Learning by Proxy | The name is bond

Bonds have the power to move all markets, including currency and equity. Deliverance is going to arrive, eventually.

The name is bond - sovereign bond. Equity investors have escaped unscathed through the pandemic, thanks to the fact that government stimulus put money in several pockets. Now, the bonds that were used to borrow that money might be the cause for concern!

Bond

I used to think that if there was reincarnation; I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody. ~ James Carville, Political Adviser to Bill Clinton.

I had mentioned the bond market in the edition called Debt-rimential Budget.

Equity and debt are two of the most liquid financial assets that anyone can invest in. They are both market-based and their prices keep changing. Debt assets, especially government bonds, are considered far more secure than equity assets which are exposed to the moods of the market and more recently Reddit groups.

A bond is a loan given to an entity at a particular coupon rate (interest rate), in market parlance, it is also called Bond Yield. The face value is the sum of loan the bond represents. So say the face value of a 10-year bond issued in 2020 is $100. When the bond matures in 2030, you will be paid back $100 by the government. If the bond yield is 3%. The issuer will have to pay you $3 every year as interest.

For bonds that are traded on the market, the coupon rate keeps changing as per the market conditions. As bond yield rises, the cost of borrowing for a country rises and the returns on the bond increases.

As bond yield rises, the cost of buying the bond increases because demand increases. The bond may be sold at a premium over the face value or a discount based on demand. As the price of the bond rises, at some point, it no longer makes sense to buy the bond because the premium paid makes up for the higher interest rates.

Since Bonds are backed by the government, there is a certainty of return as compared to equity markets. So when bond yields rise, equity takes a beating.

In the US,

The benchmark bond (10-year tenor) yields had fallen to 5.6 percent during the peak of the pandemic crisis but have since been rising and jumped 31 bps since the Budget. Year to date, the yields have crept up 16 bps in 2021 so far.

Acuit Ratings now expects the 10-year sovereign yields to rise from 6 percent in March 2021 to 6.40 percent by March 2022 given that the Reserve Bank of India may hike repo rate by 25 bps going forward given the likely rate and liquidity normalisation expected next fiscal.

Source: Indian Express

Now let us welcome inflation and currency prices. Inflation is the measure of increase in cost. A return is only significant if the return is significantly above inflation. If not, you are losing money as the cost is rising faster than the amount of money you are making. Currently, inflation across the western world is low, so Bonds make sense.

Currency prices are counter balanced against demand and supply. If a lot of American funds were looking to invest in the Indian stock market, they sell dollars to buy rupees and invest in India. This causes demand for Indian Rupee and therefore a strengthening of the Indian Rupee against the US Dollar.

On Friday, the benchmark Sensex fell 1,939 points, or 3.78%, to 49,099.99, the biggest daily drop since 4 May 2020. The 50-share Nifty index declined 3.78% to 14,529, led by banks and financial services stocks. The impact on the broader market was less severe, with both Nifty Midcap and Nifty Smallcap falling by 1.6% and 1.2%, respectively.

Indian shares fell in line with Thursday’s rout in the US after Treasury yields rose to their highest level in a year. The spike in yields and the subsequent global stocks rout drew comparisons to the 2013 taper tantrum when the US Federal Reserve announced that it would reduce the pace of bond purchases as part of the unwinding of its quantitative easing programme.

Source: Hindustan Times

And with that exodus of money from equity to bond, there was also a lot of Dollars that exited the Indian economy, increasing the demand for Dollar and reducing the demand for the Indian Rupee.

The rupee plunged the most in about 11 months after US treasury yields surged to their highest in a year, triggering concerns that increasing cost of funds stateside could accelerate outflows from emerging markets such as India. The local unit lost nearly 1.5 percent, the sharpest drop in value against the dollar since March 23, the day when New Delhi imposed a nationwide lockdown last year to prevent the virus from spreading. It closed at 73.47.

Source: Times of India

A lot of the growth in most economies has been powered by stimulus cheques and with the $1.9 Billion stimulus bill likely to pass in the next few weeks, equities will jump again. What will happen once that money runs out?

With bond yields rising across the globe, we are going to be in for some volatile times for the stock exchange.

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Social Media Regulation

Everyone has a problem with Social Media. Social Media has fast become a vector for information and disinformation.

What is information? And what is disinformation? Depends on who you ask.

The Indian government announced a Code of Ethics for Social Media and OTT.

IT minister, Ravi Shankar Prasad, briefed the media about the Code of Ethics and self-regulation for social media content including streaming platforms, especially over-the-top (OTT) platforms.

Social media is welcome to do business but must not overrule the dignity of civilised existence, he added. “The government welcomes criticism and right to dissent, but it is very important for the users of social media to have a forum to raise their grievance against the misuse of social media,” RS Prasad said.

Source: Livemint

But in the name of civility, there is a possibility that speech itself can end up getting curtailed.

Their privacy policy agreements will have to inform users to not upload, publish, share information that is defamatory, obscene, patently false or misleading, etc. They’ll need to set up a grievance redressal mechanism for resolving user complaints. A grievance officer must be appointed to acknowledge the complaint within 24 hours and resolve it within 15 days from its receipt. In case due diligence is not followed by the intermediary, safe harbour provisions under the IT Act will not apply to it.

They’ll also have to take down unlawful information basis a court direction or a government agency’s order.

