The Only Game In Town by Mohamed A El-Erian - Some thoughts

A very interesting read for people who are struggling to understand the state of global economy and the actions of central banks.  I have been perplexed by the actions of the central banks where global asset classes debt and equity both seem to be doing well simultaneously whereas growth in industry is lagging. 

The books chronicles in a way the actions of the central banks since the 2008 crisis. it is weird that the central banks are today governed by the volatility in the wall street rather than the main street. It is more like the tail wagging the dog with a few percentage points correction in wall street …statement of taper or rising interest rate is replaced with “patience “ and "will do whatever it takes”.  Also, the world is greatly intertwined and that makes it difficult to contain issues - Grexit or Graccident or likely to lead to turmoil in global financial markets. 

Also equally worrying is that the justification of increasing global / FII flows to justify valuations of emerging markets. Brian rightfully classifies this money as “tourist “ money and the money can witness flight very quickly- something which was witnessed during the recent taper talks by Fed. While, the emerging markets are the only island of growth - but this growth itself has been very patchy and investor confidence  is much higher than industrialist confidence. Industry is yet to meaningfully invest in capacity creation.  Also, bad economic news is followed by more stimulus from central bankers and higher asset prices as bankers resort to curbing volatility. A reminder of early 2008 when cut in rates was cheered by the markets.  Also, the 1974 Boxing match between Ali and Foreman is a must watch - How Ali changed his style to tire out Foreman and get a knock out. 

Some interesting quotes:

On Negative policy interest rates:   “ no history book to turn to".  “ it was like learning to drive backwards.” 

  

Why economies stall because of trust: 

Imagine a customer ordering a big Mac meal at her local McDonalds drive -through. She is directed to 2 windows after placing the order- one to pay for the meal (payment) and the other to get the food (settlement).  it is just a few yards between the two. Yet aware of the recent bankruptcy in which clients at another fast food joint had been stranded in between these 2 windows - having paid for but not recd the meals - she request instantaneous settlement at the time of payment. but the system isn’t built for such simultaneous payments for settlement. it assumes a certain amount of trust.

During periods of large capital flows induced by a combination of sluggish advanced economics, robust risk appetites and highly stimulative central bank policies, emerging markets serve as a destination for a huge pool of crossover funds - or tourist dollars. … At the fist signs of instability, they essentially tend to rush to the airport……

ON growing inequality :  “….on one hand the stunning contrast between sluggishness on Main street , and on the other the notable post-crisis recovery on Wall street , as well as the continued historic surge  in corporate profits record share of GDP.”

Main street is “ how come you are bailing them out and not bailing me out?”

ON corporates not investing:    “…it has been less an issue of the wallet ( or ability) to spend and more a question of will ( desire).

It is about not letting the urgent always crowd out the important…

  

Book review : The Outsiders - By William Thorndike

Eight Unconventional CEOs and Their radically rational Blueprint for Success

( #1 on Warren Buffets recommended reading list in Annual shareholder letter 2012) 

The Outsiders is a very Interesting read and a must recommendation for Analysts researching corporates  and for CEOs or promoters who actively take decision of Capital allocation. each of these CEOS deliver 20%+ CAGR return for investor for periods exceeding 15 years. 

The book chronicles 8 CEOs who were ready to swim against the tide and follow what was RIGHT and shun the POPULAR . Four of the Eight Companies belonged to the Media sector - A sector which has been more popular in India for wealth destruction.   All of them had strong disdain for herd behavior - something which is easy to say but hard to follow.  The CEOs showed unanimity in taking right capital allocation decisions , avoided smoothening of quarterly financials and used right metrics of cash flow and IRR to evaluate themselves as against reported earnings.   Cash flow focus seems to be low among Indian media companies and largely focus is on earnings. Also these CEOs avoided paying taxes and used the right/best instruments to reduce tax incidence - something i believe Indian Media companies are adept at.  

Some quotes i liked from the book: 

2 basic  approaches to buy back - "Straw" -  Open Market  Buy back spread across a few qtrs with a max cap price - generally used to signal under valuation.  ( HT Media did this some time back) 

Other is “Suction hose”  - Bolder approach  Buy backs  done often via tender offers within very short periods of time.   ( Jagran Prakashan recently did this) 

Singleton - If everyone doing them, there must be something wrong with them. 

Kapnick of Capital Dynamics -  initiated 3 special dividends totaling about 50% of the company and because of the size - they were deemed as return of capital - thus being tax efficient as against regular dividends.  

Most CEOs grade themselves on size and growth …very few really focus on shareholder returns.  

Chabraja ( General Dynamics CEO after Kapnick)-  What drove me was the realization that the stock was trading at a significant premium to our historic norm: 23 times next year projected earnings versus an historic average of 16 times. so what do you do with a high - price stock? Use it to acquire a premium asset in a related field at a lower multiple and benefit from the arbitrage.   — Most Indian CEOs/ Promoters perennially believe their stock is under priced and are rarely able to do such transactions.  

Characteristics of Cable business as explained by Malone :  Highly predictable, utility like revenues , favorable tax characteristics , and the fact that it is growing like a weed. 

"…. it is better to pay interest than taxes” . Malone showed strong disdain fro taxes. 

Edifice complex :  There is an apparent inverse correlation between the construction of elaborate new headquarter buildings and investor returns.    ( In India it is more synonymous with buying private jets ) 

  

He believed that the best strategy for a cable company was to use all available tools to minimize reported earnings and taxes, and fund internal growth and acquisitions with pretax cash flows. 

Disdain for consultants : Graham - CEO of Washington post :    Ironically , in the 1980s , the management consulting firm McKinsey advised the company to halt its buy back program.  Donald graham reckons this high priced McKinsey wisdom cost POST shareholders hundreds of millions of dollars of value , calling it the “most expensive consulting assignment ever.