Sunday, December 30, 2007

SS Tarapore leaves me nonplussed

I recently read a piece by SS Tarapore in IIMA's management journal - Vikalpa (Issue - Apr/Jun 2007) titled - "Impact of Monetary Policy on Bank's Growth Path"
The title is a misnomer of sorts since a substantial part of the article is dedicated to an examination of the recent rupee appreciation and RBI's handling of the same.
Below, I will point out whatever seemed downright incorrect to me in the article.

It is still not clear as to what extent the Indian economy has integrated with the world economy
I see no reason why this shouldn't be clear. As of 2007, gross capital flows amount to a staggering 45% of the GDP. Gross two way flows on both the capital and current account exceed 110% of the GDP!
Tarapore :
Persistent capital inflows into the country could result in an unrestrained monetary expansion and a REER appreciation which in turn is likely to end up in a crisis
How on earth can capital inflows increase the stock of money in the economy? Ironically, it is RBI's attempts to defend the dollar in the wake of capital inflows which is contributing to monetary expansion and not the capital flows per-se.

Also, the comment on REER appreciation is unfounded. The REER is a function of both the nominal rate and the rate of inflation in the economy. If the nominal rupee appreciation can help moderate prices, the REER shouldn't change by much. And it hasn't. Check out this piece by Swami Iyer for more on this.

Now suppose that the RBI does not intervene in the forex market. There would be an unbridled monetary expansion and...an appreciation of the REER
Now, this borders on the preposterous. RBI's vain attempts to defend the dollar and its largely ineffective sterilization attempts are to be blamed for the price acceleration India witnessed in March this year. It seems like Tarapore is inhabiting a different planet.

A real appreciation of the rupee is clearly against fundamentals and is clearly unsustainable as it would imply an over-valuation of the exchange rate.
What does he exactly mean by "fundamentals"? How does one arbitrate on whether a certain rate is overvalued or not? The comment reminds me of the fatal conceit that Hayek once wrote about. The very idea that a handful of "wise" central bankers can figure out the appropriate value of an asset which is traded by millions of market participants smacks of an arrogant condescension towards the market and an exaggeration of a central bank's abilities.

To my mind, the article has far too many open-ended unsubstantiated statements that one would not expect in an academic journal, albeit one published by a Bschool. Please do point out if I've got it wrong anywhere.



Tuesday, December 11, 2007

Equity Research vs Wisdom of the Crowds

This is an arbit post. Not much thought has gone into it. So please feel free to correct me.
What is the true 'value' of a good/asset? Whatever the buyer is willing to pay for it in my opinion.
Equity analysts disagree. They claim that certain people (read analysts) are better equipped to estimate an asset's 'true' value than the riff-raff crowd.

Isn't that very similar to the argument put forth by socialist command-and-control freaks about half a century ago? The Nehruvian conviction that a handful of wise men at New Delhi are better placed to allocate resources and dictate the destiny of the economy is not very different from the condescending attitude of equity researchers, especially the ones who rely on so-called 'fundamental analysis'.

In both cases, there is a blind faith in the discretionary wisdom of a handful of technocrats as opposed to the wisdom of the crowd (read market).


Why do mediocre novels make great movies?

I've never been a big fan of moving pictures (better known as movies) all my life. However, this changed in term 5 thanks to a not-so-curious mix of boredom, lack of academic rigour and peer-to-peer networking software.

I stumbled upon one of the less well known Hitchcocks - Dial M for Murder, halfway through the term. It was probably the best thing I did in the term. Over the next couple of months, my movie education progressed very well! I watched close to thirty movies, most of them filmed sometime between the mid 30s and the mid 60s.

A few observations -

- The older Hollywood movies are far richer on dialogue compared to the more recent ones, but score low on cinematography. Expletives are conspicuous by their absence :)
In contrast to the present day Hollywood pictures that look better than they sound, the older movies sound better than they look.

- Most of the movies, including the really good ones that feature in the IMDB Top 250/AFI Top100, are adaptations of novels and short-stories. Interestingly, most of these novels/stories themselves are often very ordinary and fall under the category of 'Pulp Fiction'. However, the movie adaptations of the same are outstanding and have become all-time favourites!

Take for instance films like Rear Window, It's a Wonderful Life, One Flew over the Cuckoo's Nest or even Double Indemnity. All of them are based on novels/novellas that are nowhere near as acclaimed as the movies!

In contrast, attempts to adapt truly popular novels to the visual medium have failed more often than not. Has anyone succeeded in making a great movie out of any of Dickens' novels or for that matter even the popular books of an Agatha Christie or a PG Wodehouse? No.

Ofcourse, there are a few exceptions like Gone with the Wind/Godfather. But those are exceptions and not the rule.



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