Sudipta Sen, the man behind the Saradha group, who has been on the run, was finally arrested yesterday in the beautiful alpine valley of Sonamarg in Kashmir. Sen is accused of running a Rs 20,000 crore Ponzi scheme.
A Ponzi scheme is essentially a fraudulent investment scheme where money brought in by the newer investors is used to pay off the older investors. This creates an impression of a successful investment scheme. Of course, as long as money entering the scheme is greater than the money leaving it, all is well. The moment the situation is reversed, the scheme collapses.(For a more detailed and historical treatment of Ponzi schemes click here).
The scheme gets its name from an Italian American called Charles Ponzi who in 1919 ran an investment scheme in the city of Boston, which promised to double the investor’s investment in 90 days. This was later cut to 45 days. At its peak the scheme managed to collect around $40 million and had nearly 15,000 investors.
Ponzi thought he had figured out an arbitrage opportunity which would help him earn stupendous return. In the end he couldn’t execute the arbitrage and started using the money being brought in by newer investors to pay off the older investors whose money needed to be returned.
While every Ponzi scheme is different from another in its details, there are certain key characteristics that almost all Ponzi schemes tend to have. And Saradha was no exception to this.
The rate of return promised is high and is fixed at the time the investor enters the scheme: For an individual to get interested, the returns on offer in a Ponzi scheme need to be higher than the returns he can hope to earn from other modes of investment available at that point of time.
An order issued by the Securities and Exchange Board of India yesterday, explains this point beautifully. This order has asked Saradha Reality, one of the companies being run by the Saradha Group, to wind up operations in three months.
Saradha Reality catered to all kinds of investors. It had had instalment plans with tenure varying from 12 to 60 months where minimum investment was Rs 100 per month. It raised money from investors with contributions ranging from Rs 10,000 to Rs 1 lakh for a tenure of 15 months to 120 months. It also had a lump sum investment scheme (with minimum amount of 1000/- and multiple thereof) with tenure varying from 12 months to 168 months. The rates of interest on offer where different for different investment plans.
At the end of the tenure the investor had the option to get allotment of land or a flat or to simply get a refund of the money he or she had put in, along with the promised interest. And what were the returns on offer? As the Sebi order points out “The average return offered by the noticee (i.e. Saradha), in lieu of the land when the investor opts for returns were between 12% to 24%.”
So clearly the returns being offered by Saradha were higher than the returns on offer through other investment avenues. And most investors seem to have opted for the absolute return option rather than claiming land or a flat at the end of the investment tenure. As the Sebi order points out “As informed by the noticee (i.e. Saradha), not many of investors have opted for allotment of land rather, more investors have opted for the pre-determined returns as promised by it.”
The higher returns clearly got investors to invest in Saradha.
The most important part of a Ponzi Scheme is assuring the investor that their investment is safe.
How did an upstart like Saradha managed to assure investors that their investment would be safe? The story that seems to be coming out is that Saradha employed agents of Peerless General Finance and Investment Co. Ltd. Peerless, formed in 1932 had pioneered the collection of small savings in eastern India, primarily West Bengal. Hence, it had a reasonable reputation among the people of West Bengal.
As The Mint points out “Though it didn’t ever default on repayments, Reserve Bank of India (RBI) forced Peerless to stop taking deposits in 2005-2006. This spawned the growth of unregulated deposit-taking companies in West Bengal and other eastern Indian states.”
Agents of Peerless were used to collect money for the Saradha group. In that way the brand name of Peerless rubbed onto Saradha. The Mint story cited earlier talks about one Debasish Banerjee, who used to work for Peerless and then became the blue eyed boy of Sudipta Sen, and presided ove 10,000 sub-agents working across eight districts in West Bengal.
The instrument in which the scheme will invest appears to be a genuine investment opportunity but at the same time it is obscure enough, to prevent any scrutiny by the investors. If you go to the website of Saradha Group (http://saradhagroup.com/index.html) you will find that they were in multiple lines of business. From real estate to two wheelers to media to tours and travels to even bio gas. The company had presence across sectors. But where they doing any business? Largely, the answer is no. The various businesses were just used as a façade to collect money from investors. They were used to show investors and agents as to what the company was doing with the money it was collecting.
As the Sebi order points out in the context of the reality division “It was prima facie observed that under the scheme of the noticee(i.e. Saradha) the real objective is to mobilize fund from public by showing some real estate projects to the investors and the noticee indirectly promises return of funds with high interest rates.”
The company had even bought a two wheeler company called Global Motors to show off to its agents. As the Business Standard points out “The Hooghly factory of Global Motors, acquired by Saradha sometime back, had closed down in 2011. But 150 of its employees had been kept on rolls to show, when agents made visits, that all was hunky dory and operations were on in full swing.”
All this was enough to create an illusion that the company was putting the money it collected from its investors to some use. Turned out it was not. It was simply rotating money.
