Posted this as a comment on an Economist article:
http://www.economist.com/comment/779255#comment-779255
"I believe that the rise in yields is a powerful emergent outcome of several factors. The market has been unable to clearly distinguish between the expected monetary tightening cycles & fiscal problems of the G4. As a result, government bond yields have been correlated to an unusual degree since the Great Recession. An expansive monetary-fiscal policy mix by the US and China and confidence in global growth prospects has caused a glut of non-genuine investment demand in several commodities, including food, base metals, oil and precious metals. This has started feeding through to inflation everywhere, even in the “deflationary” G4 economies. A part of the rise in yields was also driven by a classic "buy rumour, sell fact" story post the November FOMC rate decision. Subsequently, the extension of the Bush tax cuts boosted US yields on both growth expectations and higher fiscal deficits. Which of the two the market is pricing in to a greater degree is yet to be known. The rise in yields has been greatly exaggerated by thin liquidity in December. With the extension of the tax cuts, the outlook for consumer spending and credit growth also improves. At the same time, US homeowners will suffer greatly if mortgage yields suffer a blowout. Both core and headline inflation in the US can head higher from here on, particularly if credit growth picks up and house prices stabilize due to increasing confidence. This, unfortunately, may not be accompanied by a corresponding decline in unemployment. I believe that the US and UK may have shifted to a higher NAIRU and hence will pose interesting policy challenges for the Fed & BOE. The UK has already demonstrated this with persistently high inflation over the past year or so. With fiscal and monetary measures totalling well over 3.5 trillion, whether its a debt sustainability issue or an improving growth outlook, US yields are set to continue the rise. And till the world learns to price G4 sovereign risks independent of each other, the others will continue to follow US yields."
Comments & criticism most welcome
Sunday, December 19, 2010
Sunday, October 17, 2010
The Helicopter Pilot Does An Auto-Rotation...
Friday finally saw a long overdue correction in forex markets. EUR-USD ended the day at 1.3977 (i.e. 1 EUR = 1.3977 USD), almost two big figures down from the intraday high of 1.4157 (which means the EUR weakened and the USD strengthened)
All day long, the market was waiting, wishfully it seemed, for some big bang announcements from Federal Reserve Governor Ben Bernanke in his speech at the Boston Fed Conference. The market, over the past few weeks, has been in a firm sell-USD mode, on the expectations of massive balance sheet expansion (will explain later) by the Federal Reserve.
The market had been doing this because the US economic growth has weakened over the past few months and the Federal Reserve has communicated that it is concerned about the situation and intends to take steps to resolve it. In particular, the US unemployment rate is almost at 10%, which the Fed thinks is much higher than a long-run stable unemployment rate of 5% to 6%, and inflation is around 1%, which is much lower than a long-run stable inflation rate of 2%. Given this backdrop, the Fed is expected to ease monetary policy i.e. take measures which promote the supply of money, growth of credit and help in reducing market interest rates, so that people can undertake economic activity and growth gets a boost.
The most direct way for a Central Bank to ease monetary policy is to reduced the base interest rates that are set by them. However, the benchmark nominal interest rate in the US, called the Federal Funds target rate, is at 0% since December 2008. They cannot reduce it further (this is called the zero bound constraint). What, then, can the Fed do to further reduce market interest rates and promote economic activity? Well that was what Bernanke was speaking about : Monetary Policy Objectives and Tools in a Low-Inflation Environment (http://www.federalreserve.gov/newsevents/speech/bernanke20101015a.htm)
Let it be noted however, that this is by no means the first such speech. Several papers have been written on monetary policy alternatives at zero interest rates, and Bernanke himself is considered to be an authority in this area, having studied the US Great Depression and the Japanese Lost Decade in great detail. He's a firm believer in the use of monetary policy in fighting recessions (periods of declining economic growth) and deflation (negative inflation). One of his most famous comments made in 2002 was that he would drop dollar notes from a helicopter in order to keep the economy going.
Given all this, markets may not have been unjustified in expecting more monetary easing by the Fed. In particular, they expect a resumption of quantitative easing - the tool employed by the Fed where in they buy US treasuries (i.e. bonds issued by the US Government) and other bonds. In case of bonds, prices and market interest rates (yields) are inversely related. When the Fed buys such bonds, the price of the bonds goes up. Correspondingly, the yields go down and the objective of monetary easing is satisfied. The question is, where doe the Fed get the money to buy these bonds? The answer is - nowhere. It prints the money. The Fed controls the supply of money (i.e. US dollars) in the world. It can decide to print as much money as it wants. Of course, doing so will lead to a decline in the value of the US dollar. That will happen because any currency is supposed to act as a store of value. If there is more of that currency in circulation, then the value of other goods in that currency will increase. This is why people have been selling the US dollar - anticipating that the Fed will do further QE, by printing dollars, which should cause the dollar to weaken. (I may mention that the Fed has already undertaken QE of about 1.7 trillion US dollars last year, which is a huge amount. The size of the Fed's balance sheet has shot up from about 0.8 trillion USD to 2.5 trillion USD as a result)
However, post the speech made by Bernanke, markets were disappointed. If one goes through the speech, there is one line which is of particular importance: "In a world in which the policy interest rate is close to zero, the Committee must consider the costs and risks associated with the use of nonconventional tools when it assesses whether additional policy accommodation is likely to be beneficial on net."
Which is to say that the Fed is not thinking of QE as a one way street. They are equally worried about the negative fallouts of QE. Bernanke goes on to mention some risks of QE: "One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public. Another concern associated with additional securities purchases is that substantial further expansion of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations, to a level above the Committee's inflation objective"
The second point is particularly worth noting. Essentially, the Fed, by doing QE and purchasing assets (in this case, bonds) prints dollars. The risk here is that they may end up printing so many dollars that the dollar ends up becoming worthless over a period of time. It may not represent a store of value any more. This is also a form of inflation, which results from money creation. It may seem a little difficult to grasp intuitively since its much less common than the normal form of inflation which we are used to - goods price inflation. Inflation usually happens when there is a lot of demand for goods, which cause the prices of those goods to rise over a period of time. However, it can also happen when the country's currency starts losing value, because of which the denominated prices of goods in that currency begin to rise. The Fed is worried about the possibility of such inflation resulting because of the steps that they have taken.
Once Bernanke made his speech, markets realised that they could not assume that QE was certain. Consequently, they could not be completely sure that the US dollar would weaken and hence people started squaring (i.e. closing) their positions in US dollars (since they had sold US dollars earlier, they were buying them now). Accordingly, markets corrected and the US dollar strengthened against most currencies.
