• NY Times: Ivory Tower Unswayed by Crashing Economy

Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities around the country. True, some new approaches have been explored in recent years, particularly by behavioral economists who argue that human psychology is a crucial element in economic decision making. But the belief that people make rational economic decisions and the market automatically adjusts to respond to them still prevails.

. . . the two thinkers whose work is most relevant today are John Maynard Keynes, who argued that the government should spend its way out of the Great Depression, and Hyman Minsky, who maintained that financial institutions could prompt ruinous crashes by taking on too much risk. Neither, Mr. Galbraith said, is part of the core curriculum in most economics graduate programs.

• Chicago Tribune: China luxury hotel glut too much of good thing

“Everything that the developers are building is ‘luxury’ or ‘imperial’: luxury apartments, luxury shopping mall, luxury hotels,” said Hu Xingdou, an economics professor at the Beijing Institute of Technology. “But this is not what the Chinese people need or can afford.”

His company counted 126 hotel openings in Beijing last year, adding 29,000 rooms. Hotels that missed their deadlines for completion are still opening.

Even the Olympics were disappointing for Beijing’s hotel industry. Despite advance word that all hotel rooms would be sold out during the Games, hotels were only 67 percent occupied during August, the Olympic month, according to STR Global, a hotel research business.

• Financial Times: Hedge funds turn to gold

Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.

“The size of the Fed’s balance sheet is exploding and the currency is being debased. Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed,” Mr Einhorn wrote in a recent letter to his investors. “Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself.”

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Posted by guest blogger and virtual Portfolio Manager Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at arjun.ashar@gmail.com. Do check out his 5L Virtual Portfolio.

The prevailing wisdom last year was that the year 2008 was going to be a year of high input prices resulting in a slowdown and 2009 would be a year witnessing an acute slowdown in demand due to the sordid money market conditions of 2008.

In this context, it is interesting to note the performance of Indian steel, auto and cement sectors so far in 2009. All three sectors are simultaneously doing well in 2009. Just look around your surroundings, what do you observe first hand? In my part of Mumbai, I see roads being repaired at a hectic pace before the upcoming elections.

Real estate construction for residential buildings is being carried out at a furious pace. Of course these real estate projects are not one of the fancy ‘a swimming pool in every house’ kind, which were the children of the 2007 boom. The people who are going to buy these apartments in my area are middle and upper middle class folk who will be investing their savings built over a life time. In a city like Mumbai, there are enough people for whom moving into a 2 or 3 bedroom flat from their modest current accommodation is a life long dream for which they prudently saved throughout their lives, come recession or boom. They will lap up their dream home once it fits their budget, since their budgeted allocation for this house is accumulated over many years.

The larger point here is the Indian consumer psyche. This needs to be understood first, and understood very well before even remotely trying to gauge the future outlook for capital markets.

I think it is a great time to do business in India from an operational point of view. The four factors of production (and service) are land, labour, capital, enterprise. The first two are getting cheaper and availability of human resources would be greater than what it was two years ago. It is heartening to see newspaper headlines where many IIM grads are now going to work for public sector units and private sector companies in the real economy are also able to afford their services. Atleast this would end the silly obsession of MBA grads with capital markets. When every bright MBA, CA, engineer of a country wants to be an i-banker or allocate capital in private equity, then who will do the real work of running the companies. I love the positive realignment of human resources that is taking place over the past one year. Jim Rogers is bang on when he says that in future, farmers will be driving Lamborghinis and not brokers.

An IIT grad spends four years in his chosen field of engineering, his IIT stint being subsidized in large part by Indian tax payers, and then after 2 years of graduating he flies to US to run a hedge fund. It was absurd, where was the talent on the shop floor??? Look at the all the great scientists who work for ISRO putting spacecrafts on moon, hardly any of them have the fancy IITian tag. They come from humbler colleges.

Anyway, after land ‘n labour, we come to capital. It is scarce and expensive. Mukesh Ambani rightly said at a recent forum, that at the right risk-reward ratio, capital finds its way to deserving places. I would take him at face value. Look at the oversubscribed Tata Capital debenture issue, Reliance has raised Rs.10,000 from LIC recently. If you have a good business, capital finds you eventually.

Enterprise is a function of many factors and people who run businesses have better things to do than get bogged down by armchair economists, analysts and statisticians who keep chronicling and predicting various things for a living.

In India, a miniscule section of population is affected by stock markets unlike US where everyone has seen their 401k diminish. Plus, we don’t have that mortgage problem. The average size of an HDFC home loan is a mere Rs. 15 lakh which is payable over many years. A large part of our population is engaged in farming and government is a large employer. A person in rural India is more concerned about monsoons than what Roubini says every week and a PSU employee has got problems figuring out how to spend his windfall salary raise, and by the way, his job is secure.

