1) Guruji, welcome back after a long time. I trust your vacation went very well. I had a few fundamental questions regarding inflation while you were out on vacation. You had mentioned in this post that inflation would go down to zero – and miraculously it did. And yet the prices of rice, pulses and wheat have gone up. Weren’t rice, wheat and pulses part of this inflation calculation Guruji? Is the Govt. trying to mislead people by quoting low inflation numbers, thereby indicating reduced prices and trying to rig the election?

ANSWER: Shishya, that is a very good question. Inflation (which is close to 0% nowadays), that is quoted,  is based on an index called the Wholesale Price Index (WPI). In India, under WPI, food items (rice, dal, vegetables etc) account for only about 15% of the total weightage of the index. The other part (which is the majority) of the index is consumed by fuel, crude oil, manufacturing etc. However, if you base inflation on another index called Consumer Price Index (CPI), the inflation would be around 10% and not close to 0%.  The reason for this  is while CPI gives 47% weightage to food items (rice, dal, vegetables), WPI gives only 15%. However, WPI is a better indicator of inflation than CPI.

2) But why Guruji, if the prices of food items are increasing, and the common man is feeling the pinch, isn’t it right to base our inflation on CPI rather than WPI? Why indeed is WPI better than CPI?

ANSWER: WPI and CPI are equally important and each serves a purpose of its own. However, WPI is a better indicator of inflation. Let’s take an example. Let’s say, X’s income is around Rs. 10,000. What do you think would be the amount he would spend on food items? Compare this vis-à-vis other major expenditures like fuel (for the vehicle), fuel (LPG), rental/EMI expenditure, clothing etc. Food would not cost X more than 10-15% of his income but other items (fuel, clothing etc.) will cost a lot more. WPI reflects exactly this detail (as you would observe around you, rental prices have reduced, fuel prices have come down, large discounts on clothing items are being offered etc) while CPI allocates more of its weightage to food items and hence is hardly the right indicator to the actual inflation. The actual inflation should always be based out of WPI.

3) Thank you for that enlightening conversation Guruji. Last question for the day Guruji. I have read that most of the US banks declared much better numbers than expected in Q1, 2009 (including Wells Fargo, Citibank etc). Have they finally got their act to-gether? Is this the end of recession as we see it? Or is media creating a much ado about nothing?

ANSWER: Shishya, media is bound to create much ado about nothing. That’s their job. I would actually quote from one of the best blogs in finance I have come across recently to answer your question succinctly and I quote -

“AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.”

Remember how AIG was ‘saved’ and the US taxpayers pumped in huge amounts of money (insanely, $175 billion) into AIG alone. Now, you exactly know where this money went and how come these banks suddenly declared better results than expected. Fraud, scam, cheating – it’s all very ugly out there and someone is making truckloads of money. Well, that’s how the world is Shishya.

The stupendous blog on finance is Zero Hedge. Sometimes, extremely technical, but most of the time brilliant. Spend some time on it Shishya, and you would gain a lot more wisdom than listening to those quacks on CNBC all the time. As Jim Cramer would say, ‘They know nothing, they know nothing’.

That is it for this week Shishya. I will see you some time later once you have more questions up your sleeve. Be well.

(Part 1 of this series here)

1) Guruji, I thank you for giving me yet another opportunity to ask questions today, inspite of your busy schedule around Thanksgiving. The first question I have today is with respect to the US Auto industry. Every pundit and his grandfather, every politician and his respected chamchas seem to have an opinion. What is your view on this Guruji? Should the auto industry be bailed out with $25 billion?

