Month: April 2016

Of Success, Al Pacino and Amitabh Bachchan

amitabh bachchan

The reasons behind the success of Amitabh Bachchan are well analysed. People have talked about his deep baritone voice. His tall and brooding persona. His legendary acting skills. And the fact that his portrayal of the angry young man captured the frustrations of an entire generation.

Bachchan may have succeeded because of all these reasons and more. Nevertheless, there is a something that people never seem to talk about—the role that luck played in Bachchan’s success. Bachchan’s golden era started with the success of Zanjeer, which was released in 1973.

But the fact of the matter is that he was not the first choice for the role of Inspector Vijay Khanna, the lead character in the movie. This became the first of the many angry young man roles that Bachchan would eventually play. As Diptakirti Chaudhuri writes in Written by Salim Javed—The Story of Hindi Cinema’s Greatest Screenwriters: “Not one major star of the day was ready to act in the film”.

The script was first sold to Dharmendra for a princely sum of Rs 2,500. The actor’s brother Ajit Singh Deol was supposed to produce the movie and Prakash Mehra would direct it. Things did not work out between Ajit Deol and Mehra, and as a reason Dharmendra opted out of the movie.

The script then went to Dilip Kumar. As Chaudhuri writes: “[Kumar] thought it would make a very good film but felt the lead character was too one-dimensional and did not allow enough scope for ‘performance’.”

The script then went to Dev Anand. At that point of time both Salim Khan  and Javed Akhtar felt that this would be a “horrible miscasting”. Anand asked for a couple of songs to be picturised on him and that was that. The story continued.

Mehra approached Raj Kumar. “He too loved the script, probably because he had been an inspector before joining films, and agreed to do the role, but—and this was a big but—he wanted the film to be shot in Madras. One apocryphal story goes that he did not like the smell of Prakash Mehra’s hair oil and made this preposterous demand to wriggle out of having to work with him,” writes Chaudhuri.

After all these stars refusing to do the film, the script landed with Bachchan. As Chaudhuri writes: “Partly out of desperation and partly out of respect for Salim-Javed, and Pran[who had a pivotal role in the film], Prakash Mehra signed Amitabh Bachchan.” And the rest as they say is history.

The broader point here is that if any of these stars had taken on the role of Vijay Khanna that was offered to them, Bachchan’s story may have turned out to be remarkably different than it eventually did.

Before Zanjeer, the only performance of his worth recalling was in the film Anand, as a side-hero to the then superstar Rajesh Khanna. After Anand, Bachchan had done a bunch of forgetful films. And that is how things would have continued, if Zanjeer had not come his way. In fact, his career could have fizzled out very quickly and he wouldn’t have survived as long as he eventually has.

A sort of a similar story played out with Hollywood star Al Pacino, as well. Pacino first shot to fame, a year before Bachchan, in 1972, when The Godfather was released. Pacino played the character of Michael Corleone in this movie, who was the youngest son of mafia boss Vito Corleone (played by the legendary Marlon Brando).

As Robert H Frank writes in Success and Luck—Good Fortune and the Myth of Meritocracy: “Studio executives…wanted to cast Robert Redford, Warren Beatty, or Ryan O’Neal to play Michael Corleone in Francis Ford Coppola’s film adaptation of Mario Puzo’s The Godfather. Coppola, however, wanted an unknown actor, someone who actually looked like a Sicilian.”

But Coppola was clear that he wanted Pacino and threatened to abandon the project if anyone else was signed on. This forced the studio executives to agree and Pacino landed up with the role of Michael Corleone.

As Frank writes: “In Puzo’s novel, Vito Corleone was the central character. But Vito’s youngest son Michael is clearly the protagonist in Coppola’s adaptation. Pacino, who had previously appeared in only two minor films, thus landed what turned out be the most important role in what many critics have called the best film ever made.”

Interestingly enough Coppola was a young film director at that point of time and as Frank writes: “Inexperienced directors almost never get their way into disputes with studio bosses.” But Coppola did.

The point being that hard work and talent are important for success but they are of no use without luck and opportunity. As Frank writes: “Those who believe that talent and hard work inevitably triumph might argue that because Pacino was relatively young at the time, his skills would have eventually made him successful even if he hadn’t landed the Michael Corleone role. But there are many thousands of highly talented actors who just never get the right opportunity to demonstrate their skill.”

