A query on a column by Ajit Ranade

Shashank Patil, enthusiastic asker (it is my blog, and I say that it is a word) of questions, sends in this article, and asks the following questions:

  1. What are the possible difficulties with this?
  2. How does this weigh in with any other choice?

This promises to be a fairly long post, and for the sake of knowing where we are at any point of time, I am going to divide it into three major sections:

  1. The need for the stimulus
  2. Show me the money!
  3. What is the best choice out of all the options available?

The need for the stimulus

There’s four things that go into adding up our GDP: consumption, investment, government expenditure, and net exports (net simply means we deduct the rupee value of all of our imports from the rupee value of all of our exports, over one accounting year). But be careful, calculating GDP is surprisingly complicated!

During these times, good luck getting C, I and NX to be anything remotely related to good news, and so we’re almost certain to not have great GDP growth, or even growth at all. Unless el sarkar steps in. So when we ask for a fiscal stimulus, we’re basically saying the other components of GDP are near comatose, so government spending will have to take up the slack.

Maybe the government can build out way better health infrastructure than we have at present, like Andy Mukherjee says. Maybe we can provide clean drinking water, along with a whole list of excellent suggestions made by Shankkar Aiyyar. Direct money transfers to the poor is another idea. But for all of this to happen, we need to start at the basics: where is the money?

The government didn’t have enough money before the pandemic hit (that’s what a fiscal deficit means), and the problem is way worse now: much more money needs to be spent, and not enough money is coming in by way of tax revenue.

Ergo, all of the columns about how to raise the money that will need to be spent.

Show me the money!

There’s three ideas that I have liked so far:

  • Deepak Shenoy talks about a realignment of the liabilities side of the balance sheet of the RBI unlocking about INR 400,000 crores (thinking about numbers as big as this is an invitation to a migraine, but this is 4 trillion, unless I am mistaken. Please let me know if I am!). Let’s call this the DS method.
  • Andy Mukherjee talks about the government selling stakes in PSE’s (that’s Public Sector Enterprises). The details matter in this case: the sale will be to an SPV (Special Purpose Vehicle), which will finance the purchase by issuing bonds. When markets recover, sell the stake, and redeem the bonds. Method AM.
  • And finally, Ajit Ranade offers a pani puri instead of a puchka. That is to say, the same idea as Andy Mukherjee, but with a twist. Instead of the government stakes in PSU’s (undertaking, instead of enterprises) being sold to an SPV, he suggests selling it to the RBI as a repo transaction. That is, sarkar sells to RBI and gets money, but also gets to buy back the shares at the same amount plus an annualized interest rate of around 3%. That’s where the name repo comes from: short for repurchase. And yes, method AR.

What is the best choice?

So maybe this is just me getting old, and therefore more conservative, but I’d rank Deepak Shenoy’s suggestion third. There are two main reasons, although there are others. First, the RBI already gave out some cash last year (and Deepak Shenoy himself has a most excellent article about it. Link 3 in this post, and the others are worth reading too, especially number 5.  Bookmark CapitalMind.in if you haven’t already!). Second, maybe it makes sense to keep some of our powder dry, for who knows what other horrors wait for us in the future? If, god forbid, two years down the line we need more help, it would be better to use the DS method then – because good luck trying to convince folks of the value of PSU stakes after more two years of this.

Let me be clear: I am not saying that this will continue for two years. I’m saying we should be prepared.

Now, in a straight fight between AM and AR, well, which self-respecting Maharashtrian will pick puchkas over pani-puri? I’d plump for Ajit Ranade’s method, and for the following reasons:

  1. A repo transaction is likely to withstand market volatility better than being dependent on an SPV, especially one that may be exposed to currency risk.
  2. This sounds way more operationally feasible than the AM method. Launching an SPV might be possible right now, and you may even get a decent response because god knows markets will be looking to park funds right now – but like I said, I’m getting old, and would prefer a more conservative route.

And so Shashank, the answer to your question is that Ajit Ranade seems to be onto a pretty good idea, in my opinion. Which is not to say that the others aren’t, of course – but hey, if I didn’t force myself to choose, and write about my choice, how else to fill out a lockdown afternoon?

But on a more serious note, the “how” doesn’t  really matter as much as the when. And the correct answer to that question is “yesterday”.

 

 

 

Corporate panchayats, feni, finance and fiscal deficits

Five articles that I enjoyed reading this week, and figured you might as well.