Looks like the helicopter pilot is now trying to do an auto-rotation.
All day long, the market was waiting, wishfully it seemed, for some big bang announcements from Federal Reserve Governor Ben Bernanke in his speech at the Boston Fed Conference. The market, over the past few weeks, has been in a firm sell-USD mode, on the expectations of massive balance sheet expansion (will explain later) by the Federal Reserve.
The market had been doing this because the US economic growth has weakened over the past few months and the Federal Reserve has communicated that it is concerned about the situation and intends to take steps to resolve it. In particular, the US unemployment rate is almost at 10%, which the Fed thinks is much higher than a long-run stable unemployment rate of 5% to 6%, and inflation is around 1%, which is much lower than a long-run stable inflation rate of 2%. Given this backdrop, the Fed is expected to ease monetary policy i.e. take measures which promote the supply of money, growth of credit and help in reducing market interest rates, so that people can undertake economic activity and growth gets a boost.
The most direct way for a Central Bank to ease monetary policy is to reduced the base interest rates that are set by them. However, the benchmark nominal interest rate in the US, called the Federal Funds target rate, is at 0% since December 2008. They cannot reduce it further (this is called the zero bound constraint). What, then, can the Fed do to further reduce market interest rates and promote economic activity? Well that was what Bernanke was speaking about : Monetary Policy Objectives and Tools in a Low-Inflation Environment (http://www.federalreserve.gov/newsevents/speech/bernanke20101015a.htm)
Let it be noted however, that this is by no means the first such speech. Several papers have been written on monetary policy alternatives at zero interest rates, and Bernanke himself is considered to be an authority in this area, having studied the US Great Depression and the Japanese Lost Decade in great detail. He's a firm believer in the use of monetary policy in fighting recessions (periods of declining economic growth) and deflation (negative inflation). One of his most famous comments made in 2002 was that he would drop dollar notes from a helicopter in order to keep the economy going.
Given all this, markets may not have been unjustified in expecting more monetary easing by the Fed. In particular, they expect a resumption of quantitative easing - the tool employed by the Fed where in they buy US treasuries (i.e. bonds issued by the US Government) and other bonds. In case of bonds, prices and market interest rates (yields) are inversely related. When the Fed buys such bonds, the price of the bonds goes up. Correspondingly, the yields go down and the objective of monetary easing is satisfied. The question is, where doe the Fed get the money to buy these bonds? The answer is - nowhere. It prints the money. The Fed controls the supply of money (i.e. US dollars) in the world. It can decide to print as much money as it wants. Of course, doing so will lead to a decline in the value of the US dollar. That will happen because any currency is supposed to act as a store of value. If there is more of that currency in circulation, then the value of other goods in that currency will increase. This is why people have been selling the US dollar - anticipating that the Fed will do further QE, by printing dollars, which should cause the dollar to weaken. (I may mention that the Fed has already undertaken QE of about 1.7 trillion US dollars last year, which is a huge amount. The size of the Fed's balance sheet has shot up from about 0.8 trillion USD to 2.5 trillion USD as a result)
However, post the speech made by Bernanke, markets were disappointed. If one goes through the speech, there is one line which is of particular importance: "In a world in which the policy interest rate is close to zero, the Committee must consider the costs and risks associated with the use of nonconventional tools when it assesses whether additional policy accommodation is likely to be beneficial on net."
Which is to say that the Fed is not thinking of QE as a one way street. They are equally worried about the negative fallouts of QE. Bernanke goes on to mention some risks of QE: "One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public. Another concern associated with additional securities purchases is that substantial further expansion of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations, to a level above the Committee's inflation objective"
The second point is particularly worth noting. Essentially, the Fed, by doing QE and purchasing assets (in this case, bonds) prints dollars. The risk here is that they may end up printing so many dollars that the dollar ends up becoming worthless over a period of time. It may not represent a store of value any more. This is also a form of inflation, which results from money creation. It may seem a little difficult to grasp intuitively since its much less common than the normal form of inflation which we are used to - goods price inflation. Inflation usually happens when there is a lot of demand for goods, which cause the prices of those goods to rise over a period of time. However, it can also happen when the country's currency starts losing value, because of which the denominated prices of goods in that currency begin to rise. The Fed is worried about the possibility of such inflation resulting because of the steps that they have taken.
Once Bernanke made his speech, markets realised that they could not assume that QE was certain. Consequently, they could not be completely sure that the US dollar would weaken and hence people started squaring (i.e. closing) their positions in US dollars (since they had sold US dollars earlier, they were buying them now). Accordingly, markets corrected and the US dollar strengthened against most currencies.
Looks like the helicopter pilot is now trying to do an auto-rotation.
Friday, September 10, 2010
iPhone 4 price in India...
I have been itching to lay my hands on the iPhone 4.
But Apple's India pricing generally leaves me feeling very uncomfortable.
I have been trying to estimate what they are likely to set as the price for the iPhone 4.
The simplest way of doing this, I felt, was to see prices of other similar Apple products worldwide with those in India and work out some sort of "Apple exchange rate"(I call it that because Apple products in India are priced much higher than what they would be if one directly converted using the exchange rate. I am not sure whether its custom duties or arrogance or both)
Unfortunately, I cannot use the iPhone 3GS as a reference because Apple doesn't mention an official price for it on their India website. I need something which has readily available India and international prices.
The iPod Touch, 4th generation, is a good fit in that respect.
So I went ahead, comparing prices:
Dividing the INR price by the corresponding foreign currency price and averaging it allows me to work out the "Apple exchange rate" versus the actual exchange rate. Here are the rounded figures:
A glance tells me that Apple is kindest when it comes to Hong Kong, as far as pricing is concerned. The UK suffers the most.
Next step, work out the implied India iPhone 4 pricing using actual and Apple exchange rates. I have excluded the US since there is no non-contract iPhone 4 price available.
So the iPhones in India may be priced at 41k and 49k respectively. Startling differences here! If I were to believe in this study, buying the iPhone from Hong Kong, or even Singapore, makes a lot of sense. Theres a site called http://www.shopyourworld.com/shop/ which claims to ship iPhones from the UK; they are better off trying to get it from HK / Singapore (provided they have the necessary contacts)! Its an unlocked version that you get there (unlike the US) so no fuss about that either. So grab hold of that friend whos going to HK on a weekend trip, and save 11000 rupees! Of course, getting it into India is the tricky part. What customs duty will be applicable? I am honestly not aware. But I do know it will be difficult to stomach the ignominy of shelling out 41k for an iPhone 4 in India, knowing that the same thing costs 30k in the HK (and less than 41k throughout most of the world)
Why make Indians pay more, Mr Jobs?
