Tuesday, May 5, 2009


And, this is one of my best read in recent times!!! A manual by an ex-colleague of mine for all budding economists!! Kudos to Goldman Sachs and their likes

Fake experts, Faulty Forecasts

Will leave the comments for your take...ENJOY!!


  1. I take it you are arguing against the follies of blindly following economic forecasts? Or are you railing against GS?

    As to the first, I would only point out that sell side analysts are ranked every year by the buy side (the main users of the research - by no stretch of imagination believe they are meant for mass consumption). Every trader at the end of the year gets a sheet that asks them to rate the impact these analysts have on their trading p & l and based upon this feedback and potency of their mojo in making the right call, the analyst gets rated and that determines his compensation and survival. If a firm has lousy research, it soon gets sidelined, and its reports are just as many dead leaves.

    If your comment was re: GS's 2007 call, I will only add that the last 18 odd months have been one of complete and utter regime change. Going the numbers GS reported from prop trading, I would say, they did a lot better than the street. Markets can change faster than you can blink and no one saw the Tsunami coming.

    Finally, no offense to your ex-colleague, but I am loading up on all the oil exposure I can gather. My arguments are myriad, but suffice to say, oil is a limited resource and oil fields need constant capex to maintain production. The credit crunch has resulted in such little capex over the last two years that production capacity has actually reduced. Add to that the fact that a recent act that outlawed single hulled oil tankers (at one stroke eliminating over 50% of transport capacity), and you have fertile grounds for $200+ oil. It is silly to get in a trade at $195, so better to jump in at $55 and ride the roller coaster up. No? :)


  2. Am not rallying specifically against GS but against most economic forecasts!!

    Two, oil at $200 a barrel!! plausible but will be more of a function of how much extra liquidity is there in the market coz most hedge funds, investment banks and investors need to wipe out the previous losses!

    In fact, a little birdie in North Block told me that GS along with Citi was the primary suspect behind the last oil rally fuelled by none other than OPEC members themselves!

    Coming back to the economic forecasts..let me just take a small example --

    During the last few months of YVR's regime...he was stressing on inflation, raising interest rates, SLR, CRR and although he held interest rates in his last monetary policy (Oct)..he was of the view that further suction needs to be carried out in the market to stabilize the overall macro policy. Fair enough!!!

    a week after he vacates office and the new governor comes in...he strght away cuts SLR/CRR, repo and the reverse repo by 50 basis point and all the way indicating that more cuts are in the offing?

    So why there is a disconnect??? what happened in 2 weeks time which forced such a radical macro policy!!

    Going back to time...around feb/march we cld feel there was a lack of liquidity in the market. Overnight call money was hovering around 18%...private finance around 2.5% a month and most players are abt to press the panic button!

    fast fwd to july/Aug and that 'feel' has turned into a reality! You know SBI Caps had done a syndication for Tatas of abt 500 cr..lead syndicator was SBI. Even though the loan was approved..SBI didn't disburse it!! We ourselves raised money at 28% from a private finance!

    also, to answ one of ur query...if i have to raise a loan and does not have a strong cash flow then most bankers ask for directors guarantee along with fixed asset collateral! AB had slipped in the personal guarantee, which he had used to raise debt for his company

  3. Full disclosure: I am no expert on the Indian economy, it is outside my purview.

    Having said that, oil at $200 isn't going to happen tomorrow. The current market turmoil wiped out ~$36 trillion of global household asset value since 2007. So it is going to take some time before the output gap turns positive. But the moment it does, oil is going to run up so fast, it will be at $150 in a blink. You only have to look at production capacity of the largest oil fields to see that. Supply is going to be constrained and so you are going to see a classic supply shock.

    Regarding YVR (had to look him up), he wasn't wrong, based upon the data available to him at that time. The Fed w/ Bernanke who is way more qualified on this front than YVR, had interest rates at 2.00% at that time.