  1. “Nearly 80% of the village’s estimated 36,000 residents enrolled as members in the movement, which, at that point, was a non-governmental entity. They were all given an electronic card based on economic status. Several benefits, from free medical treatment to discounted groceries, were delivered based on this categorization, undertaken solely based on the company’s internal surveys.In 2015, probably for the first time, a corporate house directly entered the electoral arena in India. It was Kitex. Despite a unified opposition, Twenty20’s candidates won 17 of the 19 gram panchayat seats, cornering over 70% of the polled votes.”
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    A corporate panchayat in Kerla. This was fascinating on so many levels!
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  2. “Vaz begins the tour with an introduction to feni and its history. Considered Goa’s greatest spirit, this colourless clear liquid is said to date back centuries; some believe coconut feni predates the Portuguese capture of Goa. A potent drink with a strong aroma, it is made with coconut or cashew. The cashew feni possesses a Geographical Indication registration since 2009 as a speciality alcoholic beverage from Goa.”
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    On feni tourism.
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  3. “Fiscal Deficit represents Net Borrowings by the Government in a year. Difference between the Debt and Liabilities at the beginning and at the end of a Financial Year also represents Net Borrowings during the year. Fiscal Deficit should therefore equal change in the Debt and Liabilities during the Financial Year. All government expenditure, revenues and debts are required to be carried out through the Consolidated Fund of India (CFI). If it is done so, the fiscal deficit of the Government should equal to the additional debt incurred during the year, all recorded in the CFI.”
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    A 29 point essay on the state of India’s fiscal deficit and debt, by Subhash Chandra Garg. The excerpt is of the first point in its entirety, and the rest of the essay is about why 1. doesn’t quite work. Great read!
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  4. “But what have the Nifty stocks done? 10 years ago, the Nifty had a bunch of stocks. Let’s run a thought experiment. If you had invested an equal amount (Rs. 10,000) in every single Nifty stock in January 2010 and completely forgot about it, what would have happened?”
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    The excellent Deepak Shenoy being, as usual, excellent.
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  5. “After all, according to National Accounts Statistics (NAS) that produce the estimates for national income, consumer expenditure is around 60 per cent of the GDP. Investment (or gross fixed capital formation, to be precise) is about 30 per cent of the GDP, and its growth rate has plummeted to less than 1 per cent according to latest estimates. And while government expenditure has grown at a high rate (around 10 per cent), it is only about 10 per cent of the GDP. Accordingly, growth in investment and government spending contribute 1.3 percentage points to the overall GDP growth rate, and so to get an overall 5 per cent growth rate, consumer expenditure should be growing at higher than 5 per cent.”
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    The rest of this thought-provoking piece by Maitreesh Ghatak explains why a fiscal push will almost certainly be a bigger bang for the buck than the official data might show. Macroeconomics is hard!

EC101: Links for 29th August, 2019

  1. A simple explainer from the ToI about what RBI’s surplus funds are.
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  2. “Central bank balance sheets can be difficult to grasp and are the subject of much debate. This note makes the case that gross capital is large on RBI’s balance sheet (and further additions to the capital by way of retained earnings do not look necessary) but given the large government debt on the RBI’s books, it is difficult to justify any one-time standalone transfer to the government now.”
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    Ananth Narayan, writing about a year ago (close enough) on the advisability of handing over the funds to the GoI. A nuanced argument, and worth reading.
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  3. “So what you do is:      On the liability side, you reduce the provisions by a certain amount
    On the asset side, you cancel out some government bonds. What the government owes the RBI (as interest and principal) goes away into thin air.

    This gives the government the ability to issue more bonds (since it just saved a truckload on interest costs) and thus use that additional money to do different things.”
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    Deepak Shenoy on the same topic, again from a while back.
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  4. “The balance in the CF is about ₹2.32-lakh crore, which is around 6.4 per cent of the RBI’s total assets.This is reportedly much higher than the 2 per cent average that other BRICS nations (Brazil, Russia, China and South Africa) hold, according to a Bank of America Merrill Lynch report.”
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    The Hindu Business Line on how high the contingency funds are as a percentage of the balance sheet, and how high that number is in comparison to other economies.
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  5. “But there’s a danger, exemplified by Venezuela in the 1980s and 1990s. The central bank, pushed into insolvency by its support of the Latin American government’s industrial policy, leaned too heavily on the power of cheap money-printing to earn profits and repair its balance sheet, and lost control of inflation. Thinning out the Indian central bank’s capital cushion could introduce a similar vulnerability”
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    Andy Mukherjee plays devil’s advocate.

