Good Times Ahead (I hope!!)

Below is the note I sent to the subscribers of the Intelsense equity advisory earlier today.

Today was a momentous day for Indian markets. Not only did we see a huge upmove, we also saw a complete U-turn in policy stance. The government had been projecting a very aggressive tax stance during the budget and after it. I think the realization that the economy was really in big trouble had not sunk in. Today's announcements of reduced corporate taxes come as a relief to me simply because this is the first real "action" the government has taken. I am ignoring the small tinkering with minor policies over the last few weeks as inconsequential.

The action is really big and bold. Cutting peak tax rates for corporates this drastically is HUGE. It signals that the government is willing to bite the bullet, take the pain of much higher fiscal deficit to spur growth. Some of the larger corporates were paying upwards of 33%-35% and a reduction to 25% means a 33% reduction in their tax outflows. This is itself would boost earnings growth significantly (around 8%-10%). Earnings growth was what has been missing from corporate India for a couple of years now. So, the markets should re-price stocks at least 10%-15% higher wherever the tax benefits are significant.

But. And there is always a but.

But, that is a one time benefit. Say a company was earning Rs 100 as PAT today after paying Rs 35 as tax. If their tax reduces to Rs 25, then the PAT directly jumps to Rs 110. Now the company has an extra Rs 10 in hand. So, those companies which are able to reinvest this additional money most efficiently would reap the most long term benefit.

Companies will have multiple options to decide what they do with the additional cash. Some could be:

- repay debt

- invest in capex

- reduce prices to spur growth

- pay more dividends / do buybacks

- incentivise employees to produce / sell more

- waste it by splurging on inconsequential or reckless spending

- all of the above

Any or all of the moves would have second and third order consequences most of which should be good.

A major beneficiary of this move could be that as the markets become more buoyant, it will be possible to carry on large disinvestment programs of PSUs.

The other major benefit is that we will become a much more tax competitive nation for global corporates when they decide on moving their supply chain to. Today, there is significant issues in China (China-US trade war has spurred an uncertain environment for global companies who have very large setups in China. Now, they are aggressively looking at alternative locations to hedge their bets. India will now be a possible favourable destination. If we can get our act together on land and labour reforms we will be unbeatable, but that is probably asking for too much!!

The global situation continues to be problematic. Large countries are facing severe economic headwinds. Close to $18 trillion dollars are currently in negative yield and projections are there that US will have to continue to cut policy rates significantly. All the large economies are struggling. China, which fuelled, the last global commodity rally by its consumption, is facing tough times of its own. China-US trade war, the drone strike on Aramco, Brexit looming its head again continue to pose serious challenges to the macro environment. We will keep that at the back of our minds but continue to focus on individual companies that we own and would like to own.

My sense is that we will move from a negative growth spiral which we had got ourselves into and into a positive growth spiral now. Our job of identifying good quality, well managed, growing companies do not change. I will be reviewing the portfolio stocks and the allocations over the weekend and will communicate any changes. If nothing else, today’s announcement has boosted my sentiments from cautious for somewhat more bullish!! ;-)

Hoping for the best!

P.S.: If you think you or someone you know will benefit from the equity advisory, you can visit www.intelsense.in

Weekly Reading - Some Interesting Stuff

1) A Santa Monica Tech Startup Has “Hacked” Meditation

Extraordinary experiences are the norm at Upgrade Labs in Santa Monica, a gymlike facility devoted to biohacking—“the art and science of becoming superhuman". The propagation of Upgrade Labs is part of a mission, according to CEO Martin Tobias, to bring the wellness-boosting fringe technology employed by pro athletes and the ultrarich to the (relatively affluent) masses. At $50 a pop for an individual hack or five grand for a curated “stack” of therapies, options include atmospheric cell training, pulsed electromagnetic field pick-me-ups, cryotherapy, and vitamin cocktails designed for injection straight into your veins.