But Apple's India pricing generally leaves me feeling very uncomfortable.
I have been trying to estimate what they are likely to set as the price for the iPhone 4.
The simplest way of doing this, I felt, was to see prices of other similar Apple products worldwide with those in India and work out some sort of "Apple exchange rate"(I call it that because Apple products in India are priced much higher than what they would be if one directly converted using the exchange rate. I am not sure whether its custom duties or arrogance or both)
Unfortunately, I cannot use the iPhone 3GS as a reference because Apple doesn't mention an official price for it on their India website. I need something which has readily available India and international prices.
The iPod Touch, 4th generation, is a good fit in that respect.
So I went ahead, comparing prices:
| iPod Touch | USD | HKD | SGD | GBP | INR |
| 8 GB | 229 | 1788 | 328 | 189 | 15400 |
| 32 GB | 299 | 2288 | 428 | 249 | 19900 |
| 64 GB | 399 | 3088 | 588 | 329 | 25900 |
Dividing the INR price by the corresponding foreign currency price and averaging it allows me to work out the "Apple exchange rate" versus the actual exchange rate. Here are the rounded figures:
| Actual Rate | Apple Rate | |
| USD-INR | 46.5 | 66 |
| GBP-INR | 72 | 80 |
| HKD-INR | 6 | 8.5 |
| SGD-INR | 35 | 46 |
A glance tells me that Apple is kindest when it comes to Hong Kong, as far as pricing is concerned. The UK suffers the most.
Next step, work out the implied India iPhone 4 pricing using actual and Apple exchange rates. I have excluded the US since there is no non-contract iPhone 4 price available.
| iPhone version | HKD | GBP | SGD | |||
| 16 GB | 4988 | 499 | 888 | |||
| 32 GB | 5888 | 599 | 1048 | |||
| INR -Actual Exchange Rates | INR - Apple Exchange Rates | |||||
| HKD | GBP | SGD | HKD | GBP | SGD | Likely Price |
| 29928 | 35928 | 31080 | 42398 | 39920 | 40848 | 41000 |
| 35328 | 43128 | 36680 | 50048 | 47920 | 48208 | 49000 |
Why make Indians pay more, Mr Jobs?
Thursday, September 9, 2010
Ekonomikrisis - 9th September, 2010
Keeping a promise made long back to myself, I shall try and post my views on economics, financial markets and the rest regularly. Please feel free to contribute, debate, challenge and criticize.
I am fairly puzzled by the recent rally in financial asset markets, Indian equities in particular. Given the current state of things, one can always work out the reasons backwards, but to have predicted that this would have happened was, as always, difficult. I used to laugh on seeing the views touted by the retail gurus on CNBC, but so far they have been right and I have been wrong. Therefore I am forced to accept that somewhere the linkages of cause and effect as imagined by me have been incorrect.
While I am quietly confident about the prospects of economic growth in India, I am not overtly bullish the way other market participants seem to be. We have a long way to go, in many aspects, before we can really claim the coveted tag of an economic superpower. And to my mind there are obstacles right now which make unbridled growth in India seem like a pipe dream.
First, there is inflation. One can refer to innumerable examples in economic history which show that inflationary growth is unsustainable. Despite inflation hitting lows in the developed economies (the reasons for which are totally different) and remaining reasonably stable in India's "peer group" i.e. other emerging countries, India continues to suffer from high inflation. A recent article by the Peterson Institute blames this on asset price inflation (land in particular) and I am inclined to agree with them. Flats in Powai are selling for 15000 rupees a square feet. I heard of a recent sale of a flat in Bandra for 11 crores at a rate of close to 65000 per square feet! Of course it is too chauvinistic to extrapolate from Mumbai anecdotes and generalize them for the whole of India, but it does put things in perspective. Indian equities enjoy a premium of as much as 40% over bottom up valuations, as per some equity analysts. But the market continues to clear because everyone wants a slice of the pie - every financial asset manager has some portion of his money in India. Apart from asset prices, another culprit has been food price inflation. Some people are willing to take a call that with the monsoons doing well, food price inflation is likely to subside. However, I am not as sanguine because the world's supply of food continues to teeter on the edge with respect to the demand. With disturbing weather patterns and increasing protectionism, things may not be as simple.
And the RBI is not able to help as much as it would like to. They view the problem of inflation in India as partly structural due to intrinsic capacity constraints. Additionally, a lot of the country's financing needs are met outside the regulated financial system. Variations in the benchmark policy rates doesn't help them because they are dependent on an inelastic, exorbitant system of financing through local moneylenders and the like.
Compounding the RBIs problems is the fact that we have witnessed the worst recession since the Great Depression and a reasonably sharp recovery in less than 2 years. The strong action taken by policymakers post the Great Recession of 2008 has stopped the pain temporarily at least, but also confused everyone as to where in the economic cycle we stand currently. Thus, the RBI is forced to lag the monetary tightening cycle, taking baby steps as it tries to evaluate where the world and India stand. Short term real interest rates are negative, with inflation at 10% and one year deposit rates around 6%.
Coming to the second point - the fiscal deficit. One of the lessons from the Great Recession has been that governments should learn to run a proactive countercyclical fiscal policy. Essentially they should act like the proverbial ants in the ants and the grasshopper story. When the country is growing well, the government should minimize spending and borrow less, thereby keeping some cushion for it to act with force in times of crisis. In times of a recession, the government can borrow more and spend more, keeping the economy going.
The current government had an excellent opportunity to do that. With the money coming in from the 3G auctions and PSU disinvestments, plus overall robust tax collections, they could have cut down on the huge debt to GDP ratio (which is actually amongst the worst in the world) and built up a war chest to help the nation in times of strife. During the recession, they increased the fiscal deficit to support the economy, which was necessary. Unfortunately they are not reducing the fiscal deficit now. They continue to succumb to populist measures and increase spending and subsidies. I remember Mr Willem Buiter, Citigroup's Chief Economist, mentioning in a talk: The Indian government subsidizes its borrowings by various means such as the SLR (Statutory Liquidity Ratio) requirement on banks, which ensures that there is a forced market ready to buy government bonds.
If one looks at the implications of the inflationary scenario and the tepid fiscal outlook, there is a case for saying that India's interest rates currently are much lower than what they should be. Things are unlikely to continue as they are for an extended period. Something's going to give.
