Learnings of the Week-1. (2/3)

It’s time to Build

  • Western institutions’ failure due to coronavirus pandemic will reverberate for many years, as they stay unprepared despite prior warnings
  • No, it’s not because of political parties

 The problem is what we didn’t do in advance, and what we’re failing to do now.All the countries are showing the security powers like testing nuclear bombs but we failed to have materials like, cotton swabs and common reagents. We don’t have enough ventilators, negative pressure rooms, and ICU beds

  • Even there is no such a mechanism to provide money to needies who are in great trouble

Medical equipments, masks and money are providable things, but they choose not to do. They are just focusing on making skyscrapers and spectacular living envoirnment

  • They don’t even have enough houses which makes their price skyrocketing towards upside
  • For education, yes, they have top-end universities, but very low percentage of students can get facilitate of that
  • Shouldn’t every student get education?
  • Can’t US do it being superpower of the world?
  • Manufacturing
    • In manufacturing, American manufacturing output is higher than ever, but why has so much manufacturing been offshored to places with cheaper manual labour?
    • Why they don’t create manufacturing units which can create more at lower cost?
  • Transportation
    • Is the problem of money? That is not a believable aspect as they have money to wage endless wars and to bailout many institutions
    • They wouldn’t have the homes and skyscrapers, schools and hospitals, cars and trains, computers and smartphones, that we already have
  • The public sector can build better and effective hospitals, schools, transportation, cities, housing instead
  • Milton Friedman once said the great public sector mistake is to judge policies and programs by their intentions rather than their results. Instead of taking that as an insult, take it as a challenge — build new things and show the results!
  • To build all this is to fulfil the dream of Americans
  • High production of TV is leading its price down, and no increase in houses is making them too costly
  • Build to provide all things to all, to have all they need is to fulfil a dream
  • All can contribute towards the building by demanding more from all and from each other
  • Ask everyone to contribute in one or another way

Article link:
http://Article link: https://a16z.com/2020/04/18/its-time-to-build/

The making of the Real estate bubble

  • Research firms found that real estate developer’s disposable income (Personal income – taxes) are not enough to meet their interest payment obligations unless they increase their margin
  • Hence, Real estate Developers are likely to default unless there is large scale intervention
  • After global financial crisis (2008), real estate developer who borrowed exclusively for their projects in the hope that the construction boom would continue perpetually, can’t earn enough and came under stress
  •  People who borrowed from abroad, have to pay more due to rupee depreciation
  • Where is the stress?
  • Interest rates creeping up
    • Real estate prices are going up, and so developer’s inventory become costly
    • This situation (price inflation) was beneficial for both lenders and developers
    • Due to high price, unsold inventory had more than doubled
    • Common consumer was not able to purchase 2 BHK house for 1 Cr
    • High housing price tumble the rental yield (rent / total property value)
    • That means if rental yield is 2%, one is earning 2% return on his investment in that property, totally unfair as he is expected to pay home-loan interest close to 10%
    • But developers didn’t show their stress
  • By the time, the government introduced a slew of stringent regulations against black money and revoked subsidies accorded to the sector
  • Eventually, some developers began to show stress
  • The prudent measure then would have been to force defaulters to pay up or liquidate their assets
  • But banks keep delaying in booking of NPA, with talks that they will pay later, but RBI forced the banks to clean up their books during the Asset Quality Review
  • That causality came from infra and power sector, not from real estate
  • So why did the Infra companies succumb to this pressure when Real Estate companies emerged unscathed?
    • Banks normally lends against collateral
    • Infra companies have projects like road which can be sold in case of default
    • Hence, banks can collateral real estate against lending
  • After that real estate sector have slowdown as banks have pulled back lending to developers
  • So, developers started selling their unsold inventories at throwaway prices to repay their debt obligations
  • These selling will decrease real estate value and developer will simply throw up their hands and all the burden is to be borne by banks as their collateral are now worthless
  • Banks started staying away from real estate lending, NBFCs stepped in to lend them
  • Though there were bankruptcies in the sector, housing price continued to trudge along
  • When the Real Estate (Regulation and Development) Act, 2016 was passed into law by the parliament, The provisions of the act severely restricted developers’ ability to raise cash from prospective buyers and penalised them for late delivery of homes
  • Still price of homes doesn’t have any step down, but price of land was suffering as there was no demand from real estate sector was almost zero
  • Then demonetization and GST make industry weak and again their debt rises against their income
  • But NBFCs were not showing their stress and their books were still good, how?
  • NBFCs keep lending and financing developer thinking it was a time to turnaround, and their asset quality was still good as compare to PSBs
  • NBFCs were running with asset liability mismatch and were feeling hard to raise funds and developer don’t have any other way and they have to sell their unsold inventories at throwaway price, which’s effect is not pretty, as we see
  • So how will the developers come good on their interest payments?
  • Generally, they sell their assets or raise fund to repay their debt
  • However, we believe that before the Real Estate Sector turns around there will be more pain — housing prices will decline and more NPAs will be there

Article link:

Exploring current situation with Manish Chokhani

  • In what situation we currently are?
  • Is it a bull market or bear market?
  • If you are not confused by what’s going on, then you don’t really understand what’s going on
  • From past 100 years, world has never faced a crisis of this short
  • We have all things though are having tough situation, hence it is like a war
  • We can’t judge the market as this is the bottom of the market or cycle over or bull run will start as nothing is predictable
  • Nasdaq is less than 3% away from its all-time high, so what has caused those markets to rise and emerging markets to fall?
  • They are continuing their game of pumping money into system to stave off their bankruptcy
    • Keep doing this same activity many times may shrink doers very soon, and also credit rating agencies who are refusing to downgrade sovereign ratings
    • Fed can make every Americans a billionaire by doing the same
    • These guys have overstated their ability to print money
    • Whole world thinks this is a most powerful economy in the world, but we all know that bubble burst when thing get stretched
    • This is a sign of global reset coming very soon
  • Today, interest rates are all-time low, oil prices are all-time low, India have no more friendship with china, so in which situation India is?
  • Many countries’ currencies are stayed pegged who are ahead of India and their interest rate are near to zero
    • Today, G7 is ganging up against china for what they have done to the world, suggest a kind of cold war is emerging
    • If India play right, we can benefit by attracting a lot of supply chain here
    • If India show growth potential in its market, it will lead Indian market to reopen the market same as done in 1991, and is able to start bull run from now
  • Will good things come out of this crisis?
  • India only reforms when there is public outcry
    • Growth after this depression will be best from all which we are trying
  • Investing world is change, so how should we make portfolio and which sector to choose?
  • In every crash, we get the innovative companies who emerge
    • In India, institutions who do things differently, come up with new idea are the ones who will come up very well and the companies who have very strong cash flow and strong balance shet can come out very very ahead this crisis

Article link:

Published by Aakash and Meet

I am Aakash Raotole I am currently doing Bcom from Dr. Patel and Rb Patel commerce college I am currently studying at finnacle investment academy Recently done distance internship with windrose capital, Pune - for a period of 14 weeks I am Meet Bhatt Completed HSC in commerce Now studying finbridge program at finnacle investment academy and Bcom externals I had completed CFA institute's investment foundation course and distance internship with Windrose capital, Pune - for a period of 14 weeks

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