The period between the investment and the pay out in a Ponzi Scheme is short. This ensures that the word spreads fast and more money comes in. Every additional investor gives legitimacy to the Ponzi Scheme. As we can see in case of Saradha the minimum tenure on offer was around 12-15 months. While there is no conclusive proof to say that most investors opted for the minimum tenure or lower tenures, I feel it would be safe to say that most new investors who were checking out the scheme would have opted for lower tenures. And gradually as the scheme spread and got some legitimacy only then would the investment tenures have gone up.
Also the fact that the scheme has collapsed tells us at some level that not many investors opted for long investment tenures. If they had, money would still be coming in and Saradha would have managed to continue operations. The fact that its more or less shutdown tells us that money has clearly stopped coming in.
Brand building is an inherent part of a Ponzi Scheme. Sudipta Sen ensured that the Saradha Group had huge presence in the media. “His first entry into the space was through Channel 10 and thereafter he expanded into dailies—Bengal Post & Sakalbela—in 2010. Sen bought out Tara channels, as well. At the time of closing down, the group had 10 media outfits — news TV channels, newspapers and magazine,” the Business Standard points out. This gave the group a lot of credibility and helped build its brand. The cine actor Mithun Chakraborty was the brand ambassador for Channel 10.
Trinamool Congress was also seen to be close to the group. As Reba Mitra a Saradha agent told NDTV.com “We put our faith in Saradha because big leaders of the Trinamool, like Madan Mitra, Didi…the chief minister, Kunal Ghosh, Shatabdi Roy, Mithun Chakraborty – when these big people are with them, government people, then would this money be stolen from us?”
Julie Potua, another agent of Saradha told NDTV that “they told clients in their pitch that other companies could collapse but Saradha would not as “Kunal Ghosh is with us, Mamata didi is with us, so invest in us.”
Kunal Ghosh, was editor and chief executive of Saradha Group’s media business. He is also a member of the Rajya Sabha nominated by the Trinamool Congress. Shatabdi Roy is a Bengali actress who is also a Lok Sabha MP from the Trinamool Congress. Being seen close to the leading political party of the state was like the icing on the cake and attracted investors by the drove.
There are some indications being given now that the Reserve Bank of India had warned the state government on the mushrooming of chit funds in West Bengal.
What is interesting is that the SEBI has been investigating the Saradha Group since June 2010. The Saradha Group, like Sahara now, had managed to delay the process by submitting voluminous documents. At various points of time in 2012, Saradha submitted 16 cartons, 19 cartons, 170 boxes and 35 cartons, as a strategy to avoid submitting the specific information being asked for by SEBI.
After this Saradha Group was directed to provide information in excel sheets. This helped Sebi to nail the group. As the SEBI order points out “On sample study of the data (in excel) provided by the noticee (Saradha), veracity of which cannot be verified, it is noted that agreements for sale was entered into with two investors namely Dhruba Bose and Arindam Pani on January 01, 2010 for flats having number 1A and 1C, respectively, both admeasuring 1437 sq ft. area in the same building i.e., Ten Katha. It is further noted that the consideration amount for flat number 1A was Rs 37,69,000 and for flat number 1C was Rs 1,17,75,850. It is highly unlikely that in a real estate business the difference between consideration amounts for sale of two similar flats at the same building on the same day shall be in the ration of 1:4. In view of these facts the possible inference will be that the allotment of plots/flats are simply a farce, and might have been done to mislead the regulatory authority.”
But by the time the SEBI order came out, Saradha had already collapsed. What is intriguing is that the investigation against Saradha started in mid 2010, but it took the company more than two years to submit the relevant data. If SEBI had cracked the whip and acted a little faster, the situation might have been a little better.
The article originally appeared on www.firstpost.com on April 24, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Month: April 2013
Saradha and Ponzi schemes: Why there will be more suckers
In Ek Thi Daiyan, the latest horror flick to come out of Bollywood, the dying daiyan (witch) says something to the effect of “main wapas aaongi (I’ll be back).” Ponzi schemes are a tad like that. They keep coming back one after the other.
Only sometime back we were talking about the Stockguru Ponzi scheme. Before that the emu ponzi scheme and Speak Asia had been in the news. More recently the MMM Ponzi scheme and Saradha chit fund have taken up a lot of news space.
MMM India recently put itself into what it calls a calm regime where operations like money transfer will remain suspended and hence those who have put money into the scheme won’t be able to withdraw it. The Saradha Chit fund has collapsed.
The question is why do Ponzi schemes keep occurring over and over again in India? A popular explanation is that India is an under-banked country and that gets people to invest in Ponzi schemes rather than deposit money in the bank.
As The Economic Times points out in an editorial “the repeated sprouting of dubious Ponzi schemes across the country points to a failure of the formal saving and banking system.” This maybe true to some extent but does not really explain why Ponzi schemes keep cropping up all the time and why people invest in them.
