Central Banking Dilemma - Growth v/s Inflation

With the Indian economy apparently emerging from a situation of lower growth and higher inflation, there has been a widespread optimism about the country's economic prospects across the world. India has recently seen a relative pick-up in growth and improving outlook towards inflation, there has been an apparent shift in expectation from bankers as well as corporate houses in India towards a rate cut.

India is among the few countries in the high GDP group which is at the peak of its interest rate cycle with rest of the global central banks either having near zero interest rates or doing quantitative easing.

This leaves us to the question that why is there such a hugely deviant stance from the Indian central bank and the pros and cons of it.

A. The deviant stance

The deviant stance of India compared to rest of the Higher GDP group is as follows:

a. Difference in mandates of the central banks
While there are a lot of global banks who focus on employment or growth, the primary mandate of Indian central bank is Inflation. This primary mandate itself indicates that the main target is keeping the inflation low even if it leads to lesser growth or lower employment. Though this may be deemed as slightly defensive by most observers, it can be attributed partially to the stage of development of country's population most of which need low prices to ensure that they can satisfy their basic necessities.

b. Apparent demographic differences
While most countries in the "High GDP" bracket have a high HDI and great per capita income, India suffers from low (or rather extremely low) numbers in both these parameters indicating that the majority of population is near the poverty line and still focusing towards fulfilling their basic needs which mandates the central bank to ensure that they help in the process of achieving these goals by keep the inflation in check.

c. Internal and external factors
India has heavy dependence on oil and considering its volatility, it leads to huge amount of volatility in inflation and India's exchange bill which puts further strain on the central bank to ensure that that they do not react to short term movements in either and wait for a longer term trend to emerge which itself puts the bank on the defensive as the moves and decisions are generally lagging.

d. Background of the Central Bank governor
The central bank governor plays a very important role in decision making on rates and his overall background is a key element in the entire process. While the former RBI governor, Subbarao who came from a modest background and worked his way through the grass-roots, had been defensive and more inclined towards populist measures and targeting inflation. On the other hand, the current RBI governor, Raghuram Rajan who has been more exposed to global policies having worked with the IMF, is relatively more aggressive on rates.

e. Developed v/s Developing world
Generally it is observed that the interest rate cycle of the developed world leads that of the developing world by a few months as the effects of a developed rate changes generally lead to monetary outflows/ inflows from an emerging country and hence the central bank prefers having rate controls to prevent sudden volatility.

Implications and advantages / disadvantages  discussed in the next article.

Changing Indian consumerism

With the advent of the twentieth century, there has been a dramatic change in Indian consumerism- Specifically the urban consumers. The change has not been a gradual process but apparently has reached the tipping point recently and thus continues to happen at a frantic pace.

As generations pass the buying decisions to the next generation, there is always a pretty apparent change in the overall purchasing behavior. However, in India this change has been more drastic. Here are some of the elements of the changing consumer behavior in India and its impacts as well as implications on various industries and opportunities for various players to maximize their potential

a. Saving/ Consumption ratio - As the old saying went in India, Earn 100, Save 75 and Consume 25. With the baton for buying decision being passed to the new generation consumer, the ratio has changed to Earn 100, Save 25 and Consume 75. Combine this with higher earnings and you can see that there is huge amount of disposable income that an Indian consumer now has which he would spend in FMCG, Food, Travel, Consumer goods, Gadgets and Automobiles. Also this means a huge opportunity for credit services as there has been a stronger demand for buying on credit.

b. Shift in buying behavior
With the products demanded shifting from asset creation to consumption, goods which come in either of these 2 spaces need a huge amount of re-adjustment in their proposition to stay relevant to the consumer needs in India. For example- the demand for jewelry is likely to wane whereas demand for more expensive consumer goods and automobiles is likely to get a boost. Even in jewelry space, traditional gold demand is likely to wane and get replaced by fashion accessories. Similar re-adjustment is necessary in most industries and considering the frantic pace of this change, it is necessary for companies to be ready rather than be a laggard to stay relevant. The shift in mobile phone market share from Nokia (Less technology & Low cost) to Samsung/ Apple (Better technology & More innovation).

