An update to fixed income markets, courtesy Vipul Singh Chouhan

Vipul Singh Chouhan, who I had the privilege of teaching about six years ago or so, has forgotten more about fixed income securities than I’ll ever know. Immediately after posting the previous post, I messaged asking if he would like to add to the list.

What follows are his recommendations, lightly edited for the sake of clarity. Thanks a ton, Vipul!

  1. Factsheets of all the Mutual Funds released on a monthly basis. I’ve linked to the Morningstar website, but I believe this is available through multiple sources. Here’s an actual factsheet, pulled out completely at random.
  2. Vipul recommends that you keep a close eye on the commentary of the Debt CIO on the current situation of the fixed income markets. See this, for one example.
    Specifically, Vipul recommends you try and get answers to the following questions:

    1. What are they holding?
    2. In what proportion?
    3. In what maturity bucket?
    4. What is the credit rating?
  3.  It doesn’t end there! After getting to know about the credit rating of a structure, read it.  For example, let’s say a particular CMBS (Commercial Mortgage Backed Security) is rated AA+ by India Ratings, go to the website and read the entire two page rationale. Then go and read rationales for similar CMBS structures – peer review, if you will. Poke around! Compare and contrast! Find faults!
    This next paragraph is quoted verbatim:

    “Pester someone like Ashish sir and tell him “Sir in my view this should be AA and not AA+, pls correct me if I’m wrong”. Take feedback from him and improve your analysis on a continuous basis. “

    Well, please don’t take up Vipul on this suggestion quite literally, but don’t ignore the larger point, which is that you must find for yourself a mentor in the subject area you are trying to learn more about, and bug that mentor about learning more. I assure you, this is a vastly under-rated, and under-exploited skill. By me as well, to be clear.

  4. Learn to look for patterns, and learn to connect the dots. This is easier said than done, and you need to bury your nose in these reports for weeks on end, but eventually, you’ll “get a feel” for what you’re looking for. Here’s an example from Vipul:

    In the fact sheet, find patterns, let’s say investment grade AUM has increased in the last few months, while the credit risk AUM has nose dived. Explore the internet for reasons.

    Maybe that didn’t make sense to you. Well, look up the terms and phrases, try to make sense of them, and then ask your mentor the question. The question should never be, “What is XYZ?”. It should be, “I didn’t understand this term, so I looked it up, and here is what I specifically don’t understand about XYZ.” Asking the right question is a great skill!

  5. Again, a straight quote, unedited:

    Among the various structures, which MFs buy what: LAS, CMBS, Corporate guarantee, Letter of Comfort, DSRA guarantee. Understand each in detail. Which structure is preferred by which issuer and for what reasons. Pros and cons of each structure.

  6. With regard to that last point, if you want to really be a part of the industry,  learn each of those terms, once again with a weighted average of research online and follow-up questions with your mentor. The internet will tell you what the terms mean, and your mentor will tell you why it matters. Both are important, and in that sequence.
  7. Vipul recommends that you browse RBI site regularly. Specifically, whether you understand the reports or not, look out for data on the following:
    1. Outstanding G-Secs
    2. Primary auctions of CMBs (s is small, not to be confused with the CMBS mentioned above)
    3. SDLs,
    4. T-Bills. 
  8. Government Securities Market for Beginners: A Primer, which I myself hadn’t read until now (Thanks Vipul!)
  9. And finally, FIMMDA for corporate bond spreads and base yield curve.

Akash (and anybody else interested in this topic), this should keep you busy for days on end. My thanks to Vipul for taking the time to respond so quickly, and for sharing a most excellent set of links 🙂

Five articles from economists about tackling the crisis

  1. Arnold Kling advises us to not worry about “going back to normal”. It’s about winning the war, no matter what it takes. There will be a new normal at the end of it, and no one today knows what that normal will be like. Focus on winning!