Take the case of MMM India Ponzi scheme. To participate in it, an individual needed to have a bank account. To be a part of Speak Asia an individual had to participate in two online surveys per week. An individual who has access to an online connection is more than likely to have a bank account as well.
So Ponzi schemes are not just about India having fewer banks. There is a clear mental dimension at play which makes individuals invest in Ponzi schemes over and over again. And this makes sure that there are always scamsters looking to cash in.
Robert Shiller, an economist, defines a Ponzi scheme in a research paper titled From Efficient Market Theory to Behavioural Finance as follows: A Ponzi Scheme involves a plausible but unverifiable story about how money is made for the investors. It creates a false perception of high returns for initial investors by distributing to them money brought in by subsequent investors. Initial investor response to the scheme tends to be weak, but as successive rounds of high returns generate excitement, the story becomes increasingly believable and exciting to investors. Finally, the scheme collapses when new investors are not prepared to enter the scheme.
The phrase to mark in this definition is “high returns generate excitement”. Very recently, MMM India promised returns of 100% per month to prospective investors. The prospect of high returns pushes individuals to take on the risky bet of investing in a Ponzi scheme.
As Robert Shiller writes in Finance and the Good Society“The mere presence of uncertainty in a positive direction creates a pleasurable sensation (in the brain), and so the reward system creates an incentive to take on risky positive bets…This human tendency also helps explain why people like to gamble, and why many people will return every day to bet a small sum in a lottery. It also helps explain why people are willing to speculate aggressively on investments.”
This gets individuals to invest in a Ponzi scheme. And after one lot of investors has invested in a Ponzi scheme it tends to take on a life of its own. The initial lot of investors then become the advertisers for the scheme. If a person wants to invest, the chances are he will look around to see what his acquaintances, neighbours or relatives are doing with their money. If the people around the potential investor invest in a certain way, there might be a tendency for him to follow them. Much like the ‘circular mills’ of ants. The mill is created when an army of ants find themselves separated from their colony. Once they are lost they obey a simple rule: Follow the ant in front of you.
Decisions of investors, much like the circular mills of the ants, are not made at the same time but in a sequence. People who invest in the Ponzi Scheme assume that the scheme is a good bet simply because some of the people they know have already invested in it. So everyone ends up making the wrong decision because the initial investors get into the scheme by chance.
This happens because the attraction of easy money is something that investors cannot resist. Ponzi Schemes offer the prospect of huge returns in a short period of time vis a vis other investments available in the market at that point of time. Greed also results when investors see people they know make money through the Ponzi Scheme. As Charles Kindleberger wrote in Manias, Panics and Crashes “There is nothing so disturbing to one’s well being and judgement as to see a friend get rich”.
Overconfidence also has a part to play. Most people are confident that they won’t become victims of financial frauds. This also leads them to invest in Ponzi schemes. Ove
rconfidence is also at play when investors understand that they are getting into a Ponzi scheme, but they are still willing to enter the scheme, because they feel that some greater fools could be depended on to enter the scheme after they have and this would give them handsome returns on their investments.
The contract effect is also at play. It becomes relevant in the context of a Ponzi Scheme when the prospective investor starts comparing the returns on the various other investment avenues available in the market for investment at that point of time. The high returns of offered by a Ponzi scheme stand out clearly and attracts investors.
So a Ponzi scheme just doesn’t spread only because of a weak banking structure though that might be true in case of Sahara or even Saradha chit fund. Also it is important to remember the first sentence in Shiller’s definition of a Ponzi scheme, which is: “A Ponzi Scheme involves a plausible but unverifiable story about how money is made for the investors.”
So people running Ponzi schemes spend a lot of time in building a ‘supposed’ business model and building a great brand. The Saradha chit fund had built a huge media empire in West Bengal. It had also purchased a motorcycle company, to give some semblance of a business model to its investors.
Sahara is similarly into a lot of businesses and even sponsors the Indian cricket team. Similarly, Speak Asia was in the magazine and survey business. It also advertised majorly in the publications of The Times Group, to build credibility. Emu Ponzi schemes were in the business of rearing and selling emus. And Stockguru helped investors make money by investing in stocks.
MMM, in its original Russian avatar, sponsored the Russian football team in the 1994 football worldcup. When questions were raised about the huge returns, it had promised, MMM stated that it had solid investments, but did not want to disclose them as its competitors might imitate its investment strategy.
Over the years, investors have been fooled into investing their money into Ponzi Schemes which keep appearing in various forms. They ignore the most fundamental principle of investment theory: You cannot expect to make large profits without taking risk. Whenever a large amount of money is at stake, individuals should logically seek large amounts of information on where they should invest. But most investors do not do so. Few ask the right questions at the right time and are naïve enough to believe in what is communicated to them by the people carrying out the fraud.