Of all the treatments, though, the lab’s waterless virtual float tank is perhaps the most intriguing. The contraption stimulates relaxation and creative drive by, essentially, syncing your brain waves. The eyeshade is fitted with pulsing LEDs that blast white light through your closed eyelids. The headphones pump out binaural beats. The whole experience begins as sensory overload, but, for some at least, it eases into a profoundly relaxing, mentally rejuvenating experience. All this occurs because, purportedly, the rhythms of light and sound bombarding your sensory organs are specifically attuned to encourage one elusive thing: the production of theta waves in your brain.

https://www.lamag.com/culturefiles/upgrade-labs-meditation/

2) An interview with Alibaba Group chairman and CEO Daniel Zhang

The other important thing is that they tend to spend more. China is famous for being a high-savings-rate society, but the younger generation are more willing to improve their lifestyle through spending, and that presents huge opportunities. In this digital era, when we talk about Alibaba’s future, we focus on helping our business partners win through successful digital transformation, rather than about how we can make ourselves even stronger. When small businesses can grow faster and grow healthier, it will benefit the whole society. As the Chinese economy transforms into a consumption-driven economy, Alibaba has a huge opportunity to understand consumers’ changing needs. We help connect the whole world with China to facilitate easy trading and access to the world’s largest consumer market.

https://www.mckinsey.com/featured-insights/china/speak-softly-make-tough-decisions-an-interview-with-alibaba-group-chairman

3) Mixed reports on the efficacy of diet soda

A new study that found prodigious consumers of artificially sweetened drinks were 26 percent more likely to die prematurely than those who rarely drank sugar-free beverages.

Chemical sweeteners like aspartame and sucralose have also been extensively studied, with little evidence that they negatively impact human health, according to the F.D.A.

Still, many scientists say more research is needed to determine the long-term effects of consuming artificial sweeteners.

https://www.nytimes.com/2019/09/06/health/diet-soda-health-death.html

4) Data analytics is now big in sports

Days before the 2019 ICC Cricket World Cup began in May, media reports said the Indian cricket team had signed a deal with StatSports, a Northern Ireland-based performance tracking and analysis company. It produces a small device that sits between the shoulder blades on an athlete’s back, worn in a vest under the jersey. The device measures metrics such as distance covered, speed, acceleration, deceleration, and dynamic stress load. It allows the coach and support staff to analyse and record data about the players’ movements and manage their workload.

http://www.forbesindia.com/article/forbes-lifes/game-tech-match-indian-sports-teams-are-going-hightech/55155/1

5) Is SoftBank a Ponzi scheme?

Using the valuations which are largely concocted by SoftBank themselves (since they’ve often been leading the financings of these “unicorns” and it is the last round of investment capital which is often the metric used for valuing these things), they’re looking to front-run IPOs and get out.

The entire “growth” story, which is to say companies that can continuously grow market share (preferably at a loss) looks to be rolling over.

It’s the classic Ponzi scheme. You always need fresh new capital to pay off the old capital in order for the scheme to continue. When there is no fresh new money, everything reverses and folks quickly realise the value of positive cash flow.

https://capitalistexploits.at/hold-my-beer/

Weekend Reading - Some Interesting Stuff

1) Chronic stress is starting to centre stage in diseases

According to the Health and Safety Executive (HSE) of the United Kingdom, stress, depression or anxiety accounted for 57% of all “sick days” in 2017/2018. The mind’s rising leverage over productivity is prompting interest in what might be impeding its performance. The focus has fallen on stress.

http://www.bbc.com/future/story/20190813-burnout-anxiety-stress-proof-relief

2) Earphones (buds / pods) are making you go deaf … slowly

Hearing loss isn’t just the stuff of senior citizens: 1 in 5 teens will experience hearing loss — a rate that’s 30% higher than it was 20 years ago. 

At maximum volume, earbuds and AirPods can be as loud as 110 decibels, which is the equivalent of someone shouting directly into your ear. According to the CDC, being exposed to 85 decibels over a prolonged period, or repeatedly, puts you at risk of hearing damage. If you’re listening to your earbuds at the maximum volume of 110 decibels, you’re at risk of hearing loss after just five minutes — barely the length of two songs.