c. Travel & Tourism
This sector deserved a mention here as it is likely to shift gears rapidly considering the consumer behavior in India. Airline industry will get a boost and passenger transport services as a whole is likely to benefit as a result. Also the amount spent by an Indian tourist has increased manifolds. Besides, tourism and travel does not just include travel services and passenger transport systems but also includes food and recreation as well as oil and energy industry.

d. Technology
Technology has had a huge impact on both the buying process as well as the decision making process. With e-commerce taking on conventional retailers and technology taking over conventional buying, the consumer has been more information savvy and has the ability to compare before making a choice.Also, marketing and sales technology has changed and there has been greater emphasis on using consumer intelligence and data mining rather than direct sales. Also, payments shifting online has been good news for credit card companies.

e. Impulse v/s Planned
Think of a traditional Indian consumer, even the process of buying groceries or a light fitting etc were all been planned purchases. Compare it with today, an urban consumer buys a lot of stuff on the go without thinking much. Impulse purchase has taken over a lot of buying. This emphasizes the importance of point of sales marketing and ability to ensure that the product/ brand occupies the top spot on the mind map of the consumer considering the variety of products available.

f. Losers
Considering that there has been higher spending by consumers, are there any losers which one needs to keep in mind? Here are a few which are likely to face stiff competition and need to innovate to stay relevant. Gems and jewelry, Retail outlets, Greeting cards & Sms services etc.

Financial centers - Creation & Existence

When we look at most cities in the world which are the financial capitals of their respective countries, it is generally observed that these cities may or may not be the political capital but all of them have a common trait. 

New York, London, Frankfurt, Tokyo, Dubai, Singapore, Shanghai, Sydney, Sao Paulo, Auckland, Beunos Aires, Paris etc. are few of them in the list. 

Some of the above cities are central to business around the world too. All of these cities have one common trait. Each one of them is a "Port." Incidentally, many of these cities have never ever been politically important, but all of them are central to business of their respective countries. Besides, some of them have been important since their country came into existence and still retain the tag of " Financial capital" of their respective countries.

Delving deeper, it is not very surprising that each of these have this common trait. Port has been one of the most important center which connects a country to the external world in terms of goods. Since ages, business has thrived on the exchange of goods (Trade) and the most important facilitator for this is a good port. Indirectly, these cities have been the nodes that connect their country to the external world and also are the first recipients of external goods and or services. Business of the entire city in old ages would revolve around this.

With passage of time, despite a lot of transportation happening through planes, ships have still retained the prime spot for transfer of goods between countries and that too by a very huge margin. Most goods from oil to electronics etc. get transferred between countries through ports only. Hence despite the advent of more modes of transportation, business has still thrived on these cities having ports and are thus still the most important financial centers of the world. 

Trade has not only helped create a lot of opportunities for business but has also been responsible for creation of these mammoth cities of the world which act as the business nodes for their respective countries..!!

Analytics & Marketing - The Link

Analytics and Marketing - These two seemingly different words have recently found a common trait which has not only helped companies understand their customer better but also given them an opportunity to influence their buying behavior.

Analytics has grown and taken center-stage more recently with increased amount of data which has actually come into fore from the huge amount of databases created by companies like Google, Amazon etc. Companies, these days, track a lot of information right from your e-mails to your searches, from your travel details to your buying behavior to arrive at your mind map and gauge your interests and influences.

You would be surprised to see advertisements on your mail or even on your mobile. And the more surprising part is that most of the times these are very relevant. They are either on your top of the mind thoughts or based on your recent needs. For example: If you are planning to travel to New Zealand, it is very normal to see yourself being contacted by a tour operator or an airline website who would be more than helpful to book a ticket for you to Auckland. This kind of things are possible using the database of your interests as well as doing some analytics on it to arrive at your requirements.

The basic definition of marketing is to arrive at the consumer needs first and then design a product/ service based on that. This implies, that if you can somehow either understand the need of the consumer or be able to gauge his interests and be able to create a perceived need, you can influence design your product accordingly and thus influence his buying behavior. To get it in more simple terms, suppose from past database, a marketing company knows the following about you.

a. You are interested in sports

b. You like to buy expensive sport shoes

c. You buy it once a year at-least.

