views contradicting the prevailing twittergiest of India).

Appu Suresh - Why govt's demonetization may fail to win the war on black money (contains some details of the Fin Min view on how black money actually is hoarded in India).

Shivam Vij - Ways in which Indians will convert money black money to white after demonetization (note the heartbreaking story of a family that lost a newborn because the ambulance driver refused payment in old notes - this is inspite of the fact that everyone was assured hospitals could accept old notes).

posted by maverick @ 12:12 PM 6 comments

Demonetization - real consequences (as opposed to desired consequences)

From news reports a very confusing time line of the demonetization policy appears. There is story of Mr. Bokil in Pune [1].  It seems Mr. Bokil met Prime Minister Modi in July 2016 [2] and inspired the demonetization. Then there is the "for-six-months" narrative [3] where the entire issue was decided in a meeting between Sri Urjit Patel, Sri. Arun Jaitley and Sri. Modi and quietly put into action under the disguise of printing counterfeiting proof notes. Per this second narrative - the NSA Doval, COAS Suhag and the CNS and ACM were read into the actual demonetization roughly 1.5 hours before it was made public. The only story they were told is that they need to be prepared for civil unrest in the wake of a botched currency replacement operation - something that Sri. Modi believed was entirely unlikely - because no one at the meeting was even allowed to contact their staff and set up contingency plans.

It appears from these accounts that the policy never underwent an institutional review inside the GoI. Neither the NSCS nor the IDS nor the economic intelligence senior staff saw the policy in any form. No central intelligence organization appears to have had any direct inputs to the policy formulation. There was not even an internal whitepaper on the issue.

This is basically Sri Modi's (and whoever else he might have confided in) baby. Whatever else you may say about it - it seem Sri Modi has started believing his own press and twitterverse that he is some kind of financial, political and social reform genius. I don't know that he is any of those things but I do know that no good comes from believing your own press.

We have all heard how this is going to solve the problems of "70 years of corruption" in "70 days" etc... but what is it really going to do.

I want to examine the impact of this kind of policy on underworld finances - specifically on the flow of heroin trafficking revenues from India to Pakistan. 

Based on NCRB data we can crudely estimate how much drug use there is in India [4]. A crude estimate of how much heroin is consumed in India per year is around 100 mt [5] At the rate of $10-$20 per gm [6], we get a total number that is close to a billion dollars. The real number may be higher but we can use this as a reference in discussions going forward. 

The poor farmer in Afghanistan grows opium. He is paid in Afghanis by a Pakistani refiner. The Pakistani refiner processes the opium into refined heroin, brands it and sells it to a Pakistani trafficker who pays in Pakistani Rupees. The Pakistani trafficker sells the branded packs of heroin to an Indian distributor who pays in Indian rupees. The Indian distributor then moves the product into the hands of Indian addicts who pay in Indian rupees. The ancient banking network known as "Hawala" - converts between the currencies at an exchange rate that is determined locally based on immediate availability and global exchange rate fluctuations. 

The billion dollars are actually stored in the form of Indian rupees, mostly in Rs 500 and Rs 1000 notes. Whenever there is a local shortage in the system, the Pakistanis print Rs 500 and Rs 1000 denominations and give it to the Hawala system so that there is no direct impact on the exchange rate or local violence levels. 

posted by maverick @ 6:04 AM 2 comments

India's anti-corruption fetish

In India - the rich find ever more innovative ways of shitting on the dirt poor. Rather than address the root causes of inequality in society, it is much easier to dismiss an attempt by the poor to seek financial reward as "corruption".  Essentially in India - you accuse anyone you don't like of being a "corrupt fellow" (or as they say in the services when it comes times to discuss promotions ... "his reputation is quite bad...")

For example, when you want to drive your car under the influence of alcohol and you are pulled over by a police officer in India, it is the police officer who is guilty of "corruption" when he accepts your bribe, but you are not guilty of anything - you are just protecting your interests and preserving your right to drive blind drunk!

In general - when you go to do something about "corruption" - you run a risk of upsetting the complex balance of wealth inside Indian society.  Most of this "black money" is actually money for a vast variety of goods and services which can't be accounted for in the "white" economy because the specific trade is illegal or undermonetized or undervalued.