Links for 3rd June, 2019

  1. “His social credit score has been lowered, and the South China Morning Post reports that Xu also faces travel restrictions for accusing Chen of being a fake master. As a result, Xu can’t ride in second class or above on planes or sleeper trains, and cannot ride high-speed trains at all (and if he had kids they’d face prohibitions, too).”
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    First, the excerpt above is noteworthy because of the real world implications of a reduction in one’s social credit score. Second, read the article to find out why his score has been reduced in the first place. Truly mind boggling.
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  2. “There could be two reasons for this. In rural areas, the downside in incomes appears to have eroded any positive effects of lower inflation. Among urban consumers, the persistent inflation in goods and services other than food may have restricted the real and sentiment impact of lower food inflation. To be sure, it is possible that if inflation is lower but consumption has not gone up meaningfully, then savings have risen. But there is no clear data to prove this yet.”
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    Ira Dugal points out the problems of low inflation in India (who’d have thought it, huh?), but also, more broadly, points out how difficult it is to think through macroeconomic issues.
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  3. “The government has no business being in business. There are scores of government owned companies that do exactly the same thing – like BPCL, HPCL and IOC are all refiners and oil marketing companies. There’s OIL and ONGC. And a GAIL, a Petronet, an IGL and so on. That’s just in the Oil and Gas space. There are a gazillion public sector banks. There needs to be a regular practice to get rid of most of the stake in these companies and to corporatize them. What better time than when you have a mandate?”
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    Deepak Shenoy walks us through his wish list of what the new government should do, and provides (as always) an easy to understand overview of what the response of the markets has been (thus far) to the election results.
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  4. “The Great Trigonometrical Survey is credited with having measured the heights of 79 Himalayan peaks; they include the Everest, K2 and Kanchenjunga. It also measure the baselines of Saint Thomas Mount, Madras, baselines of Calcutta, Coimbatore, Tanjore, Guntur, the measurements of the Cauvery Delta, the measurements of Mysore and the Great Indian Arc – an arc extending from the tip of the Indian subcontinent to the mountains of Himalayas. The measurement of the great Indian arc is a significant milestone for Indian geography because it was the first effort to plot, in mathematical terms, the vastness of the subcontinent from the north to south.”
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    The Madras Courier helps us understand the importance of the Great Trigonometrical Survey, and gives us a peek into the romance associated with the entire exercise. If you find yourself interested in the entire exercise, there is also an entire book about it.
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  5. “So, here’s a story. On 15 April 2019, when the roofspace over the crossing of Paris Cathedral caught fire, I was in a pub in east London having a burger. My initial reaction was not one of anxiety for the 12th-century Early Gothic church, with its splendid 13th-century Rayonnant superstructure and rose windows with contemporary (if VERY restored) medieval stained glass, but instead a slight feeling of dismay of how long this would mean the building would be closed and how much it would cost to replace the roof. It was also a great shame to lose the crowning achievement of the restorer Eugène Viollet-le-Duc, his magnificent Neo-Gothic crossing flèche, albeit mere days after all the statues had been removed from it for restoration. Anyway, then I went off to watch Kubrick-themed Italian thrash-metal revival band Ultra-Violence open for Wisconsin death metallers Jungle Rot without that much worry.”
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    A rather flippant, and therefore enjoyable dissection of the Notre Dame, the damage done to it, and what could be done about it. I do not know enough to comment about whether it makes sense or not, but I learned from reading it – hence the recommendation. Via The Browser.

Links for 7th May, 2019

  1. “Cyclone Fani slammed into Odisha on Friday morning with the force of a major hurricane, packing 120 mile per hour winds. Trees were ripped from the ground and many coastal shacks smashed. It could have been catastrophic.