    “We are acting as if our biggest worry is how to get back to our “normal,” pre-war economy. Our biggest challenge instead is to win the war, after which we will transition to an economy that looks considerably different, just as the post-WWII economy was quite different from the pre-war economy.”

  2. I found this fascinating: on how the RBI is working to keep our financial system alive.

    As the country goes on a self-imposed lockdown to fight the coronavirus contagion, a crack team of 150 people, in hazmat suits, is keeping India’s financial system up and running since March 19 from an unknown location in a completely quarantined environment. These 150 people, including 37 officials from critical departments of the Reserve Bank of India (RBI), such as debt management, reserve management and monetary operations, and third-party service providers, are now in charge of the business continuity plan of the central bank, designed in a way that could help create a benchmark for such exigencies in the future as well.

  3. Greg Mankiw comes up with a form of social insurance. Here’s a challenge for you – how would you game this system?

    Let’s send every person a check for X dollars every month for the next N months. In addition, levy a surtax in 2020–due in April 2021 or perhaps spread over several years–equal to N*X*(Y2020/Y2019), where Y2020 is a person’s earnings in 2020 and Y2019 is a person’s earnings in 2019. The surtax would be capped at N*X.

  4. Via MR, how about pausing time?

    Sometimes, the best solutions to big problems are very simple. Regarding the current outbreak of COVID-19, I propose a solution that—on the surface—might seem preposterous, but if one manages to stay with it and really think through the potential benefits, then it emerges as a much more credible course of action.I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed.

     

  5. And on the same point, Tim Taylor:

    “Here, I want to focus a bit on a theme that comes up in a number of the essays: the idea that sensible economic policy can put the economy in the freezer for a few months, and the pull the economy out of the freezer, thaw it out, and restart it. I find myself in the awkward position here of largely being in agreement with this policy as a short-run approach, and at the same time also feeling that the ultimate consequences of the policy are going to be more difficult than a number of authors are envisaging. ”

    (An aside: WordPress formatting has already cut years from my life, and will continue to do so. That last bit is, to be clear, an excerpt. That is clear to me, to you – but not to WordPress)

India: Links for 7th October, 2019

  1. This was a fascinating read. I was aware of the flu and its impact on India, but had no clue about the extent, the severity and the multiple what-might-have-beens. For example:
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    “y 1918, Gandhi was being seen in intellectual circles as a future leader of the nation, but he lacked grass-roots support. That spring, in his native state of Gujarat, he had organised two of his first satyagrahas, but these were followed by thousands of people, not hundreds of thousands. When the flu returned that autumn, he was struck down, as were other leading members of the independence movement who shared his ashram, notably Gangabehn Majmundar, the formidable spinning teacher, and Shankarlal Parikh, who had helped organise one of those early satyagrahas. Gandhi was too feverish to speak or read. He could not shake a sense of doom. “All interest in living had ceased,” he wrote later, in his autobiography.”
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  2. Professor Jayanth Varma is less than impressed with benchmarking for loans, and the rules associated with them:
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    “In the next few years, India needs to work on creating both a better banking system and better financial markets. One of the pre-requisites for this is that regulators should step back from excessive micro-management. For example, the RBI Master Directions require the interest rate under external benchmark to be reset at least once in three months while elementary finance theory tells us that if the floating rate benchmark is a 6-Months Treasury Bill yield, it should reset only once in six months. Either banks will refrain from using the six month benchmark (eroding liquidity in that benchmark) or they will end up with a highly exotic and hard to value floating rate loan resetting every three months to a six month rate. Neither is a good outcome.”
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  3. “The Socioeconomic High-resolution Rural-Urban Geographic Platform for India (SHRUG) is a geographic platform that facilitates data sharing between researchers working on India. It is an open access repository currently comprising dozens of datasets covering India’s 500,000 villages and 8000 towns using a set of a common geographic identifiers that span 25 years.”
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  4. “Prime Minister Narendra Modi, through “Make in India”, has the right idea when he says he wants to make India a global or regional manufacturing hub. But this cannot be accomplished by keeping an inefficient domestic industry shielded behind import barriers forever. Until something is done to change that, the industry will continue to lurch from crisis to crisis, and no lessons will have been learned.”
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    Rupa Subramanya and Vivek Dehejia in Livemint on what ails the automobile industry, and how to correct it.
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  5. Speaking of which
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    “For a car financed to the extent of Rs 6 lakhs and driven for 1500 km every month the effective cost of ownership/operations, with a driver is probably in the region of Rs 28 per kilometre. Shared mobility wins hands down against this arithmetic of ownership costs.”