The Modi government was keen to be seen doing something substantive on the "corruption" issue. It was one of the main planks of the Modi ticket. By pandering to the "anti-corruption" fetish - the Modi government hoped to satiate a fraction of the urban voters that brought it power. The whole point behind this initiative was to secure an existing vote-bank - i.e. the anti-corruption twitterati - while denying political space to opponents (such as Mr. Kejriwal) who may need subterranean cash flows to secure their own political positions.

Unfortunately whenever you do something in a chaotic place like India - you run the risk of it backfiring on you. What may seem like a brilliant idea in one instant - can turn quickly into a major political albatross.

This is true for the demonetization initiative taken by the Modi government. The idea of demonetizing something like 80% of the total currency in circulation is very risky. I describe in detail my specific concerns below.

1) It messes with the Hawala system - A very large fraction of the Hawala banking systems relies on these denominations. The Hawala system smoothly moves funds between underworld enterprises like drug, arms and terrorism and the Indian real estate sector and India's complex political system. If there are hiccups in the cash flow there - it usually turns into a major terror strike. One of the theories behind the 1993 Bombay Blasts was that the deregulation of the Indian rupee by the P. V. Narasimha Rao government had angered powerful Hawala traders and they had in turn lent support to disaffected Indian muslims who carried out the single most massive terrorist bombing in Indian history.  We are looking at significant domestic terrorism risks on account of this demonetization move.

2) Hostility with Pakistan will grow - The Pakistanis have been printing sizable numbers of fake notes in those denominations. A lot of people view the FICN (Fake Indian Currency Notes) as another devious plot by Pakistan to undermine India's security - but there is a more IMO benign explanation. As a significant portion of heroin is trafficked from Pakistan to India - occasionally there are late payments and missed orders. The FICN is basically a Pakistani way of balancing the books. It is harmful to India and totally unacceptable from the RBI perspective - but not fatal as it is effectively ballasted with bulk heroin rates. If the GoI demonetizes the Rs 500 and Rs 1000 notes - the Pakistanis will be left with a lot of worthless paper. That will make them quite hostile. This is not a good idea given how close to an escalation the situation currently is.

3)  Ordinary people will be put to grief from the economic jamming  - Hundreds of ordinary Indians use these notes for daily transactions. They need these transactions to buy and sell essential commodities. The disruption caused to these people is overwhelmingly larger than the inconvenience caused to a few million hyper corrupt people (mostly politicians - and I will be shocked if a single a BJP politicians ever comes to grief on account of these measures).  The only ones who will suffer in this is ordinary middle class people who have to accept payments in Rs 500 and Rs 1000 notes - they will not be able to receive payment or make payments. The resulting clog in the economy will take years to clear up. ( I really don't know who believes this "50 days" stuff).

4) Criminals will circumvent the system - Most people who possess the bags and bags of money will find a way around the restrictions. A large fraction of this "black money" is tied to actual farm income (which is not taxed in India), real estate and politics in India. If you are a farmer with bags of cash - you can just burn a Rs 500 note that you dodged taxes on and then correspondingly burn up a fraction of your crop. If enough people do this, the price will go up and the difference will be made up easily. If you are a builder - make a building and take only black money in Rs 500 and Rs 1000 bills from the investors. For accepting every Rs 500 note - take a Rs 50 premium. After that take out an insurance policy on it and burn the building down with all the old Rs 500 bills in it. The insurance payment will be in new bills which you can give back to the investors and you will have earned yourself a nice Rs 50 for every note.

Now before the Modivadis start humping my leg - let me assure you - I am sure your Prime Minister is super smart and he has thought all this through. I am also sure when he is crying on TV and worrying about his assassination, those are just crocodile tears and he is actually spending most of his time gloating about how he has stuck it to Yuvaraj Rahul and his "corrupt" Congis.

I am sure that the Modivadis are 500% correct to support this - but since I am not one and I can afford to be wrong - let me state for the record - from where I stand - this demonetization thing seems like a bad idea, it brings into sharp focus how little the Modi government and its administrative allies really understand about the detailed functioning of complex economy like India.

posted by maverick @ 7:15 AM 6 comments

Social implications of the election of President Donald Trump

A large number of people voted for Donald Trump. While the specific motivations of each of these voters are impossible to guess, but it is clear from multiple independent surveys that a number of male voters were hoping President Trump would liberate them from the oppression of "Political Correctness". Even among women voters there appeared to be a few who wanted to see this changed.

posted by maverick @ 12:04 PM 11 comments

So what are President Trump's actual policies going to be?