    But as of early Saturday, mass casualties seemed to have been averted. While the full extent of the destruction remained unclear, only a few deaths had been reported, in what appeared to be an early-warning success story.”
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    A short read from the NYT about how Odisha was rather more prepared this time around for Cyclone Fani. Makes for encouraging, happy reading!
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  2. “Perhaps the earth has life because it came from other solar systems, seeded by alien probes, and indeed that is what I would do if I were a very wealthy alien philanthropist. If you end up with 100 successfully seeded solar systems for each very advanced civilization, the resulting odds suggest that we are indeed the result of a seed.That’s partly why, to this observer, the most likely resolution of the Fermi paradox is this: The aliens have indeed arrived, through panspermia — and we are they.”
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    An equally short, equally interesting take on aliens and the Fermi paradox from Tyler Cowen.
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  3. “We Are Pro-Technology, but only as a means, not an end. Technology is only as good as our understanding of it, and an incremental approach will save more lives in the near and long term while mitigating the second order consequences of an all-or-nothing approach.”
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    I was sent this by Aadisht Khanna, and while I do not necessarily agree with all of it, it does raise some fairly interesting points – and the manifesto itself is certainly food for thought.
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  4. “This looks quite tough, and there’s a significant chance the company will be valued at less than the debt itself, even if there was a buyer. After all if a buyer is paying that much money, why doesn’t he just start a new airline (or acquire a significant stake in an existing airline) and take over whatever slots, planes and rights Jet had? That’s likely to be much cheaper.”
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    Deepak Shenoy ponders the question of Jet Airways unusually high share price, and is unable to resolve the paradox.
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  5. “Without going too far down this rabbit hole, the following is worth noting: What sport psychologists, coaches, parents and players are prescribing as a model of mental toughness is equally likely to be the success-producing traits of highly successful and highly functional psychopaths. I have worked with a few psychopaths. I’ve seen the so-called attributes of mental toughness in them, which help deliver results on the field. I have seen how fans, friends and the media adore these people. But I have also seen what it looks like when their mental toughness is unmasked as psychopathic behaviour. They come across as being narcissistic and entirely self-serving, compulsive (and clever) liars, manipulators without any remorse and an inability to take responsibility for their errors. These are not qualities we should encourage as general conditions for performance.”
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    A fascinating article in Cricinfo about mental toughness, and how it doesn’t really exist – at least, not the way you think it does.

Links for 22nd April, 2019

  1. “It all comes down to money, and in this case, MCAS was the way for both Boeing and its customers to keep the money flowing in the right direction. The necessity to insist that the 737 Max was no different in flying characteristics, no different in systems, from any other 737 was the key to the 737 Max’s fleet fungibility. That’s probably also the reason why the documentation about the MCAS system was kept on the down-low.Put in a change with too much visibility, particularly a change to the aircraft’s operating handbook or to pilot training, and someone—probably a pilot—would have piped up and said, “Hey. This doesn’t look like a 737 anymore.” And then the money would flow the wrong way.”
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    The most readable account I have read about what went wrong with the 737 Max. I do not know if it is correct or not, in the sense that I do not have the ability to judge the technical “correctness” of the piece – but I did understand whatever was written. A sobering read about checks and balances gone wrong in many, many ways.
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  2. “Hardly sounds plausible. But there it is: Donald Fagen and Walter Becker—two super-fans of the genres they creatively appropriated—made some incredible, snarling, cynical, viciously groovy easy listening music, and it has more than held up over the decades since they released their debut album Can’t Buy a Thrill in 1972. Despite decades of critical praise and hit after hit, they also remain a profoundly misunderstood band.”
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    The article doesn’t actually deconstruct Steely Dan as much as they might have, but if you haven’t heard of the band, this is a good place to start to learn more about them, and then maybe listen to their music. But also a good way to learn about the benefits of non-conformity, and doing what you really like without worrying too much about the consequences – a powerful lesson!
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  3. “The iPad was not in the basket. Ollie, it turns out, had got hold of it and gone to town on the passcode, trying one idea after another, with the fury and focus of Alan Turing trying to beat the Nazis. It’s not clear how many codes Ollie tried, but, by the time he gave up, the screen said “iPad is disabled, try again in 25,536,442 minutes.” That works out to about forty-eight years. I took a picture of it with my phone, wrote a tweet asking if anyone knew how to fix it, and went downstairs to dinner.”
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    A short read from the New Yorker about, ostensibly, a toddler and an iPad, but also about empathy, technology, stuff going viral. Interesting because it is short, and we can all feel the pain.
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  4. “News floods the investment landscape about something strange in the land of debt funds. It turns out that:a) Kotak Mutual Fund has an FMP maturing April 8, and they won’t be able to pay the full maturity amount. They will pay some now, and the remaining “later”.

    b) HDFC Mutual Fund also has an FMP maturing soon. They will postpone the maturity of the fund if you so choose, by one year. But if you don’t vote to postpone, you will get the maturity value but a lesser amount than the NAV tells you.