The above statements are not that difficult for a database analyst to come up with after studying your past behaviors.

So now suppose you are at a mall. It is easy to find that you are in which mall based on the GPS on your mobile phone. Now, a Nike outlet can actually advertise on your phone and incentivize your buying. This would mean that they could either send you details of their outlet, or send you details about their product or even more compelling - send you some discount vouchers while you are in the mall itself where this store is located. Thus the marketing process will be more targeted and would generally have a higher probability of influencing a purchase. 

The above example is just the tip of the iceberg. Analytics can generate a huge number of edges for a company using it and could very easily be the next big step for any marketing company. It helps you understand your customer and his needs better and catch him at the right time and the right place.

Analytics will soon change the entire marketing landscape and appears to be not just an edge but an increasing necessity for any corporation who needs to market its products/ services!

India - Time to invest from FII perspective?

The other day, I was talking to a person from a major UK multinational company managing investments, who was telling me about how there is a sudden buzz there in increased interest in investing in India.He suggested that there is a lot of money in the developed which is looking for good value investments in India as most people are relatively extremely optimistic about the country.

The sudden upsurge in increase in investor interest in India makes you wonder if India has suddenly turned around from being one of the least popular destinations for investments in 2013 to one of the most promising ones in 2014. To get more clarity on it, lets take the following things into consideration from the fundamental side to see if it really makes sense to be considering investing in India.

a. BRIC countries - The BRIC countries actually represent a very important chunk of investments for asset managers managing emerging market funds with allocations between 20-60% whereas the rest of the world gets the remaining pie. Now looking closer, with Russia and Ukraine tensions coming to the fore, and the west planning to strongly condemn it, Russia has lost a lot of popularity in terms of investing due to perceived political instability which could lead to under performance for the country. On the other hand, the Chinese data has consistently been below expectations and there is a growing consensus that the world's second largest economy is slowing down and is having some serious economic problems to solve. This leaves the emerging market asset manager to consider only 2 destinations in BRIC countries viz India and Brazil. Thus there is a possibility of higher allocation from these BRIC focussed funds to India. Though this is not a fundamental improvement, but it still brings greater investment to India.

b. CAD - The recent fall in current account deficit in India has made the world optimistic about the seriousness and intent of the government to curb it. Besides, the improving trend augers well for the country as it helps in improving the rating of the country as well as ensuring that the debt market remains stable. Also, the cost of funding reduces for the government and companies within the country. Also, India has been grappling with this problem since a pretty long time now and any improvement in this suddenly opens the gates to growth and development improving performance of companies.

c. Monetary policies - The RBI has generally been tightening the interest rates as the inflation has been stubborn within the country. RBI is currently being headed by a very prominent economist who has been clear in his intention to promote and support growth as soon as inflation comes under control. Also, considering a possibility of rate cut cycle commencing, there appears an opportunity that Indian companies would start seeing their cost of capital coming down. This could help post companies perform better and hence leading to higher returns on capital.

d. Company performances -There has been little improvement in the performance of companies over the past 2 years. Most of the times, the results have surprised to the downside rather than upside which makes one skeptical about a possibility of a rebound here. But the silver lining is that the equity markets are generally forward looking and there has been growing optimism that the performance disappointment has been bottoming out. Most Indian banks are focusing on improving their balance sheets and reducing NPAs which would bear fruit now. Besides, the IT companies and pharma companies have found themselves at advantage due to falling rupee. FMCG companies have consistently outperformed owing to the ever increasing consumer base. Infrastructure has been a very serious concern currently with little reforms and lots of project delays and higher costs of funding but these companies have little weight on most broad indices. Oil and gas as well as metals which are major components have started benefiting with supportive government policies and stronger intent to decentralization and increased transparency. 