Like Pacino got the lead part in The Godfather, Bachchan got it in Zanjeer. They were lucky to get these parts, which gave them a huge opportunity to showcase their real talent. Of course, after they became successful, a narrative was created around their success. This narrative pointed out to their talent, their hard work and so on.

While all that is true, one cannot take away the fact that at a certain point of time, they were very lucky. And that luck gave a fillip to their careers. As Frank writes: “It is almost easy to create a narrative after the fact that portrays such outcomes as having been inevitable. Yet every event is the outcome off a complex interwoven sequence of steps, each of which depends on those preceding it. If any of those earlier steps had been different, the entire trajectory would almost surely be different, too.”

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on April 26, on www.valueresearchonline.com

Switzerland is Still the Centre of Global Black Money

3D chrome Dollar symbol

An important area of focus of the Narendra Modi government has been trying to get the black money which has left the shores of the country, back to India. Black money is essentially money which has been earned, but which has not been declared for tax purposes.

As the finance minister Arun Jaitley said in his budget speech in February 2016: “Our Government is fully committed to remove black money from the economy.”

The focus of the government has largely been on black money which has left the shores of the country. Promises have been made that this black money will be got back to India. In fact, estimates made by Global Financial Integrity in a December 2015 report suggest that the total amount of black money leaving India between 2004 and 2013 stood at $510.3 billion.

The outflow peaked in 2012 when it reached $92.9 billion. In 2013, the number had stood at $83 billion, which was around 9.7% lower than the previous year.

YearAmount(in $ billion)
200419.5
200520.3
200627.8
200734.5
200847.2
200929.2
201070.3
201185.6
201292.9
201383
Total510.3

Source: http://www.gfintegrity.org/wp-content/uploads/2015/12/IFF-Update_2015-Final-1.pdf

India is not the only country facing this problem. In fact, when it comes to the total amount of black money leaving a country, India is fourth in the list, behind China, the Russian Federation and Mexico. On this front, India has rapidly caught up with Mexico over the years. The outflow of black money from Mexico between 2004 and 2013 stood at $528.4 billion, just a little more than that from India.

This money has found its way into tax havens all across the world, including Switzerland. As Gabriel Zucman writes in The Hidden Wealth of Nations—The Scourge of Tax Havens: “There has, in fact, never been as much wealth in tax havens as today. On a global scale, 8% of the financial wealth of households is held in tax havens. According to the latest available information, in the spring of 2015 foreign wealth held in Switzerland reached $2.3 trillion.”

The money held in Swiss banks is more than India’s gross domestic product(GDP). In fact, since April 2009, the money held in Swiss banks has increase by 18%. The increase across all tax havens all over the world has been 25%.

In September 2015, the United Nations adopted the Sustainable Development Goals. The Goal 16.4 points out that countries will “by 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime.”

The term illicit financial flows essentially refers to what we call black money in India. The Modi government has also on and off talked about getting back the black money that has left India. The question to ask is how feasible is this?

One argument made against this has been that there are way too many tax havens all around the world. There are around 70 tax havens all over the world and the black money that has left the shores of this country could be stashed almost anywhere.

An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland, beyond the reach of any tax authorities. A 2013 estimate in The Economist pointed out: “Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.”

Zucman whose book I have quoted earlier in the column, estimates that around 8% of the global financial wealth or $7.6 trillion is held in tax havens. His estimate is a little lower than other estimates. But each of these estimates is a big number, and that is what matters the most.

Getting back to the point I was discussing. How good are the chances of India and other countries getting this money back? In the past I have written that given that there are so many tax havens it is next to impossible to get this money back. But after reading Zucman’s book I have revised my opinion, a little.

While Switzerland was the original tax haven where people who did not want to pay tax in their home countries, took their money to, things have changed since the 1980s. New tax havens like Singapore, the Bahamas, Luxembourg, Hong Kong etc., have emerged over the years.