    What changed from Sept 5th (YVR resignation) to Sept 8th was Sunday Sept 7th, when Fannie and Freddie went down and were placed in conservatorship. That completely blew the roof off the market and the falling tide found several of people in the water swimming around w/o their shorts. Sept 15th LEH went down! AIG was suspected of being a sinking ship. ML got taken over and there was a creditable run on both MS and GS. It was a catastrophe. Wall Street bled like a stuck pig. I can't even describe the trading floor in those days. (Maybe I should 'goss' on it, will make interesting reading for sure).

    It was a regime change to end all regime changes and no one saw it coming. The ramifications were tremendous. Re: liquidity drying up in Feb/Mar the story was Bear, but when Fed forced JPM to eat Bear, people thought the worst was over. That the shareholders of Bear paid the price and business could go back to normal. People were just wrong.

    Re: GS and C, no doubt they played in the oil markets. But the problem is the oil market is so massive, you need to be a sovereign player like China to really move the market in a meaningful way for any meaningful period of time. Off course the OPEC is behind the rally, but not to the extant that you might imagine it to be. The thing that hurts high oil prices is high oil prices. Why do you think oil was so cheap for so long (before China got into the act)? It was because at $1.5 a gal, there wasn't any margin in building an alternative energy efficient car. But at $4, the story changes. First of all, the aggregate demand goes down, headline inflation and core shoot up, next comes political will to find an alternative. As soon as oil prices fall, all those noises just go away. So it is in OPEC's interest to see oil at $70 - $90 but any more then they are in trouble. The marginal $ they earn is so small, that it isn't worth it at the cost of long term revenue.

    Okay, this is a highly complex conversation, any my comments have gotten way too long. I know I haven't fully explained my point of view in detail, but there is just too much detail to type out. So will end here. But glad to discuss it further if you desire.

    Thanks for clarifying on the AB story. But the need for a personal guarantee speaks tomes on why the Indian capital markets are always going to be constrained. Not that I have anything against the bank for doing so, when there is no rule of law and the rich and the mighty get away w/ murder (literally), personal guarantees are the only way to go.


  4. Oh I forgot to add: http://timeline.stlouisfed.org/index.cfm?p=timeline#

    Fascinating if you are history of the financial markets.

  5. i absolutely understand what you are trying to say!!! In fact, the new oil production capacity which, has been commmissioned are at a breakeven ratio of $85-90 a barrel!! So, at the current prices its an unviable investment specially at such an economic environment(crisis)!

    Most CEOs dont live for the legacy of it(there are of course exceptions to it) So, they will rather try to improve margins along with increasing toplines and reward the Dhareholders from a short term perspective. Energy is a sector, where what you sow today will be reaped after 20-30 years.

    And, thats precisely the reason why there has been very little or no new refining capacity added by Exxon Mobil or BP...investments into research for oil exploration was meagre and whatever research was being done in the space of alternative energy..the oil lobby managed to stone wall it.

    And, its not very diff in India. Indian Oil, which is one of the largest state-run refiner in India has a horrible efficiency ratio, bloated management/staff costs (officers here get money to change cars after every 3 years) and corrupt.

    But, what it does..is to form a cartel and ensure that we hardly invest much if any in alternative energy even to point of providing tax breaks for environmental friendly cars and bikes. And, thats why you see hardly any development in electric cars or bikes... with no new investments coming in.

    Even when it comes to the point of 10% ethanol..the liquor lobby ensures that the government does not allow the ethanol ratio to be revised upwardly from the current 5%.

    There were a couple of companies in india which, looked into the space of electric bikes and cars. While, Reva (the only indian auto player in this space) is a non-entity...most companies has gone slow ever since oil prices slid.

    Having said all that...i am still of the firm opinion that the intensity of the economic depression was fuelled by the excess speculative market operating in the commodity space. And, this had a knock-on effect on equity markets followed by real estate...causing instability to the fundamental parameters of business!

    Feel free to share your views!!