Indeed, many Ponzi Schemes do not get reported as people do not like to admit that they have been fleeced because of their greed. The ones, which are reported and investigated, get stuck in the quagmire of our legal system. This encourages more people to run Ponzi Schemes. And every time a Ponzi scheme is exposed, the confidence of the investor in the financial system goes down.
The most commonly suggested solution for prevention of Ponzi Schemes is sharing more and more information with the investing public. But research in psychology shows that more information does not necessarily improve judgement. Any extra information is helpful only if it comes without any bias. But that is rarely the case. Moreover, the ability of the common man to assimilate information is limited.
Rather than assuming investors are knowledgeable about investment opportunities, the best solution to the problem of Ponzi schemes might be ensuring swift legal mechanisms to punish the unscrupulous masterminds behind the Ponzi Schemes. This will ensure that every prospective fraudster will think twice before launching another Ponzi scheme.
The article originally appeared on www.firstpost.com on April 23, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Reuters bumps off George Soros, turns out he is alive and supposedly shorting gold
George Soros rest in peace. That’s what the news agency Thomson Reuters wanted us to believe when it released a 1,122 word long pre-written obituary of the famed hedge fund manager at 5.41pm eastern standard time in the United States, yesterday evening (or a little after 4 am Indian Standard Time (IST) today morning).
What gave away the mistake was the following paragraph: “George Soros, who died XXX at age XXX, was a predatory and hugely successful financier and investor, who argued paradoxically for years against the same sort of free-wheeling capitalism that made him billions.”
The dummy triple X’s made it clear that Thomson Reuters had put out the obituary by mistake. It is normal for news agencies to keep obituaries prepared in advance, but on the rarest occasions like this one they get released before the death of the person.
The obituary as can be made out from the paragraph reproduced above wasn’t kind to Soros. Someone like Soros, who has made the kind of money that he has, doing what he does best i.e. bet against countries and big bubbles, as and when he does die, isn’t going to inspire obituary writers to write nostalgia infused pieces, anyway.
The pre-written obituary did manage to list out some of Soros’ big achievements. “He was known as ‘the man who broke the Bank of England’ for selling short the British pound in 1992,” the second paragraph of the obituary read.
In fact this was the trade that made Soros famous. The story behind the trade is very interesting. On October 24, 1992, Soros was in London and was leaving his house to play tennis. As soon as he got out of his house, he was besieged by a slew of journalists and photographs. All they wanted to know was whether he had made a billion by betting against a pound. Earlier in the day The Daily Mail had carried a story on Soros with the headline “I Made a Billion as the Pound Crashed.” Soros soon found out about the newspaper report.
What is not very well known is the fact that the idea of betting against the pound wasn’t Soros’. Though once he came to know of it and was convinced about it, he went full tilt with the trade. The idea for the trade essentially came from Stanley Druckenmiller who was the chief trader and strategist of George Soros’ Quantum Fund.
As Michael Kaufman writes in Soros – The Life and Times of a Messianic Billionaire “In 1992 Druckenmiller calculated that, despite public assurances to the contrary, the Bank of England would not be able to avoid devaluating the pound. He called Soros to discuss his thinking. “I told him why I thought the pound could collapse and the reasons I had and I told him the amount I was going to do. I did not get a scolding, but I got something close to a scolding, which was, well, if you believe all that, why are you betting only two or three billion.” With Soros’ encouragement, Druckenmiller more than tripled his original stake.”
So Soros bet big on the pound being devalued and had a position of $10 billion on the British pound. The trade essentially involved short selling the British pound and later buying it back once it was devalued. And that is what happened. He eventually ended up making $1 billion on the entire trade. Soros later stated that he wanted to execute an even bigger trade and borrow and sell British pounds worth around $15 billion.
Kaufman made a very important conclusion about Soros on the basis of this trade. “There are thousands of people who are good at analysis and hundreds who re good at predicting trends, but when you get down to using that information, pulling the trigger, putting it on the line to make what you are supposed to make, you are down less than a handful…You know, the ugly way to describe it would be ‘balls.’ To be willing at the right moment in time put it all on the line. That is not something, in my opinion, that can be learned. It is totally intuitive, and it is an art, not in any way a science,” he writes. So while everyone might do the right analysis, it takes a man with balls like Soros to get up and trade big on it.
Soros is great at making big macro-economic calls. Other than betting against the British pound, he also is said to have short sold the Thai baht and the Malaysian ringitt in 1997, and made a killing in the process. Both the baht and the ringitt were then pegged against the dollar. The baht was fixed at 25 to a dollar and 2.5 ringitt made a dollar.
Soros is said to have successfully bet against these currencies by short selling them. Short selling essentially involves borrowing a particular asset, selling it in the hope that its price falls, buying it at a lower price and thus making a profit out of the whole trade.