e. Oil and Gold prices - With Iran and Iraq increasing production and call on OPEC reducing, there has been an increased oil supply in the world. For the first time in decades, US has become self sufficient in oil. Looking at the oil supply demand equation - Demand - US (Rank 1 - Self sufficient first time ever in decades), China (Rank 2 - Going through slowdown), Developed economies (OECD/ IEA/ EIA all predicting near constant demand with little upside risk). Hence it appears that demand growth has been reducing significantly. On the other hand, comparing with previous year, US production has increased , Iran and Iraq have started supplying rapidly. Libya may soon come back into supplying which means that the supply could increase by as much as 5-6 mbpd very easily compared to previous year making it clear that oil prices may not go up in near future. Oil is one of the biggest component of import bill for India and hence a stable or reducing oil price augers well for India. Also, with possibility of Fed going into a rate increase cycle, gold prices might start coming down which would reduce the cost of gold imports too. The top 2 components of Indian import bill appear to be all set to come down which would improve the trade deficit for the country and improve the INR.

f. Currency - Despite the onslaught of the emerging market currencies, INR managed to hold strong its fort which indicates improving strength of the currency. Fundamentally too, reduction in oil and gold prices, inflows of capital, relatively higher interest rates, improving CAD all point to near term support for the currency. There is  however a possibility that tightening by the Fed could change the entire picture but then considering that India is better placed than most emerging economies, it appears that India would keep its attractiveness over other destinations. 

g. Optimism on the new government

There has been an increased overall perception and expectation of a stable government which is highly progressive and could lead to spurt in economic growth. If this does happen, it could lead to a sustained improvement in company performances as well as increase in GDP growth rates which could auger well for the country.

This entire picture can change in the following scenarios:

a. Unstable central government

b. Ukraine - Russia issue transforming into a serious diplomatic/ military conflict

c. Fed tightening more aggressively than expected

d. Spillover effect of China slowdown on the world.

Since the above reasons are currently defined and one would be able to see them coming, there is a valid case for India becoming an attractive investment destination for global asset managers! 

Inflation & Hedges

Inflation is the rate at which the price of a particular basket of goods increases. In India, the standard benchmark used is the wholesale price inflation. The basket of goods comprises of more than 600 goods polled from more than 5000 vendors. This gives an estimate of the rate at which the price is increasing in India.

The inflation figure is calculated using the following formula

WPI = ( Price of the basket in current year) - (Price of the basket of goods in same month of previous year)

                                    (Price of the basket of goods in same month of previous year)

India has among the highest rates of inflation in Asia which is not really surprising considering that it has a rapidly growing rate of consumer base and a rapidly increasing rate of money flows. Higher the inflation, faster is the rate of loss of value of money. To make it more clear, lets assume that inflation is 10%. Suppose you buy a package of goods worth 100. Next year, the same 100 rupees will be able to fetch 10% lesser goods. Hence, it would make more sense to buy goods today than to postpone the purchase to the next year as the prices will increase by 10%. This can be offset only by ensuring that the value of money increases by a rate greater than inflation so that despite an increase in the price of good, the money does not lose value and can still buy the same set of goods. 

This is generally done by investing in places which would either beat the inflation rate or at least give rate of return equal to inflation (Generally called as inflation hedges). This insinuates the need for investing as failure to invest would make your money less valuable.

The most preferred inflation hedges are considered to be precious metals essentially because the index of inflation itself has them as major components. Besides, real estate is also considered as a good inflation hedge though it does not reflect it as well considering a huge cost of entry and also a a large amount of overheads on it. Also, it is considered that equities give inflation beating  returns as generally valuation of most companies is based on the assumption that the company will at minimal grow at rates above the inflation rate.

                                  

5 Worst moments in World History

Since the beginning of civilization, humans have witnessed and experienced a tremendous set of ups and downs. Some of them have helped man reach the moon whereas some have been extremely brutal and tantalizing. Here is the list of 5 worst moments in human history. These are the lows which have either made life difficult for humans or fellow beings.

Rank 5 - Forced extinction of species

The Permian-Triassic extinction event at one point threatened to completely annihilate life on earth. It occurred some 252 Million years ago and was the worst ever extinction witnessed by Earth. It destroyed 97% of marine species and 70% of terrestrial vertebrates. The destruction was so severe that it took more than 10 million years for recovery from it. Though this has been mostly a natural phenomenon, humans have also contributed recently to extinction of a huge number of species right from tigers to black rhinoceroses. For more information on Permian-Triassic extinction, refer to: 

http://en.wikipedia.org/wiki/Permian%E2%80%93Triassic_extinction_event

Rank 4- The Black Death

The Black Death refers to the Bubonic plague’s rise to power in 1346.This could be attributed to Europe’s general belief on the existence of witches. This led to mass hunting down of witches and cats (as cats were considered to be related to them). This led to extreme increase in the number of rats which were infested by fleas. The fleas carried yersinia pests, better known as plague.