The third point is India's current account deficit. India has historically had a current account deficit post Independence (somewhat paradoxical for a nation that in the past few thousand years was one of the lynchpins of global trade). The Indian economy was highly insular. As mentioned by Paul Krugman, India had a philosophy of trying to meet all its requirements internally, even if it was at a tremendous cost disadvantage, where free trade would have made sense. It is only in the past 10 years or so that software exports and capital flows have provided some semblance to the deficit. India is still forced to import much of its oil requirements and capital goods. Currently, India is able to just about finance the current account deficit (i.e. meet its foreign exchange requirements) through the capital account. Woe betide us if the world economy goes into a crisis mode again, for all the capital that we are enjoying right now will fly away in no time. The only positive, in a perverted manner of speaking, will be that our own growth will also suffer, bringing down the oil and capital goods imports and easing pressure on the balance of payments.
So yes, I am positive on the Indian economy. But I can't put blinkers over my eyes and declare that there is nothing rotten in the state of Denmark. Its probably the time to be calfish, not bullish.
I am fairly puzzled by the recent rally in financial asset markets, Indian equities in particular. Given the current state of things, one can always work out the reasons backwards, but to have predicted that this would have happened was, as always, difficult. I used to laugh on seeing the views touted by the retail gurus on CNBC, but so far they have been right and I have been wrong. Therefore I am forced to accept that somewhere the linkages of cause and effect as imagined by me have been incorrect.
While I am quietly confident about the prospects of economic growth in India, I am not overtly bullish the way other market participants seem to be. We have a long way to go, in many aspects, before we can really claim the coveted tag of an economic superpower. And to my mind there are obstacles right now which make unbridled growth in India seem like a pipe dream.
First, there is inflation. One can refer to innumerable examples in economic history which show that inflationary growth is unsustainable. Despite inflation hitting lows in the developed economies (the reasons for which are totally different) and remaining reasonably stable in India's "peer group" i.e. other emerging countries, India continues to suffer from high inflation. A recent article by the Peterson Institute blames this on asset price inflation (land in particular) and I am inclined to agree with them. Flats in Powai are selling for 15000 rupees a square feet. I heard of a recent sale of a flat in Bandra for 11 crores at a rate of close to 65000 per square feet! Of course it is too chauvinistic to extrapolate from Mumbai anecdotes and generalize them for the whole of India, but it does put things in perspective. Indian equities enjoy a premium of as much as 40% over bottom up valuations, as per some equity analysts. But the market continues to clear because everyone wants a slice of the pie - every financial asset manager has some portion of his money in India. Apart from asset prices, another culprit has been food price inflation. Some people are willing to take a call that with the monsoons doing well, food price inflation is likely to subside. However, I am not as sanguine because the world's supply of food continues to teeter on the edge with respect to the demand. With disturbing weather patterns and increasing protectionism, things may not be as simple.
And the RBI is not able to help as much as it would like to. They view the problem of inflation in India as partly structural due to intrinsic capacity constraints. Additionally, a lot of the country's financing needs are met outside the regulated financial system. Variations in the benchmark policy rates doesn't help them because they are dependent on an inelastic, exorbitant system of financing through local moneylenders and the like.
Compounding the RBIs problems is the fact that we have witnessed the worst recession since the Great Depression and a reasonably sharp recovery in less than 2 years. The strong action taken by policymakers post the Great Recession of 2008 has stopped the pain temporarily at least, but also confused everyone as to where in the economic cycle we stand currently. Thus, the RBI is forced to lag the monetary tightening cycle, taking baby steps as it tries to evaluate where the world and India stand. Short term real interest rates are negative, with inflation at 10% and one year deposit rates around 6%.
Coming to the second point - the fiscal deficit. One of the lessons from the Great Recession has been that governments should learn to run a proactive countercyclical fiscal policy. Essentially they should act like the proverbial ants in the ants and the grasshopper story. When the country is growing well, the government should minimize spending and borrow less, thereby keeping some cushion for it to act with force in times of crisis. In times of a recession, the government can borrow more and spend more, keeping the economy going.
The current government had an excellent opportunity to do that. With the money coming in from the 3G auctions and PSU disinvestments, plus overall robust tax collections, they could have cut down on the huge debt to GDP ratio (which is actually amongst the worst in the world) and built up a war chest to help the nation in times of strife. During the recession, they increased the fiscal deficit to support the economy, which was necessary. Unfortunately they are not reducing the fiscal deficit now. They continue to succumb to populist measures and increase spending and subsidies. I remember Mr Willem Buiter, Citigroup's Chief Economist, mentioning in a talk: The Indian government subsidizes its borrowings by various means such as the SLR (Statutory Liquidity Ratio) requirement on banks, which ensures that there is a forced market ready to buy government bonds.
If one looks at the implications of the inflationary scenario and the tepid fiscal outlook, there is a case for saying that India's interest rates currently are much lower than what they should be. Things are unlikely to continue as they are for an extended period. Something's going to give.
The third point is India's current account deficit. India has historically had a current account deficit post Independence (somewhat paradoxical for a nation that in the past few thousand years was one of the lynchpins of global trade). The Indian economy was highly insular. As mentioned by Paul Krugman, India had a philosophy of trying to meet all its requirements internally, even if it was at a tremendous cost disadvantage, where free trade would have made sense. It is only in the past 10 years or so that software exports and capital flows have provided some semblance to the deficit. India is still forced to import much of its oil requirements and capital goods. Currently, India is able to just about finance the current account deficit (i.e. meet its foreign exchange requirements) through the capital account. Woe betide us if the world economy goes into a crisis mode again, for all the capital that we are enjoying right now will fly away in no time. The only positive, in a perverted manner of speaking, will be that our own growth will also suffer, bringing down the oil and capital goods imports and easing pressure on the balance of payments.
So yes, I am positive on the Indian economy. But I can't put blinkers over my eyes and declare that there is nothing rotten in the state of Denmark. Its probably the time to be calfish, not bullish.
Friday, June 4, 2010
Generating Financial Headlines...
Today, a senior colleague sent across a brilliant compilation. This whole blog is dedicated to him. I reproduce the compilation here:
Column 1: US, China, Asia, Europe, World
Column 2: Stocks, Bonds, Commodities, Markets, Banks, Economy, Currencies
Column 3: Soar, Rise, Slide, Plummet, Drop, Fall, Correct, Rally, Dip
Column 4: On
Column 5: Job, Euro, China, US, Credit, Consumption, Bank, Economic, Consumption, Production, Demand, Supply
Column 6: Fears, Growth, Expectations, Concerns, Easing, Failures, Tightening, Rise, Fall, Devaluation, Intervention
Well, whats so great, you ask? Just pick a word from each column, and there you have it folks - your very own Financial Headline Generator! It actually works! Try it!
