Saturday, August 22, 2015

Weekend Reading Links

1. Ambrose Evans-Pritchard hints at an OPEC obituary, arguing that the Saudi bet on driving out shale producers as oil price falls may not materialize, 
The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June... Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

He argues that while the shale producers may be able to innovate and remain competitive despite the falling prices, the fiscal burden may be prohibitive for Saudi Arabia to weather, 
Tyler Durden though thinks that all the talk of increasing productivity and the dawn of era of low oil prices is kool-aid. Very difficult to predict such trends since there are too many other factors at play. Only time will tell.

2. Fantastic investigative essay in the Indian Express on the not-so-glamorous under-belly of India's e-commerce system, the parcel delivery boys (and yes, they appear to be mostly boys!). I am not surprised at all with this. Such practices will continue so long as the benefits (by way of cheap labour in plenty with limited alternative employment opportunities) out-strip the costs (of high attrition rates and resultant limited skill-set employees etc).

Interestingly, coming in the same week as this scathing indictment of Amazon's work practices, this essay on India's own Amazons appears to have hardly raised a flutter. Does it reflect poorly on the quality of public debates in India? As an aside, the real story with e-commerce would be one which shows how most of these firms are bleeding capital and it could be a very prescient curtain raiser on what looks certain to be India's first real dot-com bubble and bust. 

3. When Anat Admati and colleagues advocated capital reserve requirements upwards of 20 per cent, it elicited strong reaction from Wall Street. Now, Alan Greenspan, of all people, advocates higher capital reserves,
If average bank capital in 2008 had been, say, 20 or even 30 per cent of assets (instead of the recent levels of 10 to 11 per cent), serial debt default contagion would arguably never have been triggered. Had Bear Stearns and Lehman Brothers continued as capital-conscious partnerships, a paradigm under which both thrived, they would probably still be in business. The objection to a capital requirement of 20 per cent or more, even when phased in over a series of years, is that it will supress bank earnings and lending. History, however, suggests otherwise...
If history is any guide, a gradual rise in regulatory capital requirements as a percentage of assets (in the context of a continued stable rate of return on equity capital) will not suppress phased-in earnings since bank net income as a percentage of assets will be competitively pressed higher, as it has been in the past, just enough to offset the costs of higher equity requirements. Loan-to-deposit interest rate spreads will widen and/or non-interest earnings will increase. An important collateral pay-off for higher equity in the years ahead could be a significant reduction in bank supervision and regulation.
4. Livemint points to a report on ownership of equities in the Indian stock markets. Foreign participation has been rising in recent years, as reflected in the steadily rising share of foreign holdings on BSE 200 equities...
... and the declining and rising shares of Indian and foreign institutional investors respectively in BSE 200.
5. From FT, on the distortions induced by the extended period of ultra-low interest rates, which arises from the transformation of central bankers to creating demand (by low rates) from their original role as lenders of last resort,
By lowering interest rates we can weaken our exchange rate and take demand from our trading partners. We can also take demand from the future by inducing more borrowing against future income and also by a “wealth effect” when lowering interest rates makes future cash flows appear more valuable. So we can steal demand from foreigners, induce people to borrow more than they otherwise would, or make rich people appear richer. 
6. Nice article in Times which shows why the Federation of Quebec Maple Syrup Producers is the new OPEC,
Quebec's trees produce more than 70 percent of the world’s supply and fills the majority of the United States’ needs. The federation, in turn, has used that dominance to restrict supply and control prices of the pancake topping. It is effectively a cartel, approved by the provincial government and backed by the law. In 1990, the federation became the only wholesale seller of the province’s production, and in 2004, it gained the power to decide who gets to make maple syrup and how much... In 2003, a majority of federation members voted to make production quotas mandatory, meaning farmers could sell only a certain amount each year. Farmers are required to sell all of their syrup through the federation or its designated agents... When the federation suspects farmers are producing and selling outside the system, it posts guards on their properties. It seeks fines from producers and buyers who do not follow the rule. In the most extreme situations, it seizes production... 

It defends the system, saying it keeps prices high and stable... To keep prices high, the federation enforces strict quotas for the province’s 7,400 producers. Instead of flooding the market during years with bumper crops, all syrup produced beyond that amount is stored in the federation’s warehouse, which helps prop up prices by limiting supply. When seasons are lean, it releases the syrup, to maintain stable supply and pricing... Stacked in barrels nine high, the reserve currently holds about 60 million pounds of maple syrup. Prices are set by the federation, in negotiation with a buyers’ group. The federation holds most of the power, given that it controls a majority of the world’s production.
7. Share-holder friendly activities, share buy-backs and mergers and acquisitions, both driven largely by cheap borrowings and cash hordes of large corporates, have underpinned the equity boom in the US. FT points to this data from Dealogic,
Companies have raised $290bn of debt to buy competitors this year — almost triple the level in the same period in 2014. The number of issues, however, has risen only 46 per cent, so the average size has been much larger. In the first half of the year there were $987.7 bn of deals in the US... the highest since records began in 1980. 
8. Mexico is distributing 10 million 24 inch flat-screen television sets at a cost of $1.6 bn to the beneficiaries of two social welfare programs Prospera (campaign against hunger) and Liconsa (subsidized milk program) in what it calls the world's largest television distribution program. That moniker though may belong to the Indian state of Tamil Nadu, which in the 2006-11 period distributed 16.4 million 14 inch color TV sets.

The Mexican government hopes to promote internet penetration with these digital televisions which have USB and HDMI ports to access digital content. 

9. Business Standard has this story which highlights that housing is simply out of the reach of all but businessmen, self-employed, and a handful of top-flight executives. A Liases Foras study finds that housing is unaffordable within India's eight largest cities, but for double-income households. 
As I have blogged on numerous occasions, affordable housing may turn out to be the biggest brake on India's urban growth engine. 

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