    And, oh yes, that site is the most awesome site have ever visited. Thnx

  6. Completely agree on the oil company stonewalling. If you look at Detroit back in the day, before cars became famous, they actually had tram lines running through the city. So what did the fledgling car companies do? They bought out the company and tore out the tracks. They had the logic down perfectly. Once the tracks were out (taking them out was cheap), putting them back in, and the land acquisition cost would be enormous. They were right. Now Detroit has no public transportation to speak off, and now no car companies. Talk about being short sighted.

    Indian politics and oil make for nasty bed fellows. The communists and regional parties never allow the subsidy on gasoline to ever go away. And government subsidies is just not kosher in economics on account of the inefficiencies it harbors. India was almost broke when Oil hit $150 and most of the Indian airlines on the verge of bankruptcy. It was only the recession that saved their ass.

    Don't get me started on ethanol. At least the ethanol used in the US. This is consequence of American presidential politics, wherein Iowa is one of the first states to go to the primaries so has an inordinate impact on the race. So parties and administrations are very wary of pissing Iowans off. Ethanol (from corn) isn't just inefficient in terms of green house gases it generates in its making, the food inflation it feeds, but also in terms of its chemical properties. Ethanol, cannot be transported in pipes because it has a tendency to suck water out of the atmosphere, leading to corrosion and rust build up in the pipelines leading to rapture and breakages (imagine what it does to the engines of cars).

    Regarding the economic 'depression' that is the one area I strongly disagree w/ you (if I may). Having been in the trenches (so to speak), I had a first hand experience of shit hitting the roof and going through it. My personal experience and that of folks around me (who are a lot smarter and more experienced), it was a confluence of several factors that led to the 'great contraction' as we call it. The first amongst equals of which were 'subprime' and 'liquidity'. Speculation in commodities wasn't really an issue. At least in the US, can't speak for India (but I have my theories). The instability was caused mainly by greedy mortgage lenders making these 'no doc/low doc/liar loans' and wall streets propensity to slice and dice risk till the whole pack of cards was balanced on a tip. When the tip shook, the structure came tumbling down.

    Again, a very incomplete picture, but space and time restrictions compel.

  7. will look fwd to hear the goss of wall street! My sister works with a hedge fund in wall strt and kind of have some idea abt it!

    On the detroit tram issue was abt to hit it in my earlier reply but kept away as thought wld be digressing.

    You are absolutely right! in fact, the whole american economy has been built on roadways, which is meant to keep the auto sector kicking and thriving and higher shareholder value for gas companies.

    Ethanol in india is still at a very nascent stage! i think the govt is still unclear as to how it wants to tk it fwd...but, my presumption is we will get to see some clear cut policies spelled out with the Cong back in power with a decisive majority!

  8. I don't know if I have either GG's or your keen eye for reading between the lines. Though the Alley cat has mentioned this several times that when the Tom cats get together all we do is gossip. But I imagine it to be a different kind of gossip, more impersonal and less subtle.

    Ethanol is pure BS unless it comes from Sugar Cane. Which is really to Indian advantage come to think of it. India has the advantage of domestic production of sugar canes, while at the same time the socialistic pedigree of the past, which should allow us to deal w/ other leading communist leaning sugar cane growers (aka cuba) and Brazil, and no home grown corn lobby to push for usage of 'bad' ethanol (from corn).

    On a different note, at some point should probably share my email address, difficult to share research, graphs, etc. via blogs/comments.

  9. Aww you are following GG's example and shifting over to censorship of comments? Whatever happened to freedom of the press?

  10. @TK
    am really sorry on this censhorship issue! Hopefully, its been fixed...how dare i censor press when am product of the same institution which breeds over 250 channels, scores of newspaper and magazines of hue and colour.

    And also apols for a late reply!

  11. @TW - No sweat, was just pulling your leg. :)

    Also, no need to apologize for the late reply, it just means you have a 'life'! :)