Example 1: US Stocks Fall On Consumption Fears
Example 2: European Banks Rally On China Demand Growth
As you may realise, a leading news and data provider website is a leading proponent of this approach...No prizes for guessing which one!
Its a fairly comprehensive approach too and works well even when one doesn't have a clue about financial markets! Just take a region, a market, a movement verb, and a cause. Repeat ad infinitum!
Sometimes, the zeal with which news providers seach for causes in trying to explain market movements, is simply exasperating. Much of the time, market movements may not have a particular driving reason - it just happens that a combination of bids and offers makes markets move that way!
But the human mind seeks explanations, preferring a simplified single dominant cause for the observed behaviour, rather than realising that thousands of exiguous threads of action and reaction came together to produce that behaviour.
Onward then...
World Markets Fall On Production Devaluation...
(If that didn't make sense, well, thats the point!)
Column 1: US, China, Asia, Europe, World
Column 2: Stocks, Bonds, Commodities, Markets, Banks, Economy, Currencies
Column 3: Soar, Rise, Slide, Plummet, Drop, Fall, Correct, Rally, Dip
Column 4: On
Column 5: Job, Euro, China, US, Credit, Consumption, Bank, Economic, Consumption, Production, Demand, Supply
Column 6: Fears, Growth, Expectations, Concerns, Easing, Failures, Tightening, Rise, Fall, Devaluation, Intervention
Well, whats so great, you ask? Just pick a word from each column, and there you have it folks - your very own Financial Headline Generator! It actually works! Try it!
Example 1: US Stocks Fall On Consumption Fears
Example 2: European Banks Rally On China Demand Growth
As you may realise, a leading news and data provider website is a leading proponent of this approach...No prizes for guessing which one!
Its a fairly comprehensive approach too and works well even when one doesn't have a clue about financial markets! Just take a region, a market, a movement verb, and a cause. Repeat ad infinitum!
Sometimes, the zeal with which news providers seach for causes in trying to explain market movements, is simply exasperating. Much of the time, market movements may not have a particular driving reason - it just happens that a combination of bids and offers makes markets move that way!
But the human mind seeks explanations, preferring a simplified single dominant cause for the observed behaviour, rather than realising that thousands of exiguous threads of action and reaction came together to produce that behaviour.
Onward then...
World Markets Fall On Production Devaluation...
(If that didn't make sense, well, thats the point!)
Wednesday, April 14, 2010
IPL Tickets & Price Discrimination
An office discussion on the availability of tickets for the IPL final (which are already sold out) started this particular train of thought.
There is a concept known as price discrimination in economics. Roughly it means that people end up buying identical goods or services at different prices from the same provider, which may happen due to a variety of reasons.
We witness price discrimination in various forms and various markets. Different consumers attach different values to the same or similar products or services. Thus, different people are willing to pay different prices for a product / service which costs the same. Thus, if a seller wishes to maximise her profits, she should sell the product / service to each customer at the price which the customer wants to pay. However, in a perfect market, this will not happen and the goods or services get transacted at the market clearing price (where supply meets demand). The difference between what the consumer is willing to pay and what she ends up paying (if its less) is called consumer surplus.
However, under certain conditions, sellers may be able to practice price discrimination i.e. charging different prices for exactly the same product / service. Usually such price discrimination can arises and be sustained much more easily in a market with one / few players where the goods or services are non-transferable and non-replicable. It arises much more frequently in services rather than goods markets because services are far likelier to be non-transferable and non-replicable.
The best everyday example of such price discrimination is air tickets. An air ticket represents the right to travel from one place to another on a particular date and at a particular time. It meets all the requirements stated above:
1) The experience and process of travelling from a particular place to another on a particular time and date is non-replicable
2) Once the ticket is bought in someone's name and assuming suitable measures are in place to prevent someone else from travelling using that ticket, it becomes non-transferable
3) The number of players is few
4) Information about pricing from the cost side is relatively restricted. You don't know what the airline is looking at when it's setting the price for its tickets. Hence you cannot really negotiate with it. You only know how much the journey is worth to you and hence how much (upto a certain maximum) you would be willing to pay for it.
5) The value attached by different people for the same journey will be different.
I have been wondering whether there was a case for the IPL organisers to do something similar with the pricing for IPL tickets.
The current pricing incorporates some amount of price discrimination, which is common to almost any live performance anywhere i.e. differential pricing based on the seating arrangements. So you will have your common stands (by which I mean those contiguous blocks of concrete), stands with chairs, executive lounges, closed AC boxes, pavilion stands etc
Note that here the difference in prices usually does not correspond to the difference in costs. In certain categories e.g. stands with chairs and common stands, there may not be any difference in the running costs at all. Still the prices will be substantially different.
Going a step further, perhaps the IPL guys could have employed price discrimination by keeping the price within a particular category variable. A simple numerical example may make it clearer:
Let us say they have 10,000 seats to offer. Right now they have priced each ticket at Rs 1000. Assuming the match had a full house, they earned 10,000 * 1000. Note that here each of those 10,000 people who bought tickets was willing to pay a minimum of Rs 1000 to watch the match.
Now lets say they introduce a jump of Rs 100 in the price for every 10% of tickets booked.
So the first 1000 tickets get sold at Rs 1000
The next 1000 at 1100
The next 1000 at 1200
And so on. They will then earn an average of 1450 per ticket sold i.e. 1450 * 10,000
Of course, this is an oversimplification. The pricing algorithm will need to be much more robust. But the basic point remains that it could have been employed.
The most important requirement here is that there should be a sufficient number of buyers at the highest prices also. So it may end up as a tapering structure with less buyers at every price level as it goes higher.
They would have had to work really hard to ensure that they get the demand curve right.
Further, in case of matches with high demand, they would have pocketed the profits which black marketeers would otherwise earn! Funnily enough, when demand is sufficiently skewed, black marketeers ensure higher economic efficiency by pocketing the consumer surplus, which would otherwise be lost!
Lots of caveats / restrictions / difficulties in this:
1) Numbers. An average plan carries 200 odd passengers. Here the number of people for each match is in thousands. However at the end of the day, its only computers doing the job so shouldn't really matter. And even in case of airlines with 30-40 flights a day, each such airlines is doing this for 6000-8000 seats daily and around 2 lakh monthly! So it may not be that bad really.
