Mint Street lessons for Main Street: Lessons from economics to politics     

Present day financial markets are characterised by high-technology, complex products, big brains, deep pockets and of course several crooks. Its roller coaster rides hold several life lessons to be learnt.

Many of us have heard about the ‘sub-prime crisis’ which occurred in USA in the year 2008. It was a fairly catastrophic event in recent times. It led to the bankruptcy and collapse of USA’s biggest investment bank Lehman Brothers with assets over $639 billion (about Rs 45 lakh crore).

It caused recession in almost all the major economies in the world. US Fed brought down interest rates to zero and pumped plenty of money to save other financial institutions from collapse. Countries like India, China and many European countries announced several stimulus measures (akin to steroids) like tax cuts, interest rate cuts, heightened government spending etc to save their economies from recession. Many of these countries are now in the process of unwinding those stimulus measures.

What was ‘sub-prime crisis’? US banks and Housing Finance companies, in their greed to earn more profits, gave liberal loans to people without any creditworthiness (sub-prime borrowers). It led to a phenomenal housing boom in the USA. As long as prices of houses kept increasing, these sub-prime borrowers and banks had good times. Once the prices of houses started crashing- they crashed below the outstanding loan amounts - these sub-prime borrowers surrendered millions of houses to banks for foreclosure. With no buyers for such foreclosed houses, banks started collapsing.

A major financial event in India in recent times was ‘Demonetisation’ which adversely affected the livelihoods of people on the margins or sub-prime people employed in the informal sectors. Informal sectors in India are cash-driven markets and sudden withdrawal of currency has adversely affected the output and jobs in these informal sectors.

As per views expressed by several economists, ‘Demonetisation’ was catastrophic for India as it pushed down country’s GDP growth by at least 2% immediately afterwards.

The one and only one life lesson to be learnt from these two events is - neither over monetise (by giving liberal loans), nor demonetise the people on the margins or sub-prime people. Give them a helping hand or leave them to their fate.

Options market is a key segment of financial markets. Options are bought either for hedging purpose (to protect the value of one’s existing securities or assets) or to earn speculative profits. Option is a ‘right’ (but not an obligation) to buy or sell a security or a commodity or an index of securities at a ‘strike price’ (pre-determined price). Option buyer pays a premium to the seller to have such a right. Options struck at a ‘strike price’ much far away from the existing price of the security or asset are known as ‘deep out-of-money options’.

Only if some miracle or big event happens, buyers of such ‘deep out-of-money options’ can earn profits. Generally speaking, the value or premium of such ‘deep out-of-money options’ will become zero by the end of option period. Only the seller of such ‘deep out-of-money options’ will earn profits. It is like selling wild dreams for a premium. During elections, some politicians are making far-fetched non-achievable promises. They promise the moon. In short, they are selling ‘deep out-of-money promises’ to the voters. Only the politician or seller of such ‘out-of-money promises’ gains.

The life lesson to be learnt from ‘deep out-of-money options’ is - if voters buy ‘deep out-of-money election promises’ like creation of crores of jobs or loan waivers for all or deposit of money in every one’s bank account or zero rate of GST etc, they will lose all the premium (value of vote) they have paid to buy such dreams.

Algo trading’ has taken over stock markets. In algo trading, computers place the orders based on certain algorithm. Small investors who punch orders manually are no match to the computers placing orders.

93% of small investors are losing money in stock trading. Algorithm-based social media campaigns have taken over Indian elections. Booth level demographic, caste, social and personality profiling of voters is done, and personalised election campaigns are being done by computer and mobile technology.

Elections nowadays are more about perception creation, image making and digital marketing by computers, rather than the real merit of candidates or parties.

The lesson to be learnt is - algo campaigning has taken over election markets in India. Even if you are a worthy person and a good Samaritan, but cannot match the technology and deep pockets of algo campaigning, please do not enter the electoral fray. You will lose deposits.

(The author is a retired finance professional and a freelance writer)