Why liquidity is no guarantee for 'value' discovery?

John Kay has a delightful piece, where he seeks to upend the conventional wisdom on liquidity, that assets need to be tradeable every milli-second so as to generate volumes. Supporters of this view blame the increased regulation in the aftermath of the global financial crisis for the reduction in liquidity. But Kay argues that neither the savers (who lend) nor businesses (who borrow) need this kind of liquidity,

There is not much trade or liquidity in these (corporate bond) markets because there is not much need for trade or liquidity in these securities. The practitioners were worried that the absence of an active market damaged the process of “price discovery”. But “price discovery” seems to mean something different from “value discovery”, which is an estimate of the expected cash flows that holders will derive from the security over its life. “Price discovery” owes more to other traders’ expectations than fundamentals of valuation. To believe more can be learnt about the credit quality of a bond by stimulating trade in it than from careful evaluation of the circumstances of the issuer requires an unjustified faith in the “wisdom of crowds”. A lesson of the subprime mortgage fiasco is that an active market in securitised products is no substitute for careful assessment of the borrower’s capacity to repay.

And about what is needed, he writes,

Liquidity in financial markets is often equated to the volume of trade. But every financial crisis shows that such liquidity is liable to evaporate when actually required. An assurance that the funding requirements of businesses and households can be met is best achieved by a resilient, well-capitalised banking system and an asset-management sector focused on the long-term needs of both providers and users of capital. A market characterised by large trading volumes on low spreads serves the interests of market practitioners rather than their customers.

It was reported by the US Commodity Futures Trading Commission that this year itself, till September, there had been 35 "flash events" in the market for West Texas Intermediate crude futures. This is more reminder (like this, this, and this) to those who celebrate the power of more liquidity exemplified in trends like high-frequency trading etc. Amen!

Giving cattle to the poorest was the best strategy after all

The Economist points to a recently released evaluation of a large program by the non-profit BRAC in Bangladesh which gave the poorest people a small stipend for food, followed with a cattle asset (a cow or a few goats) coupled with extension services to help them graduate from 'extreme' poverty to 'normal' poverty. It writes, 

We combine data from 21,000 poor and non-poor households in 1309 villages in Bangladesh with the randomized evaluation of a program that provides a large, one-off, transfer of assets and skills to the poorest women. The evidence suggests the poor face imperfections in capital markets that keep them in a low asset-low employment poverty trap where they are only able to engage in low return and seasonal casual wage labor. The transfer of assets and skills allows them to address this misallocation of labor by undertaking more productive capital-intensive work activities, thus increasing total labor supply, earnings, savings and asset holdings. The improved earnings capacity and resource base of the poor allows them to engage in financial intermediation that benefits non-poor households and leads to village-wide increases in savings, saving rates and capital accumulation. Lifting the poor out of the poverty trap therefore sets in place a virtuous cycle that improves the allocation of labor and places the entire village economy on a trajectory out of poverty. 

The paper finds that since agriculture labor is seasonal, the poorest, especially the women, have considerable idle time. So, any asset like cattle immediately gives them an opportunity to utilize their idle time and earn additional income. But such assets require large investments, which may not be forthcoming for the poorest from standard credit sources like microfinance. 

In this context, India's decades-old experience with self-employment programs for rural poor is instructive. Income generation support to poor people by way of providing milch cattle was the centerpiece of India's flagship rural poverty alleviation programs, starting from the earliest IRDP to the more recent SGSRY. Animal husbandry related components formed more than three-quarters of all income generating schemes administered by the District Rural Development Agencies (DRDAs) across the country. 

In fact, the old IRDP documents had exactly the same mechanism logic - more effective utilization of spare time - to justify the disproportionately high spending on milch cattle. The later versions of such self-employment programs, especially those funded with multilateral assistance, in states like Andhra Pradesh even made the distinction between the poor and the poorest of poor to target such assistance. There exists a rich literature on the advantages of cattle rearing for the poorest and evaluations of such programs across different states. But, while cattle formed the major share of aggregate spending, there were regional variations in this focus within the state itself depending on the climate, water availabilty, and social acceptance.  

It then constantly faced criticism for this bias towards cattle with arguments about whether it was financially viable enough or not. In any case, the findings of this study come as an evidence-based endorsement of the existing policy priority. But, as I blogged earlier here, it is questionable as to whether a long-drawn and expensive RCT was necessary to draw this policy inference. This would all the more be so since atleast some of these studies are likely to throw up inconclusive findings, thereby raising red-flag on the evidence-based adoption of what is arguably one of the best interventions to assist the poorest among the poor.  

India economy update

More disturbing signals about the Indian economy. The RBI's latest Financial Stability Report points to increased banking sector risks due to deteriorating asset quality and weak corporate performance. Asset quality, in terms of both Gross NPAs and restructured loans has been continuously worsening.

Much the same trend is mirrored in all the important indicators of banking health.

Interestingly, as a share of total sectoral exposure, aviation is the most vulnerable. Encouragingly, with lower fuel prices, sectoral competitiveness and profitability of the aviation sector would, in all likelihood, improve significantly in the years ahead.

An interesting feature of the firm size-wise credit allocation break-up is the dominance of large firms. But the disturbing trends are the share of stressed advances to large and medium scale enterprises, at 21% each. Given that large enterprises make up nearly 35% of all non-food credit, the high share of stressed advances is a matter of systemic concern. The equally high share of stressed advances to medium scale sector is likely to further deter lending to these types of firms, thereby reinforcing the forces that prevent greater credit inflows into a category of firms which are critical to driving job creation.   

The other, upstream, side of the banking sector balance sheet is corporate performance. The major share of the stressed assets, in terms of low interest coverage ratio and high leverage, is in the construction, power, iron and steel sectors. The graphic below highlights the performace of 2711 non-government, non-financial companies.

The Business Standard analysed the balance sheets of the country's top 441 indebted non-financial companies and found that 67 firms, with a total debt of Rs 56,500 bn at end 2014-15, had negative net worth or financially insolvent. This was an increase from 16 companies at the end of 2009-10. The total debt of these 441 companies was Rs 285,000 bn and accounted for 98.1% of the gross debt of 654 listed non-financial corporates. 