2) Regulatory restrictions - I am frankly not aware whether there are any laws or restrictions which prevent this.
3) Basic consumer perceptions - Discriminatory pricing is accepted by the public in airline tickets. I am not sure how they would perceive it for cricket matches.
4) Non-transferability - This is arguably the most important point. If the tickets are transferable then arbitrage is possible. Lets say I buy a ticket at 1000. Now the IPL website is selling tickets at 1100. If the tickets are transferable, I can sell it to someone else at 1099 and he would still buy it from me. However eventually, with enough genuine demand (i.e. people want to see the matches and hence do not sell tickets to make profits) and the right pricing, such resale may eventually get over and the fresh set of people would then need to buy from the IPL website itself.
They could have at least experimented with price discrimination in a smaller way.
A simple way to do this, in my opinion, would have been to do a Tatkal kinda thing - opening bookings for a limited number of seats say one day before the match. Price discrimination would be more acceptable and easier to implement in such a situation.
Comments and criticism most welcome.
There is a concept known as price discrimination in economics. Roughly it means that people end up buying identical goods or services at different prices from the same provider, which may happen due to a variety of reasons.
We witness price discrimination in various forms and various markets. Different consumers attach different values to the same or similar products or services. Thus, different people are willing to pay different prices for a product / service which costs the same. Thus, if a seller wishes to maximise her profits, she should sell the product / service to each customer at the price which the customer wants to pay. However, in a perfect market, this will not happen and the goods or services get transacted at the market clearing price (where supply meets demand). The difference between what the consumer is willing to pay and what she ends up paying (if its less) is called consumer surplus.
However, under certain conditions, sellers may be able to practice price discrimination i.e. charging different prices for exactly the same product / service. Usually such price discrimination can arises and be sustained much more easily in a market with one / few players where the goods or services are non-transferable and non-replicable. It arises much more frequently in services rather than goods markets because services are far likelier to be non-transferable and non-replicable.
The best everyday example of such price discrimination is air tickets. An air ticket represents the right to travel from one place to another on a particular date and at a particular time. It meets all the requirements stated above:
1) The experience and process of travelling from a particular place to another on a particular time and date is non-replicable
2) Once the ticket is bought in someone's name and assuming suitable measures are in place to prevent someone else from travelling using that ticket, it becomes non-transferable
3) The number of players is few
4) Information about pricing from the cost side is relatively restricted. You don't know what the airline is looking at when it's setting the price for its tickets. Hence you cannot really negotiate with it. You only know how much the journey is worth to you and hence how much (upto a certain maximum) you would be willing to pay for it.
5) The value attached by different people for the same journey will be different.
I have been wondering whether there was a case for the IPL organisers to do something similar with the pricing for IPL tickets.
The current pricing incorporates some amount of price discrimination, which is common to almost any live performance anywhere i.e. differential pricing based on the seating arrangements. So you will have your common stands (by which I mean those contiguous blocks of concrete), stands with chairs, executive lounges, closed AC boxes, pavilion stands etc
Note that here the difference in prices usually does not correspond to the difference in costs. In certain categories e.g. stands with chairs and common stands, there may not be any difference in the running costs at all. Still the prices will be substantially different.
Going a step further, perhaps the IPL guys could have employed price discrimination by keeping the price within a particular category variable. A simple numerical example may make it clearer:
Let us say they have 10,000 seats to offer. Right now they have priced each ticket at Rs 1000. Assuming the match had a full house, they earned 10,000 * 1000. Note that here each of those 10,000 people who bought tickets was willing to pay a minimum of Rs 1000 to watch the match.
Now lets say they introduce a jump of Rs 100 in the price for every 10% of tickets booked.
So the first 1000 tickets get sold at Rs 1000
The next 1000 at 1100
The next 1000 at 1200
And so on. They will then earn an average of 1450 per ticket sold i.e. 1450 * 10,000
Of course, this is an oversimplification. The pricing algorithm will need to be much more robust. But the basic point remains that it could have been employed.
The most important requirement here is that there should be a sufficient number of buyers at the highest prices also. So it may end up as a tapering structure with less buyers at every price level as it goes higher.
They would have had to work really hard to ensure that they get the demand curve right.
Further, in case of matches with high demand, they would have pocketed the profits which black marketeers would otherwise earn! Funnily enough, when demand is sufficiently skewed, black marketeers ensure higher economic efficiency by pocketing the consumer surplus, which would otherwise be lost!
Lots of caveats / restrictions / difficulties in this:
1) Numbers. An average plan carries 200 odd passengers. Here the number of people for each match is in thousands. However at the end of the day, its only computers doing the job so shouldn't really matter. And even in case of airlines with 30-40 flights a day, each such airlines is doing this for 6000-8000 seats daily and around 2 lakh monthly! So it may not be that bad really.
2) Regulatory restrictions - I am frankly not aware whether there are any laws or restrictions which prevent this.
3) Basic consumer perceptions - Discriminatory pricing is accepted by the public in airline tickets. I am not sure how they would perceive it for cricket matches.
4) Non-transferability - This is arguably the most important point. If the tickets are transferable then arbitrage is possible. Lets say I buy a ticket at 1000. Now the IPL website is selling tickets at 1100. If the tickets are transferable, I can sell it to someone else at 1099 and he would still buy it from me. However eventually, with enough genuine demand (i.e. people want to see the matches and hence do not sell tickets to make profits) and the right pricing, such resale may eventually get over and the fresh set of people would then need to buy from the IPL website itself.
They could have at least experimented with price discrimination in a smaller way.
A simple way to do this, in my opinion, would have been to do a Tatkal kinda thing - opening bookings for a limited number of seats say one day before the match. Price discrimination would be more acceptable and easier to implement in such a situation.
Comments and criticism most welcome.
Monday, April 12, 2010
Grecian Gyrations
At last, a bailout (albeit one with a suspect emergency cord and a few holes in the lining):
http://www.independent.co.uk/news/business/news/eurozone-ministers-agree-euro30bn-rescue-for-greece-1942272.html
Those wondering what the fuss is all about can take a look here: http://www.reuters.com/article/idUSTRE63531A20100406
The last part of this saga is that on Friday, Fitch downgraded Greece to a BBB- rating from a BBB+ (which is the last investment grade rating) with a negative outlook.
Its been an interesting experience for people like me, for whom "BB" till a few years back referred to an obscure soap brand whose ads were broadcast on All India Radio.