    Whoa, you think. How can I be paid lesser than NAV? Isn’t that the very concept of an NAV? Isn’t it supposed to reflect what I’m supposed to be paid when I exit?

    Of course it is. And that’s why the mutual funds have had to take it on the chin for pretending it is not. Or rather, for ensuring it is not. But before that, let’s understand what the drama is all about.”
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    Deepak Shenoy warns us at the very outset that this is a long post, and he isn’t kidding. But that being said, it is a wonderful way of helping us understand what exactly went wrong with the FMP saga.
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  5. “Anticipating this discomfiting development long ago, Parliament passed an amendment during the Emergency years in 1976, freezing all delimitation as per the 1971 census, up to the census of 2001. Also, even after the redrawing of constituency boundaries, the total number of MPs per state was kept frozen. In 2000, another amendment postponed the day of reckoning to 2026. Thus, only after 2026 will we consider changing the number of seats in Parliament. Till then, everything is frozen as per the 1971 census. Remember, in 1971, India’s population was 548 million, and by 2031, the first census after 2026, it may well be close to 1.4 billion. The great apprehension is that redrawing boundaries and distributing the existing 550 MPs might mean that the south will lose a lot of seats to the north. Even if more members are added to the Lok Sabha, that incremental gain will mostly go to the northern states.”
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    This was written a year ago, but this is a problem that we should think more and more about in the years to come. Changing the shape of our Lok Sabha needs to happen by 2026. How is an extremely interesting question.

Links for 10th April, 2019

  1. “In an ideal world, you shouldn’t have to amortize. The prices will all be reflective of reality, there will always be a rational buyer at a rational price if you want to sell. In an ideal world corporates will not rollover their liquid fund investments every day either – they will know how much money they need, and they will only withdraw that much, leaving enough back in the liquid fund.”
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    The always excellent Deepak Shenoy explains the how, and some of the why when it comes to amortization in debt funds. If you are interested in corporate finance, finance in general, or policy-making when it comes to finance, this is well worth your time.
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  2. “Within the overall context of having asset allocation in an individual’s portfolio, passive investments will play an important role. It will increase overtime as a complementary strategy. It will not be just be plain vanilla passive but smart beta products. Look at these three benefits. Better returns profile, lower risk profile and wider diversification as compared to normal other products. So, it is a clear cut thing from the growth perspective.”..
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    An interview on Bloomberg Quint about smart beta products. As with the first link, a must read if you are a student of finance, especially from India.
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  3. ““If you wanted a snapshot of all your financial assets in one place on your mobile or to share information securely with a lender, it was previously not possible,” says Atluri Krishna Prasad, chief executive of Onemoney, one of the five entities that have secured in-principle approval from the Reserve Bank of India to operate as an account aggregator. “Now, if you give Onemoney your consent, we will fetch all your financial information from different sources, aggregate it and give you a single window with the consolidated information.””
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    If you were worried about data privacy in India, we’re only just getting started. A nice article in FactorDaily that explains how more data sharing between financial organizations will soon be on it’s way.
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  4. “Here, as in so many cases, the analysts haven’t got beyond an intuition that Johan Cruyff, the Dutch father of Barcelona’s football, had nearly 50 years ago. Cruyff played for Barça in the 1970s, coached the team from 1988 to 1996 and largely invented the passing game that the club still play. He could rhapsodise for hours about players who were “turned” the right way. He cared much less about a player’s size and speed.”
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    Just one of many excerpt-able snippets from a fascinating article about how a sporting club is using every last little bit of information about, well, everything to make Barca (for that is the football club in question) even better.
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  5. “He’s agreed to forfeit about $50m. It’s not clear what’s happened to the other $73m, but Rimasauskas was a prolific and baroque money-launderer who squirreled cash away in Cyprus, Lithuania, Hungary, Slovakia, and Latvia. Google has said that “We detected this fraud and promptly alerted the authorities. We recouped the funds and we’re pleased this matter is resolved.”Rimasauskas will be sentenced on July 29. He faces up to 30 years.”
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    One of those articles that truly help you understand Coase/Demsetz and industrial organization overall. But if I am to be honest, a great read in its own right.