Without treatment, plague is one of only three known diseases with a mortality rate of 100%. The other two are rabies encephalitis and HIV. Given the primitive medical knowledge of the Middle Ages, the world didn’t have a chance.

It killed 40% of Egypt, 30% of the Middle East, about half of the 100,000 people in Paris. The worst hit area was Mediterranean Europe, including Italy, Spain, and southern France. There, about 75% to 80% died. England suffered about 20% dead. The total average was about 25% of the whole world, as evidence indicates plague deaths in sub-Saharan Africa, India, and the Orient. As much as 66% of Europe and Asia succumbed. Approximately 100,000,000 people died in 4 years.

Rank 3- Fanatical Terrorism

Terrorism is generally an act which is meant to harm fellow humans either physically or emotionally. It has many forms like bombings, hijackings, assassinations etc which are all meant to kill fellow humans. It is a form of guerilla warfare against the existing systems and governments. Over the past 20 years – 1990 to 2010, the world has witnessed an extreme rapid rate of increase of terrorist activities. Besides, it is not limited to only one part of the world but is experienced in almost every region of the world. Besides the huge amount of human and material loss, these activities have led to a huge amount of suspicion and caution in global diplomacy.

Rank 2- World Wars - One and Two

The World War 1, 1914 makes it to the list since it was one of the worst and most destructive wars in human history which engulfed almost all of Europe and a huge amount of world. It was evident that every country in Europe as harboring hatred for the other country and was looking for a reason to invade.

About 15 million, military and civilian, died, unless we include deaths from Spanish influenza, which was itself a direct result of the War. That puts the estimate at about 65 million.

World War 2, 1939 was the next war which engulfed almost the entire world leading to huge loss of human and material. It was initiated by Germany and slowly engulfed the whole world in it.

After 6 years, 71 million people were dead. Rome, Paris, Moscow, Leningrad, and London were smoldering. Dresden, Hiroshima, Nagasaki, Stalingrad, and Manila were obliterated.

The most infamous aspect of the War will forever remain the Holocaust. In this, they carried out the murder of 6 million men, women, and children, by poisonous gas, shooting, beating, torturing, “scientific” experiments, systematic starvation, and overwork. More than 3 Million people were murdered in the camps simply because they were Jews. Meanwhile, at least 750,000 soldiers and civilians died in 199 days in Stalingrad. That was one of the battles of the war!

Rank 1- Crusades

The Crusades was a war based on religion. Though religion has been one of the most common reasons for war, it was also the reason for the bloodiest act in the history of human civilization – The Crusades. It was a war between Christians and Muslims whose sole objective was destruction of the other group in the bid to glorify their God. It lasted from 1063 to 1434 – Nearly 350 years!

The land which suffered this war was Jerusalem. The sole objective of both Christian and Muslim extremists was to capture this land and destroy all the religious observers of the other religion staying on it. There were 9 wars and in every war Jerusalem changed hands between Muslims and Christians. The war suffered severe loss of humans and also acts of mass killings. It was in the name of religion, immense cruelty and destruction was inflicted on fellow humans which led to extreme hatred which has continued even today.

Effective Promotion - Educate, Engage and Engross!

With the ever changing world of marketing, there is a need to evolve the strategies to achieve effective and lasting communication to generate a loyal customer base. 

With the new generation of customers taking center stage, there is a need to understand their usage and behavioral trends. This would enable creation of strategies which would in turn lead to lasting effects.This new generation customer is been constantly looking at active modes of entertainment (which necessitate getting more involved) over the passive ones (like just sitting and watching or reading). To examine this further, lets look at trends in the entertainment and communications industry.

