This is not any
forward mail!
- How
to cope with tough economic times?
Definitely give this a read! Take the cue!
Play safe! Also look at the 8th point! Puzzled?
By now, not many people need a
reminder that
times are getting tougher. Unfortunately, I believe it is going to be
much worse before it gets better. We did not arrive at this moment
overnight, nor, as our Finance Minister insists, due to unforeseen
circumstances. It was a perfectly predictable sequence of events that
led to the present inflationary mess, and since our diagnosis of the
root cause is all wrong, most of the attempted remedies are going to
make the situation worse.
So what we can we do? Here are
some rough guiding principles. I
hope things won't be as bad as I say, but it is still worth being
prepared.
1. No IT professional
should assume that their paychecks will grow
the way they grew in the past 4-5 years. It is possible for paychecks
to stagnate, even fall.
2. No IT
professional should assume his or her job is perfectly
safe. This industry will likely witness layoffs. There are way too many
"make work" projects, and I hear repeatedly of people sitting on the
bench for months. We recently interviewed a candidate from a big name
firm, who has not even been given a computer, after 8 months on the
"job". Instead, he is asked to spend time in the library, improving his
knowledge. I also heard of people whose managers tell them "Look, I
don't have enough work myself, so why are you bothered?"
Our company has been prudent,
avoiding the kind of mass hiring
common in the industry. But we should not assume we are immune. After
all, our customers are not immune.
3. Prices of essential
commodities will likely increase even
further. Stagnating wages, sluggish job market and rising prices will
make for a miserable time. The best way to conquer this is to cut down
non-essential expenses. If you are the type of person who absolutely,
positively have to replace that cell phone every 6 months, even every
year, rethink your priorities in life. This is not to say you have to
become a sanyasi(n), but it is a useful practice to start living on
less. I assure you, it is fairly easy to train yourself to be frugal,
if you set your mind to it.
Start finding ways of enjoying
life without spending a lot of
money. For example, watch a movie at home with friends, rather than
blow money at Mayajaal. Eat with friends - but preferably do it at
home, with each person bringing one item. I learned all of these as a
PhD student on a stipend. You can enjoy life just as much, without
spending all that much money.
4. Cut down on driving - combine
trips, pool together with friends.
It will cut down your stress level, keep you safer, and also cut down
expenses.
5. Pay down your debts first.
Reducing debts is always good, but it is essential to face a downturn
well.
6. Wedding expenses: I know this
is a major source of spending for
many of us here. If you are a man, unilaterally tell the bride's family
to go easy on wedding expenses. Be a real man, offer to share the
expenses. Most importantly, restrain your own family from demanding the
moon - like that ultra-super-expensive music band for reception, that
super-premium caterer and so on. Yes, it takes some guts, but this is a
good time to display it. Your future wife will appreciate it.
If you are a woman, insist on a
simple wedding with your groom. If a
guy lacks the guts to accept it, reject him. You will save yourself a
life-time of trouble with a coward. Remember that there is a shortage
of girls, because of the fairly widespread practice of aborting female
fetuses, so you actually have leverage. Use it wisely.
7. After repaying debts, if you
have savings, buy some gold as a
hedge, particularly when gold prices dip. Not necessarily gold jewelry,
because that may be overpriced, but gold coins & bars. Gold is a
hedge against government making a total mess of things, which, alas, is
very likely.
Gold should
not be thought of as an investment - it is a way to safeguard your
savings from being destroyed by inflation. Gold prices can also fall, so do not buy gold
with borrowed money -
that would be very stupid. Instead, think of gold as an insurance
policy.
8. Those of you who come from
rural places, and have an
agricultural background,
think about buying a few acres of farm land, provided you do
not overpay for it.
