Business, Finance

US debt problem-Part 1

US lives on money borrowed from other governments. America’s budget deficit is not a new problem but has rapidly evolved to crisis levels .Expenses exceeded revenue in all but 5 of last 47 years. This is a problem, and the problem – measured by rising losses and a rising debt load – is getting worse. So let us look at this problem in detail:

1. US Debt problem is larger than you think:

See the actual numbers below:

(Image source: )

Break up of US Government Spending:

As seen from the figure; social security, medicare and medicaid are biggest entitlements; almost 75%.

2. The size of the debt is highly sensitive to economic fluctuations :A deviation of 1 percent of average GDP growth over the next decade increases or decreases the U.S. deficit by roughly $3 trillion on a cash basis over 10 years. America’s reliance on short-term debt exposes it to interest-rate volatility.

3. Higher debt could affect American competitiveness:Federal debt may raise the cost of borrowing for domestic-based American companies.  When the government runs large deficits, it  competes for funds that could be invested in the private sector. Higher costs for capital and  limited access to investment will impact the  borrowing costs of companies as well.

In the next article we will explore possible solutions to this problem. Stay tuned!



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Business, Leadership

Marissa Meyer can have it all!

Marissa Meyer’s helping prove you can have a successful career and family life at the same time. Mayer  disclosed her pregnancy to Yahoo when its headhunters contacted her about the CEO position. No one on the board expressed an issue with that. She even resumed work within a few days after delivery.

So what are the characteristics the tech leader Marissa Meyer?

Smartness: Marissa Mayer was always smart. She was accepted into every college she applied to — about 10 schools.Mayer finally did her Masters in Computer Science from Stanford.After Stanford, she had 14 offers to choose from. She chose an offer from Google and was Google’s 20th employee.

Passion for her job: Meyer is extremely passionate about her job. At Google she would work from 9:00 am to 8:00 pm. After gymming, she would answer emails till 11 pm. She was totally excited about the potential of technology and her products to change people’s lives.

Persuasive speaker: Mayer is an exceptional storyteller and presenter. Mayer believes pictures are more persuasive than bullet points. Mayer doesn’t deliver presentations. Her slides just complement her storytelling.

Great  motivator:  Mayer isn’t just a good listener. She actively invites her employees to help build the brand. Mayer used to hold office hours at Google where employees would get few minutes of her time.  These interactions were apart from the regularly scheduled  meetings. They were a great way to discuss new ideas. Many of Google’s most popular features got their start during office hours.


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Business, Finance

Why Quantitative Easing is not good for Emerging Markets?

Federal Reserve Chairman Ben Bernanke’s Federal Open Market Committee announced a third round of quantitative easing (QE) QE3  on September 13,2012  to stimulate the economy. Quantitative easing (QE) is basically a monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective.

The idea behind Quantitative Easing is that the central bank uses this supply of newly created money to buy up government bonds and other financial sector assets. The purpose is to drive down yields on bonds and provide more financial sector liquidity. It is used in economies where the use of normal expansionary monetary policies has become impossible. In such economies, normal monetary policies no longer work because  base interest rates have already been reduced to such an extent that it is not really possible to lower them any further . The need for such aggressive monetary actions in recent years can be traced to the U.S. real estate bubble, which burst in 2007, and to the more-recent sovereign debt crisis in the eurozone.

QE pumps money into the economy and increases liquidity. This  flood of new money due to QE won’t find a home domestically, it will find places to settle down in many of the emerging markets. Are investors going to want to keep their money in U.S. dollars that are earning nearly 0% interest when they could be shifting that money into emerging market currencies where they could earn 5%+ per year?  Hence, quantitative easing will significantly increase capital flows into emerging markets.Apart from this, Emerging markets have been a popular target of excess capital for a number of reasons:

  • Their overall ability to take on debt remains strong
  • They have experienced minimal balance sheet impairment compared to developed markets
  • They have relatively innocuous levels of pre-existing leverage

So what are the ill-effects associated with Quantitative easing in emerging markets?

  • Inflation and Currency fluctuation: If capital comes into emerging markets too quickly due  to QE, it drives up their currency exchange rate and has the potential to create strong inflation in a short amount of time.  Emerging markets are generally very dependent on their exports, and if a country’s currency gets very expensive, all of a sudden its exports are less attractive.  Therefore, there are many negative effects that U.S. quantitative easing has on emerging market economies.
  • Threats of retaliatory measures:The consequences of QE could be a first-order concern in monetary policymaking. This practice can affect foreign exchange in a way that may disrupt trade flows and prove counterproductive . QE  has led emerging markets to go on the offensive against the United States, and many countries have begun intervening in the foreign exchange trading markets in an attempt to devalue  their own currency values.  If country’s begin intervening in the market on a regular basis, it could create severe imbalance and dangerous conditions.
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The Problem with Multiples in Valuation

A multiple is simply an expression of market value relative to a common statistic that is assumed relative to that value. They are often used for quick comparisons between companies. Enterprise multiples often express the value of entire enterprise whereas equity multiples express the value of  shareholder claims on business.

But multiples have their own problems.

Multiples combine a great deal of information into a single number. Combining many value drivers into a single number can lead to erroneous interpretation.

Multiples are difficult to compare. The results also depend on type of multiples used. P/E ratio gets distorted by the capital structure of the company, All else being equal, the company with a lower debt will have a higher P/E ratio. Enterprise multiples on the other hand are not affected with that distortions and hence TEV/EBITDA is used by most sophisticated investors.

If the multiples are too low for a company, the probably the company is being compared with a wrong set of peers. For multiples analysis, the relevant companies are those that compete in same markets and have similar growth prospects.

