Know-brainer : No-brainer – Series Part 2

…was busy preparing a quiz for my b-school. And hence the delay. 100th post. Yay!

(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!

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