As Zucman writes: “In all these tax havens, private bankers do the same things as in Geneva: they hold stock and bond portfolios for their foreign customers, collect dividends and interest, provide investment advice as well as other services, such as the possibility of having a current account that earns little or nothing. And, thanks to the limited forms of cooperation with foreign tax authorities, they all offer the same service that is in high demand: the possibility of not paying any taxes on dividends, interest, capital gains, wealth, or inheritances.”

As mentioned earlier the Swiss banks as of spring of 2015, had foreign wealth worth $2.3 trillion. Of this around $1.3 trillion belonged to Europeans. A lot of black money emanating from all over the world has found its way into tax havens other than Switzerland.

How different are these tax havens from Switzerland? As Zucman writes: “To view Swiss banks in opposition to the new banking centers [i.e. tax havens] in Asia and the Caribbean doesn’t make much sense. A large number of the banks domiciled in Singapore or in the Cayman Islands are nothing but branches of Swiss establishments that have opened there to attract new customers.”

And this is one of the well kept secrets of international tax havens—Switzerland is still at the heart of it all. As Zucman writes: “In the past, Swiss bankers provided all services: carrying out the investment strategy, keeping securities under custody, hiding the true identity of owners by the way of famous numbered accounts. Today only securities custody really remains in their purview. The rest has been moved offsite to other tax havens—Luxembourg, the Virgin Islands, or Panama—all of which function in symbiosis. This is the great organization of international wealth management.”

Given this, India alone cannot deal with the issue. Combined international pressure needs to be applied on Switzerland in order to get anywhere with the idea of bringing black money that has left the shores of the country, back.

The column originally appeared on the Vivek Kaul Diary on April 26, 2016

The Income of the Average Indian is Significantly Lower Than the Average Income of India

ARTS RAJAN

The speeches made by the Reserve Bank of India(RBI) governor, Raghuram Rajan, are always a pleasure to read. In his latest speech made on April 20, 2016, Rajan said: “India is the fastest growing large country in the world, though with manufacturing capacity utilization low at 70% and agricultural growth slow following two bad monsoons, our potential is undoubtedly higher. Growth, however, is just one measure of performance. The level of per capita GDP is also important. We are still one of the poorest large countries in the world on a per capita basis, and have a long way to go before we reasonably address the concerns of each one of our citizens.”

Rajan further said: “We are often compared with China. But the Chinese economy, which was smaller than ours in the 1960s, is now five times our size at market exchange rates. The average Chinese citizen is over four times richer than the average Indian. The sobering thought is we have a long way to go before we can claim we have arrived.”

The point that Rajan was trying to make was that: “As a central banker who has to be pragmatic, I cannot get euphoric if India is the fastest growing large economy…The central and state governments have been creating a platform for strong and sustainable growth, and I am confident the payoffs are on their way, but until we have stayed on this path for some time, I remain cautious.”

This was essentially a retort to politicians who keep tom-tomming India’s dodgy economic growth numbers. While Rajan did not say that he does not believe in the economic growth numbers, he did try and make it clear that if India needs to reach anywhere, it needs strong and sustainable economic growth in the years to come. And achieving that is easier said than done.

Further, Rajan also made a more important point in his speech about India’s low per capita income. What is per capita income? John Lanchester defines per capita income in his book How To Speak Money as: “The total Gross Domestic Product(GDP) of a country divided by the number of people in the country.

As he further writes: “It is a measure of how rich the country’s citizens are on average – though it is a very rough measure of that, since a country’s WEALTH is often very unevenly distributed.”

The phrase to mark in the above paragraph is on average. The question is does an average always represent the right scenario? As Robert H Frank writes in Success and Luck—Good Fortune and the Myth of Meritocracy: “It is of course possible for most people to have a trait the measures higher than the corresponding mean value for the population to which they belong. Since a small number of people have fewer than two legs and no one has more, for instance, the average number of legs in any population is slightly less than two. So most people actually do have “more legs than average”.”

How does the above paragraph apply in the context of the GDP? What it tells us is that the average income of India is not equal to the income of the average Indian. Now what does that actually mean?

Let me explain that through an example. Let’s say on a given day in the city of Mumbai, an Ambani, an Adnani, a Birla and a Tata, walk into a local Udupi restaurant in Matunga. The restaurant is known for its soft idlis and fabulous coffee. And this has attracted the four industrialists to this small place.

