Sunday 27 February 2022

The mysterious case of non-linear returns

Would you invest in a strategy if you double your money in 2 years? (100 Rs invested roughly becomes 217 in 2 years)

But this is not how the returns accumulate. Most of these returns came in the 1st year. ~83% in 1st year and 18% in 2nd year. Would you still invest?

Let’s break it down further. What if the 4 periods each of roughly 6 months had the following returns? 21.34%, 51.07%, 33.66%, (-11.40%)

Let’s take the worst-case scenario. What if you had invested at the top? You would have lost 25% of your capital by now. Would you still invest?

As you might have guessed this is not a hypothetical scenario. Q30 has completed 2 years. 100 at the start has become ~217 now (the way model portfolio returns are calculated in a standard manner, taken from smallcase daily NAVs publicly available here It has beaten the market handsomely and CAGR is coming to ~47%.

47% CAGR in 2 years which had both covid fall and the last few months of market mayhem is nothing but spectacular. Except that most of us Q30 investors are not happy (including us). There is human psychology at play.

Which scenario would you be happier in?

Scenario 1: Start with 100. Make some returns every month. End up with 217 now.

Scenario 2: Start with 100. Go to 272. Then crash to 217 now.

Same results. Different paths. Different feelings. Except that 2nd path is perfectly normal and it is what will keep getting repeated. Again, and again. Even in our backtests shared at launch, we had 1 out of 4 quarters negative. 1 out of 4 years negative. Drawdowns exceeding 30%. In the real world, we have been trying to avoid deeper drawdowns as none of us has the stomach to digest it even if it comes with very high returns. We will have to give up some returns to remain within a drawdown level. There is no point showing 50% CAGR on paper, if many of us get scared somewhere and quietly exit the portfolio, saying not my cup of tea.

What can help you stick with it? First of all, having expectations in line with how it is going to work in real world

  • Returns will not be linear. Some quarters and years will be great. Some others will be horrible. If you don’t stick through the horrible, you will not be there to see the great.
  • If you join at the wrong time and don’t stick long enough, you may actually lose money. Wrong time or right time is known only in hindsight no matter what is the market level, global news, or under/overvaluation. If you try to get in or out, you may end up doing worse than what the system has achieved.
  • The system already has an element of market timing built-in. It won’t get stocks to invest in if the market is bad. Today we are at the end of the month. And there is not a single stock that meets our eligibility filter to invest. In periods of prolonged bearishness, this will force us to remain in cash to some degree or fully. Trying to apply discretion on top of it, might be intellectually stimulating but it is unlikely to result in better risk-adjusted returns.
  • Our goal is to compound at a higher rate than the market with low effort. If market returns are say 15% p.a. over a decade long rolling period, we would be happy to get 20%+ p.a.
  • Wait, are we doing all this to get 5% extra than the market? Isn’t that horrible? Not really if you do the math. 10 Lakhs rupees invested for 20 years at 15% p.a. is roughly 1.7 crores. At 20% p.a., it becomes nearly 4 crores. The right question to ask is not what is the highest return strategy that is available anywhere but what is a high a return strategy that I can stick with for long periods and let my investment compound without getting scared out of it either due to volatility or my temperament not matching with something to do with the strategy be it the kind of stocks, buying/selling frequency etc. And this is something only you can decide.
  • Last 2 years Nifty has approximately returned 49%. Q30 has returned 117%, translating it into 47% CAGR for 1st two years against Nifty CAGR of ~22%. Everyone knows Nifty won’t generate 22% CAGR over longer time periods and neither will we generate 47% CAGR for longer time periods. The point is not to fuss about whether long term CAGR will be 20% or 40% but whether i) there is a high probability that it will beat the market, ii) it will beat it by a margin that makes the effort worthwhile, iii) the effort is low enough for me to live my life and not bother about my portfolio every day and iv) My temperament is aligned to it so that I can follow it for long periods and let my capital compound.

What can help you stick with it? Second, having some degree of asset allocation in place so that you don’t have the itch to bail out at the wrong time or feel the urge to check it every day thinking what to do.
Repeating what we have written in several Quantletters
  • Decide on the asset allocation first. Allocate a certain % of your equity portfolio to this quant portfolio. Not recommended to invest more than 25% of your equity portfolio in the quant strategy. Start with a smaller allocation and scale up as you build confidence
  • You may be tempted to pick and choose stocks or vary the allocation. Please do so in your discretionary portfolio taking the quant list as a source of ideas. However, for quant portfolio, please stick to the recommended model so that you stay closer to model portfolio returns
  • There is no buy range or targets. Any day you start, is a good time to buy provided you are buying the whole basket and not cherry-picking.
  • We are not full-time investors watching the screen all the time and trying to time entries and exits to perfection. Many of the times, we will buy/sell stocks at the wrong time at the wrong price because we are following a discipline and we want to be active only once a week at most for a few mins. This convenience comes at a price, but it also ensures that we can follow this for years.
This blog post has been written by Vikram, who is part of the Quant team at Intelsense.