Source: Quint

While on the surface this looks benign, over the past weeks the government has forced twitter to ban thousands of accounts that were tweeting posts that were unflattering to the government.

This takes us back to the question this post began with. What is disinformation? Who will be the judge of it? Can it be judged within 15 days? Also, it gives the government agencies sweeping power on something that cannot be determined for certain.

What is misleading?

As the recently concluded case between M.J. Akbar and Priya Ramani shows, what one side sees as defamatory can just be the statement of truth.

Facebook is none too happy.

According to sources, who spoke on the condition of anonymity, the social media giant is going to challenge the section of the recently released guidelines that requires social media platforms to identify — upon receiving orders from a court or the government — the ‘first originator’ of information, which the government feels could jeopardise the sovereignty and integrity of India, or includes sexually explicit or child sexual abuse material. This section, according to the source, will require the company to remove the end-to-end (E2E) encryption for chats.

Source: Inc42

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Khashoggi

In 2018, a Saudi Washington Post journalist who was highly critical of the government was murdered at the Saudi Embassy in Turkey. His death and the methods used to kill him were an open secret. It was obvious to everyone tracking the news, what had happened.

At the time,

President Trump defied the nation’s intelligence agencies and a growing body of evidence on Tuesday to declare his unswerving loyalty to Saudi Arabia, asserting that Crown Prince Mohammed bin Salman’s culpability for the killing of Jamal Khashoggi might never be known.

[...]

Punishing Saudi Arabia, Mr. Trump said, would put at risk $110 billion in military sales to Boeing, Lockheed Martin, Raytheon and other military contractors, as well as $340 billion in other investments, which the Saudis have agreed to make since he became president.

Source: New York Times

So, it came as no surprise when the documents were declassified last week.

Crown Prince Mohammed bin Salman of Saudi Arabia approved the assassination of the Washington Post journalist Jamal Khashoggi in 2018, according to an intelligence report that the Biden administration released on Friday that offered the world a reminder of the brutal killing.

An elite team of operatives helped carry out the killing, the report said. The team reported directly to Prince Mohammed, who cultivated a climate of fear that made it unlikely for aides to act without his consent, according to the report. It omitted the brutal details of Mr. Khashoggi’s death, including the dismemberment of his body with a bone saw after Saudi officials lured him to their consulate in Istanbul.

Source: New York Times

There will be consequences, some thought. And then...

President Biden has decided that the diplomatic cost of directly penalizing Saudi Arabia’s crown prince, Mohammed bin Salman, is too high, according to senior administration officials, despite a detailed American intelligence finding that he directly approved the killing of Jamal Khashoggi, the dissident and Washington Post columnist who was drugged and dismembered in October 2018.

The decision by Mr. Biden, who during the 2020 campaign called Saudi Arabia a “pariah” state with “no redeeming social value,” came after weeks of debate in which his newly formed national security team advised him that there was no way to formally bar the heir to the Saudi crown from entering the United States, or to weigh criminal charges against him, without breaching the relationship with one of America’s key Arab allies.

Source: New York Times

There is one key difference between what Trump said and what Biden said - Trump could own it. To say that it was all about the money and everything else could be swept under the carpet.

They are all cut out of the same cloth.

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Corporate Greenwashing

Greenwashing is conveying a false impression or providing misleading information about how a company’s products are more environmentally sound.

Reliance is turning into a visionary investment company that deploys funding into concepts that have been 30 years in incubation!

Mukesh Ambani has yet again displayed his seriousness towards technology, but experts believe it might be too soon to call his oil-to-telecom conglomerate “tech-first.”

On Feb. 28, Ambani’s Reliance Industries (RIL) said it had bought an additional stake in skyTran, a US-based company that has developed a technology for running pod taxis, for $26.76 million (Rs196 crore). RIL had first picked up a 12.7% stake in skyTran in 2018 and bought some additional shares of the company in 2019 and 2020. With the recent deal, RIL’s stake in skyTran’s stands at 54.5%. All these investments have been done through RIL’s subsidiary Reliance Strategic Business Ventures.

Source: Quartz

It cost Reliance Infrastructure Rs. 5800 Crores (USD ~ 800 Million) to build the Airport Express Line of the Delhi Metro. USD 27 Million is simply not enough money to get the needle moving for a company like skyTran. The infrastructure business requires a lot of money.

Then why invest?

skyTran is a personal rapid transit system concept first proposed by inventor Douglas Malewicki in 1990, and under development by Unimodal Inc. A prototype of the skyTran vehicle and a section of track have been constructed. The early magnetic levitation system, Inductrack, now abandoned by skyTran, has been tested by General Atomics with a full-scale model. In 2010, Unimodal signed an agreement with NASA to test and develop skyTran.

Source: Wikipedia

Because it allows the company to brag that they are making investments in future technologies and claim to be working towards green technologies. NASA got itself entangled in the scheme somehow. A name like NASA provides a lot of credibility. Classic Corporate Greenwashing.

So now we know what was discussed at Davos (online edition):

Larry Fink - Look at investing in green technologies, at least for the sake of optics.

Mukesh - How much?

Larry - 30 to 50 Million dollars

Mukesh - Bavla ho gaya hai! [He has lost his nuts]

Larry - Think of it as an investment to reduce future tax obligations. And justification for us to continue to hold on to your shares.

Mukesh - Hmmm.

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What we think, we become ~ Buddha