As discussed in the last post - Trump has won the electoral vote and Hillary seems to be headed towards winning the popular vote. Barring some unanticipated dynamics in the electoral college - Donald Trump is the next president.

Given that he has said so many things in his life and during the election process contradicted all of them and then retracted his contradictions and then gone back on those retractions, a reasonable person could say they are very unsure of what President Trump's actual policies will be.

Some specific questions that will need very specific answers are:

1) Will President Trump seek a renegotiation of trade treaties with major US economic partners? 

• Will he seek to effectively renegotiate NAFTA ? - NAFTA currently acts as a bulwark against inflation. By accessing cheap labor and natural resources in Central and South America while still retaining access to the US and Canadian markets - US based companies are able to make huge profits which they then send back into the IRAs of all "middle class" Americans. Poorer Americans benefit from this arrangement too because they can buy things made cheaply in places like Mexico - the same goods made in the US would be unaffordable. I tend to think of NAFTA as a kind of stent that keeps the American economic heart from seizing up. As Trump enterprises itself benefits "bigly" from this arrangement - I don't know why he would put into place any measure that seeks to disturb this arrangement. 
• Will he seek to introduce trade barriers on Chinese imports? - US trade with China is a two-pronged affair. While China supplies cheap goods to the US, it also accepts a very large number of dollars. The dollars are recycled to the US via purchases of raw material (from the very states that elected President Trump) and from Wall Street (which doesn't seem to care for President Trump). Even if you don't like Chinese made goods - you still buy them. Even if you insist on a "Made in the USA" tag on everything - the tag itself is made in or made with stuff made in China. Even the Trump brand clothing is made in China. Any attempt to disrupt this trade pattern will lead to massive shifts in the real value of the dollar. With the Chinese economy is widely believed to be nearing its Lewis point and possibly approaching a Minsky moment - any fluctuation in that trade pattern could couple far outside its intended limited scope. The economic damage from such a fluctuation could spread across the world. 

2) What will President Trump's true posture on debt issues be? 

• Will President Trump interfere with the Federal Reserve? - The Federal Reserve wants to raise the interest rates because it is difficult to keep printing money without doing that. Unfortunately the Trump campaign has engaged a lot of popular resentment against the "International Bankers" who "rigged the election" and "system". If the US economy is to grow - those rates must go up. If President Trump stays clear of the Federal Reserve - then he will alienate a vast portion of the people who elected him. If he interferes in the Federal Reserve's functioning - he will condemn the vast majority of the people who voted for him to perpetual economic stagnation.
• Will President Trump default on the treasury bonds? - Investors are dumping stocks and jumping into long term treasury bonds which are linked heavily to the Trump Campaign's promises of an America that is "Great Again". At the most basic level investors are hoping that bonds will insulate them from immediate market fluctuations that will occur in the aftermath of the election. If President Trump attempts to implement his strategy of defaulting on treasury bond obligation in an effort to cut what he sees as a growing debt burden, then this strategy will fail. This is considered a low probability high impact risk right now but it is crucial to the security of all investments in the world - every IRA, college fund, mutual fund etc.. etc... is linked to these treasury bonds. If the US defaults on the bonds, - to quote George H.W. Bush - things fall apart.

3) What is President Trump's national security posture? 

