Interesting things we read last week: The problems of India's Uber drivers, handling oil shocks, and more such stories

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At Ambit we spend a lot of time reading articles that are not directly relevant to Indian stocks. However, since the Indian economy is now umbilically linked to its global counterparts, the articles that we come across have relevance for Indian stocks and the Indian economy. In that context, this report contains the ten most interesting pieces that we read this week.

Here are the ten most interesting pieces that we read this week, ended April 7, 2017.

1) Ray Dalio – Populism: The phenomenon [Source: ValueWalk]
Ray Dalio, the legendary hedge fund manager in this piece highlights how the level of populist support today compares to populism in the past by creating an index of the share of votes received by populist/anti-establishment parties or candidates in national elections, for all the major developed countries (covering the USA, the UK, Japan, Germany, France, Italy and Spain) all the way back to 1900, weighting the countries by their population shares. The broad trends suggest that populism has surged in recent years and is currently at its highest level since the late 1930s. Given the extent of it now, he believes that over the next year populism will certainly play a greater role in shaping economic policies. In fact, he believes that populism’s role in shaping economic conditions will probably be more powerful than classic monetary and fiscal policies. It will also be important in driving international relations.

2) In praise of ‘useless’ endeavours [Source: Financial Times]
Almost eight decades ago, the American educationalist Abraham Flexner published an essay entitled ‘The Usefulness of Useless Knowledge’. In it, he argued that the most powerful intellectual and technological breakthroughs usually emerged from research that initially appeared “useless”, without much relevance to real life. These “useless” endeavours thus, should be supported, even if they did not produce an immediate payback, because otherwise the next wave of innovation simply would not occur. This endeavour paid off in the post-depression era of 1930s when brilliant Jewish scientists fleeing from Nazi Germany, such as Albert Einstein, congregated in US to explore undirected ideas. And while some of these, such as Einstein’s own work developing his earlier theory of relativity, did not initially seem valuable, many eventually produced powerful applications (albeit after many decades). Concepts such as quantum mechanics or superconductivity also seemed fairly useless at first — but yielded huge dividends at a later date. Scientists however fear that this core principle is increasingly under threat. That is partly because the Trump administration has released a projected budget that threatens to slash funding for the arts, science and educational groups.

3) True leaders believe dissent is an obligation [Source: HBR]
As per this HBR study, formed by studying the best leaders — executives and entrepreneurs who have created enduring economic value based on sound human values — recognising and embracing the “obligation to dissent” is a key to success. Put simply, you can’t be an effective leader in business, politics, or society unless you encourage those around you to speak their minds, to bring attention to hypocrisy and misbehaviour, and to be as direct and strong-willed in their evaluations of you as you are in your strategies and plans for them.

4) India’s Uber drivers feel taken for a ride on earnings promises [Source: Financial Times]
Uber launched in India in 2013, and has scaled up rapidly in what it deems a “top country” in its quest for global growth. It boasts some 240,000 drivers in 29 Indian cities, though many also drive for Uber’s local rival Ola. While the company believes it’s on the path to profitability, it has wrestled with a big challenge on the subcontinent: how to get more cars — and drivers — onto its platform. Uber’s global business model is designed to be capital-light, because drivers own their own cars and shoulder their expenses. But in India, car ownership is relatively low, typically the privilege of those with well-paying, stable jobs. In late 2014, Uber set up a “vehicle solutions” team for India to get more cars on the roads. It set up Xchange Leasing to provide aspiring Uber drivers with vehicles on lease, but they represent just a fraction — a “few thousand” — of Uber’s Indian fleet. The bigger push was to partner with auto financiers to extend car loans to would-be drivers, including many who might not ordinarily meet the credit criteria. However, that strategy has led to conflict with disgruntled drivers, whose earnings have not lived up to expectations. They complain they are struggling to repay their debts and feed their families. Tensions grew particularly acute after Uber cut incentive payments and subsidies for Indian drivers in recent months.

5) The flip side of ‘one nation, one tax’ [Source: Livemint]
“One nation, one tax” is the Indian Union Government’s slogan for GST. The implication is that uniform tax rates across all states of India will serve as a unifying force of efficiency. Replacing several hundreds of different tax rates across the 29 states of India with just five tax slabs for all goods and services will reduce friction in the movement of goods and services across state borders. This can boost economic activity and contribute substantially to gross domestic product (GDP) growth. For these reasons, the GST initiative has been justifiably acclaimed as a milestone economic reform in independent India. But there are reasons to be cautious. GST aims to forge an economic union of India at a time when the economic disparity among the various states of India is at its peak. For the sake of “one nation, one tax”, states have sacrificed their fiscal rights. Such economic disparity combined with India’s unique political diversity renders the GST regime vulnerable to fractious demands.