When you’re using earbuds on a plane or train, you’re really pushing the limit of what’s safe. Some trains get up to 80 or 90 decibels. Then you’re pushing the limit 13 decibels over that, and that’s when it gets really dangerous.

https://elemental.medium.com/something-you-dont-want-to-hear-about-earbuds-d554e85696b5

3) Is non-standard labelling leading to food wastage?

In the US, as much as $218 billion on uneaten food is wasted every year. When analysing the entire supply chain, including farming and processing. Globally, the carbon emitted by wasted food can be classified as its own country—the third worst carbon emitter in the world, behind the U.S. and China.

https://www.fastcompany.com/90397198/the-218-billion-design-problem-sitting-in-your-fridge-right-now

4) Amazon’s latest payment method uses flesh and blood.

The e-tailing giant’s engineers are quietly testing scanners that can identify an individual human hand as a way to ring up a store purchase, with the goal of rolling them out at its Whole Foods supermarket chain in the coming months. The high-tech sensors are different from fingerprint scanners found on devices like the iPhone and don’t require users to physically touch their hands to the scanning surface. Instead, they use computer vision and depth geometry to process and identify the shape and size of each hand they scan before charging a credit card on file. The system, code-named “Orville,” will allow customers with Amazon Prime accounts to scan their hands at the store and link them to their credit or debit card.

https://nypost.com/2019/09/03/amazon-testing-payment-system-that-uses-hands-as-id/

5) An interview with Keshub Mahindra, now 95, discussing what life has taught him and lessons he would like to share with younger generations.

Keshub Mahindra is chairman emeritus of India’s Mahindra Group, a $20.7 billion conglomerate. His father and uncle founded the company in the mid-1940s. Mahindra joined the business soon after its inception, took over as chairman in 1963, and retired in 2012 after leading the group for five decades.

I believe happiness is an attitude of the mind. I tell my children, be happy in whatever you are doing, but I also tell them, be tolerant, be open, be honest, and transparent. That is how you should be. Take joy in the happiness of others.

http://knowledge.wharton.upenn.edu/article/dream-impossible-life-lessons-keshub-mahindra/

Weekly Reading - Some Interesting Stuff

1) How AI is shaping new fintech

Data science is increasingly being used to speed up processes, compare products, find deals, and produce answers customised to an individual’s circumstances. 

Using natural language processing, chatbots are designed to cope with the huge variety of unstructured responses that people may type or speak into their devices. As they become more sophisticated, chatbots learn from each encounter, so they can pick up on more subtle or idiosyncratic phrasing and better identify ways to help users. This includes “sentiment analysis”, where the bot detects tension or upset in a user’s tone of voice, and quickly switches over to a human operative to resolve the issue. 

https://www.ft.com/content/37ca12d8-b90a-11e9-8a88-aa6628ac896c

2) Inverted yield curve explained using a sports analogy

The financial world has been atwitter about the inversion of the yield curve. It is a phenomenon in the bond market in which longer-term interest rates fall below shorter-term interest rates, and has historically been a warning sign that a recession could be on the way.

This all seems obvious to people who are steeped in bond market math and the workings of fixed-income markets, and can be completely perplexing to those who are not. Maybe a sports gambling analogy will make the intuition clearer.

https://www.nytimes.com/2019/08/15/upshot/inverted-yield-curve-bonds-football-analogy.html

3) How deepfakes on social media is getting stronger as the technology to catch it as well

Misinformation has long been a popular tool of geopolitical sabotage, but social media has injected rocket fuel into the spread of fake news. When fake video footage is as easy to make as fake news articles, it is a virtual guarantee that it will be weaponized. Want to sway an election, ruin the career and reputation of an enemy, or spark ethnic violence? It’s hard to imagine a more effective vehicle than a clip that looks authentic, spreading like wildfire through Facebook, WhatsApp, or Twitter, faster than people can figure out they’ve been duped.

