Is India Poised for Takeoff?

India turns 70 years of age this year, as do I.

Screen Shot 2017-04-28 at 2.16.18 PMI was born there shortly after India obtained its Independence from Britain, on August 15, 1947, in a fiery, brutal birth of the country. The British left a burning mess – a very painful split of the country with a huge humanitarian cost. There were mass forced migrations, lost property, split families and refugee camps orders magnitude bigger than the ones in Palestine. Millions were killed in sectarian violence. Territories, like Kashmir remained disputed and festering sores, and permanent rivals were created: Pakistan,  a muslim, theocratic, illiberal state (as Fareed Zakaria calls it) and a secular, liberal, messy democratic experiment called  India.

Since then India has come a long way. By any measure there have been big improvements – life expectancy has more than doubled, education levels are better and economic activity has soared. Now with two decades or more of rapid growth the expectation from India is high. Will it be the next Superpower? Is it the emerging country to invest in given slow growth in the rich countries?

I have lived in the Bay Area now for almost 50 years since I first came here to pursue a Ph. D. at Berkeley.  So as an entrepreneur and a venture investor I would like to give my personal perspective about India’s progress as an emerging country and its desirability as an investment destination.

Screen Shot 2017-04-28 at 1.10.50 PMIn the last month a couple of events have focussed my attention on India – a lecture by Ramachandra Guha, the well known Indian historian and author, at Berkeley, titled, India at 70, A Historian’s Report Card,  and a two-week trip I made to New Delhi to conduct a personal property transaction.

My Trip to India

Anecdotically, let me start with the recent two week trip, which, like most visits to India, is suffused with deep stimulation to the senses and a bewildering array of happenings. It was hot – pavement-melting hot. Every single day the temperature was above 110 deg, the hottest mid-April in New Delhi’s history. The air hung thick with the collected efflua of smoke-belching, grid-locked, noisy, honking traffic. Hot vapors rose from the ground, mixing the smell of food vendors’ spices, cow droppings and fly-littered open trash along the roadsides, even in the poshest locations of the country’s capital. Much of the city is unplanned, crammed with a mishmash of assorted houses side-by-side with hovels, homeless pavement habitation and a lot of low-productive or purposeless humanity shuffling around or squatting in the shade to avoid the heat. Despite its economic miracle of the last two decades India has only moved a paltry 3% of its population from poor to middle class – as opposed to 50% for China.

In the news while I was there: Because of a drunk driving incident the Supreme Court has banned the sale of alcohol within a half kilometer of every National and State Highway. Overnight many of the city’s bars and five-star hotels could not serve beer, wine or cocktails – a tremendous impact on their customers and their bottom line. It’s an example of arbitrary rule making that Indians just routinely endure and that keeps economic growth in India subpar. The recent demonetization of high denomination Indian currency notes was another example of  heavy-handed and ineffective rule-making at a colossal scale.

The business transactions that I was doing involved commercial property that I had invested in with my cousin many years ago. We had to fill out a stack of 50 forms; 200 pages of contract had to be individually signed or notarized, fingerprints and photos in triplicate had to be affixed. Tens of thousands of rupees worth of Stamp Paper had to be purchased, along with attorney fees. I had to spend a whole morning at the courthouse – a teeming, overcrowded, noisy building full of government clerks, called babus,  each bent on slowing you down and showing their importance. There was supposedly air-conditioning in the court building but it was not turned on. So we dripped with sweat along with the other elbowing multitudes as we awaited our turn at the window where our paperwork could get done. Nobody formed a queue that I could discern. Without an attorney who pushed his way through and greased some palms we would have gotten nowhere.
Screen Shot 2017-04-28 at 1.34.03 PMI got a haircut and a massage at the local Westin Hotel in the suburbs of Delhi. It was at  the nice, cool, soothing hotel spa with a ritualistic jasmine hot oil deep rub, with calm meditation and yoga on the side, along with a neem-steam sauna. Aaah! You need this kind of thing every now and then to retain your sanity. The guy who gave me the haircut, M. Khan, was a very young muslim guy. We got chatting. He was from Moradabad in the heart of Uttar Pradesh (U. P. ), the largest state of India.

This state has held recent assembly elections and the nationalistic, Hindu-centric party, the BJP swept the elections, gaining 80% of the seats. Screen Shot 2017-04-28 at 1.57.41 PMThe new Chief Minister is a man called Yogi Adityanath. He wears the Hindu saffron robes and has a strong agenda, rather like Trump’s, which a lot of people love. U. P. is a mess and everyone believes that a strong man is needed at the helm to make the “trains run on time”. And indeed he seems to have made a lot of high profile changes. But he also has a strong religious mind-set that says Hindu values must be imposed to sustain the cultural vitality of the country. So while I was there a ban on all consumption of beef was being contemplated. Already zealous religious mobs were raiding muslim eateries and using violent tactics.

Anyway, M. Khan, the muslim barber, told me that he was going back to Moradabad the next week to get married – a girl (his cousin) he had known since he was a child. I asked him if he was all excited about the prospect. He said he was very happy indeed and looking forward to much celebration. “But, sir” he said, “We are not even serving any chicken at the wedding”. The zealous “enforcers” make surprise checks at muslim weddings and if they even suspect that beef is being served there is hell to pay. And only they decide whether something suspiciously meaty is beef! The $4 billion dollar Indian beef export industry is in limbo.

Ramachandra Guha’s Analysis

So onward to my second recent analysis of India, viz. the lecture by Ramachandra Guha at Berkeley. Screen Shot 2017-04-28 at 1.36.10 PMGuha is a well known historian and author with many great books on modern Indian history. He currently lives in Bangalore and was visiting Berkeley at the Institute for South Asian Studies.

His Report Card on India brought up the multi-faceted aspects of India and its performance since independence. I am summarizing below my very subjective interpretation of what Guha said (he didn’t give any grades, just talked in qualitative terms):

Here India gets Guha’s highest score. India is an astonishingly effective democracy. It has more people that all of Europe, more than 27 distinct languages, many different religions and even a big diversity of races. Yet it has held together and is confoundingly stable. Churchill said at the time of de-colonization: India is no more a country than the equator is a country. It is just a region. I give it ten years at most.

And today at 70 years of age India is a shiny example of a diverse, pluralistic, secular democracy, with 1,300 million people, that remains relatively strong and united. All segments of Indians, including the much-maligned muslims, remain largely committed to India and, despite the loud complaining, are satisfied with the liberal, free, democratic arrangements. When compared to the EU which in just a few years of its creation is unzipping rapidly, India is bigger and more committed to its union and republic. Anti-democratic forces do exist, particularly in the non-secular tendencies of the current party in power, but India will never have an Erdogan or a Kim Un.