Within the daily ups and downs of the financial markets, the Euro Zone stands out as a very absorbing and challenging case study in itself. A union which would have seemed almost impossible at one point of time, hailed for giving the first real competitor to the US dollar, bringing prosperity to Europe and boosting European & World trade. Or did it really? Did it instead end up fuelling a vicious cycle of excessive leverage (debt) in the southern peripheral economies which lost no time in using the drastically reduced borrowing costs to their advantage in building an unsustainable growth cycle of consumption and housing booms?
Unfortunately, one thing I have learnt in this field is that skeletons may be shoved into cupboards, but they have an unfortunate propensity to smell and tumble out with alarming alacrity, sooner or later. Greece is no exception.
This tiny nation of a few million people has become the focal point and unwilling poster boy for the excesses of a system which was in all probability not the wisest of choices in the first place. Of course, its much easier to be wiser after the event has occurred.
A few weeks back, George Soros wrote an interesting article in the Financial Times: http://www.ft.com/cms/s/0/88790e8e-1f16-11df-9584-00144feab49a.html
As he wrote: "The euro was a unique and unusual construction whose viability is now being tested. The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency."
Or as Joaquim Voth of the Barcelona GSE has written on his blog: "If history teaches you something, it's that countries will stick to a silly monetary standard for way too long, especially if it's seen as the ultimately proof of adulthood in terms of currency."
An obvious thing, but as someone has mentioned earlier, the world is full of obvious things which no one by any chance observes. The discussion on this can go on and on.
So, quo vadis, Euro? Remains to be seen, though the answer seems to be down for the time being.
And as for Greece? Heck, whats a sovereign here or a sovereign there?
http://www.independent.co.uk/news/business/news/eurozone-ministers-agree-euro30bn-rescue-for-greece-1942272.html
Those wondering what the fuss is all about can take a look here: http://www.reuters.com/article/idUSTRE63531A20100406
The last part of this saga is that on Friday, Fitch downgraded Greece to a BBB- rating from a BBB+ (which is the last investment grade rating) with a negative outlook.
Its been an interesting experience for people like me, for whom "BB" till a few years back referred to an obscure soap brand whose ads were broadcast on All India Radio.
Within the daily ups and downs of the financial markets, the Euro Zone stands out as a very absorbing and challenging case study in itself. A union which would have seemed almost impossible at one point of time, hailed for giving the first real competitor to the US dollar, bringing prosperity to Europe and boosting European & World trade. Or did it really? Did it instead end up fuelling a vicious cycle of excessive leverage (debt) in the southern peripheral economies which lost no time in using the drastically reduced borrowing costs to their advantage in building an unsustainable growth cycle of consumption and housing booms?
Unfortunately, one thing I have learnt in this field is that skeletons may be shoved into cupboards, but they have an unfortunate propensity to smell and tumble out with alarming alacrity, sooner or later. Greece is no exception.
This tiny nation of a few million people has become the focal point and unwilling poster boy for the excesses of a system which was in all probability not the wisest of choices in the first place. Of course, its much easier to be wiser after the event has occurred.
A few weeks back, George Soros wrote an interesting article in the Financial Times: http://www.ft.com/cms/s/0/88790e8e-1f16-11df-9584-00144feab49a.html
As he wrote: "The euro was a unique and unusual construction whose viability is now being tested. The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency."
Or as Joaquim Voth of the Barcelona GSE has written on his blog: "If history teaches you something, it's that countries will stick to a silly monetary standard for way too long, especially if it's seen as the ultimately proof of adulthood in terms of currency."
An obvious thing, but as someone has mentioned earlier, the world is full of obvious things which no one by any chance observes. The discussion on this can go on and on.
So, quo vadis, Euro? Remains to be seen, though the answer seems to be down for the time being.
And as for Greece? Heck, whats a sovereign here or a sovereign there?
Sunday, April 11, 2010
The CFA - A Case For Hierarchical Certification?
A chat with a friend who is (somewhat dispassionately) preparing for his Level 3 CFA examination prompted this question in my mind.
A few lines from Wikipedia on the CFA designation: Chartered Financial Analyst (CFA) is an international professional designation offered by the American CFA Institute (formerly known as AIMR) to financial analysts who complete a series of three examinations. To become a CFA Charterholder candidates must pass each of three six-hour exams, possess a bachelor's degree (or equivalent, as assessed by CFA institute) and have 48 months of work experience in an investment decision-making position. CFA charterholders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct
Having seen many friends prepare for the examinations (and my own half-hearted attempt) I know for sure that the course coverage and subsequent examinations are tough and rigorous. This is the oldest designation of its kind and is well-respected. (The Wikipedia CFA link also has a list of the recognitions that this designation possesses)
However, having worked for two years now in a "finance" role, I am not sure of how much of a value add the CFA is. The reason is that it is simply not intended for everybody who wishes to be associated with a finance role. And there lies the tragedy, in India at least. We tend to have a penchant for degrees and qualifications. Any qualification seen as sufficiently prestigious is coveted (in fact, one reason for the mushrooming of MBAs, but more on that some other time)
There is no doubt that the CFA is A solid qualification. But whether it is THE solid qualification one needs is something that has to be carefully evaluated.
A mere glance at the Body of Knowledge tells us how focused a course this is:
http://www.cfainstitute.org/cfaprog/courseofstudy/topic.html
Another look at the exam area topic weights shows a marked progression from breadth across areas of finance to depth in studying asset classes and portfolio management: http://www.cfainstitute.org/cfaprog/courseofstudy/topicareaweights.html
It is totally intended for people who are looking for careers in investment research / management / banking & advisory. This is a very specific area of finance. Finance as a field is much broader. Consider:
- Commercial Banking
- Insurance
- Corporate Finance (borrowings, cash management)
- Domain Experts in Consulting / IT companies
Would CFA make a difference for people who are working in the above sectors? My sense is - not much unless they want to shift to the field of investments. Of course, one can argue at the end of the day that one will learn something BUT theres a huge cost - the programme requires intensive preparation and is not easy. Will they be able to reap benefits which justify those costs? Probably not. And yet, directly or indirectly, I hear of plenty of people preparing for it without having a clear idea of where it will take them.
In fact, I have often felt that the number of people who want to take the exams is actually higher. The 3 year period and the 4 years of work experience actually acts as a deterrent.
For the CFA institute, here lies a really good opportunity. If they can correctly gauge the latent demand in India and elsewhere for a good general finance degree which has international recognition and brand value, I am sure it will blow them away! What they can do is to offer the first two levels of the CFA charter as separate designations in their own right. This will ensure that the "CFA" designation brand doesn't get diluted
and at the same time there is enough of a delineation to satisfy the needs of all market segments.