The analysis points to a negative feedback loop of falling profitability, rising interest costs, and falling investments, 

Return on capital employed (RoCE) for the indebted in the Business Standard sample declined to a decade-low 7.4 per cent in 2014-15, which was only a few basis points (a basis point is a hundredth of a percentage point) more than their average interest cost of 7.1 per cent. At this rate, many companies may be forced to default on their loans as profits from operations will be insufficient to cover the cost of debt servicing. The firms' interest cost on incremental debt is already trending higher than the underlying return on capital employed. In 2014-15, the cost of incremental debt shot up to 11.8 per cent, nearly 440 bps higher than the underlying return on capital employed. At its peak during the financial year 2004-05, these companies reported a return on capital employed of 18.7 per cent more than twice their average interest cost of 6.9 per cent.

The last financial year was also the first instance in a decade when companies' interest expenses were higher than depreciation. The indebted companies of the sample spent Rs 2.03 lakh crore on interest payments in 2014-15, up from Rs 1.83 lakh crore a year ago. In comparison, their depreciation allowance rose marginally to Rs 2.02 lakh crore from Rs 1.9 lakh crore in 2013-14. Thus, companies spent a greater part of their operating profits on debt servicing rather than capital expenditure and growth. In all, interest payments accounted for 34.2 per cent of the companies' operating profits in average last financial year, up from 16.7 per cent five years ago and 12 per cent a decade ago. This leaves little resources for growth capital.

This is a powerful deterrent to the revival of the investment cycle, essential to the creation of jobs. Worse still, it appears to be taking its toll on the existing jobs, as a recent series in the Indian Express, which also examined the situation in power and roads sectors, wrote, 

A look at the group of 230 leading companies listed on the Bombay Stock Exchange (BSE 500), and have an aggregate market cap of over Rs 55 lakh crore, shows that for the first time in at least four years they witnessed a decline in their aggregate employee strength as it fell by 14,000 in the year ended March 2015. While 105 out of the 230 companies reduced their headcount by an aggregate of 84,688 during the year, 114 companies within the list increased their staff strength by 69,910. For the remaining 11 companies, the numbers remained constant. The aggregate employee strength for these companies came down from 21.56 lakh in the year ended March 2014 to 21.41 lakh in the year ended March 2015... In Financial Year (FY) 2014 the same group of 230 companies added an aggregate of 1.63 lakh employees and in the three year period between FY’11 and FY’14 they added close to 4 lakh employees. However, the numbers fell in FY’15 as companies facing decline in revenue growth and low capacity utilisation resorted to laying off their employees. The biggest drop in number of employees during the year was witnessed by companies in manufacturing, construction and infrastructure, and capital goods, whereas IT and pharma companies saw net addition to their employee strength.

This trend, especially in those sectors which traditionally contribute to large job creation, does not portend well. 

The one-way renminbi bet?

It is now well-acknowledged that the fortunes of the world economy for the year ahead are more intimately tied to developments in China than elsewhere, including the US. Arguably one of the most keenly watched China-related news is that about its currency. In this context, Christopher Balding argues that the renminbi may be a one-way bet,

The market knows the RMB is going in one direction and they like those odds. Even if a hedge fund just shorts the CNY/CNH overnight with a not insignificant leverage and sells at trading open, recently, they would be making solid money... Chinese investors, retail and institutional, know that quality investment options in China are limited and are very interested in moving money elsewhere... If investors believe that the RMB is going lower, they will move more money out of China... the more the PBOC moves the RMB down, I see the pressure build on the RMB for additional weakening and additional pressure for rapid and violent movement. I see the incremental downward movement as adding incrementally to the probability of a sudden dislocation.

Given this strong incentive to short renminbi, the People's Bank of China's (PBoC) management of the currency over 2016 would be a test of its ability to play against global financial market participants. In this contest, it is likely that we end up seeing a few bouts of volatility in the value of renminbi, with its adverse consequences on the global financial markets as well as the competitiveness of other emerging market exporters.

But Beijing may have few other options left. As Balding writes, given the estimated 20-40% overvaluation of renminbi, any abrupt floatation would result in a sharp depreciation, with attendant adverse financial market consequences. It is, therefore, appropriate that on 11th December, the People's Bank of China (PBoC) announced that the currency would be denominated against a basket of currencies and not just the dollar. But this is also confirmation that Beijing prefers devaluation. Given the rising dollar and depreciating currencies elsewhere, this move would allow the renminbi to decline hopefully gradually against the dollar, thereby increasing China's export competitiveness without destabilizing other EM economies.

The fallacy of "decoupling" from EM asset class

Neelkanth Mishra cautions against reading too much about the Indian economy from the stock market gyrations. I agree completely. 

He also argues that stock markets react to global economic weakness, in particular, problems in emerging markets (EM), the category to which India gets bundled,

The market capitalisation of the top 100 stocks (BSE100) has fallen by 5 per cent in the last 12 months, whereas for the next 400 stocks (let’s call them the Next400), the aggregate market capitalisation has increased by 9 per cent... The larger stocks are more pressured by FII selling as they have higher FII ownership, and they also have much higher fundamental linkages to global trends. The Next400 stocks are dominated by sectors like consumer discretionary and non-banking finance companies that are less exposed to global trends, and better reflect the improvement in the Indian economy. They are also less owned by FIIs... 

Indices regularly shed weaker companies and add stronger ones: Over the next few years, as the Indian economy continues to outperform global trends, it is likely that they may become more representative of the economy. Similarly, it is likely that India becomes an “asset class” by itself, that is, given its idiosyncratic economy, global savings may choose India-focused funds rather than investing in India through EM or Asia funds.

This conclusion is baffling and as misleading as the Sensex is of the economy. For a start, the share of the Next 400 in the total market capitalization is most likely to be disproportionately small. More importantly, the hope of India decoupling from the EM asset class and acquiring its distinct identity among international asset managers and other financial institutions goes against a voluminous body of research on cross-border capital flows which clearly indicates that it does not discriminate based on fundamentals. It may, therefore, be unrealistic to assume that India can, based on a few years of growth, emerge as an asset class distinct from the broader EM category.   

At a more broader level, such reasoning presumes that it is possible to have a significant share of the domestic economy, one that drives economic growth, largely insulated from the rest of the world. This overlooks the fundamental economy-wide structural imbalances and limitations, arising from the very narrow corporate and industrial bases, in a landscape dominated by small and informal enterprises. It would require more than economic growth to address these problems. 