As a pioneer of digital fakery, Li worries that deepfakes are only the beginning. Despite having helped usher in an era when our eyes cannot always be trusted, he wants to use his skills to do something about the looming problem of ubiquitous, near-perfect video deception.

https://www.technologyreview.com/s/614083/the-worlds-top-deepfake-artist-is-wrestling-with-the-monster-he-created

4) A city grows based on the commute time

From ancient Rome to modern Atlanta, the shape of cities has been defined by the technologies that allow commuters to get to work in about 30 minutes. Even if there is a vast amount of land available in the country, that land has no value in an urban context, unless transportation makes it quickly accessible to the urban core. And that pattern has repeated itself, again and again, as new mobility modes have appeared. This means that the physical size of cities is a function of the speed of the transportation technologies that are available. And, as speed increases, cities can occupy more land, bringing down the price of land, and therefore of housing, in newly accessed territory.

https://www.citylab.com/transportation/2019/08/commute-time-city-size-transportation-urban-planning-history/597055/

5) McDonalds is experimenting with a new futuristic store layout

The fast-food giant is known for its quick drive-thru service, but now it’s taking things a step further with a new to-go location that only serves food with no seating.

With its takeout location, McDonald’s is leveraging new technology and touchscreen ordering. McDonald’s creative solution makes the technology an integral part of its business operations, which could prove incredibly successful.

https://www.forbes.com/sites/blakemorgan/2019/08/22/a-sign-of-the-future-restaurant-the-new-mcdonalds-to-go-location/#2d55c9293d7f

Understading the US and China trade war

Firstly, let me be upfront and admit that my knowledge about history and geopolitics is very rudimentary. However, I am fascinated by models and try to learn about how to view things and events from multiple perspectives. I am fascinated by the drama of the “US-China Trade War” and enjoy the edge-of-the-seat theatrics created by President Trump’s daily tweets!

I am trying to understand the US-China Trade War in the context of “The Thucydides Trap”. Thucydides was a Greek historian who explained that when a rising power causes fear in an established power it escalates toward war. Thucydides wrote: "What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta."

Nearly all such contests have ended badly, often for both nations. A team led by Graham Allison at the Harvard Belfer Center for Science and International Affairs has concluded after analyzing the historical record. In 12 of 16 cases over the past 500 years, the result was war. When the parties avoided war, it required huge, painful adjustments in attitudes and actions on the part not just of the challenger but also the challenged.

When I look through the lens of this mental model, then suddenly the US-China trade war begins to make sense.

Earlier, wars were fought for the control of territory and natural resources. Today, mega corporations, technology (both software and hardware) and data are probably more important tools of global domination and conversely also of conflict.

The world of today and of the future will be owned by those who control these new-age “natural resources”. Huawei then becomes a symbol or token of this struggle for control. The US is refusing to allow the company's technology to be used for key future communications networks and is pressuring its allies to impose a similar ban. China also prevents US tech giants like Google and Facebook from operating freely in their land.

As Singapore’s late leader, Lee Kuan Yew, observed, “the size of China’s displacement of the world balance is such that the world must find a new balance. It is not possible to pretend that this is just another big player. This is the biggest player in the history of the world. China wants to be China and accepted as such—not as an honorary member of the West.”

Eventually, all this could lead to others having to take sides in this “war”. We could be heading to a “cold war’ like situation with two completely disparate technology blocks – google, facebook et al on one side and Alibaba, Tencent, Huawei, ZTE on the other. This will play out in every sphere. In electric vehicles, BYD is taking a major leap ahead of US companies. Tesla and BYD may come to a head in defining the standards of interoperability in connected EVs. China already dominates the hardware industry globally and US is not even a credible player in that space. The more software technologies that China can become leaders in, the more dominant their future power becomes. And the closer they get to being the preeminent superpower.

So, the next time you see a “trade war” story, view it from the lens of this model and see if it makes more sense.

Note: If you are interested to read more about The Thucydides Trap, please read https://www.theatlantic.com/international/archive/2015/09/united-states-china-war-thucydides-trap/406756/

Disclaimer: The author is the Chief Equity Advisor at www.intelsense.in and nothing in the article should be construed as financial advice.