ANSWER: Shishya, first, let’s understand the basics before moving on to conclusions. Auto industry is very cyclical. It entirely depends on the cost of steel and aluminium which form the major part of their costs. Inherently, both the steel and aluminium industries are also cyclical. Couple this with a weak economy, it is no wonder that every automotive company in the world is going through one of the worst slumps it has ever known. However, the problem with the US Auto industry is not one of cycles but of gargantuan stupidity. Neither can these companies sustain themselves in face of outside competition like Toyota, Hyundai etc., but cannot reconcile themselves with internal tussles with UAW (United Auto Workers) with respect to pensions and other benefits which are bogging these companies tremendously. All said, there is no hope – whether it is $25 billion or $250 billion. If they are sustained today with $25 billion, there are going to go bankrupt 2 years down the line. That is a much worse investment than producing a Himesh Reshammiya movie. The only hope is for them to declare a Chapter 11 bankruptcy (not Chapter 7, which is liquidation) and allow themselves to restructure it.

2) But Guruji, what would happen to millions of workers, ancillary suppliers and other vendors? Wouldn’t it send the US economy in a tailspin?

ANSWER: Shishya, listening properly is the key to knowledge. Else, you would end up like Manmohan singh who just nods but doesn’t listen. I said, declare a Chapter 11 bankruptcy and not a Chapter 7 bankruptcy – which essentially means that all the vendors, ancillary suppliers would still be functioning. The companies would not shutdown but would restructure. Yes, there certainly would be retrenchment and a lot of pain but isn’t efficiency a good thing in the long run. Doesn’t the US propound itself to be the champion of free markets? (although all evidence when it comes to free markets within the US is close to zero). It is time for a ‘Change’ as the President-elect put it. Else, we would have the Airline industry, then the Steel industry and then the Cement industry and so on begging for alms like this and if fulfilled, we would have another USSR in the making. [On a side note, the difference between Treasury bonds and GM bonds is 7000 basis points - 7000 basis points?? That's like double bankruptcy and then some]

3) Guruji, focusing on India, our real leader Sonia Gandhi made a very important statement the other day, which I think made a lot of sense. She lauded her mother-in-law (which is probably the first of its kind in the world) for nationalizing the banks 40 years ago since we haven’t really been affected by the slump in world economy, atleast in the financial sector. She praised her mother-in-law’s foresight  (again, first of its kind) and indicated to the western powers to go eff themselves if they ever comment on India’s financial strength again. Did she finally speak sense Guruji?

A) Shishya, first up, Sonia and Sense are parallel lines – they never meet. Such dreams are best forgotten. Foresight of 40 years…hmm. The total asset size of India banking sector is US$270 billion. Heck, it is just close to one-third of the bailout package of the US (which was US$750 billion). As we all know, growth in financial sector correlates with growth in the economy. So, effectively by nationalizing those banks, the ‘foresight’ had killed our growth to a large extent (an estimate which is beyond the scope of this discourse). Recessions are a part of every economy. They are necessary to reduce the flab in the system and not necessarily a bad thing. Only when there is growth, there is a possibility of a recession. I don’t know how far this ‘foresight’ has helped but Indira’s foresight had almost driven us bankrupt in 1992 (where we pledged gold for some money) before we opened up our economy under the aegis of then-brilliant Manmohan Singh and the results are there for all of us to see. Shishya, always cut through the clutter and trash of these politicians – else, you would be led to think that driving an Ambassador and waiting for a Bajaj Chetak to be delivered after 7 years is Utopian.

4) One final question Guruji. With the Indian colts winning against England today in Cricket, they have achieved an unassailable 4-0 lead in the series. Do you think this is the resurgent India that we are seeing?

A) Shishya, Winning is important. Performing, even more important. Our role models should be someone like Sachin Tendulkar, Anil Kumble and Vishwanathan Anand who perform and win but with dignity and discipline. Not someone like Gautam Gambhir or Harbhajan singh who abuse at every chance and get docked for either fees or matches. Resurgence in winning is important. Not reaction, not over-confidence. I hope India wins all the matches, but with the right intent. With that final message, I will leave you with one final message (heard on radio) that has been on my Gtalk for this week -  ‘The financial meltdown is so bad that women are now marrying for love’.

Have a great week ahead!