The moment these four walk into the restaurant, the average income of the people seated in the restaurant goes up by leaps and bounds. If I may rephrase the last sentence, the per capita income of the restaurant goes up leaps and bounds, when the four industrialists walk into the Udupi restaurant.

But this increase in per capita income of the restaurant will have no impact on the incomes of the other people seated in the restaurant. (This example is essentially an adaptation of an example Charles Wheelan uses in his book Naked Statistics).

As Charles Wheelan writes in Naked Statistics: “The mean, or average, turns out to have some problems in that regard, namely, that it is prone to distortion by “outliers”, which are observations farther from the center.”

So basically, the Ambanis, Adnanis, Birlas and Tatas, of the world, essentially India’s rich, push up the average income of India i.e. the per capita income. As Wheelan writes: “The average income…could be heavily skewed by the megarich.”

In this scenario, the average income does not give us a correct picture. Further, it is safe to say, that the income of the average Indian is lower than the average income of India.

At this point it is important to introduce another term i.e. the median. As Wheelan writes: “The median is the point that divides a distribution in half, meaning that half of the observation lie above the median and half lie below.”

Hence, the median income is the income of the average Indian. Given this, the median income is the right representation of the income of the average Indian. This is because the rich outliers (the Ambanis, the Adnanis, the Tatas and the Birlas) are taken into account. Data from World Bank shows that the top 10% of India’s population makes 30% of the total income. And this pushes up the per capita income.

The trouble is that it is not so easy to find median income data in the Indian context. A survey carried out by Gallup in December 2013, put India’s median income at $616. Data from the World Bank shows that India’s per capita income during the same year was $1455.
Hence, the median income was around 58% lower than the average income or the per capita income. And that is not a good sign at all.

This shows the tremendous amount of inequality prevalent in the country. The difference in the income of the average Indian and the average income of India is thus huge. In fact, I had written about this inequality in the column published on April 19.

In 2015-2016, the average income of those not working in agriculture was 4.9 times those working in agriculture (using GDP at current prices). If we were to use GDP at constant prices (at 2011-2012 prices), the ratio comes to 5.5. Constant prices essentially adjust for inflation.

And this is really a big worry!

The column originally appeared on the Vivek Kaul’s Diary on April 25, 2016

The United States is Helping China Buy Gold

gold

In June 2015, China declared having bought 604.34 tonnes of gold. It’s last declaration before this had come in April 2009, when it had declared to having bought 454 tonnes of gold.

It couldn’t have bought such a huge amount of gold all at once given the limited supply of the yellow metal. Between April 2009 and June 2015, China regularly bought gold. It only declared it all at once in June 2015. The country had followed a similar strategy before April 2009, as well. It had last declared having bought 99.5 tonnes of gold in December 2002.

Hence, even though China has been buying gold all along, it has chosen to do so quietly, instead of going public with it. The reason for this was fairly straightforward. Gold is a thinly traded commodity, and hence, it makes sense for China to keep accumulating gold at a slow and regular pace, without making its intentions public and driving up the price.

Having said that since June 2015, there has been a change in strategy. Between July 2015 and February 2016 (the latest data that is available) the country has been making monthly declarations of the purchases it has been making.

These purchases vary from a minimum of 9.95 tonnes in February 2016 to a maximum of 20.84 tonnes in November 2016. Officially, China now has 1,788.4 tonnes of gold. It is the sixth largest gold owner in the world.

 

Tonnes% of reserves**
1United States8,133.575.3%
2Germany3,381.069.0%
3IMF2,814.0 
4Italy2,451.868.3%
5France2,435.663.2%
6China1,788.42.2%
7Russia1,447.015.1%
8Switzerland1,040.06.8%
9Japan765.22.4%
10Netherlands612.559.4%
11India557.76.2%

Source: www.gold.org

While in absolute terms 1,788.4 tonnes of gold sounds quite a lot, when it comes to gold as a percentage of reserves, the country still needs to catch up with other countries. As can be seen from the above table, China’s gold hoard as a percentage of its reserves is the lowest among the top eleven hoarders of gold.