The broad outlines of a health care system for India

Lancet last week released a comprehensive study of India's health care system which reinforces the belief that it needs serious repair. Its headline findings,

We make the case not only for more resources but for a radically new architecture for India's health-care system. India needs to adopt an integrated national health-care system built around a strong public primary care system with a clearly articulated supportive role for the private and indigenous sectors. This system must address acute as well as chronic health-care needs, offer choice of care that is rational, accessible, and of good quality, support cashless service at point of delivery, and ensure accountability through governance by a robust regulatory framework. In the process, several major challenges will need to be confronted, most notably the very low levels of public expenditure; the poor regulation, rapid commercialisation of and corruption in health care; and the fragmentation of governance of health care. Most importantly, assuring universal health coverage will require the explicit acknowledgment, by government and civil society, of health care as a public good on par with education. Only a radical restructuring of the health-care system that promotes health equity and eliminates impoverishment due to out-of-pocket expenditures will assure health for all Indians by 2022.

The conventional wisdom is that health insurance is the holy grail in health care. I have written here about why this is a fiscally unsustainable slippery slope that could potentially ruin even that small part of the country's health care system that functions. In this context, here is a set of possible prescriptions about translating this vision into action.

1. India's healthcare priority should be to dramatically improve preventive and primary care standards. Its facilities should be strengthened with more personnel, increased capacity building, and rigorous monitoring, all complemented with greater demand-side pressures. The primary health center (PHC) and its subcenters should be trained to act as a single-stop for all preventive and primary care services, and a gatekeeper for all referral services. While this is notionally their mandate even today, its compliance remains weak and these institutions have been reduced to being maternal and child health centers. All the existing national programs, including the village public health activities, should be closely integrated into the PHC and brought under the control of its medical officer. These facilities should be provided resources to equip themselves with all the basic infrastructure and equipments and maintain them in a clean and hospitable manner. Wherever the medical officer is not appointed, a senior staff nurse should be entrusted the supervisory responsibility.

2. The PHC would act as a nodal agency co-ordinating all preventive and primary care activities - maternal and child health interventions, basic OP services, normal deliveries, administration of national programs, and coordination of village public health activities. This functional profile demands the services of a public health manager, more than a trained medical practitioner, much less one trained rigorously for more than five years. A three-year course with a curriculum designed to accordingly may be one way to also overcome the acute shortage of MBBS doctors that leaves a large proportion of PHCs without any doctor. 

3. Given that less than fully qualified (LTFQ) providers, commonly called quacks, are the point of first contact in nearly 80% of cases in rural areas, no meaningful reform is complete without integrating them into the mainstream. Their capacity building should involve continuous trainings and a gradually phased pathway to formality. One approach may be to offer a very basic preventive and primary care-focused course curriculum as a certificate in primary care, to be acquired over a 4-6 month duration of distance learning. The entire coursework can be provided on-line and through mobile phone apps, with the final examinations too conducted online under strict monitoring. Once they acquire the certification, these providers can be empanelled and used for various preventive and primary care services offered by the government in return for a fee.

4. The secondary care institutions like the 30-100-bed community health centers (CHCs) should be strengthened with all basic facilities and kept very clean. Currently, they are the weakest part of India's health care system. These hospitals should contain round-the-clock doctors and be equipped to handle basic surgeries including C-section deliveries. Wherever resources are extremely scarce, staff from two CHCs can be temporarily redeployed to run at least one full-fledged CHC. A mobile team of anesthetists can be made available if required.

5. All tertiary care admissions, except in cases of emergencies, should happen only through the primary care center and preferably the first referral unit in the CHC. While this may be difficult to enforce, a variety of different approaches may have to be adopted to gradually internalize this approach among all the public and private stakeholders.

6. It may be difficult to put the insurance genie back in the bottle. The next best option is to consolidate all the public insurance schemes offered to different categories of people under one umbrella, with a basic insurance plan and different types of top-ups, including those which provide premium care. Like in the continental Europe, the basic plan should be community-rated, cover a very basic set of high-incidence catastrophic medical conditions and no more, and have the same premium across insurers within a region. Private insurers should also offer this basic plan and at the same terms. They would be allowed to differentiate based on the top-ups and the quality of their services. 

7. The government, jointly with the private insurance agencies, should negotiate the annual price schedules of care providers and diagnostic services on a regional basis. This price schedule would be applicable for all government and private insurance and for any other contracting of services (like with CGHS). It would be a matter of debate as to whether the fee schedule should become the price standard for all categories of consumers as would be the case in a completely regulated market. 

8. The public tertiary care facilities should be strengthened with more facilities, greater cleanliness and responsiveness, and better management. Since such institutions are only a handful in each state, the state governments should take it up as a mission to bring them up to the standards of the best private hospital in the region. Patients under public insurance or being subsidized for their health care should be discouraged from visiting tertiary care facilities for simple secondary care treatments. Apart from providing affordable and accessible care for the poor, strong public tertiary care facilities are essential to keep private providers honest. 

9. In an environment where government hospitals are badly managed and discourage even those who cannot afford private hospitals, allowing insured citizens to choose their hospital is certain to further enfeeble public facilities. In the circumstances, there may be only two options. One, public insurance schemes can mandate that patients go to private facilities only in case the same treatment is not available at the public facility and on referral by the tertiary care facility (or on pre-authorization by the TPA). Two, the personnel delivering the care in the public facility should be incentivized with a share of the payments. It is not clear as to which of the two alternatives may work and a light-touch mix of both may be necessary. 

10. Finally, districts should be allowed to innovate to implement the components of this plan. The Government of India should offer a menu of interventions to improve health care service delivery - electronic medical records of all medical transactions in public facilities, strengthening of the rogi kalyan samitis at the PHC level, initiatives to make public facilities more attractive for patients, integration of the LTFQ care providers, rating of private providers and so on. The district may commit to the implementation of a clearly defined action plan consisting of some of these interventions and corresponding outcomes and enter into a 3-5 year MoU with the state National Health Mission Society. In return, the district should be encouraged with an incremental share of the NHM allocations. This strategy should not be forced upon all districts. In fact, only a handful of self-selected districts in each state should experiment with it, and based on their learnings, the strategy should be gradually expanded to cover others. Apart from closely monitoring and refining the programs, the state and central governments should encourage competition among those districts in the achievement of their action plans.

Now, it would be impossible to implement all these components in a one-size-fits-all mode across the country on a mission mode. It is just too complex. For sure, many of these reforms would struggle to pass the test of political acceptability and seriously strain the administrative bandwidth for effective implementation. Greater program flexibility would certainly lead to failures and scams. Dfferent parts of the country, even parts of the state, will progress at different pace in implementation. But given the enormity of the challenge, this may be the only way to initiate a process which could, potentially, over a long time frame, atleast stand a reasonable chance of getting us to the destination. 