This post was first published in The Economic Times.

Weekend Reading - Some Interesting Stuff

1) The Earth is burning

Major wildfires are burning all over the world right now.

More than 21,000 square miles of forest have gone up in flames in Siberia this month, putting Russia on track for its worst year on record for wildfires.

a wildfire in the Canary Islands forced more than 8,000 people to flee. Over the weekend, new fires ignited in Alaska, extending what’s already been an unusually long fire season for the state. Last week, Denmark dispatched firefighters to Greenland combat a wildfire approaching inhabited areas. If not extinguished, officials are worried the blaze would burn through the winter, further driving up the already massive ice melt Greenland has experienced this year amid record heat.

But perhaps even more alarming are the wildfires in the Amazon rainforest, the world’s largest tropical forest. It’s an area with torrential rain that almost never burns on its own, yet the blazes have burned for more than two weeks, growing so intense that they sent smoke all the way to São Paulo, Brazil’s largest city.

https://www.vox.com/world/2019/8/20/20813786/wildfire-amazon-rainforest-brazil-siberia

2) Mosquitoes - the greatest killer in history

Malaria laid waste to prehistoric Africa to such a degree that people evolved sickle-shaped red blood cells to survive it. The disease killed the ancient Greeks and Romans—as well as the peoples who tried to conquer them—by the hundreds of thousands, playing a major role in the outcomes of their wars. For much of military history, deaths caused by mosquitoes far outnumbered, and were more decisive than, deaths in battle. 

Globalization is helping to spread a new generation of mosquito-borne illnesses once confined to the tropics, such as dengue, perhaps a thousand years old, and chikungunya and Zika, both of which were first identified in humans only in 1952. Meanwhile, climate change is dramatically expanding the ranges in which mosquitoes and the diseases they carry can thrive. One recent study estimated that, within the next fifty years, a billion more people could be exposed to mosquito-borne infections than are today.

https://www.newyorker.com/magazine/2019/08/05/how-mosquitoes-changed-everything

3) What if the cost of capital never rises again?

When the cost of money is low (or, effectively zero) as it is today, intellectual property and brand, intangible assets become more highly valued by investors than physical assets are because they are weapons that corporations can use to nullify the moats and assets of the incumbent corporations that they are competing with for customers, revenue and market share.

The implications of a world in which equity capital is flowing while interest rates on credit never rise to the level of being a serious roadblock for innovation are fascinating to consider. What if every new idea that comes along, no matter how world-altering and disruptive, no matter how unproven or risky, can get overnight funding without much of a problem? Masayoshi Son’s Vision Fund has been investing based on this premise. Massive pools of capital from sovereign nations and university endowments and gigantic corporations like Google’s moonshot division are investing this way as well.

There are no asset managers who represent their strategy to clients as “We buy the most expensive assets, and add to them as they rise in price and valuation.” That’s unfortunate, because this is the only strategy that could have possibly enabled an asset manager to outperform in the modern era. It’s one of those things you could never advertise, but had you done it, you’d have beaten everyone over the ten-year period since the market’s generational low.

https://thereformedbroker.com/2019/06/13/when-everything-that-counts-cant-be-counted/

4) A brief economic history of Independent India

The 73 years after India got its independence can be broadly sliced into three phases: The three decades post-1947 till the 70s was when Jawaharlal Nehru and, then, his daughter Indira Gandhi went about the task of institution and nation-building. The 80s was arguably a lost decade, with Indira pursuing her gambits of nationalising banks and loan melas when she should have been ushering economic reform and deregulation. That eventually came in the 90s when the country’s coffers had dried up. The last three decades have transformed India, made a fraction of Indians richer, but poverty and inequality are still fetters in the eighth decade after India became a free country.

