FOMO, learning from others and low interest rates
Rediscovering a love for economics
Hi,
This year, I rekindled my love for economics because of Vivek Kaul. He writes Easynomics, a newsletter for the Mint newspaper breaking down complex topics and how it affects you and me.
I love reading it, so much so that every Wednesday the first thing I do is check the website to read what he has written.
Today I want to share learnings from my favourite editions of Easynomics.
Ants, Chickens and Herd Mentality of Retail Investors in the Stock Market
When it comes to investing, people tend to buy after they have seen prices go up for a while, and a fear of missing out sets in. This is true for investing in stocks and crypto. I have firsthand experience.
I started investing in Ether during the NFT boom, meaning I invested after the prices shot up thinking it would rise further. Oh, how wrong I was. 🙈
The article explains with data how Indian retail investors opened demat accounts to invest in stocks when the market was booming. They bought stocks after the price of equity had risen considerably, believing that the price would rise further. While FII’s did the opposite, they bought when the stocks were cheap and sold near the peak.
Once a retail investor has bought into a story, it takes time to unravel. Meaning they might be sitting on losses hoping for the price to bounce back instead of booking the loss.
This tendency of ours is surprising and ever since I read this article, I have become more cognizant of why I am taking a particular decision.
Read the entire article here.
Gautam Gambhir, MS Dhoni and When Ideas Have Sex
This article talks about inherited learning- to learn from the experiences of others. In practice, we build upon and learn from the mistakes made by people, every new discovery/innovation is derived from learning what people did/are doing and improving on it.
“The point is that innovation rarely happens in isolation with a lone genius at work. Often, it’s the recombination of existing ideas, and that’s how society moves forward one step at a time.”
[…]
“In the modern world, the search engine is an excellent example. While Google may have won the search engine war, there were many other search engines that came before it. The ones that I remember using are AltaVista, Ask Jeeves, Lycos, Yahoo and so on. Of course, Google worked, and these search engines did not because none of these search engines was as good as Google.”
My takeaway is that don’t only focus on the winner, the person who cracked the technology and made a fascinating product. To understand the whole picture, understand how the person improved on what existed, what hurdles they crossed and what changed in the ecosystem which benefited them. This makes for a more fascinating story.
Like Fritz Haber, he invented the process to make ammonia, which is used in fertilizers that farmers spray on crops to enhance yields. He studied the process of past inventors, what worked and what didn’t, and had access to rare materials which his predecessors did not. The people before him gave him a roadmap that this is the wrong way, try another direction.
Read the entire article here
Watch the video about Fritz Haber here, it’s titled The Man Who Killed Millions and Saved Billions.
Who Moved Your Interest Rate?
We think of the world in terms of cause and effect. If interest rates are low, then lending will rise as borrowers take out more loans. But,
Borrowing is not just about low interest rates for the borrowers, it is also about the confidence that the economy will continue to grow and that they will be able to repay the loan.
Let’s say an individual wants to take a car loan of Rs 5 lakh to be repaid at 8% per year over five years. The EMI for this works out to Rs 10,138. If the rate of interest was 10%, the EMI would have been Rs 485 higher.
Nobody is going to buy a car because the EMI is around Rs 500 lower. They will buy a car only if they have the confidence to make a down payment and pay the EMI over five years. In the case of other loans like two-wheeler loans, personal loans and consumer durable loans, the difference in EMI is even lower. This confidence is missing right now due to financial as well as psychological reasons.
My learning - trying to stimulate the economy only using low interest rates does not lead to higher economic growth.
There is also a downside to low interest rates - savers who put their life savings in fixed deposits and plan their expenses from that interest have a lot to lose. The low interest income forces them to search for better yielding assets and they might have to take on more risk to earn their previous return.
Sometimes I get so absorbed by the big picture that I forget to understand how it affects the common people.
Read the entire article here
How real estate speculators are leaving Indians homeless
This is my favourite story from Easynomics, about how the financialization of commodities began,
In the 19th century Chicago became the foodgrain capital of the US and North America. As Rupert Russell writes in Price Wars—How Chaotic Markets Are Creating a Chaotic World: “Farmers would arrive in Chicago at the same time with their freshly harvested wheat. Supply soared, prices plummeted, and farmers ended up dumping their worthless grain into Lake Michigan.”
Futures contracts were invented to get around this problem. This allowed farmers to sell their future crops in advance at a fixed price to buyers like hotels or bakeries. The wheat had to be delivered by a certain date in the future.
The trouble was that enough genuine buyers who had some use for the wheat they bought weren’t around throughout the year. To get around this problem, Russell writes: “private investors—later called ‘speculators’—were invited into the market to make sure that somebody would always be available to buy the farmer’s contracts.”
The speculators would guarantee a price. The farmers would then use this guarantee to get a bank loan to be able to finance the wheat crop. At the same time, “the speculators were given a small discount to compensate them for the risk they were taking, called the risk premium”.
This sounded fair given that the speculators helped take the risk of future price uncertainty for the farmer out of the equation. Nonetheless, what happened was that over time, the paper market for wheat became bigger than the physical market.
As Russell writes: “In 1875, the Chicago Tribune estimated that the physical market was $200 million, but the paper market was 10 times greater at $2 billion. Rather than just taking the risk premium, speculators were making large bets on their future prices.”
This essentially ensured that the price of wheat was split into two, “one price was rooted in the real world, the other in finance”. In that sense, speculators could drive the price up even if the demand-supply dynamics of wheat and other traded commodities hadn’t changed.
[…]
This speculative demand ultimately led to food prices going up dramatically. As Russell writes: “Between 2005 and 2008, global food prices had risen by 83 per cent as the price of wheat more than doubled. As the prices surged, over 155 million people were pushed into poverty and 80 million into hunger in 2008 alone. Riots broke out in forty-eight countries.”
All this happened primarily because of the financialization of commodities. They had also become an investment and the speculative demand that came along drove their price up. This, in turn, created a problem for many people for whom food was just food, something they ate and not traded.
Read the entire article here
I have learned a lot from reading Easynomics, so I created a list of all the books Vivek Kaul has mentioned, an astounding 169 books! You can have a look at the list here.
I hope you enjoyed this edition of Filtered Kapi. Do let me know if something struck a chord with you.
Filtered Kapi #36 Someone sent you this?
Thanks for this...How do I read his archive from the very first piece