Grade: A


Here India has failed quite badly at the Primary and Secondary levels. Although literacy levels are rising steadily, more than half of the 350 million kids now aged 0-16 will remain near-illiterate. High school completion rates are abysmal. Compared to China or Vietnam India is a stunning under-achiever. In fact it trails almost all countries except sub-Saharan Africa.

At the college level there are some impressive stats. India has world class engineering, medical, science, business and law schools. In space exploration, India is a powerful player, having had a successful mission to Mars and also a major satellite launch business. In pharmaceuticals and Information Technology India is near cutting edge. Still, India does not pull its weight in creating an educated and skilled citizenry.

Grade: C minus


There’s a lot of hype here. Certainly in the last two decades India has pulled its economy up from dismal levels. India claims to be the fastest growing major economy in the world  today at 7+ percent growth. Yet, as the Economist magazine points out, this is probably overstated. The banks are heavily laden with non-performing assets and there is little new capital formation for the corporate structure. As the Economist states: If this is 7% growth what does stagnation look like?

There are segments of the economy that do well: IT, Pharmaceuticals, Space, Nuclear Power, Solar and Wind Energy, Telecommunications are all great strengths. India remains utterly horrible at manufacturing and construction. There is no “maker’ culture and the bad infrastructure is a drag. Imagine in a country with 900 million cell phone users – a huge domestic market – there is not one Indian cell phone manufacturer!

In one Wall Street Journal survey India ranks below 150th, as a country,  in the Ease of Doing Business category. The current Prime Minister, Narendra Modi,  (that many say is the only adult in the room in Political India) has made great efforts at very innovative reforms – boosting Solar, building much needed country-wide infrastructure, implementing a federal level Goods and Services Tax, GST (a kind of VAT) to replace a myriad of individual district and state tax jurisdictions, and creating a national identity card (called Adhaar)  to streamline government-to-people interactions and transfers. Despite all this, economic progress is anemic. Corruption and red tape remain. Money-losing government firms have not been privatized. Exports remain weak and quality of manufacture is unimproved. Banks have bad debt to the tune of 10% of GDP and no one in government has a clue about how to fix this.

Grade: C

Quality of Life/Human Development:

International studies and Guha’s assessment vary here somewhat. A  recent  U. N. Report  ranks India at 122nd out of 155 countries in the Human Development index. That is low indeed. Lower than all other countries in South Asia! (Pakistan is 80th). This study includes lots of subjectivity, although measurable material consumption, health, longevity, access to facilities etc.  are included.

Ramachandra thinks India is way better than that. There are informal structures and cooperation that tend to make an intangible contribution. Still India has a long way to go.

Grade: C


Here Guha has the harshest assessment. India has failed to even have a national debate on the ravages to the environment wrought by neglect and lack of policy. Guha says that all rivers in India are now biologically dead. Lakes, streams, nallahs are filthy, putrid unhygienic, disease producing cesspools.

Since rivers and lakes are essentially dead, much of India lives on ground water, through tube wells etc. The consumption of water is way above what can be replenished. In Gurgaon, a thriving Cyber City outside Delhi, which has world high tech offices, the water table has fallen more than 100 feet in just a few years.

There is indiscriminate de-forestation. Coal is the major source of electricity (although this at least is changing) and the cities are the worst polluted in the world.

Grade: F

Investor Perspective

So what are the prospects for investing in India for someone seeking high, emergent market returns and global diversity?

Somehow everything you read about the future prospects of India comes out hyperbolically rosy. There are surveys that show the Indian middle class growing to more than 500 million in 2025 and India overtaking the US in GDP by 2040. These are amazingly out of whack.

Even though India has the most generous definition of middle class it has less than 3% of its population in the middle. The rest are poor to very low middle. See this article.

Investment returns in India are never as good as hyped. And they are certainly not worth the inherent risks.

To take an example: After the success of Alibaba there was a lot of hype about e-tail in a rapidly emergent India. Companies like Snapdeal and Flipkart were touted as the next Alibaba and had astronomical growth rates and prospects. I was indirectly an early investor via a very savvy India Venture Fund. Now it turns out that much of this was unsustainable hype. The growth of e-retail, which was fueled by huge, investor funded discounts, was unsustainable. So after a record year in 2015, e-tail is essentially flat. Forecasts for 2020 and beyond have been drastically slashed. Snapdeal will probably merge with Flipkart at a minuscule fraction of its valuation just a couple of years ago. Further the entry of Amazon into this winner-take-all space has clouded the competitive landscape. I’d be surprised if even Amazon can make a good return any time soon on their $5 billion investment in India.

This kind of thing occurs again and again. The final results in Indian investment are not reflective of a 7+% growth economy. India will make great strides in certain areas, notable, infrastructure and solar but there is no clear road to investing. For solar the best bet in my opinion is still the US company, Tesla, which will no doubt provide lots of support in batteries and other areas.

Will there be another Google or Microsoft out of India? Maybe, although the challenges are formidable. I would not bet on it for the foreseeable future.

The stock market in India is doing reasonably well. The indices are at all time highs. Still, adjusted for currency fluctuation, high fees for investing in India, and the large risks, you are better off being in the US. The Dow index remains a powerhouse.

Further I don’t think India provides a diversification advantage. In 2008 when the US market crashed India did not act in an uncorrelated way. It fell equally badly, so no additional diversification advantage was apparent.

I hope I am wrong – I keep rooting for India to do well. I invest there, through savvy people I know, and I also contribute to charitable activities to give back to the place where I got my start. India has tremendous potential and is a great geopolitical ally of the US. It has a freedom oriented, secular mindset and always ranks high in support of Western liberal ideas. We all hope that it will make a turnaround! But as an investor you are better off elsewhere.





















Posted in Current Events, Emerging Markets, India, Investing, Money, Politics, Travel, Uncategorized, Venture Capital | 2 Comments

Make Mine a Shingle

Two announcements regarding Tesla have caught my attention since I wrote my earlier blog about Tesla being a 25-bagger about a month ago.

Solar Shingles – Now Ready to Order

The journey to MEGA (Make Earth Green Again) took another giant step forward a week ago as Tesla started taking orders for its aesthetic solar shingles.

Solar home

Solar Single  Home from Tesla’s Website


We will begin selling roof tiles that convert solar energy into electricity in April, CEO Elon Musk said.

The goal is to make solar roofs that look better than a normal roof, generate electricity, last longer, have better insulation, and have a total cost that is less than a normal roof plus the cost of generating electricity. “So why would you buy anything else?” asks Musk.