Saturday 26 February 2022

Weekend Reading: 26-Feb-22

Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider sharing it with someone who you think will appreciate it.


You can sign up to to receive all blogs from me directly into your inbox.

Sustainability is not as new an idea as you might think—It’s more than 300 years old

Although it may not have been called sustainability until Carlowitz, societies had practised it for a long time as a vital part of cultural or religious practices.

Ancient Egypt pursued sustainable systems for more than 3,000 years. The Maya, according to anthropologist Lisa Lucero, practised a “cosmology of conservation.” The literature of ancient India is brimful with references to the preservation of the environment.

Without scientific forestry, people across Europe and around the world would have faced far more severe economic and social disasters than the ones witnessed in the last few centuries.


During the summer of 2021 in the United States, firefighters wrapped aluminium foil around the trunk of a giant old sequoia, hoping to save the world’s largest tree from “a raging wildfire” in California. Sequoias, which can live for up to 3,400 years, have coexisted with occasional forest fires for millennia.


Perhaps it is helpful to acknowledge that the world was in trouble before, and that, driven by necessity 300 years ago, it found solutions. The challenges being faced by people across the globe are far bigger today, but the tools available to them are better too. The world has added much science, and people should have a better understanding of how nature and societies work. 


Why kids hesitate to ask for help?

New research suggests young children don’t seek help in school, even when they need it. Until relatively recently, psychologists assumed that children did not start to care about their reputation and peer’s perceptions until around age nine. But a wave of findings in the past few years has pushed back against that assumption. This research has revealed that children as young as age five care deeply about the way others think about them. In fact, kids sometimes go so far as to cheat at simple games in order to look smart.


Research suggests that, as early as age seven, children begin to connect asking for help with looking incompetent in front of others. Their concern about reputation may have significant consequences, particularly when it comes to education. At some point, every child struggles in the classroom. If they are afraid to ask for help because their classmates are watching, learning will suffer. With this knowledge, teachers and caregivers should evaluate their practices and consider how they might make children more comfortable with seeking aid.


Seeking help could even be framed as socially desirable. Parents could point out how a child’s question kicked off a valuable conversation in which the whole family got to talk and learn together. After all, asking for help often benefits not just the help seeker but also others listening in who have similar questions or struggles. Moreover, adults could praise kids for seeking assistance. That response signals that they value a willingness to ask for help and not just effortless success.



We write notes to forget

We don’t write things down to remember them. We write them down to forget.


Like a hunter/gatherer stashing their prey, the ideas and the links we stumble upon feel valuable, rare, something worth saving. We ascribe value to the time we spend discovering things online. Surely that time wasn’t in vain.


Then we’re burdened with our findings. It’s tough to focus on something new when you’re still holding the old in your mind. So we write things down. Bookmark them. Add them to our reading list. Highlight our findings. Make long lists and check them twice. We need a cave, a storehouse, somewhere to stash our findings.


By letting go, you’ve cleared up space for new quests. No more dozens of tabs open forever; you saved them, then let them go back into the ether. No perpetual thinking on an idea; you wrote it down, let your second brain remember for you. Then we’re free. We’ve stalked the prey, secured it for later nourishment. We can safely forget. We’ve insured against faulty memories. Now on to the next quest, finding something new to stash.


That's the true value of notebooks, notes apps, bookmarking tools, and everything else built to help us remember. They’re insurance for ideas. They let us forget.


Understanding and differentiating between uncertainty and risk

Economist Frank Knight pointed out many years ago that uncertainty is when we can’t assign probabilities to events in advance. This seems like a simple and obvious statement. It cuts through the very foundation of economics and finance. Both of these disciplines assume away uncertainty. They are built on the bedrock that, as rational actors, we know the probabilities and payoffs of everything that may happen in the future. “Risk” is when one of the lower-probability outcomes occurs.


Complexity is like a novelty engine. It is constantly “inventing” new outcomes. We cannot know the probabilities of these outcomes in advance. Uncertainty, therefore, is born of complexity.