When Soros supposedly short sold the baht, the Thai baht central bank would have initially bought the baht by selling dollars. This helped maintain the peg between the dollar and the baht. The trouble was that the Thai central bank had only a limited number of dollars to sell. And once they ran out of dollars they had to let the baht fall in value against the dollar, which is what Soros wanted, and thus he made a killing. The same logic would have worked in case of the Malaysian Ringitt as well.
As the third paragraph of the Reuters obituary pointed out “His Soros Fund Management was widely blamed for helping trigger the Asian financial crisis of 1997.”
Soros has the ability to make big macro-economic calls. But he never a good stock picker. As Aswath Damodaran professor of finance at the New York University’s Stern School of Business,told me in an interview sometime back “Soros has never been a great micro investor. He has made his money on macro bets. He has never been a great stock picker. For him it has got to be massive macro bubbles, an asset class that gets overpriced or underpriced.”
In that sense Soros is different from the class of investors who believe in buying financial assets which are supposedly underpriced and then holding onto it in the time to come. Soros works in the opposite way. He either likes entering a bubble early or shorting them once they have got on for too long. As he writes in The New Paradigm for Financial Markets “Nothing is quite as profitable as investing in an early-stage bubble.” In fact one his favourite quips is “when I see a bubble, I invest”.
What works in Soros’ case is that he is able to exit just before the tide turns. As he has honestly admitted to in the past: “I don’t have a particular style of investing, or, more exactly, I try to change my style to fit the conditions…I assume that markets are always wrong…Most of the time we are punished if we go against the trend. Only at inflection point are we rewarded.”
And his ability to exit just before the tide turns or what he calls an inflection point, was most recently at play in case of gold. Soros is said to have made a lot of money by betting correctly on gold in the last ten years. He is recently said to have cut his gold holdings before the price of the yellow metal started to fall and now there are even rumors that he is shorting gold big-time and making a killing doing the same.
In his latest interview he was very vague on gold as any good trader would expected to be. As he told South China Morning Post when asked what was his view on gold “That’s a complicated question. It has disappointed the public, because it is meant to be the ultimate safe haven. But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else. Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.”
In recent times Soros has tried to set his legacy right by projecting himself as not just a ‘greedy’ hedge fund manager who has made tonnes of money but as a thought leader. As he told the US Congress a few years back: “The main difference between me and other people who have amassed this kind of money is that I am primarily interested in ideas, and I don’t have much personal use for money. But I hate to think what would have happened if I hadn’t made money: My ideas would not have gotten much play. I wish I could write a book that will be read as long as our civilization lasts…I would value it much more highly than business success.”
Soros has written several books in which he has fancied himself as a philosopher who is a firm believer in the Theory of Reflexivity, originally proposed by Karl Popper. Soros has explained this theory in great detail in some of his books and has even gone into some detail on how it helps him make investment decisions.
As he writes in The New Paradigm for Financial Markets “People are participants, not just observers, and the knowledge they can acquire is not sufficient to guide their actions. They cannot base their decisions on knowledge alone…People’s understanding is inherently imperfect because they are a part of reality and a part cannot fully comprehend the whole…One must put oneself in the position of a detached observer. The human mind has worked wonders in trying to reach that position, but in the end it cannot fully comprehend the fact that it is part of the situation it seeks to comprehend.”
And this understanding Soros feels helps him make the investment decisions that he does. But that is something that his eldest son Robert, doesn’t agree with. As he puts it “My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit, I mean, you know the reason he changes his position in the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s his early warning sign.”
So much for all the philosophy of investing. It’s the back pain which gets Soros going.
The article originally appeared on www.firstpost.com on April 19,2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Don’t count gold out: it may be the last man standing
At the very outset let me confess that this has been a difficult piece to write. When everyone around you is shouting the same thing from their rooftops, it is very difficult to say something which happens to be exactly the opposite.
Gold over the last one week has turned into a four letter word. Last Thursday (i.e. April 11, 2013) the closing price of the yellow metal was $1564.2 per ounce (one troy ounce equals 31.1 grams). A week later as I write this gold is selling at around $1375 per ounce. The price has fallen by around 12.1% over the period of just one week.
And this fall has suddenly turned investment experts (at least the ones who appear on television and write and get quoted in newspapers) all bearish on gold. They have been giving different reasons to stay away from it. But if they were so confident that the price of gold would fall, as it has, why didn’t they warn the investors before fall? Everything is obvious after it has happened.
But as the Nobel Prize winning economist Daniel Kahneman writes in Thinking, Fast and Slow “The ultimate test of an explanation is whether it would have made the event predictable in advance”. Those offering the explanations now, clearly did not predict the massive and sudden fall in price of gold. What is interesting is that before the price of gold started to fall the Bloomberg consensus forecast for gold by the end of 2013 was at $1752 per ounce. Hence, the broader market did not see this coming.