Orders are now being taken for these shingles for the first time indicating that the product has tamed the technical hurdles that has kept everyone else out of this market and, in fact, is tooling up for mass production. These hurdles have included low electric yields, high heat production, messy connections and interfaces and lack of storage for intermittent power production. Also unsightly tiles and uneconomical production and distribution. Formidable barriers that it is now claimed have been overcome.

The first general announcement for this product was made last last year when Tesla bought SolarCity for $2.6 billion – that everybody bemoaned as an outrageous price. But the grand vision of uniting the three big components of a green energy planet is now beginning to take shape and we’re stunned by its audacity. The three big components are:

  • Energy Generation
  • Energy Storage
  • Green Transportation

Watch the video at this Tesla site to see the grand vision and how technology, engineering, aesthetics and efficiency are being combined to change the paradigm.

Important details about the solar shingles are still awaited. Like the price.

Musk says the solar roof will be priced similarly to a regular roof, plus the cost of electricity, but what he means by “regular roof” hasn’t been defined.  He may have in mind expensive “regular” roofs, like ceramic or concrete tiles, which can cost ten to twenty times normal asphalt roofing.

But you never know.

Lyndon Rive, SolarCity’s former CEO, said on a Nov. 1 call: “we think we can get to that price point of 40 cents a Watt over time in large scale” for the solar cells. That would be quite impressive because today even stand-alone solar panels are not that cheap. Still lots of uncertainty there. Lyndon Rive is certainly talking only about the electricity add-on part of the cost not the full shingle cost.

According to Bloomberg:

Make no mistake: The new shingles will still be a premium product, at least when they first roll out. The terra cotta and slate roofs Tesla mimicked are among the most expensive roofing materials on the market—costing as much as 20 times more than cheap asphalt shingles.

Much of the cost savings Musk is anticipating comes from shipping the materials. Traditional roofing materials are brittle, heavy, and bulky. Shipping costs are high, as is the quantity lost to breakage. The new tempered-glass roof tiles, engineered in Tesla’s new automotive and solar glass division, weigh as little as a fifth of current products and are considerably easier to ship, Musk said.

I read somewhere that Tesla/SolarCity has set up a special glass division for research and manufacture of beautiful, strong, light  and shatter-proof roof tiles.

There are four different materials for the shingles including terra cotta and a futuristic French slate.

Each French slate tile was made using a process known as hydrographic coloring, a process that uses water to apply printed designs. It allows the customer and his architect to custom design the look, color and aesthetics of the roof adding an invaluable element to the electricity generating shingles.

It seems from all the data one can get that the initial roof tiles will be quite expensive, competitive with only the most premium roofs. However with this product Tesla has set in motion yet another exponential innovation journey which will result in dramatically dropping costs and amazing new designs and capabilities. The market is more than 4 million new homes in the US each year and twenty times that around the world. And don’t forget the big enabling product for this technology, viz the Powerwall home storage battery.

Already there is market action that makes this a potential success. An Australian builder just announced that it will include Tesla in its homes!

The announcement (See this site) says: The Tesla Powerwall will now become a standard feature for houses built by Australian home builder company Arden Homes. It’s a setup that will help cut the cost of electricity in many Australian homes.

Tencent Buys $1.8 Billion worth of Tesla stock

Last week the Chinese giant Tencent Holdings (Market Cap: $275 billion) announced that they will buy 5% of Tesla for $1.8 billion. Tencent is one of the triumvirate of Chinese superstars, Baidu, Alibaba and Tencent. This just shows the high value China is placing on battery technology and other green energy products for the future. In fact Chinese companies have been requiring electric car sales in China to be contingent upon turning over the battery technology to them. China, by many accounts, will be a dominant player in battery production.

Tencent’s acquisition of a part of Tesla reduces a lot of capital risk from Tesla’s flamboyant approach to the green energy market. To become a trillion dollar company will require a lot of capital and big bets by Tesla, which Elon has shown a lot of appetite for, but which is potentially a big gamble. Now Tencent and a large Chinese capital source is in Tesla’s ring, watching its back. This very greatly reduces the risk of a 25-bagger in ten years.

Posted in Current Events, Innovation, Investing, Money, Politics, Science, Uncategorized, Venture Capital | Leave a comment

Oil – Looking Down the Barrel?

Creative Destruction

I remember the opening line of the book “The Third Wave” by Alvin Tofler, the futurist:
A new civilization is emerging in our lives and blind men everywhere are trying to suppress it.

He wrote the book many years ago, but that sentiment is still true. Blind men cling to the idea that buggy whips will always be needed, that we must continue to mine coal  in order to achieve energy independence. But the handwriting is on the wall – the world is rapidly embracing a new paradigm which will spur a multi-trillion dollar change in direction. If we see it coming before the blind men we can get in early as investors, entrepreneurs and citizens.

In an oft-quoted comment Wayne Gretzky, the superstar hockey player, said, “I skate to where the puck is going to be, not where it is.” That was the rare ability that made him such a dominant player. It is the same in investing and entrepreneurship. Those that are successful don’t just look at the existing landscape, they see future trends and paradigm shifts and creative destruction and new worlds emerging from the destruction. They see the phoenix dives into fire and rebirths. They see Vishnu, the Destroyer of Worlds, and Brahma, the Creator of new Worlds!

Optimum – A 5 -10 Year Investing Horizon

Of course how far you can see into the future has limits. For a comfortable and practical investing horizon lets take 5 – 10 years. This, I believe, is the optimum time for trying to predict the economic puck’s location. Also, as a side note, I think that if you want to invest in the stock market you must have a buy and hold mentality of 5-10 years. In-and-out strategies are guaranteed to lose money because you’re playing in a  rigged game against professional players armed with large data, analytics, special information and nano-second trading. It’s like a game of poker where they can see your hand but you can’t see theirs! The largest professional short-term traders make a very large percent of the Wall Street profit, and the counter-parties to these profits are losers in the zero-sum game, usually small investors, day traders, large pools of managed money and the like. A 5-10 year horizon, however, is not where the sharks are feeding and you have an excellent chance.

[In fact, a purely passive strategy of buying a large cap US index fund with low fees, like the DIA (the Dow Jones Index Fund), will provide you with great returns over a 5-10 year horizon. You will probably beat inflation by 5 – 7% and you will beat 95% of the Mutual Funds! All this without lifting a finger. I keep repeating this in my blogs and for most investors this may be all the advice they need.]