The ever increasing share of active methodologies of entertainment like social media and gaming or pursuing adventure sports in the mode of entertainment over the passive ones like watching movies or reading books clearly insinuates on this evolution. Most surveys and research highlight increasing trend towards modes of communicating which are more engaging and involve more active response. With mobile phones and laptops surpassing televisions in sales and people accessing more facebook than reading books/ newspapers, clearly there has been a greater reception for modes of media which are more engaging.

Hence any corporation looking at effectively promoting their goods or services should essentially focus on ensuring that their promotion contains the 3Es - Educate, Engage and Engross to make sure that their promotion achieves a lasting effect and generates a loyal customer base.

Educate - Educating the consumer helps in two ways. It helps in not just helping create a newer market and creating more market segments. But most times, a customer who has been educated by a particular brand/ product tends to remain loyal to it. Also, it helps in ensuring that the product/ service is used in an optimal way as it has been designed which rather helps in creating higher customer satisfaction too!

Engage - Engaging a customer by games/ events/ contests etc help in getting a mind-share of the customer as well as ensuring greater recognition considering that there is a lot of clutter in the market with constantly increasing product varieties. Also, reports show that higher ability to recollect a particular brand influences buying behavior and which would in turn boost sales.

Engross - Engrossing a consumer would work exceptionally well for goods and services which are big ticket purchases. Big ticket purchases unlike FMCG are made at a lesser frequency and hence engrossing would enable better remembrance and recollection. The most commonly employed mode is loyalty programs. However with ever reducing cost of marketing on internet, engrossing could assume more methods and strategies to ensure that the product stays in the consumer's TOMA.

The success of lot of the companies can be attributed to their ability to engage their consumer. In some companies like Apple, Facebook etc. their product itself is engaging. Whereas automobile companies like Mercedes, BMW etc. go at length to engage their consumers and retain TOMA or influence buying behavior.

Valuations - A myth , A calculation , Or Just a random number

For generations, human mind has been perplexed by a question which looks simple but is still unanswered!
What is the value of this??

This question applies to everything from an electronic gadget to a house to even company valuations!

For products, it gets a little simpler, as the answer to this question is given by the manufacturer itself by attaching a price to the product. Despite that, the human mind still evaluates if the price is greater than the value or not and based on that makes a decision whether to buy it or not.

However, even in this case, the value is more or less a perceived value of it and would vary from one person to another. Someone might value a product at 100 dollars while someone else might value it at 500 dollars.

Lets look into this with an illustration - A bag made by a local vendor priced at x. Now suppose this local vendor becomes famous and besides starts using a better quality of raw material and as a result produces a better quality product. Also, he creates a loyalty program to benefit loyal customers, how should I value it?

Mathematically

Original price of the product = x
Add better quality of raw material ensuring the bag looks better and life of it increases twice = x
Add loyalty benefits = 0.25 x
Brand value (Esteem value for using that brand ) = y

Nett price = 2.25x + y

However it is common to see people paying a price of 10x ( or even 30x).Does it make sense for the same product. Look at Rolex or LVMH etc.

Now Isn't paying this amount a blunder for a value buyer! However this segment still exists and its pretty commonly perceived that the owners of such products are generally perceived as more successful people. This is an irony that these successful people are rather the most foolish value buyers!

The same is the case with company valuations. A company is valued at x. A sudden increase in someone's interest in buying that company pushes it valuation by 5x too! Besides, higher is the desperation (Rather foolishness) of the acquirer, the higher is the value it fetches despite any change of underlying fundamentals. Essentially, this simply shows how the so called smarter CEOs and investment bankers ( who show off complicated excel sheets and business fundas) are rather foolishly wasting time on valuing a company when the value of the company is simply the buyer's perception (desperation) for buying it.

Broadly looking at it, one could conclude that valuation of a product/ company/ service or anything for that matter is just a random number which comes from elaborate calculations which generally are simply based on one's perception and need.

Investing - Fixed Deposits v/s Equities

Over a period, I have heard people debating between investing in the so called riskier equities v/s the less risky fixed income investments. Here is a perspective on how you should allocate your capital between the two depending upon your investment horizon and goals. Here, I would rather focus on fixed deposits as an investment vehicle for Fixed income and equity mutual funds for investment in equities and India as the country.