Weekend Reading Links

1. Quietly, Barack Obama, the reluctant foreign policy President, has made it a landmark year for US foreign policy,

In reality, the climate change accord brings to an end a year of landmark breakthroughs in international diplomacy by the Obama administration. As well as the climate agreement, this year has brought a diplomatic pact on Iran’s nuclear programme, a major trade accord in the form of the Trans-Pacific Partnership and the reopening of US diplomatic relations with Cuba. All four of these achievements have been many years in the making.

2. Livemint has the latest dismal news on the Indian banks stressed assets problem which comes from Nomura Research,

The banking industry is sitting on around Rs.5-6 trillion of stressed assets. The brokerage further says that the loss resulting from default on these assets could be as much as Rs.1.7 trillion. Put another way, these Rs.6 trillion of assets are as high as three-fourths of the current stock of stressed assets (declared non-performing assets, or NPA, plus restructured assets) in the system.

Clearly, for metals and infrastructure, two of the drivers of investment cycle, there is no light at the end of the tunnel.

3. Livemint captures the declining share of corporate profits as a share of economic output.

In this context, Jahangir Aziz makes the point that even the mid-2000s rise in corporate profits were driven by exports rather than increased domestic demand,

In the golden years of 2003-08, when growth in India averaged almost 9 per cent, much of it was driven by corporate investment, which tripled from 6 per cent of the GDP to 18 per cent. Who consumed most of the goods produced by the increased investment? Not residents, as domestic consumption fell from 61 per cent of the GDP to 58 per cent. Instead, much of the newly created capacity was absorbed by foreigners, with exports surging from 15 per cent of the GDP to 24 per cent. With foreign demand accounting for more than 50 per cent of India’s manufacturing in the pre-crisis year, the relentless decline in exports since 2011 has, more than anything else, driven the weak industrial growth and languishing corporate investment.

This goes back to my argument that tries to make the distrinction between making in India for exports and for local market, with the trade-off being one between quality and price. Given the anemic global economy and the 12th straight month of decline in exports, the case for orienting make in India for the domestic market appear compelling.

4. Bhupesh Bhandari makes the case for industrial policy to encourage mobile handset makers to print their circuit boards in India, so that a value addition of eight to nine per cent takes place here. Currently manufacturers import everything as semi knock down (SKD) kits and then assemble them here, creating a value addition of no more than one to two per cent. Instead, he advocates imposing a countervailing duty of 12% on imports of PCBs so as to encourage phone makers to import the components as completely knock-down (CKD) kits and then print the circuits in India. This would be first step in designing and fabricating chips in India, which together make up nearly 40% of the phone cost.

This may be a good example of actually picking winners by guiding the development of a market. The duty could potentially set the industry in the path of an escalator from printing the circuit board, to designing the chip, to finally manufacturing it.

5. Whatever spin you try to give to the US health care market, one cannot but come away with convinced that it is the best example that free markets do not work in health and regulated prices are necessary. The Times points to a new study which examined US insurance data for the 2007-11 period and found,

First, health care spending per privately insured beneficiary varies by a factor of three across the 306 Hospital Referral Regions (HRRs) in the US. Moreover, the correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs is only 0.14. Second, variation in providers’ transaction prices across HRRs is the primary driver of spending variation for the privately insured, whereas variation in the quantity of care provided across HRRs is the primary driver of Medicare spending variation. Consequently, extrapolating lessons on health spending from Medicare to the privately insured must be done with caution. Third, we document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures. For example, hospital prices for lower-limb MRIs vary by a factor of twelve across the nation and, on average, two-fold within HRRs. Finally, hospital prices are positively associated with indicators of hospital market power. Even after conditioning on many demand and cost factors, hospital prices in monopoly markets are 15.3 percent higher than those in markets with four or more hospitals.

6. The Lancet has an article calling for an integrated national health care system for India built around a strong public primary care system supported by private and indigenous providers. Livemint has a graphical summary of the report, from which two stands out. One, the personnel deficiency, especially of paramedical staff is staggering.

In a country with very high out-of-pocket spending, health care costs have been rising across the board. 

7. In a week the Fed finally took the plunge and reversed monetary accommodation by raising the Federal funds rate by 25 basis points, Larry Summers points to the work of Luckaz Rachel and Thomas Smith, who find that a 450 basis points decline in the global neutral real interest rate over the past 25 years. Summers points to the authors finding that factors other than slowing global growth being responsible for more than 75 per cent of the decline in real rates,

They note that since the global saving and investment rate has not changed much even as real rates have fallen sharply, there must have been major changes in both the supply of saving and demand for investment. They present thoughtful calculations assigning roles to rising inequalityand growing reserve accumulation on the saving side and lower priced capital goodsand slower labour force growth on the investment side. They also note the importance of rising risk premiums associated in part with an increase financial frictions.

This from Mervyn King and David Low captures the declining real rates

 8. At a time when politics is increasingly characterized by extreme caution bordering on paralysis, parochialism and short-sightedness, Angela Merkel's embrace of the Syrian refugees has rightfully earned her FT's acclaim as the Person of the year. I feel this assessment is spot on,

Her response to the refugee crisis has shaken Europe profoundly. Germany will never be the same again. For better or for worse, the cautious Ms Merkel is boldly transforming a continent. Even if she fails, she has left an indelible mark.

To put that in perspective, by end-November the country received 965,000 refugees, more than five times the figure last year. Who cares whether she succeeds or fails, this is the stuff of great leadership. This profile by George Packer is a classic.

The China Effect on the World Economy

Times has five excellent articles about the China effect on the global economy. The earlier ones were on the country's efforts to use its deep pockets to win diplomatic allies and secure natural resources, especially in Latin America, Africa, and Middle East, and the impact of Chinese slowdown on the multinational corporations and commodity exporting countries. To get a sense of the latter,

Vale, the Brazilian mining giant, is racing to unload assets. In Australia, Vale and its Japanese partner, the Sumitomo Corporation, sold a coal mine in July for just $1, after it had been valued at more than $600 million three years ago. In Argentina, Vale is trying to sell a potash mine in which it invested more than $2 billion.