But suppose you have insights about the puck as it is likely to be in 5-10 years. You can make better investment decisions. The trends for this time frame are beginning to become apparent but are not yet fully appreciated or widely acted on, making them an opportunity.

Death Watch

In the 5-10 year time frame the following large sectors should be on a Death Watch list

  • Oil, Coal, Gas – Fossil Fuels
  • Banks, Brokerages, Investment Houses, Financial Institutions.
  • Insurance Industry including Healthcare Insurance providers

These industries (and others) are in the early throes of an extinction spiral – not yet apparent to everyone. In 5 years it will be apparent to a lot of people but we want to act now before everyone bails.

In this blog let’s focus on the Oil, Gas and Fossil Fuels industry. We can hopefully take on the others in future blogs. Stay tuned.

Grim Reaper

To the blind men it looks like the oil and coal industries are essential to the world’s energy needs and will remain a part of a balanced investment portfolio. The US Energy Information Administration (EIA), which  makes official forecasts several decades out says in its 2016 report that in the year 2040 petroleum and other fossil fuels will still constitute 78% of the world’s energy use.

Here is their Summary:

“Even though consumption of nonfossil fuels is expected to grow faster than consumption of fossil fuels, fossil fuels still account for 78% of energy use in 2040. Liquid fuels—mostly petroleum-based—remain the largest source of world energy consumption, the liquids share of world marketed energy consumption will go from 33% in 2012 to 30% in 2040.  Coal, the world’s slowest-growing energy source, rises by 0.6%/year.

Solar will be the fastest growing at 9% per year, but still not enough to change the landscape much by 2040.”

This is so bad a prediction that it should qualify for malpractice in forecasting! Talk about the blind men! Solar is already producing more in 2017 than they predicted for 2020. In fact if you look at an internet article on solar predictions that is 6 months old it already feels woefully obsolete. Wikipedia predicted in mid 2016 that India will have 6 GW of solar by year end. The real number on Dec. 31, 2016 was more than 9 GW.

In fact solar will grow more than 25% per year! It will generate twice more energy in 2025 than the EIA predicts for 2040. The contribution from oil and coal will dive precipitously, down to virtually buggy whip levels.

Take this report, much more on the button from the insiders in the field. It says:

Cumulative solar PV capacity will double every 24 months. Since the inception of solar, there has been a total of 320 GWp built. Within the next two years, this total capacity will be doubled. In the next 4 years there will be 4 times as many solar installations.

Therefore, in 2018, there will be ~640 GW of PV installed and the industry will need to employ up to 5 million people. By 2020, there will be ~1,280 GW installed and possibly 10 million people employed.

At the same time, costs of PV panels will continue to drop, so PV electricity will be cost competitively in more and more local markets.

Here’s a visual cue to the future of energy as the deeper predictors see it. Green means significant or growing, Yellow stagnant and Red declining.

Energy Outlook

The oil industry (or the fossil fuel industry more generally) has a lot of champions, including the blind men in our current government. They are building a huge wall. Its  cost is trillions of dollars, not just billions. And you, not Mexico, will pay for it!

The Wall

wall of liesThe big wall that the oil/coal industry has built is one designed to keep facts out, bottled behind the wall. But for how long? Very soon the facts will build up, form an inexorable force and break the wall.

Here the the inconvenient facts that are blocked by this wall:

  • Global Warming is real. It is exacerbated by human fossil fuel burning and is not just part of the natural earth cycle. Moreover it can and will be economically addressed, creating new businesses and meaningful jobs. The whole world is on board with this. In the US there is deliberate disinformation being spread using enormous sums of money from entrenched fossil fuel interests and feckless politicians
  • There is also huge non-carbon pollution from the burning of oil and coal. It’s choking the air with toxic particles, pumping mercury and other pollutants into rivers, causing aquifer degradation and methane etc from fracking. (In New Delhi, India, for example where I was last winter, the air is unbreathable. Lung cancers are growing. Children are developmentally arrested. All from oil-burning cars and coal-burning plants nearby).
  • Oil has gigantic, civilization-destroying geo-political costs. Oil is the lifeblood that feeds the tumor of terrorism and causes us to engage with dreadful countries like Russia, Venezuela, Iraq and Saudi Arabia. If you really want to win the war on terror no need to “bomb the shit” out of the Middle East. Just get off oil.
  • Fossil fuels are no longer the economical solution for the world’s energy needs and a growing, thriving world economy. We don’t need to trade off growth and material well being against poisoning ourselves or being beholden to Russia and Saudi Arabia. This is because we have, for the first time, very viable and less expensive green options.

Of all of the above facts the one that will be most decisive is the last.

Solar is on Moore’s Law Journey

Already alternative green tech like solar is at parity with oil at $50/barrel in much of the world. This is true even when we do not recognize the true cost of fossil fuels by subsidizing them, not attributing CO2 costs to them, or terrorism-fighting losses to them. But solar power, in particular, is seeing an exponential reduction in cost. In ten years (or sooner) it will beat oil even at $10/barrel. And a big enabler of this green, plentiful and inexhaustible energy source is batteries. Great strides are being taken in solving the battery road block and soon solar will ride the Moore’s Law exponential curve. It is in the early stages of this exponential ride which could go on for decades. See my article on why Tesla, at the vanguard of the battery business,  will be a trillion-dollar company in 10 years.

The consensus among the energy industry Gretzkys, those who see the puck 5-10 years from now, is that we will leave up to 80% of all our oil and coal in the ground. This makes a lot of sense in bending the carbon curve while building a new economy with good jobsThink about it: we should value much of the oil reserves of oil companies at zero! I’m sure this sounds extreme but this is emergent reality.

I’m not including any Black Swan events in this prognostication which can further speed us into an alternative energy future. Black Swan events are by nature unpredictable so I don’t know what they’ll be. It’s still fun to speculate. Could it be a new revolutionary battery? Artificial photosynthesis? Genetically modified bacteria? Graphene-based semi-conductors?

We know with much forecasting certainty that the fossil fuel industry is headed to the gallows.

The oil stocks are already beginning to reflect a persistent malaise. For sure our current administration is going to fight this trend. They will deny all mention of CO2 harm, they will eliminate environmental protections, they will cut funding for green energy research and  subsidies. Even more, I predict they will try to sell off federal lands to oil interests in fire-sales, with subsidized mineral rights to big oil and coal interests. None of this will work for long. Reality is a formidable opponent.