While officially China may have 1,788.4 tonnes of gold, experts who are in the know of such things, suggest, that China has more gold than it is currently showing.

As James Rickards writes in The New Case for Gold: “The most interesting case is China…We know from various reliable sources including mining production and import statistics that their actual gold stock is close to 4000 tonnes. I’ve spoken to refineries and secure logistics firms—people who actually handle physical gold—in addition to official sources, and included their information in my estimates. On the whole, there is enough credible information available to support this estimate at a minimum. It is also entirely possible that China has considerably more than 4000 tonnes.”

So what this means is that the Chinese government’s real gold hoard is at least 2.2 times its official one.

In fact, Rickards in his book The Death of Money explains how China has gone about accumulating gold over the years. The country buys gold through secret agents based out of London. These agents are known to be very disciplined, and they buy gold whenever the gold price falls significantly. The gold these agents buy is paid for by the State Administration for Foreign Exchange (SAFE), one of China’s sovereign wealth funds.

The gold bought by SAFE is later transferred to the People’s Bank of China, the Chinese central bank. China also buys gold from mines directly. During April to June 2013, when the price of gold had reached a low of $1,200 per ounce, the country bought 600 tonnes of gold directly from Australia’s Perth Mint.

Also, China is now the largest producer of gold in the world. The disadvantage with China’s gold production is that it does not really have any big gold mines and a lot of gold that it produces comes as a by-product in the mining of other base metals. The Chinese government buys gold from the mines within China but does not report these buys. These reasons also explain why China’s gold hoard is actually significantly bigger than what it is telling the world.

In fact, China’s gold hoard maybe more than 4000 tonnes because Rickards seems to have made this estimate in July 2015, when China’s official gold hoard was at 1,658 tonnes. Since then, the number has officially risen to 1,788.4 tonnes.

The question is why is China buying gold? As Rickards explains in The New Case for Gold: “China’s acquisition of more than three thousand tonnes of gold in the past seven years represents almost 10 percent of all the official gold in the world…China is trying to acquire enough gold so that when the international monetary collapse comes and the world has to recut the deal, China will have a prime seat at the table. Countries like Canada, Australia, and the United Kingdom, with small gold-to-GDP ratios will be seated away from the table.”

Currently, the global financial system revolves around the dollar. Given that so much of it has been printed (or rather created digitally) in the last few years, there is the threat of the current financial system collapsing due to high inflation.

When the time for the new financial system comes around, China wants to be in the driver’s seat along with the United States, Germany and Russia, countries which have a significant amount of gold.

It needs to be mentioned here that China owns a significant amount of US treasury securities. These are bonds issued by the US government to finance its fiscal deficit or the difference between what it earns and what it spends. As of end February 2016, China owned $1.25 trillion of the total $6 trillion worth of treasury securities owned by foreign investors.

As I mentioned earlier, the United States has printed a huge amount of dollars over the last few years. This has led to a situation where the chances of a high inflation scenario remain. If something like this were to happen, then the value of the Chinese investment in US treasury securities will fall.

Hence, there is a quid pro quo which is currently at work. As Rickards writes: “The compromise between the Fed’s desire for inflation and China’s desire to protect its reserves is for China to buy cheap gold. That way, if inflation is low, China’s gold won’t go up much, but the value of its paper Treasury reserves is preserved. If the United States gets the inflation it wants, China’s Treasuries will be worth less, yet its gold will be worth much more. Having Treasuries and gold is a hedged position that protects China’s wealth.”

As Ricakrds further points out: “What remains is a strange condominium of interests where the [American] Treasury and China are in agreement that China needs more gold and the price cannot be too high or else China could not easily afford all it needs…The United States is letting China manipulate the market so China can buy gold more cheaply. The Fed occasionally manipulates the market as well so that any price rise isn’t disorderly.”

The question is when will this manipulation end?

The column was published on the Vivek Kaul Diary on April 22, 2016

The winner’s curse of IPL

Indian-Premier-League-IPL-logoThe auction of players in the Indian Premier League (IPL) T20 cricket tournament always throws up some interesting results. This time around, the auctions happened in early February and were no different from past years, with several uncapped players, who had played no international cricket and in some cases very little first class cricket, getting bought for a lot of money.