So why is the price of gold falling? One conspiracy theory doing the rounds has the investment bank Goldman Sachs at the heart of it. As John Cassidy of the New Yorker magazine puts it “Last December, Goldman’s economic team turned bearishon gold, saying the multi-year upward trend in gold prices “will likely turn in 2013.” And last Wednesday,(i.e. April 10, 2013) the bank’s commodities team advised its clients to start shorting gold.” Short selling refers to a scenario where investors borrow gold and sell it with the hope that as the price falls they can buy it back at a lower price and thus make a profit.
Goldman Sachs was not the only big bank turning negative on gold. On April 2, the French bank, Societe Generale, the also issued a report titled The end of the gold era, and turned bearish on the yellow metal.
This many believe is a conspiracy on part of the big banks to drive down the price of gold. As Paul Craigs, a former assistant US Treasury Secretary told Kings World News “This is an orchestration. It’s been going on now from the beginning of April…Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance. Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold. So what they are trying to do is scare the individual investor out of bullion. Clearly there is something desperate going on.”
Nevertheless, conspiracy theories are easy to talk about but difficult to prove. There are several other reasons being offered on why the price of gold will continue to fall. A major reason being offered is the improvement in the American economic scenario and that leading to the Federal Reserve of the United States, the American central bank, printing lesser money in the days to come.
The Federal Reserve currently prints $85 billion every month in the hope of reviving the American economy. Societe Generale in its report The end of the gold era believes that this will continue till September and come down to $65 billion after that, until being fully terminated by the end of the year.
The Federal Reserve on its part has guided that money printing will come down if it sees a ‘significant improvement in the outlook for employment’. The latest U3 rate of unemployment in the United States for the month of February 2013 stood at 7.6%. U6, a broader measure of unemployment, was at 13.8%. Both numbers have declined from their peaks. U6 touched a high of 17.2% in October 2009, when U3, which is the official unemployment rate, was at 10%. In December 2012 U6 stood at 14.4% and U3 was down to 7.8%.
So yes things have improved but they are still far away from being fine. U3 in the pre-financial crisis days used to be at around 5%. Also long term unemployment (where people are out of work for 27 weeks or more) has changed little and is at at 4.6 million or 39.6% of the unemployed people(U3).
(There are various ways in which the bureau of labour standards in the United States measures unemployment. This ranges from U1 to U6. The official rate of unemployment is the U3, which is the proportion of the civilian labour force that is unemployed but actively seeking employment. U6 is the most broad definition of unemployment and includes workers who want to work full time but are working part time because there are no full time jobs available. It also includes “discouraged workers”, or people who have stopped looking for work because the economic conditions the way they are, make them believe that no work is available for them.)
Another measure of the US economy turning around is the increase in real estate prices. As per the S&P Case-Shiller 20 City Home Price Index, real estate prices have gone up by 8.1% between January 1, 2012 and January 1, 2013. This after falling by 3.9% between 2011 and 2012.
One of the reasons the Federal Reserves prints money is to ensure that there is enough money going around in the financial system and interest rates continue to remain low. This ensures that people borrow and spend more. Hence, the low interest rates have helped in reviving the real estate sector in the United States.
But lets think for a moment on what will happen if the Federal Reserves stops printing money? Interest rates are likely to go up. People will take on fewer home loans to buy homes and that in turn will mean the real estate sector will go back to the dumps that it was in. So will the Federal Reserve take the risk of going slow or stopping money printing? Also, economic growth for the three months ending December 2012, was at -0.1%. So much for the American economy improving.
In this scenario it is unlikely the Federal Reserve will go stop money printing anytime soon, even though its Chairman Ben Bernanke, its Chairman, may keep dropping hints about doing the same.
As Stephen Leeb writes on www.Forbes.com “The Federal Reserve also wants to beat up on gold, via its drumbeat, suggesting that liquidity may be drying up and monetary easing might end soon. Never mind that recent economic data, on the whole, appears much weaker than expected, or that any halt to U.S. monetary easing could only follow higher inflation and commodity prices.
And as long as United States keeps printing money gold will remain a good investment bet, its current huge fall notwithstanding.
The last bull market in gold ended soon after the legendary Paul Volcker took over as the Chairman of the Federal Reserve in August 1979. As economist Bill Bonner wrote in a recent column “Paul Volcker replaced G. William Miller as chairman in August 1979. A loose money policy became a tight money policy. Volcker jacked up interest rates…But what’s the Fed doing now? Has it reversed course? Has Ben “Bubbles” Bernanke been replaced with a tough-as-nails inflation fighter? Has the Federal Open Market Committee(FOMC) vowed to stop printing money? Has the loosest monetary policy in US history given way to a tight policy?”
And the answer on all the above counts is a big no.
Moving on, another reason given for the gold price falling is that Cyprus is selling gold worth $500 million in order to raise cash to pay its debt. As Peter Schiff president of Euro Pacific Capitalwrote in a recent column “Concerns quickly spread that other heavily indebted Mediterranean countries with large gold reserves like Greece, Portugal, Italy and Spain would follow suit. The tidal wave of selling would be expected to be the coup de grace for gold’s glory years.”