The recent articles include one on the soaring Chinese investments in US real estate. Constrained by investment opportunities at home and a stock market crash, coupled with recent capital account liberalization measures, Chinese savers have been scouting investment opportunities abroad in large numbers. As part of the liberalization, insurers have been allowed to invest 15% of their assets overseas, of which just 1.44% has so far been estimated to have been invested abroad. The Times writes, 

This year, Chinese families represented for the first time the largest group of overseas home buyers in the United States. Big spenders on new homes are helping prop up local economies in the Midwest. But in dense areas like San Francisco and Manhattan, they are also affecting the affordability and availability of housing, as demand outpaces supply and bidding wars ensue. While Chinese purchases make up a small sliver of overall sales in the United States, they have had a disproportionate impact on the market for more expensive properties, buying one in 14 homes sold for more than $1 million. On average, buyers from China, including the mainland, Taiwan and Hong Kong, pay $831,800 for a home, more than three times as much as Americans spend, according to a National Association of Realtors survey...

Some Chinese are buying homes purely as investments, capitalizing on surging rents in many parts of the United States. Others are trying to move their money beyond the reach of the Chinese government. Many buyers have their children’s education in mind, picking up homes in good school districts or close to universities. At the upper echelon, the wealthy are hoping for green cards, joining with developers to take advantage of a federal program that fast-tracks them for residency.

The scale of such spending, and the larger capital outflows from the country, is staggering,

Chinese buyers spent $28.6 billion on American homes in the year ended in March, more than double their purchases two years before, according to the Realtors association. Chinese purchases in overseas commercial real estate jumped 49 percent last year, Jones Lang LaSalle, a big real estate brokerage firm, has estimated. The real estate deals follow a broader exodus of money from China to countries and companies around the world. An estimated $590 billion moved out of China in the 12 months through June, according to Fitch Ratings. And the amount of outflows most likely set a record in the third quarter, although detailed data will not be available until next month. In the past, they tended to stay under $200 billion a year.

And the Chinese buyers' strategy to buy in cash has given them an edge over even the locals,

For typical American home buyers who require mortgages, the influx of Chinese money makes it even more challenging in markets facing low inventory and rising prices. A majority of home purchases by Chinese buyers — 69 percent — are entirely cash, according to the Realtors association. Such bids often rise to the top for sellers who can then close on a deal in little more than a weekend. Even in Silicon Valley, a market awash in millionaires, Chinese buyers — if they pay cash — can edge out tech entrepreneurs whose wealth is tied up in stock options.

Chinese students, who make up 31% of international students in American colleges, are an important driver. Parents of these students find it far cheaper to buy a home in the US than in their own larger cities. Some others have been purchasing homes in good school districts so as to get their children have school education in the US. 

Chinese investors have been particularly aggressive at using a federal visa program called EB-5 that allows overseas citizens to put $500,000 to $1 million into a project that will create at least 10 jobs. Investors can get a green card in about two years. So far this year, 86 percent of the EB-5 visas issued worldwide have gone to Chinese.

This rush of Chinese (and other overseas) buyers has had the effect of putting upward pressure on property prices in many cities across the world. Its impact has been mixed,  

Hong Kong and Singapore have each imposed 15 percent taxes on nonresident buyers of residential real estate. In Australia, the state government of Victoria, which includes Melbourne, introduced a 3 percent tax on overseas buyers. Still, some places are welcoming the economic activity. City coffers benefit from stronger property tax revenue. Many overseas arrivals are relatively wealthy, spending on new cars and furniture as well as everyday shopping and dining. The interest from Chinese buyers is reshaping demographics in Texas. As the volume of Asian purchases grow, the number of Mexican buyers, historically the largest category from abroad, is leveling off.

Another article explores the growing dependence of Nigerian economy on China and the backlash it appears to have generated. Like elsewhere China has lent billions to build roads, railway lines (including a $875 m high speed line between Abuja and Kaduna), airports, power plants and other infrastructure, in return for securing access to mineral resources. Nigeria is the largest overseas customer of Chinese construction companies at $24.6 bn since 2005 and China is the country's top lender. Now, the Nigerian government is investigating corruption in Chinese construction contracts and state governments are struggling to repay loans on many trophy projects. Further, Chinese imports have destroyed local industry and created massive unemployment problems,

In Kano, angry protesters in the streets blame widespread joblessness on China, which is manufacturing African fabric designs in shimmering hues more cheaply than Nigeria. Employment in Nigeria’s textile and apparel sector has plummeted to 20,000 people, from 600,000 two decades ago. In Lagos, authorities are trying to stamp out subpar Chinese electric goods. Imported power strips and wiring have inadequate copper to handle Nigeria’s 240-volt system... Nigerian authorities are stymied. Corruption is endemic, making it more difficult to enforce safety standards. And Chinese goods are so dominant that consumer have few other choices.

The scale of Chinese overseas lending is staggering,

State-controlled Chinese banks have lent money at rock-bottom interest rates in deeply indebted Nigeria. They have done so based on the assumption that the Chinese government will repay them if Nigeria cannot. A little-known Chinese government agency, Sinosure, has guaranteed the loans. Sinosure insured $427 billion worth of Chinese exports and overseas construction projects around the world in 2013, the most recent year available. The Export-Import Bank of the United States, by comparison, issued just $5 billion worth of credit in each of the last two years.

Another article explores how the Chinese sponsored 57 member Asian Infrastructure Investment Bank (AIIB), which focuses exclusively on infrastructure investments, seeks to upend existing multilateral lending rules of the game. The $100 bn institution is hoped to become an alternative to the traditional institutions like World Bank, IMF, and ADB. 

PS: More on China's impact, this being the export of coal power plants,

Since 2010, Chinese state enterprises have finished, begun building or formally announced plans to build at least 92 coal-fired power plants in 27 countries... Once complete, the 92 projects will have a combined capacity of 107 gigawatts, more than enough to completely offset the planned closing of coal-fired plants in the United States through 2020. The expansion is the equivalent of increasing China’s own coal-fired electricity output — already more than twice as much as any other country’s — by more than 10 percent. The overseas push comes as China’s state engineering firms are struggling with declining profits and a glut of coal-fired power plants at home, where economic growth is slowing. Beijing has encouraged state firms to “go out”and seek projects abroad to stay in business, increase demand for Chinese steel and bind the Chinese economy more closely with those of its neighbors.