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.

EC101: Links for 1st August, 2019

Heard of cantons?

Here’s an interesting question to ask: when one thinks of an organization, how decentralized should it be? Should all decision making flow from the very top, with lower levels of hierarchy being essentially automatons with no autonomy at all? Or should it be the other way around – little fiefdoms that are only nominally a part of a larger whole?

When you are early to check in at a hotel, should the clerk have the ability to decide whether you should be checked in, or should she be inflexible about rules that have been set at the very top?

Can one think of nations as one thinks of organizations? If yes, then what about the ability to tax and spend at the governmental level? Should that rest with the centre, or the states? Today’s five articles help us start to learn about this particular problem, keeping India front and centre:

  1. Here’s the World Bank with it’s view on decentralization in India.
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  2. “The effectiveness of decentralization requires the calibration of the administrative, political and fiscal dimensions. Without political decentralization, participatory decision-making is not possible. Administrative decentralization is necessary to implement political decisions, and an important precondition for fiscal decentralization. Efficiency in the delivery of public services depends on administrative efficiency and accountability. To assess rural local government finance in India, it is useful to compare the system with current thinking on a well-functioning intergovernmental fiscal system.”
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    Again from the World Bank, this time the rather more difficult issue of separating out decentralization and what it means in an administrative sense, and in a fiscal sense.
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  3. The results of a UNDP survey about decentralization in India. I found the slide on challenges about decentralization to be the most thought provoking.
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  4. “Vertical imbalance essentially arises due to the fiscal asymmetry in powers of taxation vested with the different levels of government in relation to their  expenditure responsibilities prescribed by the constitution. Our Federal Structure has three levels of Governments: Central Government, State Governments and the elected Local Bodies. In India the Central government has far greater or larger domain where it may tax e.g., income taxes personal or corporate, taxing consumption of goods and services (CGST), taxing foreign transactions (exports/imports) and capturing natural resources rents, e.g.,
    Spectrum Auction. In contrast, post-GST, the State governments may only tax the consumption of goods and services (SGST) and agricultural incomes, while the local or the third tier has even more limited power to tax which is largely confined to property tax”
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    My apologies for the poor alignment of the text – pasting from a PDF is an act of sorcery that I am very far from mastering. The PDF itself is well worth reading for a student of fiscal federalism in India – Dr. Kelkar on the subject in a working paper.
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  5. And finally, if you have made it this far, a rather long (but fascinating) read from the RBI on the experience of fiscal decentralization from other nations – especially pertinent for India in terms of how to think about this rather thorny issue in the years to come.