The key, though, is to understand the role of uncertainty. Complexity means that systems do not necessarily behave in a stable manner. Their underlying patterns can shift, sometimes abruptly.


Why reading books or watching videos cannot fully prepare you as an investor

Most actions have two sides: skill and behavior. What’s true in theory vs. how it feels in the moment. The gap between the two can be a mile wide. No amount of empathy and open-mindedness can recreate emotions. Textbooks and classrooms can’t teach what genuine fear, adrenaline, and uncertainty feel like. So you think you understand how a field works until you experience a new part of it firsthand. Then you see it through a completely different lens.


Can you survive your assets declining by 30%? On a spreadsheet, maybe yes – in terms of actually paying your bills and staying solvent. But what about mentally? It’s easy to underestimate what a big decline does to your psyche. You might realize your confidence is more fragile than you assumed. You – or your spouse – may decide it’s time for a new plan. I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets can model the historic frequency of big declines. But they can’t convey the feeling of coming home, looking at your kids, and wondering if you’ve made a huge mistake that will impact their lives.


I don’t think there’s any way to understand what a bear market feels like until you’ve lived through one.

Friday 18 February 2022

Weekend Reading - 18-Feb-22


Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider forwarding it to someone who you think will appreciate it.


You can sign up to to receive all blogs from me directly into your inbox.

1. Beliefs are the new luxury goods!

Human beings become more preoccupied with social status once our physical needs are met. In fact, research reveals that sociometric status (respect and admiration from peers) is more important for well-being than socioeconomic status. Furthermore, studies have shown that negative social judgment is associated with a spike in cortisol (hormone linked to stress) that is three times higher than non-social stressful situations. We feel pressure to build and maintain social status, and fear losing it.


Material goods have become more affordable and, thus, less reliable indicators of social class. Status has shifted to the beliefs we express. And beliefs are less expensive than goods because anyone can adopt them.


Luxury beliefs are similar to luxury goods, but present new problems. Attaching status to luxury goods or financial standing meant there were limits to how much harm the leisure class could do when it came to their conspicuous displays. For example, fashion is constrained by the speed with which people could adopt a new look. But with beliefs, this status cycle accelerates. A rich person flaunts her new belief. It then becomes fashionable among her peers, so she abandons it. Then a new stylish belief arises, while the old luxury belief trickles down the social hierarchy and wreaks havoc.



2. Public Vs Private Blockchains: How Do They Differ

Blockchain technology is the fulcrum of the ‘next internet’. At a granular level, every ‘block’ is a part of a database that records information. Blockchain is divided into two types: Public and private. While public blockchains are decentralised peer-to-peer networks, the ledger is controlled by a centralised authority in private blockchains: Meaning, the main difference lies in the level of access given to users.


Also known as permissionless blockchains, public blockchains are completely open. Bitcoin and Ethereum are both examples of public blockchains. Anyone in the network can access the chain and add blocks. Public blockchains are also largely anonymous, unlike private blockchains, where the identity of the people involved in the transaction is not kept hidden.

Advantages of public blockchains: Security, Transparency, Anonymity.

Disadvantages: Power consumption, Scalability, Security.


Private blockchains like Ripple and Hyperledger have the advantage of speed because a smaller set of users means less time to reach a consensus to validate a transaction. Private blockchains can process thousands of transactions every second and are easily scalable.


A private blockchain has a centralized network that quickens the transaction process. Having a centralized network also raises the issue of trust, which is resolved in a public blockchain. A transaction’s validity cannot be verified on private networks and relies on the authorised nodes’ credibility.


3. Smartphones Are the New Cigarettes

If you think about it, our attention is the only thing we truly own in our lives. Our possessions can go away. Our bodies can be compromised. Our relationships can fall apart. Even our memories and intellectual capacity fade away.


But the simple ability to choose what to focus on—that will always be ours.


Unfortunately, with today’s technology, our attention is being pulled in more directions than ever before, which makes this allocation of our own attention more difficult—and more important—than ever before.


To be happy and healthy, we need to feel as though we are in control of ourselves and we are utilizing our abilities and talents effectively.2 To do that, we must be in control of our attention.


4. Developing a process to challenge your own beliefs

My favorite quote from Seneca is “Time discovers truth.” My goal is to discover the truth before time does. I try to divorce our stock ownership from our feelings.


Let me give you this example. If you watch chess grandmasters study their past games, they look for mistakes they have made, moves they should have made, so in the future they won’t make the same mistake twice. I have also noticed they say “white” and “black,” not “I” and “the opponent.”