Judicial activism gone too far

Regardless of whatever regulatory and legal reforms India undertakes, it is unlikely to achieve its objectives unless its judiciary shows maturity and exercises restraint. Its propensity to interpret stated law in the broadest terms, far beyond its contextual and literal sense, most often transgressing its functional jurisdiction, has been at the cost of other institutions. The latest institution to fall victim is the Competition Commission of India (CCI),

India’s competition regulator has netted a paltry 0.6% of the total amount of fines that it has imposed on companies as lengthy judicial reviews and overturned orders have rendered the anti-trust watchdog almost toothless. Since its inception in 2009, the Competition Commission of India (CCI) has levied Rs.13,900 crore in penalties on companies for violating rules. The regulator’s success rate in recovering the money is, however, alarmingly dismal at Rs.82.1 crore... Judicial appeals have either delayed or blocked CCI from recovering penalty money, making the regulator appear ineffective... 97% of the penalty (approximately) has been stayed by the courts/appellate authority.

For sure, the CCI cannot absolve itself of its share of the blame for the quality of its orders. But it cannot be so bad that 97% of its orders are not only contested but continue to remain under litigation. Does the Ministry of Finance really want the Reserve Bank of India to be the next victim? 

Weekend Reading Links

1. Larry Summers has a very dismal prognosis for the US and world economy. He has one more reason to be sceptical of any significant rise in the real interest rates,

the increases in demand achieved through low rates in recent years have come from pulling demand forward, resulting in lower levels of demand for the future. For example, lower rates have accelerated purchases of cars and other consumer durables and created apparent increases in wealth as asset prices inflate. In a sense, monetary easing has a narcotic aspect. To maintain a given level of stimulus requires continuing cuts in rates.

And this argument about the possibility of a recession in the US and the weakness of monetary policy in combating it is disturbing,

The experience of the US and others suggests that once a recovery is mature the odds of it ending within two years are about half and of it ending in less than three years over two-thirds... History suggests that when recession comes it is necessary to cut rates more than 300 basis points. I agree with the market that the odds are the Fed will not be able to raise rates 100 basis points a year without threatening to undermine recovery. Even if this were possible, the chances are very high that recession will come before there is room to cut rates enough to offset it. The knowledge that this is the case must surely reduce confidence and inhibit demand.

Central bankers bravely assert that they can always use unconventional tools. But there may be less in the cupboard than they suppose. The efficacy of further quantitative easing in an environment of well-functioning markets and already very low medium-term rates is highly questionable. There are severe limits on how negative rates can become. A central bank forced back to the zero lower bound is not likely to have great credibility if it engages in forward guidance.

2.  The aftermath of the sub-prime crisis has upended many a conventional wisdom. One of them was on interest rates - that zero is the lower limit, below which people will pull out their money and stash it under their mattresses. But, as we have seen with negative rates across Europe, no such thing has happened. While the ECB has cut its main target interest rate to minus 0.3% and the Swiss National Bank is aiming for even minus 1.25%, the total deposits in European banks were 327 bn Euros higher in October 2015 than in June 2014 when the negative rates were introduced. As ECB has reiterated its commitment to go even lower, it remains to be seen how low is too much for savers to start pulling back. For the time being, the conventional wisdom has been replaced by this,

There are a lot of benefits to keeping money in a bank besides the interest you earn. If you keep $10,000 in savings in a bank, and the bank gets robbed, you’re unaffected; the bank is on the hook for the losses. If you keep it in your freezer, theft is your problem. The peace of mind of having your $10,000 in a federally insured bank account and the ability to write a check to make a purchase or wire money to a family member are valuable. More valuable, it seems likely, than the $30 in annual costs that would apply if the Fed put in place the E.C.B.’s new negative 0.3 percent rate.

3. As its own economy slows down and its mills, smelters, and refiners struggle with their excess capacity, Chinese manufacturers have been exporting massive amounts of  steel, aluminium, and oil products, hurting producers across the world. 

This Bloomberg report captures the scale of the problem,

Net fuel exports surged to an all-time high of 2.22 million metric tons in November, 77 percent above the previous month, customs data showed. Aluminum shipments jumped 37 percent to the second-highest level on record while sales of steel products climbed 6.5 percent, taking annual exports above 100 million tons for the first time... there is almost 700 million tons of excess capacity around the world, with the Asian nation contributing as much as 425 million tons.

4. Ikea is iterating with a new business strategy. In a break from big box, large storefront retailing, the privately held company now proposes to try out three new strategies - pick-up points, smaller stores, and city center stores. Its CEO, Peter Agnefjall describes how it proposes to adopt these changes,

That’s what we’re doing and then it will be trial and error — that’s what an entrepreneurial business is about. You don’t get everything right from the beginning and in some cases it will fail. In some cases this will be a super success, and in some cases it will be something that we can tweak and improve and that’s the way we develop Ikea constantly.

5.  A friend sends this cartoon which captures the essence of the negotiating positions in the climate change meeting at Paris.

6. Talking of climate change, the most striking image of its impact is this.

The website has excellent illustrations of the impact of climate change. 

7. India's National Green Tribunal (NGT) has ordered an interim stay on registration of new diesel vehicles and renewal of registration of those older than 10 years in National Capital Region (NCR). This follows its earlier orders banning the plying of diesel vehicles older than 15 years in NCR, pollution tax on all commercial vehicles entering Delhi, closure of all roadside hot-mix plants in Delhi, and directions to the Delhi government to identify critically polluted areas and issue stay-at-home warnings to elderly and children. In fact, the recent decision of the Delhi government to ban cars with odd and even numbers on alternate days is itself motivated by NGT directions to improve air quality levels in the capital city.

It is another example of how, in the absence of political leadership, judicial activism may be the only way that vexed public policy challenges with strong inertia can be addressed.

8. As the Fed's reversal of monetary accommodation nears, the corporate bond markets appear to have become spooked with borrowing costs for the lowest rated companies spiking sharply. UBS has estimated that $1 trillion worth US corporate bonds and loans below investment grade may be under stress as borrowing costs rise. The ultra-low interest rate environment had driven large volumes of money into high-yield debt in search for yields. 

The clearest evidence of trouble is the decision by asset manager, Third Avenue to stop withdrawals and liquidate its high-yield bond fund, $788 million Third Avenue Focused Credit Fund. This follows the Fund's 27% slump this year which has resulted in investors rushing to redeem their assets. Third Avenue says it has run out of money to "pay redeeming investors without having to dump bonds at fire-sale prices", which would further drag down the Fund's valuation and usher in a death spiral. This is the largest mutual fund failure in the US since the Reserve Primary money market fund shut shop in the immediate aftermath of the Lehman collapse in September 2008, heralding the bursting of the sub-prime mortgage bubble. This from the FT captures the risks,

The Third Avenue fund closure underscores a situation that has raised worries since the financial crisis. Mutual funds have been piling into corporate bond markets in recent years, even as the ability to trade these debts has atrophied as regulation and risk-aversion has spurred investment banks to curtail their market-making activities. That has raised fears over a toxic “liquidity mismatch” in corporate bond markets, a phenomenon that people from Jamie Dimon to Stephen Schwarzman have said could exacerbate or even cause a crisis. The crux is that investors can exit from mutual funds rapidly, which could create a so-called “flighty capital” stampede. However, the funds hold increasingly illiquid securities that are harder to sell... The average yield of the most lowly rated US corporate bonds has rocketed from 10 per cent earlier this year to over 17 per cent this week, and the woes have begun to spread from the energy sector that was the epicentre earlier this year.