So lets consider the case that the investor has an income such that his return on investment income falls in the 30% tax bracket. In such cases, the return on Fixed deposit = 9% (-30% tax) =6.3% risk free!

Now on the other hand, if the investor invests in equities with a horizon greater than 1 year, he is exempted on long term capital gains tax. Hence if the return is greater than 6.3%, it would make sense to be invested in equities. However, looking at the inherent risk, the overall return one would expect is in excess of 8 percent.
Generally, it is expected that equities return more than that as the inflation rate in India itself is around 8 percent and the basis of investing in equities is that it should at least beat inflation in terms of returns.

Considering this, it is pretty obvious that investing in FD does not make any investment sense in terms of returns. However, one should allocate a small chunk of one's portfolio to such products(15-30%) based on risk profile to ensure that the risk is partially managed in case of severe shocks in the economy.

To conclude: If you are long term investor, your equity allocation should be at least 2-3 times your fixed income allocation. Else, you are likely to be outrun by inflation in your investments.

Top Mountain Peaks...!

Mountains are generally classified into four types based on the process of their formation. They are Folded mountains, Domed mountains, Volcanic mountains and fault block mountains. This classification is done based on their process of formation. The adjoining image gives visual representation of each of these types. 

Here is the list of top 10 mountain peaks in the world.

Peak	Mountain	Type	Height
Everest	Himalaya	Fold	8848
K2	Karakoram	Fold	8611
Kanchenjunga	Himalaya	Fold	8586
Lhotse	Himalaya	Fold	8516
Makalu	Himalaya	Fold	8485
Cho Oyu	Himalaya	Fold	8188
Dhaulagiri	Himalaya	Fold	8167
Manaslu	Himalaya	Fold	8163
Nanga Parbat	Himalaya	Fold	8126
Annapurna	Himalaya	Fold	8091

The Himalayas and Karakoram are thus the home of the highest peaks in the world with no exception. The list of top 100 also contains only Himalayan/ Karakoram peaks! 

The highest non Himalayan/ Karakoram peak in the world does not even feature in the top 100! It is mount Aconagua in South America and is below 7000 metres. Both the himalayas and Karakoram are fold mountains viz they are formed by relative movement of earth plates leading to their formation. Hence it is clearly evident that fold mountains are the ones with highest potential of high peaks.

Besides, all these peaks are located in the Indian subcontinent or adjoining areas. There is a theory which says that there was relative movement which actually lead to movement of Indian subcontinent from Africa into Asia and this collision led to formation of Himalayas. Had this relative movement not happened, the world might not have seen these big peaks getting formed.

The Earth plates keep moving un-noticeably and once in a few 1000s of years lead to formation/ destruction of some of the highest and lowest points in the world history.  Going to the extreme imagination, one should say, Don't take the land under you for granted, it didn't exist sometime in history and has a very high probability that it will not exist sometime in future!

Friction & Skiing

I had learnt about friction in school physics as the force which hinders motion. The official definition of friction is "Friction is the force resisting the relative motion of solid surfaces, fluid layers, and material elements sliding against each other." Delving deeper, we understand that it is basically the reluctance of any body to move. Hence one would need to overcome this frictional force to ensure that the body moves in the first place! And besides that once the motion begins, one has to continuously keep applying extra force to ensure that the frictional force is balanced and the motion continues.

Most times being an engineer, the focus is to reduce the effect of this friction to ensure easy motion. There are large number of lubricants available whose sole purpose is to reduce friction as it is in most cases considered to be an undesirable phenomenon in physics. However, it is often overlooked that the complete absence of friction could lead to uncontrolled motion and hence could lead to disasters. 

Last week, when I was at ski resort at a place called Auli, Uttarakhand, I encountered this dimension of friction. Standing on ski on an icy surface makes one realize how the complete absence of friction could make motion as difficult as the presence of it. The relative friction between ski and the ice surface to quote the least is minuscule and in most practical cases can be considered to be close to zero. 

The first encounter with this zero friction phenomenon came when I was wearing my ski. It is very common to see people slip even before they take their first step with the ski as the mind as well as feet are not habituated to motion without friction. I experienced a similar feeling and was on my knees even before I stood on my feet with skis on them.