Take the case of Murugan Ashwin, a 25-year-old leg-spin bowler from Tamil Nadu, who had only played very few first class matches before the auction. His base price was Rs 10 lakh and he was finally picked up for a price of Rs 4.5 crore by the Rising Pune Supergiants team.

Why did someone with so little experience get picked up at such a high price? The recency effect was at work, with the recent performances of the players being given more weight by the team managements looking to pick up players. Ashiwn had performed very well in the Syed Mushtaq Ali trophy, which is the name of the domestic T20 competition, getting a wicket every fourteen balls.

The recency effect benefitted several other players as well. Rishabh Pant, the wicket-keeper of the India under-19 cricket team got sold for Rs 1.9 crore to the Delhi Daredevils team. His performances in the under-19 cricket world cup, was probably top of the mind recall for various cricket teams. Pant had smashed 78 runs in 24 balls, a few days before the auction happened.

In fact, in Ashwin’s case his performance in Syed Mushtaq Ali trophy was noticed by several scouts and this led to a bidding among teams driving up his price to Rs 4.5 crore. Scouts tend to be very confident about their choices and this bids up prices. It also leads to what economists call the winner’s curse.

As Richard Thaler writes in Misbehaving—The Making of Behavioural Economics: “When many bidders compete for the same object, the winner of the auction is often the bidder who most overvalues the object being sold. The same will be true for players.”

Thaler of course is not writing about cricket but American Football. But the logic applies equally to IPL as well. There were other cricketers also who benefitted from the winner’s curse. South African all-rounder Chris Morris, was sold for Rs 7 crore, after a bidding war erupted between Rising Pune Supergiants, Mumbai Indians and Kolkata Knight Riders. He was finally bought by Delhi Daredevils. His base price had been set at Rs 50 lakh.

Karun Nair who plays for Karnataka, also benefitted from multiple teams bidding for him. He was finally sold for Rs 4 crore, many times his base price of Rs 10 lakh. The same stood true for Rajasthan fast bowler Nathu Singh, who was sold for Rs 3.2 crore, many times his base price of Rs 10 lakh. Deepak Hooda’s price also went from his base price of Rs 10 lakh to Rs 4.2 crore, after multiple teams bid for him. Hooda plays as an all-rounder for the Baroda team in the domestic cricket competitions in India.

Not only the winner’s curse is at work, but there is something known as the false consensus effect at work, as well. And what is this effect? As Thaler writes: “Put basically, people tend to think other people share their preferences. For instance, when the iPhone was new I asked the students in my class two anonymous questions: do you own an iPhone, and what percentage of the class do you think owns an iPhone? Those who owned an iPhone thought that a majority of their classmates did as well, while those who didn’t thought iPhone ownership uncommon.”

Now how does this apply in case of auction of players? As Thaler writes: “When a team falls in love with a certain player they are just sure that every other team shares their view. They try to jump to the head of the line before any other team steals that guy.”

KC Cariappa who got bought for Rs 2.4 crore by Kolkata Knight Riders in the 2015 auction is an excellent example of the same. He was deemed to be a mystery player and the Kolkata Knight Riders team seemed to have fallen in love with him. In the process they bid up his price to Rs 2.4 crore, from a base price of Rs 10 lakh.

The thing is that many of these expensively priced players do not perform as well as the teams think they will. The winner’s curse takes its toll. An excellent example of this is Yuvraj Singh, who was bought for Rs 16 crore and Rs 14 crore respectively in 2015 and 2014, and did not deliver much bang for the buck.

As Thaler writes: “The winner’s curse says that those players will be good, but not as good as the teams picking them think.” Not surprisingly this time around Singh was finally sold at a much lower Rs 7 crore, to Sunrisers Hyderabad. Chances are this time he might perform better than the last two years.

The surprising thing is that it is not always performance that gets the money in IPL. Take the case of leg-spinner Pravin Tambe, who has bowled brilliantly over the last few years. In the 2016 auction he was sold to the Gujarat Lions for Rs 20 lakh. Given that he is 44, goes against him.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the April 2016 issue of the Wealth Insight magazine.