The first three decades may be a distant memory, but to assume that they are gone forever would be a mistake. We still have not fully abandoned some of the mindsets and approaches of that era. 

http://www.forbesindia.com/article/independence-special-2019/1950s-to-1970s-how-indias-economic-dna-got-hardcoded/54757/1

5) Amazon's Prime Now service may be delivering your next meal

Amazon India has long been eyeing the food delivery business in India. People aware of the company's plans told The Times of India that Prime Now, Amazon's two-hour grocery delivery platform, could be the primary vehicle for its foray into food delivery business in India.

https://www.businesstoday.in/technology/news/amazon-to-foray-into-food-delivery-space-with-prime-now/story/373676.html

Weekend Reading - Some Interesting Stuff

1) Americans are now buying survival bunkers for themselves

Americans have, for generations prepared themselves for society’s collapse. They built fallout shelters during the Cold War and basement supply caches ahead of Y2K. But in recent years, personalized disaster prep has grown into a multimillion-dollar business, fueled by a seemingly endless stream of new and revamped threats, from climate change to terrorism, cyberattacks and civil unrest.

“Fear sells even better than sex,” Professor Hoopes said. “If you can make people afraid, you can sell them all kinds of stuff,” he added, “and that includes bunkers.”

https://www.nytimes.com/2019/08/13/us/apocalypse-doomsday-capitalists.html

2) Keeping calm under stress - from those whose accomplishments will blow your mind

This elite organization was founded in 1904 and has 3,000 invitation-only guests. To qualify for nomination, you need to have done something truly earth-shattering (literally, for those members who study earthquakes). At their annual dinner this year, for example, 250 people had been to the North Pole, 150 to the South Pole, an odd dozen had summited Everest, two had been to the bottom of the Mariana Trench (the deepest point in the ocean), a bunch had orbited the Earth, and six people—six!—had been to the Moon.

Last month, the group held its inaugural Global Exploration Summit in Lisbon. It was the kind of conference where you’d overhear stories that started with “So, when we were coming back to Earth…”

https://qz.com/1685041/how-to-keep-calm-in-high-stress-situations/

3) How US Fed policy created the last 2 boom and bust cycle

The central bank cannot control the economy. The idea of discretionary monetary policy is a flawed concept stemming from Keynesian ideas of government intervention in the economy. It creates a boom and bust cycle. Until central bankers abandon the boom and bust cycle idea, things are not going to change—there is no "correct" rate hike or decrease. Once a boom occurs (tech bubble), a bust happens when interest rates are raised (2001 downturn). In order to get the country of the downturn, another boom is created (housing bubble), which also leads to a bust (2008 crisis).

https://fee.org/articles/a-tale-of-two-bubbles-how-the-fed-crashed-the-tech-and-the-housing-markets/

4) The great companies of the future is not going to look like those of the past(!!)

As tech companies move into finance, as the fortunes poured into health research reap a new harvest of breakthroughs, as our dependence on fossil fuels for transport and energy disappears, as robots eliminate mindless work, the consensus is that we will genuinely move into a brave new world of ever-better modern conveniences. But while this sounds attractive and exciting, we should remember that multi-year investment trends are like very big dogs: they seldom live past their first decade. Instead, the historical precedents would suggest that the top 10 companies of 2030 are more likely to reflect either the growth of capitalism into new territories (India? Latin America? China? South East Asia?) or the fear that there won’t be enough for everybody.

On this point, the Mayans used to believe that history was made up of recurring cycles of 52 years; a notion which fits nicely with the popular belief that people avoid making their parents’ mistakes, only to repeat their grandparents’ errors. So perhaps in 2030 the market will be primed for a return of the belief that democracy can only lead to inflation, as politicians chase votes with barely-dry cash?

https://blog.evergreengavekal.com/an-investment-thesis-for-the-2020s/

5) More food will be delivered than eaten in restaurants

In 2020, more than half of restaurant spending is projected to be “off premise”—not inside a restaurant. In other words, spending on deliveries, drive-throughs, and takeaway meals will soon overtake dining inside restaurants, for the first time on record. According to the investment group Cowen and Company, off-premise spending will account for as much as 80 percent of the industry’s growth in the next five years.

https://www.theatlantic.com/ideas/archive/2019/08/all-food-will-be-delivered/595222/

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