This advice only applies if you actually have someone who can take care
of it, and actually farm it. If it costs Rs 15 lakhs an acre, it is not
farm land, it is speculation. Do not get deluded with "Velachery land
costs 20 crores per acre, and in my village it is only 20 lakhs an
acre, so it is a bargain". That is stupid thinking. I would buy only at
1-3 lakhs per acre - at which price you can actually eke out a profit
from agriculture, if you are careful.
I hope this helps.
And if you are still patient, here is his previous post!
The
most urgent economic problem facing India, and much of the world, today
is inflation. It is impacting even the upper middle-class, but it is
the poorest people who pay the biggest price. We hear our Finance
Minister, who I respect, but do not agree with, say this inflation
problem is due to oil prices, over which we have no control.
Unfortunately, he is taking a very short term view of this, as if this
inflation problem suddenly manifested itself in just the last 6 months,
and all the "growth" that happened in the previous 4 years had nothing
to do with present inflation. Sadly, our Finance Minister is not alone
in such thinking: much of the economic profession takes a very
blinkered view of reality, which is why we have such bad results in
spite or (or perhaps because of) having an economist as Prime Minister.
Let
us remember that just about a year ago (but it feels like a long, long
time ago, in another economic age altogether), the main "problem"
facing RBI and the finance ministry was rupee appreciation. This was
deemed a major problem in 2006/2007 period, and RBI actively intervened
to stop it, by buying up dollars. As a result, India sits on nearly 400
billion dollars of reserves. If any of you remember my blog posts at
that time, I said that this stupid RBI policy would unleash inflation,
which punishes the poor, all in the name of saving exports. That is
exactly what has come to pass.
Here
is the sequence: in response to the bursting of the dotcom/telecom
bubble in 2001, as well as the Sept 11 attacks, the US Federal Reserve,
fearing a huge recession, lowered interest rates to historically low
levels. This had the effect of creating a huge supply of dollars, which
Americans spent on imported goods & services. Indian exporters,
including companies like us, got some of those dollars. The low
interest rates in the US also caused a surge of investment flowing out
of US, seeking higher returns. This boosted foreign investment in
Indian stock market, as well as easy loans to Indian companies to
expand.
As
the dollars flooded in, the rupee started to appreciate. The exporters,
who had too much of a good thing going, lobbied to keep the rupee from
appreciating. Our Finance Minister, as well as the RBI, obliged, by
buying up dollars in massive quantities. As the RBI bought up the
dollars, it unleashed a flood of rupees, which at first found its way
to the stock market & then the real estate market. We saw a
historic real estate boom, which took prices in places like Velachery
to unheard of levels (nearly 5x in 5 years).
As
long as only the stock market & real estate was going up, the
government was feeling good, declaring victory. The general public also
felt good (at least those people who had the good luck to buy land or
houses before the prices increased so much). Exporters were happy too,
because they had got hooked on a cheap rupee to make their heavily
people-based business models work.
Alas,
that situation was not bound to last. The flood of dollars caused oil
prices to go up. If the Indian government had let the rupee appreciate,
we may have had a cushion to face the dollar-based oil price increase.
But we tied ourselves to the sinking dollar (sinking in terms of gold
& oil), letting the rupee sink with the dollar.
Eventually,
as it always does, the flood of rupees found its way to the prices of
goods & services. Wages rose by record percentages in India in the
last 2-3 years, and as the record amounts of money got spent, it pushed
up prices.
There
is nothing mysterious about this process at all. You create more money,
it causes prices to increase. The only thing that stumps people is that
this process works with a lag - it takes about 18 months for the effect
of increase in money supply to show up in general prices. We are at
that point now.
If
the government continues to print money, continues to keep interest
rates low, inflation will only get worse. The only solution is to
sharply hike interest rates, let the rupee appreciate, ignore the cries
of exporters. Inflation is a far, far worse problem than exporters
having to adjust to what is inevitable: wages go up, so they have to
get their people to be more productive, rather than simply adding
people to add revenue. Exporters have to do this anyway at some point,
so the sooner the better.