A couple of weeks ago (on March 19th, 2017)  Dr. Ernest Moniz, the Energy Secretary under Obama was on Fareed Zakaria’s excellent CNN program, The Global Public Square, or GPS. He said that the Paris Accords were not just an agreement among countries to limit their emissions to specified levels. The main outcome of the Accords was a commitment to building shared new technologies and products toward a renewable energy future. Technologies such as new kinds of batteries, new integration of solar panels into building materials, new standards to allow uniformity and compatibility of products, improvements in Balance of Systems for solar. Also, offshore coastal grids for transmitting wind and solar power from ocean sites, and a host of other engineering innovations.

This will spawn a spate of new, well-paying and meaningful jobs. In manufacturing, construction, management, accounting, scientific research and even new art and literary expression. If the US signs out of this we cease to be a prominent player in this multi-trillion dollar emerging sector. The leadership will go to China, Germany, India and other committed countries. And our jobs will migrate out no matter how much global trade we ban.

From this perspective it makes little sense to invest in the fossil fuel industry. Losers will include large oil conglomerates, oil services companies, pipelines, coal interests and even the fracking and natural gas companies. It is interesting that pipeline partnerships such as Energy Transfer Partners have fallen in price despite support from the Trump administration and even when oil had a (dead cat) bounce. Dear TransCanada – sorry, the Keystone pipeline is not going to be killed by environmental concerns alone, you will be dead because we don’t need another 800,000 barrels of oil per day.

How to Invest

What is the best way to invest with a 5-10 year horizon? The passive purchase of the Dow Index Fund (DIA) or equivalent S&P 500 ETF remains the best approach for most. I know that the Dow 30 stocks have Oil/Gas, Financials, Brokerages as components. Still the 30 stocks are selected and monitored by very smart people  and they will most likely get out of dying sectors before the inevitable.

If one has a stomach to be somewhat more proactive, I would create my own large cap “Modified Dow”. It  would consist of all Dow stocks except  ExxonMobil, Chevron, Goldman Sachs, JP Morgan Chase, Travelers and American Express. I  would add in Tesla, some other tech stocks,   like Amazon, Google (Alphabet), even  Salesforce,  and some tobacco including a couple of international  giants, like British Tobacco. Throw in a progressive utility or two like Duke (active in green energy).  Also Tencent (SEHK) – a Chinese company that just bought a 5% stake in Tesla. The Chinese see the value of clean energy that is why they are requiring that companies that want to sell electric cars in China hand over their battery technologies! I hope we don’t give away our tech edge – now that would really be a bad trade deal.

I would buy equal number of shares of all on my list and not touch this for many years. Reinvest dividends.

This is not really an investment advice column. I’m stating a macro level view and guessing where the puck will be in about a decade. It’s purely a sharing of a personal perspective.

Posted in Current Events, Education, Innovation, Investing, Money, Philosophy, Politics, Science | 5 Comments

Tesla – The 25-bagger!


Screen Shot 2017-03-07 at 10.57.56 PMTesla looks so overpriced by all the usual metrics. It made a loss in the 4th quarter of 2016. Its revenues in the last year were about 7 billion and it is selling at a market cap of $40 billion. The stock has been flat for three years and they made that expensive purchase of Solar City. Elon has recently missed many deadlines  and the roll out of the $35,000 model looks delayed and money-losing.

And yet Tesla is very likely to be a 25-bagger in a decade. To be a 25-bagger it would need a market cap of $1 trillion, more than any other company in the world today, including the high-flying Apple, which is capped at $700 billion. It will sell for 25 times its current stock price of $250/share in a decade. Maybe sooner, Yup. And then it’ll probably triple from there in another few years.

To understand my logic consider these facts:

We live in a winner-take-all economy.

Winner-take-all  has always been the tendency in a free market system, but there is a lot of evidence that it is accelerating. In a March 3rd article in the Wall Street Journal  Jason Zweig says that winners are taking it all and it’s time to buy the winners.

Some examples:

. Google dominates the ‘search’ category despite major attempts by competition, like $10 billion spent by BING from Microsoft. Google 75%, BING 15%

. Amazon and Alibaba have destroyed their competition. In India, Flipkart and Snapdeal once considered on-line retail faves have begun biting the dust.

. Uber is valued at $50 billion plus. Next one in this category is Lyft with one-tenth the valuation.

. Apple is the dominant winner in the smart phone business – they got more than 90% of all of the industry’s profits since 2015.

. Facebook is gobbling up the “Attention Space” online with more than a billion users and an exponentially increasing database of user information that it exclusively owns. This monopoly gives it a huge advantage over everybody else in this category.

Other winners include Netflix, Adobe, Google’s You Tube in the video space (5 billion video viewings per day!). This market dominance is not just a feature of high tech – although it is faster and more obvious there. Banks and investment firms, like J. P. Morgan Chase, Bank of America, and Goldman Sachs, are once again concentrating in size and scope – the largest few being behemoths, too large to fail by any account. In Real Estate, Tobacco, Supermarkets and the Insurance sectors the same trends are very prominent.

In their recent book, Play Bigger, How Pirates, Dreamers, and Innovators Create and Dominate Markets,  Ramadan, Peterson, Lockheed and Maney point out that 54% of all profits in the last 5 years have gone to the category-leading companies. In the last decade start-up valuations have tripled, they found. But the rising tide doesn’t lift all boats any more. The Category killers got all the action – a six-year start-up that wasn’t yet “King” had an almost zero chance.

The reasons are manyfold. Today the advantages of being large greatly tilt the odds in your favor. In high tech the largest companies get the best talent, attract the largest number of  Apps from developers, have the best access to capital and get the biggest free buzz. Companies like Apple, Google and Amazon have a huge gravitational pull across the globe that sucks everything into their category space. Also they have the largest flexibility in growing their categories as well as defining new categories that they can naturally dominate.

So this throws out the wisdom of mere valuation as an investment criteria. Recently I had lunch with my friends, Steve Butler of Pension Dynamics and Blair Hull of Hull Investments, (Blair runs an ETF called Hull Tactical US) and we were discussing this very issue. Steve said that small-cap companies outperform the Dow companies over the long run. Small-cap returns historically, he said, are 12% annually vs 10% for the Dow. I think this is a fallacy going forward. In a winner-take-all market small companies have structural and competitive disadvantages that increase their risk of simply perishing unless they can dominate their category.

How should you invest in such an environment?

One timeless advice which requires minimal effort is to invest in a large cap index, such as the Dow Jones Industrial Average (DJIA) tracking DIA or the S&P 500 Index. The 30 stocks in the Dow tend to be dominant in their category – they represent 30% of the entire  market cap of all stocks- and thus have a lot to gain by the advantage that accrues to size. The DJIA has a well-documented 120-year record and has grown 10% compounded for this period, despite the 1929 depression, the dot-com bubble and the 2008 financial collapse. That means that you could double your money approximately every 7 years, beat inflation by a whopping 7% per year, and beat the US GDP growth rate by 3% or more per year! All with near-zero effort.