The stronger countries of the euro zone (the countries which use euro as their currency) led by Germany have been rescuing the heavily indebted weaker ones for a while now through multi billion dollar rescue packages. In case of Cyprus the rescue came with terms and conditions which included seizing a part of its banking deposits and selling its gold.
This experts feel is likely to be repeated in the days to come with other countries as well. What they forget is that if the euro zone makes a habit of seizing deposits and selling gold, countries are likely to opt out of the euro and move onto their own currencies. As James Montier writes in a recent research paper titled Hyperinflations, Hysteria, and False Memories “If one were to worry about hyperinflation anywhere, I believe it would have to be with respect to the break-up of the eurozone.” Another reason to keep holding onto gold. If there is even a slight whiff of a euro breakup gold is going to fly.
Another logic being bandied around (especially by some of the Indian analysts) is that with the price of gold falling the investment demand for gold is likely to go down. Fair point. But a falling gold price can also push up the jewellery demand for gold. In 2011, gold jewellery consumed around 1972.1 tonnes of gold. This was down to 1908.1 tonnes in 2012, as prices rose.
A slowdown of Chinese growth has been offered as another reason for gold prices falling. As Cassidy of New Yorker writes “Many of today’s news storiesabout the gold price emphasized disappointing economic figures from China, which showed economic growth slowing down slightly in the first three months of 2013. China is a big consumer of virtually all natural resources, and gold was but one of many commodities that fell sharply after the report from Beijing.”
But this theory doesn’t really hold either. “The purported slowdown in the Chinese economy was very slight. First quarter growth came in at 7.7 per cent, compared to 7.9 per cent in the last three months of 2012. Allowing for the vagaries of the statistics, the difference is inconsequential,” writes Cassidy.
Also the gold bears who have suddenly all come out of the closet are not talking about what is happening in Japan. Japan has decided to double its money supply by printing yen to create some inflation. The hope is hat all this new money will create some inflation as it chases the same amount of goods and services, leading to a rise in prices. When people see prices rising, or expect prices to rise, they are more likely to buy goods and services, than keep their money in the bank. This is the logic. And when this happens businesses will do well and so will the overall economy.
A side effect of this money printing which is expected to be thrice as large as that in the United States, is the Japanese yen losing value against other major currencies because a surfeit of yen is expected to flood the financial system.
A weak yen also makes Japanese exports more competitive. (For a detailed argument click here). But it puts countries like Taiwan, South Korea, China and even Germany in a spot of bother. As Societe Generale analysts write in a report titled How to make profits from the Sushi-style QE in Japan “In effect Korea, Taiwan and China are losing competitiveness while Japan regains it.”
Printing money is not rocket science, if Japan can print money, so can the other countries in order to weaken their currency and thus keep their exports competitive. Hence there are chances of a full fledged global currency war erupting. And this is another reason to own gold.
The final argument against gold has been that central banks have been printing money for more than four years now. But all that money has not led to high inflation, as the gold bulls had been predicting that it would. So central banks have managed to slay the inflation phantom. “After more than four years of quantitative easing in the United States, the inflation rate, as measured by the consumer price index, is running at just two per cent…In Britain, where the Bank of England has followed policies similar to the Fed’s, the inflation rate is 2.8 per cent—a bit higher, but hardly alarming,” writes Cassidy.
But just because money printing hasn’t led to inflation till now doesn’t mean we can rule out that possibility totally. There is huge historical evidence to the contrary. Let me quote Nassim Nicholas Taleb here, something that I have done in the recent past. As Taleb writes in Anti Fragile “Central banks can print money; they print print and print with no effect (and claim the “safety” of such a measure), then, “unexpectedly,” the printing causes a jump in inflation.” James Rickards author Currency Wars: The Making of the Next Global Crises says the same thing “They can’t just keep printing…All major central banks are easing…Eventually so much money will be printed that this will lead to inflation.”
And in a situation like this, gold will be the last man standing.
To conclude, this is how I feel about gold. I maybe right. I maybe wrong. That only time will tell. Hence its important to remember here what John Kenneth Galbraith, an economist who talked sense on most occasions, once said: “The only function of economic forecasting is to make astrology look respectable.”
Given this it is important that one does not bet one’s life on gold going up. An allocation of not more than 10% in case of a conservative investor is the best bet to make. And if you are already there, stay there.
The article originally appeared on www.firstpost.com on April 18, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)
If Sanjay Dutt can get four weeks off, why can't others?
Leading male superstars of the Hindi film industry change anything that they don’t like about the movies they choose to act in.
If they don’t like the actress (or female actor, as the actresses like to call themselves these days) who is starring opposite them, they can change the actress.
