How poor leadership leads to poverty.

3 years back, every one was screaming the India shining story. How India would push a GDP growth of 8+% and roar its way out of poverty. And today in 2008 we say we would be happy if we achieve 6+% and we would be ok. What happened, why are we suddenly so pessimistic. What happened to a country that was roaring, resembling the Tiger.
Its poor leadership. Even though I have been a proponent of Chidambaram and the UPA for the past 4 years. Today I feel I am smarter than them. A year ago they could not foresee what is happening today. But I could. Ha. People around know it. Then why am I bragging so much? I want to introspect, why even after knowing all this I am at break-even in my portfolio, playing all but defense. Let me examine my thesis.
In 2006, when we were reporting growth rates of 8%, they was a problem of inflation. The cost of money was going up. The cost of housing was going up. The cost of food and oil was going up. Everyone was telling me. Oh, we have a housing shortage. Standard of Living in India is going up. People are making more money. Salaries are growing 10% +. Thus cost of housing is going up and therefore you should invest in property. With a housing boom, came inflation in Cement and Steel prices. There was a steady inflation in petrol prices.
I began to think what is it that is required to fight inflation. An increase in supply. If we flood a market with something then prices fall. Hence we should increase supply. But how do we flood the market. If something is expensive and the margin of profit is high. People get interested in it. If I think I can make money doing something, I would invest in it. Thing is 20% profit is good. 19% is ok. 15% is good, 14% is ok. This feeling of ok, brings in more players. People who think they can survive with a lower margin of profit even is someone else is making better margins. The threshold of course is zero. Nobody wants to enter any market at a loss.

Now what does our government do.

1. Fixes the price of petrol. Makes upstream companies like ONGC pay a subsidy. Tell me if I have to sell petrol at a loss, will I invest in such a business. The consequence is that besides the state run oil marketing companies nobody else retails fuels. There is no competition. Upstream companies are fearful of India, they cannot trust that India will not force them to provide subsidies or discount to Oil refining companies. ONGC is a scapegoat. Paying a subsidy for no reason.
Now lets examine another consequence, no major private participation in oil drilling and exploration. India is no Saudi Arabia with lots of potential oil deposits. There are few and therefore it is risky places. Oil exploration today is most off shore. Its expensive to drill offshore, even Reliance cannot find Rigs. Most Rigs (Aban Offshore) have made a killing. By our policy of fixing the price of petroleum products we have basically constrained our supply. This would get more and more expensive. Just think today oil prices have fallen 45%, Prices in India have not fallen, and they have fallen by 45% in the US. Bottom line is if you increase supply, prices fall. But prices have to rise for new players to invest. Otherwise you are at the mercy of Russia and Saudi Arabia. But India doesn’t get it.
2. We fix prices of fertilizers: As a result few people want to invest in fertilizers, as one cannot pass the prices of fertilizer. We are facing shortages in food, as farmers are not sowing because fertilizer is not available.

3. The government does the same with Cement and Steel. It bans exports and frees up imports.
My point is one must let the market decide. Sure you can regulate the market to ensure people play by the rules. But don’t change the rules to benefit one over the other. Doing so de-motivates people. And they stop investing.
Everyone wants to make money. People invest to make money. Giving subsidies, soft loans, fixing prices, increasing interest rates. All these tactics manipulate the market favoring someone over the other.
Think about it, after 5 years, the things that the government tried to protect us against “Inflation” are stronger. Houses are still expensive. Loans are still expensive. Petrol is still expensive. Food is still expensive.
One can argue that they are not too expensive. But we never encouraged supply. Now even if we cut interest rates, these are not less expensive. We simply did not create the supply. Why would a cement manufacturer increase supply, when the government can put curbs on him anytime. We need to free up the system, we cannot be socialist and capitalist at the same time. We have to choose where we want to go.
Jim Rogers whom I faithfully follow says India will collapse into small countries. I think its true. We are seeing it. How much I wish it will not happen.
If we have to stay as a nation we have to fight inflation. By increasing supply. We have to provide the markets the pricing power.
For example, if the stock market is free to decide prices, people are happy when prices of IPOs hit the roof, the same people are unhappy when commodity prices hit the roof. Once many IPOs hit the market the prices of IPOs eventually comes down. That is because there was too much supply. The same would happen to commodities.
Inspite of the fact I knew that we were in a bubble. I did not exit my position. Maybe it was a feeling when you are up 300%, how bad can it get. At max 50%. My friends, I am at break-even (Only because I shorted the market heavily with the Hedge Funds in Oct.).
I remain short on this market. I think we are done for 2009. More jobs will be lost. And the market will grind towards 2000 (Nifty). And when people accept that they are doomed. We would have a bottom. Bottoms don’t happen fast. They happen when there is utter despair (No hope). Right now there is Hope. People think the stimulus packages, interest rate cuts will help. I wish governments could change fortunes. But they never do.

Bottom Line: Buy commodities on every correction. Gold, Agriculture, Oil. They are in short supply. Sell the stock market (Esp. expensive companies). Do not do something you don’t understand.