India: Links for 10th June, 2019

  1. How does the Reserve Bank of India aim to spread awareness about key topics to as many people as possible across the entire country. It uses a concept called Financial Literacy Week, among other things. Posters and leaflets will be circulated to rural banks, and a mass media campaign will be carried out throughout June (on Doordarshan and All India Radio) – this time, with a specific target in mind: farmers. (Via Mostly Economics)
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  2. “In the circumstances, measures that can minimise wastage and increase the local holding capacity of farmers so as to stagger supply release can be an area of engagement to increase farm incomes. In many respects, this may perhaps be the most promising medium-term intervention to increase farm incomes.”
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    Gulzar Natarajan asks how farm incomes can be increased. He suggests a way to increase storage capacity and improve it over time. Completely agreed – but I’ll reiterate (and I think he’ll agree), the best way to have farm incomes go up is to have lesser people be engaged in agriculture.
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  3. Anantha Nageswaran comes up with a thoroughly delectable set of links about “advice” for the new government in India. Each of the links is well worth reading. In fact, I would recommend that an hour going through these links is well worth your time.
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  4. “Agriculture is a like any other business—the farmer needs the freedom to enter into contracts, use it to raise credit, tie up insurance, seek advisory and inputs to get a fair return on his land. The instrument for this is contract farming—whether individually or in a group backed by a regulatory mechanism. Paracetamol policies like loan waivers have detained the modernisation of agriculture, resulting in poor output from a large mass of precious land and half the workforce. ”
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    This actually is one of the links in 3. above, but it is too good to not share in it’s own right. As Prof. Nageswaran says, full marks!
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  5. “The GLP was initiated in August 2018 through a partnership between Pratham and the Uttar Pradesh Basic Education Department and sought to target all primary school children in UP. There were three aims: (i) significantly improve their learning levels in basic reading and arithmetic, (ii) introduce and sustain innovative teaching-learning practices in schools, and (iii) build monitoring, mentoring, and academic support capacity at block and district levels. After some delays, by January 2019, the programme reached classrooms across all 75 districts.”
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    Read, and hope. The most encouraging thing I have read in 2019.

Links for 22nd May, 2019

  1. “Perhaps the most typical thing about Bergstrom’s gambling was that for him, as for so many others, the money seemed to signify something else. Gamblers often describe how, when the chips are on the table, money is transformed into a potent symbol for other psychic forces. In Bergstrom’s case, the action on the craps table seemed, like a love affair, to be a referendum on his self-worth.”
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    What are the motivations for gamblers? How do they view money? Is it the means to an end, is it a metaphor, is it symbolic? How might the lessons one gleans from reading something like this be applied elsewhere? For these reasons, a lovely read.
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  2. “Virat Kohli, Mahendra Singh Dhoni, Rohit Sharma, Suresh Raina, Dinesh Karthik, KL Rahul, Kedar Jadhav and Ambati Rayudu are all collectors if you go by their IPL batting. I had mentioned in the copy (which later got edited out) that it is worrisome that the Indian batting lineup ahead of the World Cup has a sort of sameness to it.Fortunately, while they all bat the same way in T20 cricket, they are all different kinds of beasts when it comes to One Day Internationals.”
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    Beware of relying too much upon data, but that being said, the cricket fans among you might want to subscribe to this newsletter, which analyses cricketing data to come up with interesting ideas about the upcoming world cup.
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  3. “Well, you know what Graham understood, I think, better than probably anyone who had written about investing before him is that there’s a big difference between what people should do and what they can do. Another way to think about this is that distinction between what’s optimal, and what’s practical. And we pretty much know how people should invest. Investing is – as Warren Buffett likes to say “It’s simple, but it’s not easy.” And dieting is simple, but not easy. In fact, a lot of things in life are simple, but not easy. And investing is a very good example. I mean, if all you do is diversify, keep your costs low, and minimize trading. That’s pretty much it. It’s like eat less, exercise more. Investing is just about as simple, but it’s not easy. And so Graham understood that people are their own worst enemy, because when they should be cautious, they tend to take on risk.”
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    David Perell interviews Jason Zweig, and it is an interview worth reading, and perhaps even re-reading. I have linked here to the transcript, but if you prefer listening, you should be able to find out the link to the podcast.
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  4. “Any time a central bank – unless it has a completely sealed closed economy – raises or cuts interest rates, it is taking currency and interest rate risk vs. the major reserve currencies, even if it is not directly buying or selling foreign currency.”
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    A short, clear and concise article about the RBI’s rupee-dollar swap.
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  5. “Diets have changed most dramatically in Africa, where 18 countries have diets that have changed by more than 25 percent. Sugar consumption in Congo, for example, has increased 858 percent since 1961.”
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    A truly excellent visualization – worth seeing for a multitude of reasons: data about nutrition, visualization techniques being just two of them. And that statistic about sugar consumption in Congo is just breathtaking.