So our demand has picked up January ‘09 onwards and could continue. People who are financially conservative don’t consume something just because they can. They do it when they really need something. Indian demographic composition would mean that people need clothes, food grains, electricity, education, healthcare, basic entertainment, telephony, maybe even cheap cars. Recession or no recession, coaching classes in India remain a roaring business. Just think of all the stuff you have consumed in your life since the day you were born, you were going to need most of that stuff anyway. As an average Indian, you have always lived within your means and consumed only what you needed and could afford. With cheaper input costs of fuel, land, human resources being made available at the right places, India at the moment, as you read this, is sowing the seeds of the next sustainable boom.

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.

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• The Atlantic: China’s Way Forward

Let’s begin by considering how bad things could get, for China and those it influences. The clearest approach I’ve heard to this question comes from Michael Pettis, the Beijing-based finance professor whose side business as a rock-music impresario I described in the March Atlantic. To think about China’s predicament in the late 2000s, he says, you should think about America’s in the 1920s.

Heaped on my desk are other sector-by-sector analyses suggesting that the rebound may come more quickly than the gross-demand figures indicate. “When can we expect to see signs of life in the mainland economy?” asked Andy Rothman, of CLSA Asia-Pacific Markets, in one such report, about the cement and steel industries. “Our answer is, March or April 2009,” when the first orders from the stimulus program will reach steel and cement companies.

• Bloomberg: Special Report: Global Water Crisis

Water upheavals are intensifying because the population is growing fastest in places where fresh water is either scarce or polluted. Dry areas are becoming drier and wet areas wetter as the oceans and atmosphere warm. Economic roadblocks, such as the global credit crunch and its effects on Mulroy’s attempts to sell bonds, multiply during a recession.

Yet local governments that control water face unyielding pressure from constituents to keep the price low, regardless of cost. Agricultural interests, commercial developers and the housing industry clash over dwindling supplies. Companies, burdened by slowing profits, will be forced to move from dry areas such as the American Southwest, Udall says.

• Paul Graham: How to Be an Angel Investor

How do you be a good angel investor? The first thing you need is to be decisive. When we talk to founders about good and bad investors, one of the ways we describe the good ones is to say “he writes checks.” That doesn’t mean the investor says yes to everyone. Far from it. It means he makes up his mind quickly, and follows through. You may be thinking, how hard could that be? You’ll see when you try it. It follows from the nature of angel investing that the decisions are hard. You have to guess early, at the stage when the most promising ideas still seem counterintuitive, because if they were obviously good, VCs would already have funded them.

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• Wall Street Journal: Buffett’s Unmentionable Bank Solution

Now comes Warren Buffett, a big investor in Wells Fargo, M&T Bank and several other banks, who, during his marathon appearance on CNBC Monday, clearly called for suspension of mark-to-market accounting for regulatory capital purposes.

We add the italics for the benefit of a House hearing tomorrow on this very issue. Mark-to-market accounting is fine for disclosure purposes, because investors are not required to take actions based on it. It’s not so fine for regulatory purposes. It doesn’t just inform but can dictate actions that make no sense in the circumstances. Banks can be forced to raise capital when capital is unavailable or unduly expensive; regulators can be forced to treat banks as insolvent though their assets continue to perform.

Meanwhile in India, the IACI has decided to keep AS-11 as is, thus requiring companies to continue to M2M their forex gains & losses. Ouch!

• Financial Times: Lost through destructive creation

• Prem Watsa, Fairfax: 2009 Annual Report

We think this recession is going to be long and deep and the only comparable data points are the debt deflation that the U.S. experienced in the 1930s and Japan experienced from 1989 to the present time. While the U.S. government has initiated a massive stimulus program and is providing up to $2 trillion for its Financial Stability Program, the effect of these programs will be diminished by the enormous deleveraging going on by businesses and individuals: government in the U.S. only accounts for less than 20% of GNP while the private sector accounts for more than 80%.

The situation will have to be monitored carefully over the next few years. Of course, many of these negatives are being discounted in the stock market and credit markets as stock prices are down more than 50% and credit spreads are at record levels. We have not had as many opportunities in both markets in our investing career and we are busy!

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I’m reading V. S. Ramachandran’s Phantoms in the Brain:

It’s a mind-blowing piece of work, pardon the pun.

Do check out his essays @ Edge; the earlier ones talk about mirror neurons while the recent ones discuss self-awareness (The Last Frontier).

On a related note, given all the denial in the financial world, what we need to do is squirt some cold water in Greenspan’s left ear canal.

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