This little trick removes them from the game so that they can look for the best move for each side. They say “This is the best move for white”; “This is the best move for black.”


5. How many stocks to own in a portfolio?

There is another important point that sometimes gets overlooked: If you want to run a concentrated portfolio, then certain stocks must be off-limits (for example, highly-leveraged businesses) or you risk disaster. Your focus needs to be: “don’t lose money.” And you can do that by raising the quality of what you own. Search out wonderful businesses as Warren Buffett has often said, and ignore everything else.


If you have a really wonderful business, it is very well protected against the vicissitudes of the economy over time… And three of those will be better than a hundred average businesses. And they'll be safer incidentally. There is less risk in owning three easy to identify wonderful businesses than there is owning 50 well-known big businesses. It's amazing what has been taught over the years in finance classes.


Everyone will have to find their own answer to the question of “how many stocks?” And there’s more to think about than what I have addressed here.


For me, I love the idea of owning about a dozen wonderful businesses that I get to know really well and then leave them alone. No trimming. No “trading around positions.” No fretting during drawdowns. As long as the businesses continue to perform, I just let them be.



A brief introduction of our advisory services:

Intelsense Knowledge Series - Annual Report Summaries:

Lincoln Pharma

Lincoln Pharma.pdf

Thursday 10 February 2022

Weekend Reading - 11-Feb-22


Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider forwarding it to someone who you think will appreciate it.


You can sign up to to receive all blogs from me directly into your inbox.

Why Do Kids Lie?

Children typically begin lying in the preschool years, between two and four years of age.

But from a developmental perspective, lying in young children is rarely cause for concern. In fact, lying is often one of the first signs a young child has developed a “theory of mind”, which is the awareness that  others may have different desires, feelings, and beliefs to oneself.


While lying itself may not be socially desirable, the ability to know what others are thinking and feeling is an important social skill. It’s related to empathy, cooperation, and care for others when they’re feeling upset.


As children get older and their perspective-taking ability develops, they’re increasingly able to understand the kinds of lies that will be believable to others. They also become better at maintaining the lie over time. Moral development also kicks in. Younger children are more likely to lie for personal gain, while older children increasingly anticipate feeling bad about themselves if they lie. Older children and teens are also more likely to draw distinctions between different kinds of lies. White lies, to them, are considered more appropriate than harmful or antisocial lies


Strive to be 1% better each day

The 1% better each day mindset doesn’t work if you have an enormous ego. Egos tell us we can have 300% better days. Egos make us believe in fake progress. Egos make us take credit for progress someone else created.


1% better is laced in humility. It’s a competition you have with yourself, quietly, each day.


The progress of 1% better is slow. It took me 5 years to get momentum from this 1% mindset. Most people can’t last. They want it now! now! now! so they can take a picture of success and put it on Instagram.


It takes everything you’ve got to show up every day for 5 years and be 1% better each time. When you do, though, you stack hidden progress you can’t see. Being 1% better includes pain. No need to avoid it. Expect it and let it help.


You stay on path with your goals when you have a system. But if tragedies can temporarily derail systems you build, then there’s a mindset you need.


Program your mind to see everything in life as opportunity. Optimism helps keep your 1% each day winning streak going. The best question is this: how can I use this to my advantage? Or say to yourself, if I had a gun to my head and got forced to see the good in this situation, what would it be?



We are never satisfied

As for money, more of it helps up to a point—it can buy things and services that relieve the problems of poverty, which are sources of unhappiness. But forever chasing money as a source of enduring satisfaction simply does not work. “The nature of [adaptation] condemns men to live on a hedonic treadmill,” the psychologists Philip Brickman and Donald T. Campbell wrote in 1971, “to seek new levels of stimulation merely to maintain old levels of subjective pleasure, to never achieve any kind of permanent happiness or satisfaction.”


Yet even if you recognize all this, getting off the treadmill is hard. It feels dangerous. Our urge for more is quite powerful, but stronger still is our resistance to less.


So you try and you try, but you make no lasting progress toward your goal. You find yourself running simply to avoid being thrown off the back of the treadmill. The wealthy keep accumulating far beyond anything they could possibly spend, and sometimes more than they want to bequeath to their children. They hope that at some point they will feel happy, their lives complete, and are terrified of what will happen if they stop running. As the great 19th-century philosopher Arthur Schopenhauer said, “Wealth is like sea-water; the more we drink, the thirstier we become; and the same is true of fame.”