Links for 1st April, 2019

  1. “For many in technology, New & Improved means faster with more of every measurable parameter. More memory, more pixels, more storage, more bandwidth, more resolution. In devices, the tendency has been to communicate “new & improved” through an increase in screen size. We are subject to this to such an extent that phones are becoming unusable with one hand, stretching screens to the edge of the device and then wrapping those screens around the edges and then even folding the screens so that we have to unfold or unroll to use the product. Maybe an origami phone is in the works.But there is a parallel movement where “New & Improved” means smaller. This is the trend to miniaturization. Smaller is better because it’s more portable, more conformable. Things sold by the ounce are better than things sold by the pound. The best computer, the best anything, is the one you have with you and having it with you is more likely if you can take it with you. So that which you can take with you is the best. QED.”
    On the face of it, a review of the iPad mini. But the excerpt above is also a useful way to think about improvements in general – how much of learning, for example, has become better because of ‘miniaturization’?
  2. “It is yesterday once more. The Reserve Bank of India (RBI) has put forth an old solution for a perennial problem. It has suggested, through a discussion paper, the need to create ‘Wholesale & Long-Term Finance Banks’. The discussion paper argues that with the “deepening of the financial sector” there is a need to evolve a structure where apart from universal banks, “differentiated banks provideservices in their areas of competitive advantage”. The thesis is that this would enable fulfilling long-term financing needs of the growing economy.”
    This is from a while ago – nearly two years ago, in fact, but is worth reading, especially if you are a student of finance in India. The article is a good summary of the many, many efforts made by the government to arrange for long term financing in India – and how they just haven’t worked out – and are unlikely to work out in the future as well.
  3. “And what might Rodgers and Hammerstein themselves have thought of Ms. Grande’s song? Todd S. Purdum, the author of “Something Wonderful: Rodgers and Hammerstein’s Broadway Revolution,” said the masters of musical theater enjoyed being in the thick of popular culture. But most important, he said, they were never ashamed of commercial success.“They would love the ka-ching of it,” Mr. Purdum said.”
    Have you heard the song seven rings? I haven’t, although as the article goes on to tell you, if you do go ahead and hear it, two long dead musical geniuses from the past will become richer. Copyright, property rights, music, licensing rights, streaming, the economics of music – all in there.
  4. “Then with the Kindle and the iBooks coming along, that allowed me to start treating books like I treat blogs. When I go to blog, I’ll actually skim through lots of articles until I find one that looks really interesting and then I’ll read that whole article all the way through and maybe take notes. Now I treat books the same way. I’ll skim through a large number of books. I’ll put them down. I’ll jump around, back, forward, middle, until I find a part that’s interesting. Then I’ll just consume that piece. I won’t feeling guilty about having to finish the entire book.I just view it as a blog archive. A blog might have 300 posts on it and you could read just the two, three, five that you need right now. I think you can think of a book the same way. Then that opens the world wide web of books back open to us instead of it being buried somewhere.”
    Books as a series of blog posts is a remarkably useful, and dare I say it, comforting idea. It probably is a more useful way to think about reading books, and about not reading them. I didn’t finish reading the entire transcript, but hope to get around to listening to the podcast soon.
  5. ““In a fight between a fly and a lion,” he wrote, “the fly cannot deliver a knockout blow and the lion cannot fly.” Using conventional methods “have at best no more effect than a fly swatter. Some guerrillas are bound to be caught, but new recruits will replace them as fast as they are lost.”I know very little about Kashmir, and I am aware of how little I know every time I read a little bit more about it. But this particular analogy leaped out at me, and helped me think about not just the insurgency problem in Kashmir, but about guerilla warfare in general. The entire article is worth reading, by the way. Multiple times, in fact.