Here is the first part of the series (Shishya’s questions followed by Guru’s answers) -

1) Guruji, Why are desis in the US intent on debating American politics, get involved in heavy-duty discussions about who is going to be the next American president, watch Fox/CNN/MSNBC for the latest update on different campaigns – when in fact, none of the policies any of the presidents make affects them? Why is there an obsession to discuss American politics when they don’t have the right to vote, and even more embarrassing, they refuse to discuss/acknowledge the political happenings back in India?

ANSWER: Shishya, your question is culturally significant. Culturally and historically, we are known to be very self-centered and apathetic. As you sow, so you reap. Desis in the US lead very…erm…for the lack of a better word…interesting lives. Most of their life runs around pooling money to buy a house and subsequently pay EMIs for life, paying health and car insurance, paying heavy tuition fees for their kids and in general, lead a very dynamic life in making ends meet till their end. In such situations, an outlet for frustration in terms of discussing totally irrelevant, the inconsequential and highly insignificant is of paramount importance to the desi. To answer your second part of the question and since pithiness is in order in this world of infinite information, the singular answer is ‘ghar ka murgi daal barabar’.

2) Guruji, why is there a misplaced sense of the term ‘terrorism’ in India. I understand that in the US, the way things work, the logic is pretty clear – if you work for the US, you will be deemed a freedom fighter while working against US would coronate you with the word ‘terrorist’. However, what I am not able to understand is, in India, if a youth fires randomly on someone due to some frustration, he is branded a terrorist. In the same breath, ransacking railway stations, bringing the govt. to a halt and throwing stones at police is not terrorism. Is this a way of the world?

ANSWER: Shishya, you have asked a very important question but it has a simple answer – an answer which all Ph.Ds are aware of. To steal ideas from one person is plagiarism, to steal from many is research. Similarly, one death is a tragedy and a million a mere statistic. I can go on and on, but again the rule of pithiness stops me. You should understand that our society does not allow individuality, does not allow us to challenge things and situations individually. We are a democracy – where opinion of 100 fools is more correct than of one genius. I see your frustration – but this is not Timbuktu. This is the Republic of India, funnily having a multi-party democracy and comical things such as these are bound to happen in a country where Times of India is read widely, Vijay Singh is a celebrity (golfer from Fiji, mistaken to be Indian because of the name) and Mamata Banerjee is a leader of a party.

3) Guruji, what is the harshest lesson that can be taught to Gilchrist after he insulted Ten’gul’kar in his autobiography, ‘True Colours’? And why do people have to resort to cheap publicity like this to gain sales? The backlash has been severe. What are the lessons to be learnt from this episode Guruji?

ANSWER: Shishya, you are touching upon very important questions today. There is Bollywood to the rescue of the Indian cricket fan like you and to the peril of Gilchrist (fondly called Gilly). Gilly, instead of just playing in the gully tried to steal the thunder from Mr. Cricket. Well, for starters, I think you can telecast Saawariya and God tussi great ho all across Australia on Saturday and Jimmy and Shabd on Sunday. That would serve as a  lesson, not only to Gilly but all Australian fans and cricketers who plan to write a biography or a autobiography or any graphy. Ideally, most of them would be dead by Saturday night but any remaining folks would certainly be killed on Sunday. That would take care of Gilly. The lesson to be learnt, my dear Shishya, is to be daring, cunning, controversial while writing a book or otherwise – it pays, in bounty, to have cheap…err..free publicity!

4) What is your message on the eve of Diwali Guruji?

ANSWER: Like life, my message is very simple Shishya – be healthy, wealthy and lead a prosperous and happy life. Don’t buy real estate, sell stock and hoard cash. Things are going to get worse before they get better. Value-buying is being bitch-slapped right now in all TV channels and newspapers – but who knows what ‘value’ is in this grim economy, which is supposed to get worse (with such news trickling in). Become an anti-consumerist for some period of time. Hold your expenses, and invest in yourself and be happy throughout your life. That, my dear shishya brings us to the end of our session today.

Wish you all a happy and prosperous Diwali!