• If the SecDef refuses to press the button - will President Trump say "you're fired"? - The current dyad system requires that the President and SecDef push the red button together. The SecDef can't veto the decision but the SecDef can refuse to press the red button. If the SecDef refuses the President can fire the SecDef. During the campaign, Donald Trump showed a complete lack of awareness of these details. He also didn't understand the fundamentals of nuclear security. The only thing standing between a 3AM mood swing and global nuclear destruction is the dyad system. 
• Will President Trump turn a blind eye to nuclear proliferation? - This is something that has been hinted at during the campaign. Is this how it will actually go down? Are Japan and South Korea on their own - going forwards?
• Will President Trump reduce US contributions to international security organizations? - Most of the US alliances are held together because of a flow of dollars. This has a two fold effect - first it secures basing rights for US forces in various countries, and secondly it attaches a sense of physical security to a piece of paper we call the dollar. If the US cuts off this flow - NATO will fall apart and old European rivalries will re-emerge or the Russians will walk into Western Europe. The Trump campaign made promises to the various groups about "getting others to pay more" etc... but there is very little actual leverage to do this. 
• Will President Trump carry out more direct military interventions? - These are very expensive affairs regardless of what the initial sticker price says and the procedure for legally declaring war with congressional approval is quite involved. During the campaign Donald Trump has spoken openly about indulging in military adventures. Does President Trump intend to make this kind of stuff a part of his national policy structure? - if so then we are likely to see more illegal wars of the Iran-Contra or Laos variety break out.  If not then we are likely to see to see the present - much criticized - state of affairs continue. 

4) What will President Trump do about his media problem?

• Will the Trump Administration pursue policies that limit the freedom of the press? - The Trump campaign railed against the media and the manner in which it explored the truth behind the campaign's claims. Will President Trump actually insist on passing laws which effectively muzzle the media? 
• How will President Trump cope with the negative portrayals of his policies? - The Trump campaign has shown a remarkable inability to cope with negative perceptions of his own words. People will not stop using his own words against him. 

These are open questions at this time.

I am leaving out the issue of immigration - as we all know that there no likelihood of real change on that issue.

I am leaving out discussion on specific infrastructure building ideas (a lot of those have been bandied about) as none of those can be financed (even privately) without the Fed's approval.

Most people who voted for Donald Trump do not know the answers to these questions. They voted for him because they saw themselves in him - not because they possessed any real understanding of policy frameworks or decision making systems.

As with any new administration - the Trump Presidency begins with a huge surge of support among the people that voted for him.

posted by maverick @ 6:41 AM 0 comments

Looking beyond the election - a divided society.

I know a lot of people feel strongly about the upcoming election - and whatever happens one is going to have to cope with those views.

I tend to believe the data and any model that is reasonably well tested. I find Nate Silver's projections to be reasonably accurate and barring a massive difference between the likely voters polled in the surveys underlying Nate's model, and the actual voter turnout - I don't see any reason for the probability projections to be vastly different.

So as Nate says - Donald Trump has little chance of winning a popular vote, but he might win the electoral vote and become president. Again - this is nothing new in the American context. We all remember the 2000 election of George W. Bush.

I am not surprised by this, although I confess that in mid October - I did believe things might be different and that the country might somehow get past the divisiveness and focus on a national vision which was more unified. But that was not to be - it appears as soon as Sheldon Adelson opened his purse strings, the Republican party quickly defaulted to its politically opportunistic roots and the polarization returned.

What one now sees is a very divided society.

A society where one segment is completely mentally unprepared to accept the empowerment of women, sexual, racial, ethnic and linguistic minorities and another segment can't get enough of the empowerment agenda and wants to seek the agenda expanded far beyond where it has reached.

A society where one segment pines for the days of the past - where you could call someone whatever you felt like and never be held to account for your actions and another segments which wants to see all aspects of the social interaction under a perpetual review.

A society where one segment relies entirely on conspiracy websites to grind out confusing and self-serving facts and another segment demands extremely high quality and highly vetted data with clear trends.

A society where one segment survives on short term memory alone and another segment remembers every last detail of everything.

A society where one segment accepts vaguely worded non-prescriptions for hard policy issues and another segments wants to see detailed answers to questions that can't possibly have real answers.

A society where one segments thinks feelings are facts and another segments thinks that facts are facts and feelings are feelings and the two should never mix.

It is difficult to see how society as whole could function with such completely divergent views. What we see in the electoral process is a kind of social shearing that is happening as these divergent views appear to pull the narrative in different directions.

I wonder if I should dust off my old set of Pakistan analysis tools and use them to discuss America at this point. America today is behaving like Pakistan did on the eve of Sept 12th when General Musharraf pledged his support for the American led War on Terror.

posted by maverick @ 6:47 AM 5 comments