The month of freedom* (Conditions apply)

August 2021: Freedom* (Conditions apply)

Salaries in Bangalore, for tech people are very high, it seems. The founder of Ola tweeted that he’s looking for a lower cost place to source tech talent from, such as the Bay Area. Which would have been funny if it wasn’t the truth. A set of conversations with people working in the IT industry reveal that salaries have indeed gone through the roof, with attrition levels crossing 25%. The old IT adage of “trespassers will be recruited” has changed to “we’ll trespass anything if we can recruit you”. New hires are paid a substantial amount higher than the existing employees, and the best way to get a hike is to leave (or threaten to) because a competitor offers a higher wage.

This is not unhealthy, of course. Anything that puts money in the pockets of people is good. And I’m not going to say I’m unbiased - this means more customers for us, eventually. But the basic point that I hear is: there are some tech people who are astoundingly good (and implicitly, deserve any wage no matter how high), but the vast majority of people aren’t of that quality and thus do not deserve these incredulously high salaries.

I’ve heard this before. When I was in Gurgaon, an apartment group buzzed with the idea of a “maximum wage” sheet for household help. This much for cooking, this much for cleaning and so on. It didn’t work of course - because if I want to pay more to get help, I will most certainly do so. This concept of “pay them less for the greater good just because I can’t afford more” is just BS - and an affront to the freedom of employment, which implicitly also is the freedom of asking for a higher wage because otherwise I’ll go somewhere else.

A recent article on wages of food-delivery executives invited outrage because what someone that was “too little to survive” turned out to be two times what ASHA health workers get - who go door to door with vaccines and medicines. This “too much” or “too little” is a relative thing - but in reality, the idea of an absolute upper/lower limit is always a way to restrict someone’s freedom.

That people would want such a restriction on house help, but not on themselves who hire those help, is telling. Our concept of freedom is conditional. Their thought process (and I disagree with it) is: We shouldn’t rein in the salaries of the technology workers (even the Ola founder didn’t want to have any law that restricted it - and no one does) but it’s not that bad to have maximum wages for maids and cleaners.

Put another way, everyone’s equal, but some people are more equal than others. This is a contradiction, but it’s how we are.

Conditional freedoms prevent us from moving on and upwards. We aren’t fearful that the Taliban has taken over Afghanistan, as much as we are about how they will restrict the freedoms of a few people (women, journalists, teachers etc). Less politically, an example is about “floor pricing” in telecom. I’m not profitable, says one player, asking for a floor limit to prices, even when the others seem to be making enough profit. A floor price limits the freedom of a new (or existing) player to attract customers by using better technology to cut costs. We as customers would like that, but at a floor price, there’s no incentive to do so.

Much about everything this last year seems to be about conditional freedom. The Fed wants to reduce their current operational process of buying everything under the sun, but it could make markets collapse, which they don’t want. Everytime they even mention such a proposal, markets fall heavily, and they continue to buy. In effect, the Fed is fighting the freedom of the market to price risk, even the risk that the Fed will stop fighting it someday!

Why does this matter? Because things get irrational, and money pours into higher risk assets because the lower risk ones are being bought by the central bank. What this has done is only to widen the rift between those who can take risk - by definition, the rich, who have a safety net - and those who cannot. Money piles onto markets, startups and bitcoin, and a little bit of it goes into creating some revenue for the have-nots as well. Food-tech could never have been a thing if investors had the safety of government bonds at 9%, and thus, the argument of whether a food-tech delivery person was paid enough would be moot.

But I digress. This note was about freedom, and where conditions apply. There is no true freedom, because that is anarchy, so we live with an experiment of freedom: how much can we constrain you before you believe you’re not free? The answer will vary, of course, for different people, at different times and for different reasons. We remain a slave to time, to our emotions and to our irrationalities.