The liquidity crunch and the contagion effect on other assets and intermediaries/institutions from forced fire-sales is also a reminder about the systemic importance of asset managers. 

It does not hurt to be corrupt!

Sometime back I had blogged about why corruption was pervasive, arguing that it pays to be corrupt. A newer version of the decision-tree diagram below (please click to blow-up) captures the expectations and deterrents facing officials when they take bribes

A cursory examination of the extant administrative processes on disciplinary action would reveal that each of the probabilities - p, q, r, a, and b - are far closer to zero than one. Given this, the likelihood of the biggest punishment of a person being caught taking bribes and dismissed from service is (p)(q)(r)(a)(b), an infinitesimally small chance. In any case, the administrative processes make establishing a corrupt practice very difficult. And, even when caught, the current processes leave pretty much the whole share of the rents captured by the official in tact. So, given the stakes involved, if you do not mind the infamy and can manage the inquiry process (not very difficult), it clearly pays to be corrupt!

The probabilities and cost at each stem vary based on how strict the officer concerned with the task is.

Crossing the rubicon in urban air pollution and traffic management

The decision of the state government of Delhi, prompted by a direction on air pollution from the National Green Tribunal, to prohibit private cars and two-wheelers with number plates ending in odd and even numbers on alternate days may well be India's crossing the Rubicon moment in combating urban traffic congestion and air pollution. It is the first time demand constraining policies are proposed to be implemented by an Indian city. 

The measure has predictably not gone down well with opinion makers and vehicle users. The expected responses are out - it will be difficult to enforce, should be after good public transport is put in place, will encourage users to adopt measures to circumvent it, should have been part of a menu of measures, and so on. All logical arguments and with lot of merit. It is for these reasons that the results so far across the world have been mixed, though very successful in some places.

In fact, in an ideal world, this decision should have followed all the aforementioned measures. But in the real world of messy decision making in an Indian city like Delhi, with scarce resources, limited state capability, deficient civic-spiritedness, and lack of long-term political leadership, it would have been impossible to take such a decision if it were to be done only after all these concerns were addressed.

The conventional wisdom on addressing the twin problem of traffic congestion and air pollution in our cities have all been supply-side - widen roads, build fly-overs, expansion of public transit facilities, progressively tightening vehicle emission standards etc. But such supply side measures only take you so far in a context of fast increasing urban population, living standards, and social aspirations. Therefore, demand constraining policies, which seek to limit the numbers of vehicles entering the roads, assume significance. They include both measures to control vehicle usage - congestion pricing, alternate day odd and even numbered vehicle bans, locational bans, car pooling, prohibitive parking charges, etc - and those to limit vehicle ownership - number plate auctions, ceilings on new vehicle registrations etc. I have written about demand constraining policies here. 

All such policies, by their very nature, inconvenience and hurt politically powerful constituencies - vehicle users, businesses, vehicle manufacturers, opinion makers etc. This unpopularity, coupled with its complex nature, would invariably deter political leaders. The same is the case with a vast majority of such wicked problems in public administration. We do not have the luxury to sequence interventions, the omniscience to craft fail-proof implementation plans, and the state capacity to execute implementation plans to perfection. In such circumstances, the only way out is to identify binding constraints, prepare a carefully thought out implementation plan, and then bite the bullet. 

For sure, there will be considerable inconvenience and disruption when this gets implemented from the coming New Year. There will be enforcement problems galore - people will seek to possess two number plates for the same car, paint their plate yellow (to make it appear as a taxi), and even just ignore the ban in confidence that they can bribe their way if caught. But the answer is not to back away from such policies daunted by these challenges, but to implement them by putting in place adequate implementation bandwidth and contingency measures to iterate quickly on addressing the most egregious flaws and transgressions. The entire Delhi administration needs to be alert enough for the next couple of months and be galvanized into responding very quickly to the emergent problems and mitigate them with appropriate changes to the policy and implementation plan. 

Over the coming months, this should be followed up with measures to expand the public transport facilities (more general buses as well as air-conditioned ones), raise parking charges in certain commercial areas, and even try out limiting new vehicle registrations. This could well turn out to be a crossing the Rubicon moment in the fight to make our cities more liveable. If successful, it would turn out to be the smartest among all the proposed Smart City interventions and a strong demonstration of the country's political and societal appetite to run with such contentious and unpopular reforms. 

Weekend Reading Links

1. India needs more of this type of market makers and peer-to-peer lending platforms which can credibly signal the credit-worthiness of borrowers by using non-conventional sources and strategies of credit assessments,

The financial tech startups are trying to evaluate credit risk using a wide variety of consumer data including the digital footprint of customers arising out of social networks, ecommerce, mobile usage and geo-location. For example, IndiaLends claims to capture alternative information points such as bank statement, utility data, social data and customer interaction with the website... Startups like IndiaLends do not lend money of their own. Using their technology platform, they connect consumers with banks and financial institutions which results in better rates for the borrowers and a reduction in overall default rates... where they differentiate... from the bank is in scientifically matching the right borrower profile with the most relevant lender and hence reducing inefficiencies that lead to lower loan approvals, higher interest rates and sub-optimal loan amounts.

2. The most obvious indicator of state capability weakness is the gross inadequacy of personnel in many critical public agencies. As against a global average of one policeman per 450 people, India's has one for 709 people, with the numbers being 1298 and 1282 for Bihar and UP respectively. 

The problem here is that any discussion on increasing personnel strength gets conflated with the mistaken belief that the government is already too big and needs to be pruned down.