Mind your attention

It’s not just your time that matters, but your attention. As the great Stoic philosopher Seneca once said: Life is long if you know how to use it.


But I’m not wasting time anymore. Because I’ve started to notice how some other people guard their attention and it’s had a profound impact on me.


For example, Marc Andreessen has been known to block thousands of people on Twitter so that he doesn’t have to see opposing ideas in his newsfeed. He won’t even let his attention stray from his core beliefs for a fraction of a second. Though Andreessen’s actions are extreme, I understand why. He realizes that attention is the last frontier, the last thing we have to ourselves. So he does everything he can to protect it.


The message is clear—protect your attention at all costs. Because if you don’t, someone else will happily take it from you. That someone else could be a corporation, a social media influencer, or someone in your personal life. Whoever it is, watch who and what you give your attention to.


Because every day your attention is getting more valuable. Every day companies are getting better at monetizing it and every day you are getting a little bit older (meaning you have less total attention to spend than the day before).


In fact, there is a war going on for your attention. It’s a war that has been waged for decades and it’s only getting worse. For example, it’s been estimated that the average person encounters over 5,000 advertisements per day, up from just a few hundred per day in the 1970s.


Today there are more people fighting for your attention than ever before. This is why you have to be mindful of it if you want to make progress in your life.



Wealth is what you don't do with your money

Wealth is what you don’t spend, which makes it invisible and hard to learn about by observing other people’s lives. Spending is contagious; wealth is mysterious.


Money is often a negative art. What you don’t do can be more important than what you actively do.


Everything has a price, and prices aren’t always clear. The price of exercise isn’t just the workout; it’s avoiding the post-workout urge to eat a ton of food. Same in finance. The price of building wealth isn’t just the trouble of earning money or dealing; it’s avoiding the post-income urge to spend what you’ve accumulated.



As part of the Intelsense Knowledge Series, we published the following Annual Report Summaries:

Thursday 3 February 2022

Weekend Reading - 04-Feb-22


Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider forwarding it to someone who you think will appreciate it.


You can sign up to to receive all blogs from me directly into your inbox.

1. It’s OK To Build Wealth Slowly

Life and risk are both full of trade-offs.


I know clients with tens of millions of dollars who have the ability to take lots of risk but not the desire so they play it safe. I know other clients with tens of millions of dollars who have the ability to take lots of risk and do so with certain parts of their portfolio because they can.


So much of the success for any investment or wealth-building strategy comes down to your personality. And the best part about building wealth slowly is…it actually works.


Had I made some extreme bets with my career or portfolio I could have way more money but those bets also could have crashed and burned, leaving me in a far worse position.


What ifs are useless when it comes to your finances. There are plenty of different ways to build wealth. The important thing to remember is you don’t have to follow someone else’s path just because it looks easy.


There are always trade-offs in life and investing.




2. Why competitive advantage dies

Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies.


Maintaining financial success takes precedence over traits that were vital to building the initial idea. Nothing to lose is a wonderful thing to have. You focus all your energy on building something great. Having a quarterly dividend to maintain is what happens after you build something great. But it can come at the expense of what made you successful in the first place.



3. Your Attention Didn’t Collapse. It Was Stolen.

The average teenager now believes they can follow six forms of media at the same time. When neuroscientists studied this, they found that when people believe they are doing several things at once, they are actually juggling. “They’re switching back and forth…”


Imagine, say, you are doing your tax return, and you receive a text, and you look at it – it’s only a glance, taking three seconds – and then you go back to your tax return. In that moment, your brain has to reconfigure, when it goes from one task to another. When this happens, the evidence shows that your performance drops. You’re slower.


This is called the “switch-cost effect”. It means that if you check your texts while trying to work, you aren’t only losing the little bursts of time you spend looking at the texts themselves – you are also losing the time it takes to refocus afterwards, which turns out to be a huge amount.



4. Always be prepared for a correction in equities

Investing in the stock market is a challenging mental exercise.


Among other things, investors have to cope with two seemingly conflicting realities: In the long-run, things almost always work out for the better; but in the short-run, anything and everything can go very badly.


Unfortunately, it is incredibly difficult to predict when stocks will fall. And exiting stocks in an attempt to avoid short-term losses can prove incredibly costly to long-term returns.


So, whether or not you can comprehensively identify and balance all of the potential bullish and bearish market catalysts, it’s probably a good idea to just always be prepared for stocks to experience some big dips on their long upward journey.


If you’re not able to stomach short-term volatility or if your portfolio can’t handle short-term unrealized losses, then investing in the stock market might not be for you.