Alas,
I doubt this is going to happen. The government will try really bad
policies like price controls, and will make the situation worse. Price
controls will cause shortages (already regular petrol is disappearing
and only premium petrol is available, a direct result of price
controls). Get ready for a very bumpy road ahead.
How do you
survive this? Fortunately, this is simple, but only if you understand
what is simple:
1) Live for yourself only. Dont live
for others. This
might sound repulsive to many. Einstein said, one should see the world
through one's own eyes and feel it through one's own heart. In other
words, if you like wearing "suits", do so because you like it. Dont
wear it because others will like you wearing it. Be bold enough to say,
you cant go to the movie as it is expensive and youd rather wait for it
to be shown in "doordharshan".
2) Be debt free. Having debt
will expose you to "collection agencies" - who are rowdies. And in a
deflationary environment, the debt will consume huge amount of your
future earnings besides having destroyed your past savings. If you are
trapped in debt, the best scenario would be default on the debt and
play "hide and seek" with the bank. Some people find this immoral. But
then, isnt the Bank immoral to give you this loan through "printing
money/credit" i.e lending you money that they dont have in the first
place?
3) Learn to live within your means.
And anticipate that your incomes are going to continously fall because
of higher taxes, "inflation", falling salary (be ready to take
pay cut as having a job is much more relaxing than being jobless) etc.
i.e Be prepared to think that, few years from now, you might have
non-veg once a week or fortnightly. It will not be a daily affair
(these will definetely sound as a normal behavior to your grand
parents!). One should be willing to take this in pride rather than see
it as one's failure in life. The most powerful aspect of the deflation
is that it makes you feel powerless. Anything you do will tend to be
loss making!!
4) If you are smart and hold savings,
it is better to invest after the market stays in the bottom for 2 or 3
years!! In
1929, the stock market fell 80% (Iceland market fell 77% on just this
wednesday alone!!) - then went up 50%, then fell 45% and so on and
finally by 1935 it settled at 90% off the peak!! What will survive
after the crash (even with low stock price) are the higher stages
industry. Yet, today, those are the considered inferior to tech etc. Be
careful about catching falling knife. One has to be extremely lucky to
be profitable in this speculative market. Even folks who understood
deflation and made lot of money (google Jesse Livermore) in 1929 ended
up losing it later because of the high volatility which is the nature
of speculative market. I would not look at deflation as a "profitable
opportunity". Deflation is like someone pressing reset button -
everyone falls to ground zero either through regulation or through
simple debt deflation. What is the right asset to pick then will depend
on then govt regulations, people need etc.
5) Idle mind is the devils workshop: It
is even better to work in the farm fields rather than remain idle and
brood over the past!!
6) Buy some farmland now (2 acres?),
so that you are able to atleast feed yourself through zero budget
farming etc.
7) Franklin said, during times of financial crisis (he lived during
french revolution), rich men should hang togather or hang separately!!
So the key to "hang separately" is not to flaunt. Hoard essential
stuff, but dont let the neighbors be aware of it. Keep quite a bit of
"money under the mattress".
8)Just as financial markets are volatile, real economy will also be
volatile. i.e it will be like diesel shortages when it happened first
time, it was there for 3 days. Then it reappeared, more severely for
more days. And so on. Like wise, if you are hoarding food for a year,
replenish it whenever there is reappearance of food in the market
place. Be friendly with traders as
they will let you know where goods are. Also, you might be able to pay
a doctor visit with these hoarded stuff (this happens in all crisis) -
you dont necessarily need money!!
9) What is the safe store of your current savings will depend on one's
"level of paranoid" and ingenuity. Gold investments can go bad because
it can be stolen or you could end up buying fake gold and so on. Farm
land in remote areas at 25K/acre could be good asset provided you are
willing to travel that far to take care of it. You
can probably buy fish farms or other nature based industry on the cheap
as the credit crisis tightens and hopefully you have access to cash
while that is credit tightens etc.
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