But you can do better if you can explicitly play the winner-take-all paradigm.
You can do this if you can spot an emerging category with a huge potential market size and then identify the company or players that will dominate it. This will be the potential winner-take-all and if you spot this company early before everyone else jumps in you have a market King with big returns. Many such players are not public yet so the biggest opportunities might lie in the Venture space. This is a hazardous space, not for everyone and not easy to spot the winners.

But there are areas where you might be able to pick up a publicly traded company that meets the above criteria. If you can spot such a company you have a potentially very rewarding investment – a multiple bagger. Tesla is one such dominant company in an exploding market.

Why Tesla?

So back to Tesla.  What space do they dominate – no, it isn’t electric cars. The big, emergent, giant category they dominate is Batteries. Batteries for home storage, solar/wind power generation, peak shifting by utilities and another million uses that will emerge as the price drops. And emergent is the word for this market.

Since mid-2016 Tesla makes their Powerpack (for utilities and industry) and Powerwall (for the home solar market) battery storage units.The price has already come down  15%  to about $400 per KWH and they reportedly have $1 billion in outstanding orders for 2017! That’s triple the order rate in 2016. At current prices that means 2,500 MWH of battery storage. Tesla is a leader in this field and it looks very likely that they will break the $100/KWH price target first, at which the battery market goes crazy. This will almost certainly happen in 5 years (by 2022).

How crazy will the battery storage market be? Let’s estimate.

Solar power generation in the US  is about 1% of total today – it looks insignificant and below everybody’s energy radar, but it’s doubling every 30 months. It will follow Moore’s law of exponential growth as costs come down and efficiencies of scale kick in. In 5 years it will grow four fold. In 10 years 16 fold. Such is the nature of exponential growth.

In 2016 solar generation in the USA was already at 54 trillion-watt-hours (TWH) which is more than 1.35% of total electricity generation here (about 4,000 TWH). Each TWH is a billion KWH. With prices coming down rapidly solar installations are growing and will continue to grow at about a 35% compounded rate of growth. Thus in 5 years solar will be at over 200 TWH or 4% of US electric output and in ten years at 800TWH or 16%. Wind power will most likely grow more slowly but starts at 200 TWH, four times the amount of solar today.

Both solar and wind produce power intermittently and need batteries to even out the electric usage. If you assume that, as a minimum, one day’s worth of consumption should be stored in batteries, the demand for storage for solar and wind (in the US alone) comes out as follows, according to my conservative calculations:

2022: 180 GWH
2027: 4000 GWH

The cost for storage will drop approximately by 15% per year – so assume that these demands are realized only for  $100/KWH of storage cost, about 1/4th of today. That makes the market size for this segment of battery demand to be:

2022: $18 billion
2027: $400 billion.

Batteries for cars, peak-shifting and non-US markets are not included in the above estimate.
Tesla will dominate this market – having a huge first mover advantage. Even at 75% of the market they will sell $13 billion of batteries in 2022 growing to a whopping $300 billion in 2027! Their first mover advantage is huge: a giga-factory in Nevada that will most likely produce 150GWH of battery storage per year, according to Musk. They also are sewing up a virtual monopoly on utility-scale storage with well-engineered, modular and small-footprint units. Other players and better battery technology may emerge to compete, but the likelihood is that Tesla will absorb them into its own orbit, either through acquisitions or collaboration agreements.

Add to this car sales, rooftop solar and other ancillary products for Tesla and we can, conservatively, say that Tesla could have sales of over $500 billion in ten years. This sounds wildly optimistic, but Elon Musk is planning for it and can pull it off. A trillion dollar valuation – a 25-bagger – easy! A decade from now this market will still be growing, it will not have reached a maturity stage. The demand for storage will be immense indeed and will not peak for at least two or three decades. So Tesla should get “growing” company valuations.

There are risks, of course. But such good bets don’t often manifest themselves and frankly we are still ahead of widespread recognition of this market segment and its exponential growth. Winner-take-all thinking in investing is still a new realization and not factored in by many in the market.







Posted in Current Events, Innovation, Investing, Money, Politics, Science, Uncategorized | 13 Comments

The Faked Fury of Fiorina

Fake Fiorinous Fury at the Republican Debate

Fake Fiorinous Fury at the Republican Debate

At the recent Republican debate held at the Reagan library, I found it hard to swallow the phoniness.

A fake video followed by fake outrage! Carly Fiorina gave a diva performance. Clenched teeth, seething rage, talk of butchered babies, body parts sold to Frankenstein labs for blood money. The image was one of a coven of Planned Parenthood witches with baby blood dripping from their fangs sucking at the Obama-supplied teet of government money… a horrific culture of death and big government that Carly will squelch like a cockroach. Man, she is impressive, if you ignore the content and concentrate on just the atmospherics.

So what’s the truth? Are abortions in America a run away epidemic? Are organizations like Planned Parenthood, motivated by gain and a liberal (meaning immoral) mindset, adding to the epidemic?

Let’s take a  look at abortions in America.

The simple fact is that you reduce abortions by reducing unwanted pregnancies, specially among unmarried teens and underprivileged young women. Planned Parenthood and many other subsidized organizations spend a bulk of their effort in preventing unwanted pregnancies – through advice, free contraception and a presentation of options to young women. And how have they done?

Here’s a chart showing the U. S. abortion rate since 1980. (Data from Guttmacher Institute)

US Abortions per year

After 1990 the abortion rate has steadily come down from approximately 1.6 million abortions per year to about 1.0 million in 2012, which is the date where the latest figures are available (the red dot in the above diagram). It’s projected to be even lower today at less than 900,000. A large part of the gain has occurred under the Obama and Clinton administrations although the decline has been steady for 25 years. This data is from the Guttmacher Institute which collects detailed statistics on women’s health issues.

The decline is a direct result of reducing unwanted pregnancies – teenage pregnancies are down by 40% in the US in the last 7 years. That’s how you reduce abortions – not by criminalizing it, or taking away reproduction-based counseling  provided by organizations like Planned Parenthood.

What would be an ideal goal for America?
Zero abortions.

But not because it is illegal or difficult to have one.

Zero abortions, because abortion bloodwe have young women in charge of their lives, supported by community, counseled on their options, and completing their educations, instead of having to drop out to be single mothers. There are far too many young women in this country that face very difficult choices –  poverty, broken homes, alcoholism in the family, hopelessness and community indifference. For such women Planned Parenthood provides education, support and options such as contraception, adoption and unfortunately even abortions.