3. Ian Bremmer points to this map of the world would could well represent the beliefs of ISIS

4. Economic Times has a story on the increasing use of robots among India's car manufacturers,

Robots have begun to take over an array of functions from humans at car plants in India. Volkswagen India has 123 robots at its Pune plant while Hyundai Motor India, the subsidiary of the Korean carmaker, has 400 robots at its factory in Chennai... The Ford Sanand plant actually has 453 robots in the shop floor, with up to 90 per cent of the work automated... The entire body shop, most of the paint shop and parts of the final assembly line in these plants are now automated. Robots are performing functions ranging from welding to foundry operations to laser applications.

But robots are not likely to displace humans any time in the foreseeable future,

Still, despite the many benefits, companies will not be in a hurry to replace labour simply because robots are costly. A robot does the work of three technical workers, but it typically costs between $3,00,000 and $4,00,000. In other words, automation is 10 times more expensive than manual labour

5. Business Standard has an article on the findings of the Ashok Misra Committee which examined India's unregulated professional course entrance examinations coaching industry. The report proposes the establishment of a regulator for the coaching industry. The report highlights the scale of the industry,

According to an a 2013 survey by Associated Chambers of Commerce and Industry of India (Assocham), titled "Business of Private Coaching Centres in India", the size of the private coaching sector was $23.7 billion, or Rs 1.41 lakh crore. The survey also predicted that by 2015, it would grow to $40 billion, or Rs 2.39 lakh crore. The survey had collected data from 5,000 students and parents across 10 cities. It revealed that 87 per cent of primary and 95 per cent of high school students in the major cities took private tutoring. This industry grew by 35 per cent in the previous six years.

6. Global corporate bond offerings have crossed $2 trillion for the fourth consecutive year on the back of continuing monetary accommodation and signals that the ECB may be willing to continue and expand the ongoing QE.

7. Roula Khalaf has a nice summary of the differences between Isis and Al Qaeda. This is interesting,

The Sahwa movement comprised a group of Iraqi tribesmen that collaborated with the US a decade ago to root out the Iraqi branch of al-Qaeda. That branch took its revenge: it eventually became the Islamic State of Iraq and the Levant, better known as Isis... Isis seems obsessed with al-Qaeda, from which it split in 2013 following disagreements over the goals of jihad in Syria. Since then Isis has distinguished itself from its parent through its savagery (there is no limit to the violence it is willing to inflict) and its move to create a caliphate in parts of Iraq and Syria. 

8. Nice article in NYT on how Isis sustains itself - "they fight in the morning and they tax in the afternoon". The article describes how Isis is running the legitimate revenue collection operations of a regular government,

The better known of the Islamic State’s revenue sources — smuggling oil, plundering bank vaults, looting antiquities, ransoming kidnapped foreigners and drumming up donations from wealthy supporters in the Persian Gulf — have all helped make the group arguably the world’s richest militant organization. But as Western and Middle Eastern officials have gained a better understanding of the Islamic State’s finances over the past year, a broad consensus has emerged that its biggest source of cash appears to be the people it rules, and the businesses it controls...

(Isis) has set up a predatory and violent bureaucracy that wrings every last American dollar, Iraqi dinar and Syrian pound it can from those who live under its control or pass through its territory. Interviews... describe the group as exacting tolls and traffic tickets; rent for government buildings; utility bills for water and electricity; taxes on income, crops and cattle; and fines for smoking or wearing the wrong clothes. The earnings from these practices that mimic a traditional state total tens of millions of dollars a month, approaching $1 billion a year, according to some estimates by American and European officials. And that is a revenue stream that has so far proved largely impervious to sanctions and air raids... 

In Raqqa, the Syrian city that is now the de facto capital of the Islamic State, a department called Diwan al-Khadamat, or the Office of Services, sends officials through the city markets to collect a cleaning tax — 2,500 to 5,000 Syrian pounds, or about $7 to $14, per month depending on the size of the shop. Residents go to collection points to pay their monthly electricity and water bills, 800 Syrian pounds, or roughly $2.50 for electricity and 400 pounds, about $1.20, for water. Another Islamic State department, the Diwan al-Rikaz, or the Office of Resources, oversees oil production and smuggling, the looting of antiquities and a long list of other businesses now controlled by the militants. It operates water-bottling and soft-drink plants, textile and furniture workshops, and mobile phone companies, as well as tile, cement and chemical factories, skimming revenues from all of them...

The group has taken over the collection of car-registration fees, and made students pay for textbooks. It has even fined people for driving with broken taillights, a practice that is nearly unheard-of on the unruly roads of the Middle East. Fines are also included in the punishments meted out for breaking the strict living rules imposed by the Islamic State. 

In this context, the prevailing strategy to contain them, involving targeting their oil production and smuggling operations is unlikely to yield results,

Ultimately, though, many officials and experts said the Islamic State would probably be able to cover its costs even without oil revenue, and that so long as it controls large stretches of Iraq and Syria, including major cities, bankrupting the group would take a lot more than blowing up oil tankers. “These are all going to be little pinpricks into Islamic State financing unless you can take their revenue bases away from them, and that means the territory they control,” said Seth Jones, a terrorism expert at the RAND Corporation... the old strategy for stopping the flow of money to terrorist groups like Al Qaeda, which was largely based on cutting them off from donors in the Persian Gulf upon which they depend, does not apply to the Islamic State. 

9. The $160 bn reverse takeover of US-based Pfizer (maker of Viagra) by the Dublin-based Allergan (maker of Botox), an investment company trading pharmaceuticals businesses, is classic tax-inversion. It enables Pfizer to use its accumulated overseas profits without incurring US tax liability, thereby saving atleast $21 bn in future tax liabilities. It also joins Burger King and Liberty Global as brands which have fled overseas to avoid tax payments.

Apart from tax inversion, as John Gapper writes, it also highlights a new trend in pharmaceuticals industry,

Pharmaceuticals companies used to be research enterprises that discovered and developed drugs. Then they became marketing giants, skilled at selling as many blockbuster pills as possible. Lately, they have turned into mergers and acquisitions machines, buying and selling medicines invented by others. It is hard to view their evolution as progress... Instead of taking their chances by investing in drug discovery themselves, some wait until a smaller biopharmaceutical enterprise has done so and then try to buy the rights. It is less risky and uncertain for investors but it also tends to be extremely expensive. AbbVie, for example, paid $21bn for Pharmacyclics this year, largely to acquire a single blood cancer treatment.

In this case, Pfizer is buying up Botox!

10. Finally, the ECB has extended QE, but not by as much as anticipated. Apart from extending its 60 billion Euro a month bond buying program for another six months till March 2017 or "beyond" and purchase municipal bond in addition to government bonds, it has also lowered the deposit rate to minus 0.3 per cent.