After getting enough training, I learnt how to habituate yourself to this zero friction motion and also various techniques to ensure that there is some friction which is created either by weight transfers or the orientation of the ski which would later on come in handy in controlling as well as maneuvering motion.

To understand how to do this, one has to understand the construction of Ski . The main body of it is a flat surface which has almost zero possibility of generating any friction. The edges however are sharp and hence would cut into the ice and thus help in hindering motion and thus controlling it. Hence, the greater the exposure of edges to the direction of motion, the more will be the hinderance to it. Hence edges act as the braking force - Expose the edges more when you want to brake and reduce the exposure when you want to accelerate. It sounds simple but execution takes a little bit more time just like learning any other art.

The first lesson was to ensure that the ski pointing downhill are always in the shape of "V". The bigger the V, the higher is the friction as more of the edge comes in contact with the downhill slope and the smaller the V, the lesser is the friction and hence lesser is one's control. 

Next comes the management of body weight which is as important as management of the "V". When there is higher weight on one leg as compared to other, there is higher relative friction of that Ski which would lead to slower movement of that leg and hence lead to smooth turn in other direction. It is like drawing a circle using a rounder, The sharp edge fits into the paper and doesn't move and the one having pencil moves forming a circle. Same as the case with the ski. The only difference being that even the sharp edge moves too and so does the other edge! The only objective is to ensure that the other moves faster leading to a turn. So one can assume that your legs are the steering wheels of the ski. Turn left by putting more weight on left leg and vice versa.

So the next time you ski, Look how physics works and experience its magical impact on your movement!

Gold losing sheen

 

For the first time since ages, gold price has fallen year on year. Most of the current generation has never seen gold prices falling. Is this a temporary change or is it a longer term change? What are the reasons for us to believe that this is more long term and not just temporary and vice versa? Should we invest in gold or should we stop looking at it as an investment tool?

 

Trying to answer these questions is somewhat tough, though lets look at the fundamental reasons behind gold purchase and the motives behind investing in gold.

 

Firstly, with the Fed ending the QE, the price and value of money is more or less likely to increase. As in, within the next couple of years, if there are no major economic shocks, the interest rates in US will start moving up and hence there will be higher value in investing the money in banks. The major reason why gold was competitive to investing in banks was because of near zero interest rates and the attractiveness of gold as a physical asset. With Fed leading the way, it is more or less likely that sooner or later, other countries will also start increasing their interest rates to protect their currency and also to control inflation. These include the ECB, BOJ and BOE as the most substantial ones.

 

This would lead to lesser lucrative nature of gold investment as compared to holding bank fixed deposits or term deposits. Besides, the emerging world is severly fighting inflation and currency crisis and is highly unlikely to aggressively reduce rates and hence will rather have higher value to investing in term deposits v/s gold.

 

On the other hand, with India curbing gold consumption aggressively, the consumption demand for gold is also going down which leads to further less upside in gold prices. Besides, gold is also a hedge against inflation. But this relationship has gone down as over the years as the application of gold in industries as well as medicine has gone down considering its high prices. So the inflation hedge funda of gold has also been broken down. 

 

The next reason for holding gold is that it is considered safer than holding other currencies as it is independent of economic situation of one particular country but is dependent on global economy. However with more and more banks and more and more part of the world using dollar as reserve currency and constantly building reserves, it is more or less likely that any failure of USD will lead to a global crisis which will happen only if all the world central banks go out of firepower as now none of the banks and not just Fed can afford USD to fail. Hence such a crisis looks to be very unlikely and if it does happen, then it will be mayhem in global financial markets.

 

I have heard most investors in India saying that we should invest in gold as gold prices never go down. They keep appreciating but if there are couple of years when they see prices falling year over year, this sentiment is likely to change and hence investment in it will slowdown even more severly.

 

Looking at this scenario, it appears that investing in gold heavily is definitely out of window. Investing in gold in milder proportions - approx 5% - 10% of the portfolio is wiser as it can help you avert a major crisis situation which is more or less very unlikely. Hence people who have invested in gold as around 40-50% of their portfolio should rebalance it and get that value below 10% to approx 5%. The rush for gold is dwindling and its good to look at it with cynicism and avoid the thought " Gold prices always go up"