By insisting that we should shut down public resources for Planned Parenthood we will not achieve the goal of zero abortions, we will do the opposite.

So, Carly, what do you say – let’s double the support for organizations like Planned Parenthood and accelerate our journey to Zero Abortions?

Posted in Abortion, Planned Parenthood, Uncategorized | 1 Comment

Ready for Prime Time?

Prime numbers never cease to enthrall and fill us with wonder. There is something about them, I don’t know what, but if you catch the bug you will never stop being amazed. (Prime numbers are those that have no factors other than 1 or themselves, e. g. 7 or 13)

Take Mersenne numbers. They are named after the 17th century French monk who studied them and are of the form:  2^n – 1, or 2 raised to the power n for some positive integer n, minus 1. The first few are: 1, 3, 7, 15, 31, 63, 127, 255 …. Since 4 out of the above 7 (not counting the number 1, which is outside the realm of numbers eligible to be prime) are prime, Mersenne thought that this series would be a rich source of prime numbers. He conjectured that an infinite number of these numbers would be prime – something that may be true but hasn’t been proven yet.

But the Mersenne series does yield some interesting properties. First, the exponent of 2 (i. e. the power to which 2 must be raised in a Mersenne number) must itself be prime! And even then very few prime exponents actually result in a Mersenne prime. Even so, last year, the largest prime currently known to man. a Mersenne prime, was found using fast computer searching. It is the 48th Mersenne prime and has more than 17 million digits!

The largest prime known: 257,885,161 − 1, a Mersenne prime.

(If you can be the first to find a prime number with more than a hundred million digits I believe there is a prize of $150,000 awaiting you  – so go at it!)

Mersenne numbers are also an example of an area of mathematics called Dynamical Sequences. Here you generate numbers, starting with a seed, such as zero and repeatedly plugging into a simple algebraic expression. For example you can generate the Mersenne numbers by using the expression 2x+1. Start by plugging x=0 and the expression calculates out 1. Now plug 1 into the expression and you get 3. Repeat and you get 7 followed by 15, 31, 63, 127 …  i. e. the Mersenne numbers.

Holly Krieger, currently at MSRI* (see below) in Berkeley, is studying the arithmetic properties of some magical dynamical sequences and coming up with mind blowing results! MSRI has a video series at the website full of fascinating math games, puzzles, tricks and number facts. To see a wonderful show on her dynamical sequences and how prime numbers crop up everywhere see her presentation by clicking her picture below. Do see it all the way to the end for she has an unexpected surprise!

*MSRI – Mathematical Sciences Research Institute, Berkeley. Website here. MSRI is an advanced institute located in the Berkeley hills dedicated to the advancement of fundamental math and also to the cultivation of its beauty, power and importance.

I have the privilege to support some of their activities and in return get a rich exposure to fun math people and cutting edge researchers in the field. Next time you’re in Berkeley check them out. Ashok

Posted in Cosmology, Education, Fun, Math, Philosophy, Puzzles, Science | 1 Comment

Six Cherished New Year’s Wishes

I’ve been thinking Math this last week. We had the Math Lover’s Forum at our house – a gathering of Math enthusiasts in an intimate setting discussing a problem of deep interest.

Prime Obsession

Prime Obsession

One of the attendees, Sean Hennessee,  brought along a book for me, Prime Obsession, by John Derbyshire. As it says on the subtitle of the book, it’s about: Bernhard Riemann and the Greatest Unsolved Problem in Mathematics.

It’s amazing how much fun Math books like this can be – you really don’t even need to be a very deep scholar to love them, although it helps to be curious about the subject. I remember reading One, Two Three.. Infinity by George Gamow many years ago – a book that got me started loving all the math lore and magic.

Another fun book that I read many, many years ago is, A Mathematician’s Apology by G. H. Hardy, the celebrated Trinity College (Cambridge) don who discovered S. Ramanujan. He describes his own life as a mathematician elegantly and walks us through the corridors of Trinity College where the likes of Bertrand Russell, John Maynard Keynes, John Edensor Littlewood, James Clark Maxwell were doing world-changing science and where Ramanujan spent several years, a complete social misfit but a huge natural genius that everyone at Cambridge tried to adopt and understand.

There are many fun stories about Hardy and other prominent Mathematicians (Gauss, Euler etc.)  in Derbyshire’s book along with an exploration of their genius and passion for math. The “Unsolved Problem” that the book talks about is The Riemann Hypothesis,  one of 7 so called Millennial problems in Mathematics that has a $1,000,000 prize for its proof. It is the most talked about enigma that the math community incessantly talks of and is indeed a problem with a lot of astonishing twists and turns, all brought out very nicely in this book.

Here’s a fun story about G. H. Hardy from this book, which illustrates his interests and mindset. In a postcard to a friend around 1920 he talked about his six most cherished New Year’s Wishes:

1. Prove the Riemann Hypothesis.
2. Make 211 not out in the fourth innings of the last Test Match at the Oval in London.
3. Find an argument for the non-existence of God which shall conc=vince the general public
4. Be the first man at the top of Mt. Everest.
5. Be proclaimed the first president of the USSR, of Great Britain and Germany!
6. Murder Mussolini

Isn’t that a fantastic list! Wouldn’t you just love to chat with a genius who had that kind of New Year’s wish list?

What would be your six most cherished wishes?

In my next blog my New Year’s wishes (It’s New Year’s day tomorrow by the Hindu calendar. Happy Diwali and New Year’s everyone!). Also in a future blog another fun story from Hardy!

Posted in Cosmology, Education, Fun, Innovation, Math, Philosophy, Puzzles, Science | Leave a comment

Wolfram Alpha – A Wonderful Math Knowledge Engine

I was talking to my smart nephew the other day. He loves math and loves even more to stump me with math riddles and puzzles.

Me: Let’s talk about some fun problems with prime numbers*. I’m thinking of two prime numbers that add up to 753, what are they?

Nephew (instantly): Oh, come on, Uncle. That’s too easy. Clearly if the sum of two numbers is odd (in this case 753) then one of them must be even and the other odd. But the only even prime number is 2, so your numbers are 751 and 2.

Me: OK, you’re a genius.

Nephew: I have one for you. Think of prime numbers with a single digit repeated many times. The smallest such number is 11. What’s the next one?

Me: OK, Let’s see. A single digit repeated. A number like 777, hmm. Clearly the digit cannot be anything other than a 1 because if it’s any other digit like 7 the number will be divisible by 7 and hence not prime.