6) Paralysed man regains arm movement using ‘power of thought’  [Source: Financial Times]
Bill Kochevar, paralysed from the neck down for eight years after a cycling accident, is the world’s first quadriplegic patient to regain some limb movement electronically, using a brain implant that enabled him to reanimate long-dormant muscles through the power of thought. The University of Cleveland study based on this recovery brings together two components of neurotechnology that have shown great promise individually. One is a brain-computer interface that translates thoughts into computer signals. Similar devices have enabled paralysed patients to move robotic arms and operate computer keyboards through their thoughts. The other part of the system involves functional electrical stimulation (FES) of the arm and hand. FES, which activates paralysed muscles with small pulses of electricity, is used extensively to restore or improve mobility in disabled people. However, it has not previously been controlled directly by the user’s own brain. While this study is groundbreaking, this treatment is not nearly ready for use outside the lab. Mr Kochevar’s arm movements are slower and more restricted than a limb working naturally on an able-bodied person. He also needs to keep looking at an object to grasp it accurately. Future improvements might include providing a wireless connection to the brain implant and developing better computer programmes to translate thoughts into more precise movements.

7) When an error analysing Snapchat shone light on Wall Street Research [Source: Livemint]
Imagine the following scenario – A Wall Street investment bank has just led the biggest tech IPO in years, but then makes a mistake in the first research note it publishes on the stock. The error means the bank overstated its forecast for earnings for a five-year stretch by nearly $5 billion. Yet, when the bank issues a correction and updates its earnings models, its price target on the shares remains the same! How does that happen? The answer says a lot about the weaknesses in Wall Street analyst research and the closely-watched price targets published by big banks. Those numbers can move markets, and underpin the Street’s buy or sell recommendations on the shares. But they’re also dependent on highly subjective calls by the research analysts, which, often times, are themselves worth scrutinising.

8) WhatsApp picks UPI for payments  [Source: The Ken]
WhatsApp, the Facebook-owned messaging app, is working quietly to launch person-to-person payments on its platform within the next six months. The initiative is seen as strategic for Facebook and currently being driven out of the company’s headquarters in Menlo Park, California. With over 200 million Indian users already, its entry into the payments space is likely to be pivotal for the entire sector. While there exist a slew of digital options in India currently for both person-to-person and person-to-merchant type transactions, much of it is very nascent, and there is a considerable overlap. Thus, the protocol chosen by a giant like WhatsApp could potentially tilt the balance towards a leader. As per this piece Whatsapp’s primary choice in this regard is likely to be UPI.

9) Is it worth the trouble? [Source: Medium.com]
In 1942 Albert Camus wrote a book called “The Myth of Sisyphus”. It is about the one truly important philosophical problem: Given the circumstances of our existence, shouldn’t we just kill ourselves? This is his answer: At first Camus describes those moments in our lives when our ideas about the world suddenly don’t work anymore, when every daily routine — going to work and back — and all our efforts seem pointless and misdirected. When one suddenly feels foreign and divorced from this world. In these frightening moments of clarity we feel the absurdity of life i.e. Reason + Unreasonable World = Absurd Life. This absurd sensitivity is the result of a conflict. On the one hand we make reasonable plans for our lives, and on the other hand we are confronted with an unpredictable world which does not comply with our ideas.  So if reason and an unreasonable world are the key components, then — argues Camus — we could “cheat” and avoid the problem of the absurd by simply eliminating one of the two. This articles deals with how such a scenario is senseless and why true existence is all about keep on pushing.

10) How to handle an oil shock [Source: Project Syndicate]
Highlighting the dramatic economic effects of oil producers’ recent reversal of fortune, Carmen Reinhart, professor of International Finance at Harvard University showcases in this piece that for amongst majority of the case for 18 oil producers, the twin surpluses of 2011, prior to the peak in oil prices, gave way to substantial twin deficits in 2016. The most recent data indicates that the recent setback in the WTI Crude Oil price has not slowed the growth in the Crude Oil Rotary Rig Count, which increased sharply in the week ending March 24. The rise took the Rig Count to its highest level since September 2015, as US production has replaced cutbacks by OPEC and other producers, and US inventories have set new record highs each of the last five weeks. Judging from their actions, the governments of several oil-producing countries appear to be betting that the slide in oil prices is either over or about to end soon. Gulf countries are forecast to issue sovereign debt in possibly record magnitudes. As for external debt, these countries are expected to drive the bulk of 2017 sovereign issuance. If oil prices fail to recover, however, this surge in debt issuance could backfire. Furthermore, issuing dollar-denominated debt carries an additional risk and cost in the event of currency depreciation (or devaluation) for those with an exchange rate pegged to the US dollar.

- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.