Coming back to markets, things have changed in August. The large caps, looking at the Nifty, see a massive jump while the mid and small-caps scaled down considerably. This dichotomy is just a small reversal, because mid and small caps are still up 30% in the year, while the Nifty (large caps) is only up 18%. In the age of every day markets, it’s important to zoom out and see a larger picture.

One thing we do see is that corporate profits are absolutely huge. Going by RBI data, the first quarter of this year - April to June 2021 - has seen a big jump in income tax payments both by individuals and corporations. Let’s not do a year on year comparison since 2020 was a washout, but instead, compare it to two years back (2019). And we see personal taxes are up 25% in two years. But corporate taxes - measured by advance taxes paid in June - are up 65%!

Remember, this is despite one big fact: in April to June 2019, corporates were paying taxes at a rate of 33% or more. Today they pay tax at 25%. Meaning, the actual underlying profits are even higher!

How do profits go up so much when the economy has been in trouble with the second wave (which hit us hard in the April+May 2021 time)? My answer is, again, the inequality of freedom: the rich corporates had safety nets, borrowing lines and redundancy. The poor had nothing. So the rich got richer, and the poor floundered. To expect this to continue isn’t kind, but the reality of life is that unless the rich actually help, the poor will take a lot of time getting their back up on their feet. And in India, that help doesn’t come easy, and so expect corporate profits to stay unrealistically high until India starts to get its act together.

Inequality and freedom don’t go hand in hand, but markets love them both and necessarily in that order. Markets will forgive the lack of freedom, but abhor any attempts to bring about equality. Which is why the Fed has no freedom to bring things back to normal, because it looks at markets as a barometer for its decisions. This is essential for us to understand - because that stance will eventually give way under social pressure, not economic.

While we discuss freedom, let’s introduce the new portfolio at Capitalmind Wealth. The low-volatility portfolio is simple: a basket of stocks that are relatively stable in terms of daily price movements has beaten the index over time. It’s a quantitative portfolio - meaning, there’s an algorithm that selects stocks that qualify, based on price and volume information. The concept is similar to momentum, and low-volatility just uses a different mechanism.

A way to think about a portfolio like this is like the story of the turtle versus the hare. I won’t bore you with the details, since we all know who won. But the turtle didn’t win because he was slow. He won because he was “steady”. The idea of a steady mover is boring, in today’s world, where you wake up every morning to find out where the action is - but the world is kept alive by things that work exactly the way you expect them to, every single day. Your car doesn’t work phenomenally one day, and then horribly the next. (Okay, I admit, I have had such cars, but not any more). Stock markets too are run by the steady performers, who may not hog the headlines, but don’t hurt too much when things go sour.

Capitalmind’s low-volatility portfolio has one additional factor - that stocks should have some kind of upward trend, so that we can go to cash in a sustained correction. That gives it the ability to sustain better when markets fall. Here’s how the “formula” worked when tested with data from 2005:

You can allocate part of your current portfolios to this strategy (min: Rs. 5 lakh) or add more to participate in the strategy. Please connect with Varun/Akanksha at Wealth support (support@capitalmindwealth.com) for more information and details about the portfolio.

Things have been kind for the markets, and even if the Nifty’s up about 24% in 2021, all of Capitalmind’s equity portfolios have done better. Such great times will not last forever, we know, but we cannot predict when they will end. Given how much money is flowing into markets all over the world, it appears as if markets have a conditional freedom: prices can fluctuate but only in the upward direction. The day we accept that condition as sacrosanct is when the fall is likely to begin: like the advice, in 1929, that prices had reached a “permanently high plateau”*.

* Famous Yale economist, Irving Fisher, had said in early October 1929 that prices had reached a permanently high plateau, and there was a huge crash that took stocks down about 50% by mid-November. There were other reasons for that crash, of course, but the lesson is: be wary of highly educated people telling you that you can’t lose money in the short term.

I’ll stop here, given that I’ve written enough for two letters. Do let us know what you think. Be happy, be free.

Independently,

Deepak

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