By splitting the designations into a hierarchy, the CFA Institute will end up doing somewhat of a differentiation in segmentation rather than a one-size fits all approach. (I am sure there's a marketing term for what I am saying - can one of the marketing studs out there help me out?)There are examples of this in other fields. The one that comes to mind right now is the Cisco series of certifications in the field of computer networks. Those interested can check out: http://www.cisco.com/web/learning/le3/learning_career_certifications_and_learning_paths_home.html
Of course, such complexity may not be needed in case of the CFA.
One possible scheme of things could be:
The Chartered Financial Manager designation for people who have say 1-2 years of work experience and clear the CFA Level 1 examination. It would be targeted at and useful for all those looking at a designation which gives them a broad introduction to the field of Finance. This could actually act as a good competitor to the MBA (Finance) degree since it would be faster and hold its own in terms of brand value. It will be a good option for people looking for a more focused entry into financial management, as opposed to management in general.
The Chartered Financial Market Analyst designation for people who clear CFA Levels 1 & 2 and have say 2-3 years of work experience. It would be useful for all those looking at a designation connected with Financial Markets.
And finally, the CFA designation.
Done this way, more and more people will have an incentive to take up the CFA since they have an incentive as the effort and preparation for one examination is not wasted - they get some bang for the buck in the form of a separate recognition. No doubt one may argue that the difference is largely psychological - at the end of the day, a person can always mention in his / her CV that he / she cleared CFA Level 1. However, if you place yourself in the shoes of a prospective CFA candidate, this mere difference in terminology could prove to be a clever marketing tool which changes the perceptions of people about the programme drastically. The CFA institute will be able to attract a much wider base of candidates.
Are Mr John Rogers and the rest listening?
A few lines from Wikipedia on the CFA designation: Chartered Financial Analyst (CFA) is an international professional designation offered by the American CFA Institute (formerly known as AIMR) to financial analysts who complete a series of three examinations. To become a CFA Charterholder candidates must pass each of three six-hour exams, possess a bachelor's degree (or equivalent, as assessed by CFA institute) and have 48 months of work experience in an investment decision-making position. CFA charterholders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct
Having seen many friends prepare for the examinations (and my own half-hearted attempt) I know for sure that the course coverage and subsequent examinations are tough and rigorous. This is the oldest designation of its kind and is well-respected. (The Wikipedia CFA link also has a list of the recognitions that this designation possesses)
However, having worked for two years now in a "finance" role, I am not sure of how much of a value add the CFA is. The reason is that it is simply not intended for everybody who wishes to be associated with a finance role. And there lies the tragedy, in India at least. We tend to have a penchant for degrees and qualifications. Any qualification seen as sufficiently prestigious is coveted (in fact, one reason for the mushrooming of MBAs, but more on that some other time)
There is no doubt that the CFA is A solid qualification. But whether it is THE solid qualification one needs is something that has to be carefully evaluated.
A mere glance at the Body of Knowledge tells us how focused a course this is:
http://www.cfainstitute.org/cfaprog/courseofstudy/topic.html
Another look at the exam area topic weights shows a marked progression from breadth across areas of finance to depth in studying asset classes and portfolio management: http://www.cfainstitute.org/cfaprog/courseofstudy/topicareaweights.html
It is totally intended for people who are looking for careers in investment research / management / banking & advisory. This is a very specific area of finance. Finance as a field is much broader. Consider:
- Commercial Banking
- Insurance
- Corporate Finance (borrowings, cash management)
- Domain Experts in Consulting / IT companies
Would CFA make a difference for people who are working in the above sectors? My sense is - not much unless they want to shift to the field of investments. Of course, one can argue at the end of the day that one will learn something BUT theres a huge cost - the programme requires intensive preparation and is not easy. Will they be able to reap benefits which justify those costs? Probably not. And yet, directly or indirectly, I hear of plenty of people preparing for it without having a clear idea of where it will take them.
In fact, I have often felt that the number of people who want to take the exams is actually higher. The 3 year period and the 4 years of work experience actually acts as a deterrent.
For the CFA institute, here lies a really good opportunity. If they can correctly gauge the latent demand in India and elsewhere for a good general finance degree which has international recognition and brand value, I am sure it will blow them away! What they can do is to offer the first two levels of the CFA charter as separate designations in their own right. This will ensure that the "CFA" designation brand doesn't get diluted
and at the same time there is enough of a delineation to satisfy the needs of all market segments.
By splitting the designations into a hierarchy, the CFA Institute will end up doing somewhat of a differentiation in segmentation rather than a one-size fits all approach. (I am sure there's a marketing term for what I am saying - can one of the marketing studs out there help me out?)There are examples of this in other fields. The one that comes to mind right now is the Cisco series of certifications in the field of computer networks. Those interested can check out: http://www.cisco.com/web/learning/le3/learning_career_certifications_and_learning_paths_home.html
Of course, such complexity may not be needed in case of the CFA.
One possible scheme of things could be:
The Chartered Financial Manager designation for people who have say 1-2 years of work experience and clear the CFA Level 1 examination. It would be targeted at and useful for all those looking at a designation which gives them a broad introduction to the field of Finance. This could actually act as a good competitor to the MBA (Finance) degree since it would be faster and hold its own in terms of brand value. It will be a good option for people looking for a more focused entry into financial management, as opposed to management in general.
The Chartered Financial Market Analyst designation for people who clear CFA Levels 1 & 2 and have say 2-3 years of work experience. It would be useful for all those looking at a designation connected with Financial Markets.
And finally, the CFA designation.
Done this way, more and more people will have an incentive to take up the CFA since they have an incentive as the effort and preparation for one examination is not wasted - they get some bang for the buck in the form of a separate recognition. No doubt one may argue that the difference is largely psychological - at the end of the day, a person can always mention in his / her CV that he / she cleared CFA Level 1. However, if you place yourself in the shoes of a prospective CFA candidate, this mere difference in terminology could prove to be a clever marketing tool which changes the perceptions of people about the programme drastically. The CFA institute will be able to attract a much wider base of candidates.
Are Mr John Rogers and the rest listening?
Calling All Reflective Practitioners of Life...
I guess a blog of this sort was long overdue. I am not sure how this will pan out. I shall take refuge in recursive assertion and state:
This blog is what this blog does.
Onward, then...
This blog is what this blog does.
Onward, then...
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