These short-term challenges are the price investors pay for long-term riches.



5. Size helps. Before it hurts.

Body size in biology is like leverage in investing: It accentuates the gains but amplifies the losses. It works well for a while and then backfires spectacularly at the point where the benefits are nice but the losses are lethal.


Take injury. Big animals are fragile. An ant can fall from an elevation 15,000 times its height and walk away unharmed. A rat will break bones falling from an elevation 50 times its height. A human will die from a fall at 10 times its height. An elephant falling from twice its height splashes like a water balloon.


The most dominant creatures tend to be huge, but the most enduring tend to be smaller. T-Rex < cockroach < bacteria.


Size is nature’s leverage. Sought after for its benefits straight up to the point that it ferociously turns against you.


Same thing applies to companies and investments.


The important point here is that these companies didn’t get big because of greed or ego. They got big because economies of scale made them more efficient. Economic evolution pushed them that direction, naturally and rationally, so they could do their job better. Cope’s Rule in action. But that same force pushes them straight up to a level of self-destruction that can undermine all the previous gains, even put them out of business. That sounds crazy, but it’s been happening in nature for hundreds of millions of years.



Wednesday 2 February 2022

Investing During Inflation


I am writing this the morning after the budget. The budget has slowly become a non-event, which is exactly what it should be. It is only the financial media which, more driven by TRP – a form of incentive caused bias, keeps it at the center of events. In essence, the budget has two components. The first is a presentation of finances for the ongoing financial year. The next is a plan of allocation of financial resources for the next year. That’s it. The plan for the next year is an intent. It is not cast in stone. And the plan also is updated based on updated situations during the year. At most the budget can give a feeler in terms of the intent of the government for the following year.

Even without the pronouncement during the budget, most of those who follow the financial sector, knew that the focus is on infrastructure building which in turn leads to what economists’ term as “crowding-in effect”. That is when government spending is followed by private spending due to a rise in overall economic growth. Overall, this leads to a rise in jobs, wages and hopefully, more prosperity all around.

The other areas of government expenditure are social spending under various names and heads and a push for “Atmanirbhar Bharat”.


Perhaps the biggest threat to global equities today is inflation. Some economists say it is because of temporary supply side constraints whereas others believe it to be more structural in nature and occurring due to the massive injection of ‘helicopter money’ by central banks post the pandemic.

I am not an economist. So, my thoughts are more theories based on my observations.

When I look at the production of any commodity, I don’t see any dip in supply.

I cannot find any industry where supply is way below what was there before the pandemic began. Even in the most well-known case of semiconductor shortage, the aggregate production has not really gone down. It is just that the demand has increased sharply and also some companies like Intel are also now outsourcing their fab work to TSMC and their likes till their own expansion is in place. (ref:

The second fact that can be seen is the “Great Resignation” in the US. Literally millions of people, more low wage workers than their higher paid counterparts, are leaving the job market. There are many reasons being cited. From being overworked and underpaid to location constraints.


The last thirty odd years had seen a major shift in production of goods and services. For various reasons which are now well known, both manufacturing and services shifted to Asia (China, India, Vietnam, South Korea, Thailand, Philippines, Malaysia etc). This was presented as a win-win as it helped customers in developed countries tide over labour shortages and get their products cheaper than producing it at home. The global supply chain started working in a completely optimized and efficient manner.

Additionally, the Asian countries have also developed in this period and the cost of production has started growing there are well. Wage rise and reduced working hours in China is a classic example. Stricter adherence to environmental norms is another such example.


Another phenomenon that started taking shape parallelly was the rise of inequality across the world. People with higher education earned more and over three decades the gap that has been created has become substantial. This has many repercussions. We have started seeing social unrest across the globe. Countries and political parties have started becoming more hardline to protect domestic jobs and a lot of countries have started incentivizing domestic production. Free movement of labour across borders are also now being met with lot of skepticism and protectionism.


The net result of all these is that the manufacturing and services is likely to shift away from its lowest cost production centers globally in the next two-three decades. China+1 is just one such example. Similarly, we have seen Indian IT companies hiring significantly more in US and other “nearshores”.


We should witness a persistent inflation that is higher than what we are accustomed to in the past.

Governments straddled with mountains of debt would want to run a few years of high inflation and negative real rates.

The best part of all this is that companies that adopt technology which tends to have a disinflationary characteristic, are able to pass on cost increases to its customers (preferably global), are likely to benefit the most in the future.

This post first appeared in The Economic Times