The Migration Of Value

How Some Things Change And Why Some Don’t The “Times Of India” front-paged a table on India’s 60th Independence Day, some parts of which I have reproduced below, with my own derived data: Item 1947 2007 Growth IAS starting salary per month Rs.350 Rs.17-22K ~48-63 times Lever Bros’ starting salary per month Rs.400 Rs.75,000 ~188 times Cost of a car Rs.350-400 Rs.2 – 150 lacs 500 times (ignoring the higher value) Circulation of TOI 65,000 35,00,000 ~54 times Biggest film hit Jugnu (Rs.30 lacs) Dhoom 2 (Rs.140 cr) ~467 times Defence Budget Rs.93 cr Rs.90,000 cr ~968 times Per capita income Rs.255 Rs. 29,382 ~115 times The Price of Gold per 10 gm Rs.88 Rs.9000 ~102 times Now focus on the first and the last column. There are 2 “averages”, (Per Capita Income and The Price of Gold), both of which seem to closely track each other. Distributed around them are 2 laggards, the IAS starting salary and the circulation of the TOI, both of which have under-performed these ‘averages’. We know very well what the IAS has done for us over these last 60 years, so “just desserts”, we tell them. About the TOI, well sorry, but you’re getting there…! But if you did anything useful in life, including selling soap, you seemed to do fairly well for yourself at 188+ times. And the more complicated the product/ service, the better you did for yourself. Making cars or films could have earned you 500 times, but peddling arms, as we can see, tops it all. I wonder where Politics would stand on the table…….compare Gandhi/ Patel with, say, Mayawati/ Mulayam/ Laloo?!! During the same period, population went up 350%, literacy 500% and life expectancy doubled. In other words, “relevant” economic population went up 35 times (i.e. 3.5*5*2 = 35 times). This is a measure of India’s “demographic dividend”; if the size of the economy tracks the total ‘sweat’ available, (which tracks population growth, literacy and life expectancy), then that economy should also go up 35 times. This would be the baseline to measure any long-term growth rate for an economic activity. What will the TOI say in 2067, if it is still around, that is? Their own target is certainly reachable, 189 mn readers out of a population of, say, 1.3 bn. Everyone owning a cellphone should be their target, my son will be arguing with his driver who gets to read the TOI in the car to work. But Levers has a problem. There simply isn’t enough soap and oil to sell to the balance unwashed multitudes left around in our “Shining India”. Even my driver uses toothpaste already. As for the IAS, can you imagine an officer getting Rs.14 lacs per month ON HIS PAYSLIP. No, my guess is that you will see an acceleration of the trends already visible above. Services and complex products will take an ever larger share of the cake, while food and basic products (which includes soaps and even newspapers) will shrink their share of the economic pie. My guess is that you will see energy come up in the list, maybe alternative energy. That is one mega-trend that I am optimistic about. Leisure and entertainment will dominate, so watch out for Dhoom 32. Only a Chinese film may offer competition. Tertiary services, which include financial and ‘intellectual’ services, will be the place to be in. The latter will include some niches, like maybe ‘tattoo burning’ in a hospital setting, who knows? My existing paradigms are hurdles to my creative ability here. Which brings me back to financial services, about the only item in the above list that I feel comfortable with. The explosion that takes place in the “accumulated sweat” available in India as its “demographic dividend” plays out, will lead to a sure-shot explosion in this one industry. I might fear whether there is enough land, water, energy, food, even newspapers to feed such a trend, were it to continue………but I am sure there will be enough money to keep all these people running around in a state of perpetually suspended animation, kidding themselves that they are getting ahead. Can you see an investment idea in what I have said here? As you can see from the table above, the price of gold has tracked the per capita income, so if you just HELD gold through this period, you did better than working honestly in the IAS. Or honestly, it was better than working in the IAS!! Can you imagine what you would have achieved if you had traded gold through all its ups and downs, just keeping your average buying price within the bottom 10 percentile of the price curve? And if you had also managed to sell within the top 10 percentile, that alone would have put you at the top of the above table…..! Mind you, being able to do this is not half as complex as making complicated Defence Equipment or skin flicks, and you have the added bonus of not having to change any part of your operation over a full 60 years. The way you trade gold has not changed as much as making movies has. The weighted average probability that you will get it right, multiplied by the payoffs that you get every time you get it right, will always outdistance any other business over the long run. Now look to the future. One other mega-trend is going to be on your side. Innovation in products and processes has always created discontinuous wealth, upsetting the economic pyramid. People, cities and even countries have got ahead by doing something innovative. This created (and concentrated) profits and wealth that were a significant proportion of the total profits and wealth of society, like IT in America or Oil Drilling in Saudi Arabia. With increasing globalisation, such spikes will be an increasingly insignificant proportion of total wealth. If wealth is “accumulated sweat”, more people will earn it by doing ordinary things than by doing extra-ordinary things. Thanks to globalisation, the larger mass of people will be accumulating their wealth making things and writing newspapers, rather than discovering a cure for cancer. This will be increasingly so, in the current century. The pyramid may be getting bigger, but much of the growth will be at the base, although the news will be about the top of the pyramid, giving you a distorted impression. Therefore, that larger mass of people will be buying ‘basic currencies’ like gold and other old-fashioned things whose supply cannot be increased at will by the Govt. As the incomes of the base of the pyramid rise above subsistence levels, more and more of the surpluses will end up in ‘savings’ instruments. Oh yes, stocks will go up on the same argument, but I am pointing to something that does not take any monitoring, and ‘fundamental’ analysis, just buy and hold forever. On the same logic, real estate will go up forever, hiccups like the current one notwithstanding. Real estate will have another powerful driver, the generation of black money, which creates an unthinking, irrational force in keeping prices high above sanity. But that is an argument that holds true for gold too. Gold will have one big kicker which will happen sometime over the next 60 years, i.e., the loss of credibility of Central Banks in general, and of the US Fed (the printer of the world’s reserve currency) in particular. This will create one huge uptick in gold, after which it will settle at a permanently higher (than today) level. This, and the transfer of wealth to the bottom of the world pyramid (a.k.a. Asia) will be a big boost to the price of gold. Volatility, if you can read it well, will only add to your returns. Sanjeev Pandiya teaches, trades and writes.. He is also Director (Finance) at Renuka Commodities DMCC.. spandiya@hotmail.com