Or if they are having an affair with an upcoming actress on the sly, they can promote her and get her a role in the movie by getting the writers to introduce an extra character in the storyline.
If they don’t like the storyline of the movie, they can ask the writers and the director to rework it.
Items numbers, songs, comic tracks, action sequences and just about anything that the male superstar demands is added to the movie. Even the end of a movie can be changed, if the superstar is not happy with the end that has been shot or narrated to him.
The Hindi film industry in a very euphemistic way uses the term “suggestions” in reference to all the meddling around by the leading male superstars.
Nevertheless this ability of male superstars to get almost anything that they don’t like changed is limited to “reel life” and not “real life”. Not unless if you are Sanjay Dutt.
The actor was supposed to surrender on April 18, 2013, to undergo his remaining jail sentence of 42 months, for having held onto illegal weapons under the Arms Act. But he had urged the Supreme Court to allow him to finishing shooting of seven films starring him. This he said would take him at least 196 days (that is around six and a half months). He also told the court that Rs 278 crore had been invested in these films.
The Supreme Court granted Dutt an extension on “humanitarian grounds”. “Considering the peculiar facts and circumstances of the case and reasons stated in the petition, we are not inclined to extend the time by six months. However, we extend the time by four weeks from tomorrow. It is made clear that no further extension will be granted,” a bench comprising justices P Sathasivam and B S Chauhan, commented.
This is rather ironical because yesterday the Supreme Court(a different bench) refused to extend the time to surrender in case of Zaibunissa Kazi and four other individuals. These are Kersi Bapuji Adjania, Yusuf Khan, Ranjit Kumar Singh and Altaf Ali Sayed.
Dutt was arrested in 1993, for acquiring three AK-56s rifles, nine magazines, 450 cartridges and over 20 hand grenades. Some of these weapons were later stored at the home of a woman called Zaibunissa Kazi, whose request to extend the time to surrender was refused by the Supreme Court yesterday. The weapons that were stored with Kazi included two of the three AK-56s rifles that Dutt had got. Kazi was convicted underthe Terrorist and Disruptive Activities (Prevention) Act (or what we better know as TADA). She is now seventy and is suffering from cancer.
The one AK-56 rifle that was left with Dutt was melted at the foundry of Kersi Bapuji Adjania. Adjania is now 83. As per his son “He is over 82 years old, partially deaf and has serious coronary problems. His movement is restricted.”
If Sanjay Dutt can get an extension of one month to surrender why haven’t Adjania and Kazi been given the same as well? Is it because they are not celebrities who don’t have Rs 278 crore riding on them? Like Dutt does. Or the fact that they don’t have the Press Council Chairman and ex Supreme Court judge, Justice Marakandey Katju, batting for them.
In fact the argument that Dutt has Rs 278 crore riding on him and thus deserves an extension does not work at all. In a month’s time he won’t be able to finish all the seven movies anway. Despite that the bigger question is how can losses being faced by a few Hindi film producers come in the way of justice.
In fact, when these producers signed on Dutt to star in their movies they should have been fully aware of the risk that they were taking on. Dutt has been out on a bail for a while now, and a bail can be cancelled at any point of time. When a bail’s cancelled, the individual has to go back to jail. This is a factor that should have been a part of their calculation. If they chose to ignore it, that’s their problem, not the problem of the Republiclic of India.
But his producers continue to remain an unhappy lot. “He is thankful, but he is still under pressure as to how he can finish six months of work in a month,” Rahul Aggarwal, the producer of the upcoming Dutt starrer Policegiri told Reuters. Well, the producers will simply have to wait for Dutt to come out of jail and then complete their movies with him. This was a risk that they took on and are now paying for it.
In fact, some producers have now come around to the idea of waiting for Dutt. Rajkumar Hirani and Vidhu Vinod Chopra, who were supposed to start the third instalment of the Munna Bhai series with Dutt, said in a statement recently: “Just two days back Sanjay called and said, ‘It’s tough to be in prison but I’m ready to go there because when I come back, I will experience freedom in its true sense. I will be rid of this monkey who has been sitting on my back for the last 20 years and scaring me’. When I walk out of prison, I want to walk straight onto the sets of Munna Bhai.” Dutt is lucky that there are people who are ready to wait for him for three and a half years.
In school this writer was made to by-heart the Preamble to the Constitution of India for the tenth standard exams. A part of the Preamble goes like this:
WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:
JUSTICE, social, economic and political;
LIBERTY, of thought, expression, belief, faith and worship;
EQUALITY of status and of opportunity;
The preamble might vouch for justice and equality but it does help if you happen to be a Sanjay Dutt. To conclude, in life it is important to remember what George Orwell once wrote in the Animal Farm: “All animals are equal, but some animals are more equal than others.” Sanjay Dutt is one such unequal animal, who now seems to be above the law of the land.
The article originally appeared on www.firstpost.com on April 17,2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)