It is seen that in mature industries multiples vary little among peers. Even if companies outperform their competitors , there is a convergence of growth and returns hence it is difficult to predict which companies will actually outperform. Hence, a company’s multiples are largely uncontrollable.

Hence generally multiples are used in conjunction with other valuation methods like DCF.

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Why is the US expensive as compared to India?

Ever wondered why a simple haircut in India costs much less as compared to the US? Or why nannies can be really expensive in US as compared to India?But a laptop costs almost the same in India and the US. Why this difference exists? Why are prices of some goods and services the same whereas they vary widely in case of others?

The reason for this can be explained by what economists term as the “Balassa Samuelson effect”. The Balassa Samuelson effect captures the relationship between real exchange rate and productivity.It states:

  • The traded good has the same price in both countries
  • Productivity in traded goods determines wages
  • Wages determine the prices of nontraded goods

Lets understand it in simple words:

The reason why the prices of some goods like laptop don’t vary is because if they vary, it would create opportunities for arbitrage. If you bought a laptop in India for $1,000 and sold it in US for $1,500; then eventually price in India will be raised to $1,500.Laptop is a traded good and hence its price does not vary much across countries.

But services like haircuts are not tradable. You won’t fly from US to India just because a haircut is cheap. Similar you cannot hire an India nanny to look after US kids. So for non –tradable services like salons, restaurants , baby sitting there is a local market. In case of US, the incomes are high and people can afford to pay more. So the price levels for these services are high in US. But how are incomes determined? Balassa-Samuelson effect states that productivity in traded goods determines wages. For countries with higher worker productivity, they can trade their goods abroad and hence get richer. Prices can also vary within a country. A haircut may cost more in places where rentals are high versus the place where rentals are low. This is because land is a key non tradeable good and prices of land vary widely across the country based on supply and demand.

Apart from Balassa Samuelson effect , price levels are also determined by exchange rate.  For countries who try to depreciate their currencies to make exports attractive, the services are cheaper than they would be without the depreciation. A classic example of this case is China.

If we had to boil all this — Balassa-Samuelson effect, exchange rate down to a simple statement: it might be this: All things equal, prices rise fastest in the places where rich, talented people want to be.

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What you didn’t know about the most powerful Indians in the Gulf region!

The has released a list of 100 most powerful Indians in the gulf.( It is interesting to note that the majority of these come from industries like banking and retail; with 18 of them being CEOs.

The top slot is taken by Kerala born Yussuffali MA. He is the boss of the EMKE Group which is headquartered in Abu Dhabi and has offices in 29 countries and has an annual turnover of $4.5bn. V Shankar, the CEO of Standard Chartered occupies the 8th slot. Based in Dubai, Shankar is regarded as the most senior executive of an international bank to be located in the Gulf. An interesting personality is Raghuvinder Kataria who occupies the 2nd slot. In June 2009, at the height of the global financial crisis, real estate valuations in Dubai were in freefall.That time Kataria quietly acquired two buildings in Emaar Square The value of that investment has increased by over 40 percent in the past three years.He turned out to be one of the savvy investors at that time.

Some of the other diverse personalities in that list are

Tennis Player Sania Mirza: She occupies slot 30. She is the current Indian No.1 in both singles and doubles and has held this position since 2003. In her career, Mirza has notable wins over Svetlana Kuznetsova, Vera Zvonareva, Marion Bartoli and former World No. 1s Martina Hingis & Dinara Safina.

Chef Vineet Bhatia: Vineet Bhatia trained at Mumbai’s prestigious Oberoi Hotel before immigrating to England where he became the first chief of Indian cuisine to be awarded a Michelin star at Zaika.

Lawyer Ashish Mehta: Ranked 86th in the list, Dubai-based Indian lawyer Ashish Mehta’s list of clients is both impressive and diverse. It ranges from Indian celebrities, to members of the Dubai ruling family and Benazir Bhutto, the former prime minister of Pakistan who was assassinated in 2007.

Ophthalmologist Dr Pramod Warhekar: He specialises in a range of techniques and procedures including Lasik eye surgery. He is also a member of the American Academy of Ophthalmology and European Society of Cataract and Refractive Surgeons

So yes the list indeed comprises of diverse and interesting personalities! What say?

You can view The downloadable excel file – top indians in gulf  here.

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Factorizing Success

A lot many of us spend our lives drooling over other people’s success. We keep searching for that one variable behind all of it. Is it Intelligence, Ambition or Hard Work? Let’s think for a second. Is success really a function of single variable? Well answer might not be as simple. In mathematical terms, success is a complex function of many interrelated variables. I will try and ponder over some of these based on Malcolm Gladwell’s “Outliers”.

First and foremost is the “Mathew effect”. “For to all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have will be taken away. Simply put, Rich becomes richer, Poor becomes poorer. It is found that those who acquire particular skills at an early stage are at a substantial advantage to their peers. Those who lag behind, practice less, thus increasing the gap. People who start early get the accumulative advantage. What better example than Sachin Tendulkar. He started at very small age, practiced a lot, achieved success, which in turn motivated him to work even harder. Somewhat like a positive feedback loop. To have talent is good but tapping it at an early stage is more important.

Another factor is Environment. One needs to be in the right place, with the right company and at the right time. Bill Gates was in an exclusive preparatory school which offered Computer time to children. It was here that he became entranced with Computers. I am not saying that he might not have been as successful otherwise. But it sure did help. When parents want their child to go to the best of schools, it points to the race of being in the right environment.

Last but not the least comes the hard work. “Practice makes a man perfect”. The more you work, the more is probability of success. One of the success stories of JEE Akanksha Sarda used to hate physics during schools. But with constant practice and hard work she achieved great heights.

Just to summarize, Success = ƒ(talent, environment, hard work, timing etc)
This function can neither be differentiated nor integrated, but with right reactants it can race exponentially towards glory.

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