Nephew: Good

Me: So the prime will be composed of repeating 1’s. It’s not 111 because 111=37×3. It’s not 1111 because that can be divided by 11. What about 11,111? How do I check what the factors are for 11,111 or whether it’s a prime?

Nephew: You’re on the right track, my smart but oh-so-out-of-touch Uncle. Have you tried a great tool called Wolfram Alpha? It’s an Answer Engine as opposed to a mere search engine. It actually calculates your query using the famous computational program, Mathematica, written by scientist, Stephen Wolfram. Among other things it will factorize any number for you – within limits, of course. No one can factorize extremely large numbers, those containing say 100 digits, yet. But Wolfram Alpha will do any math that is possible, even including symbolic math and closed form equation solving,  and will give you the latest conjectures to boot.

Try it and see if you can factorize 11,111.

So I pulled up my iPad, went to the site and typed in “factorize 11,111” as below:

Wolfram Alpha Query

Back came the answer:

Screen Shot 2013-02-18 at 4.12.40 PM

It had factored my number: 11,111 = 41 × 271.

Me: You have shown me a great new resource, dear nephew. Now I shall try numbers with repeated 1’s to find a prime number.

Nephew: Great! And did you notice that you only need try numbers with 1’s repeated a prime number of times? So you needn’t try 1 repeated six times or 111,111 because 6 is composite. Since 6=3×2, you know 111,111 will be divisible by 11 or 111. Right?

Me: I was just going to say that myself. So the next numbers we will try will have repeating 1’s: 7, 11, 13, 17, 19, 23…. times. We tried them on the Wolfram Alpha Math Engine and got:

7:     1 111 111 = 239 × 4649
11:    11 111 111 111 = 21 649 × 513 239
13:    1 111 111 111 111 = 53 × 79 × 4187 × 265 371 653 × 14 064 697 609
17:    11 111 111 111 111 111 = 2 071 723 × 5 363 222 357
19:    1 111 111 111 111 111 111 = Prime!!!

Success! The smallest prime number with a repeating digit (after 11) is 1,111,111,111,111,111,111 or 1 repeated 19 times! We would never have been able to compute this using any conventional program like Excel or a traditional search!

Turns out the next one is 1 repeated 23 times and then we don’t see any more primes of this form for quite a while. They are there though. Many have been found but it’s a tough job even for very fast supercomputers.

Wolfram Alhpa is a real boon. Try it if you love playing with numbers or symbolic math. Here’s one last result I got playing with this fantastic math engine. I asked for the integral of secant(x). The answer, along with graphs, a Taylor’s series expansion and much more came out as below:

Screen Shot 2013-02-18 at 4.37.01 PM

What a fun resource available to all math freaks!

*(Prime numbers, as most of you know are numbers that cannot be divided by any other number, except of course 1. Examples are: 2, 7, 11 but not 21 because that can be divided by 3 and 7).
Posted in Education, Fun, Innovation, Math, Puzzles, Science, Uncategorized | Tagged | 7 Comments

“Goodness Gracious Me!” – A Classic from 1960

Millionairess PosterPeter Sellers has done some wonderful roles in his life time. In 1960 he starred in the movie “The Millionairess” with Sophia Loren. It is a hilarious comedy in which Peter Sellers is an Indian doctor living in London and Sophia Loren is his millionairess patient. She has fallen in love with him and feigns all kinds of illnesses to come and see him.

There is a great song from this movie called “Goodness Gracious Me!” which was a hit, particularly in India. It has hilarious lyrics, e.g.

Sellers loren millionairessFrom New Delhi to Darjeeling
I have done my share of healing,
And I’ve never yet been beaten or outboxed,
I remember that with one jab
Of my needle in the Punjab
How I cleared up beriberi
And the dreaded dysentery,
But your complaint has got me really foxed.

When I was a teenager in New Delhi this song used to play on the radio a lot and hearing it again it brought back big memories and I laughed hard once again as I did in those magnificent 1960’s and my college days. How fondly I remember them!

I’m appending a YouTube rendering of this song below. Please watch and you will love it. Also rent the movie, The Millionairess if you can find it. It’s a lot of fun.

Some things are evergreen!

Posted in Fun, Old Movies, Travel, Vacation | Tagged , | 6 Comments

The Cure for Deficits

Our Federal Deficit is in the headlines again. It’s a bi-i-i-g deal! (That’s why I’m capitalizing the F and the D). There’s talk everywhere of the fiscal cliff and debt ceilings and who should pay and what to cut … All the talk is, of course, dishonest and does not give any inkling to the average American about what the real picture is. The press simply jumps on the wagon of the politically self-serving parameters in this debate, reports “both sides” and basks in the improved ratings for the media garbage they generate. It is too lazy to learn the real perspective on our federal financial situation. So I am laying out a perspective here that, maybe, gives us a tool to repair this problem.

Everyone knows by now that our national debt stands at $16 trillion. There’s even a national debt clock that shows this every time some political hack wants to make an issue. But what does this number mean – that so far we have spent $16 T more than we collected in taxes at the federal level. To understand the debt and the annual deficit we must understand a key aspect of how the government does its accounting.

The government does its books on a Cash Basis i. e., all the federal accounting, budgeting and assessments are done based on annual cash inflows and cash outlays, something no 21st (or even late 20th) century financial entity would be allowed to do. Only the government among major economic bodies (Corporations, NGO’s, Partnerships etc) does business and reporting this way and it distorts the picture immeasurably. If we want to have any chance of understanding the public products, services and obligations and the time lag with which their costs and benefits kick in we have to unravel this cost basis accounting and see what’s lurking below.

Cost Basis does not recognize accrued costs and obligations. The federal government has many, many future obligations (that we can define and quantify to varying degrees right now) that it does not include in its deficit calculations. Our budget deficits are based solely on what the government pays  and receives in taxes every year, not the obligations we accrue.


In this form of accounting, our deficits are not caused at all by the major entitlements so viciously under fire by Boehner, Paul Ryan and their ilk. Quite the contrary, the personal payroll taxes that are used to pay for these services have more than paid for their cost. On a cash basis Social Security and Medicare have a surplus of over 2.5 trillion dollars right now. So here’s how our debt clock looks if we break out these “Entitlements”:

Federal Debt (non Entitlements):         $18.5 Trillion
Surplus (Entitlements):                              $2.5   Trillion
Net Debt:                                                    $16 Trillion

It’s true that in 15 to 20 years this surplus will evaporate and Social Security and Medicare will go “bankrupt” if we do nothing. By “bankrupt” we mean that future obligations will require more taxes or deficit spending – just like we pay for most of the other government right now! But do understand that the current debt of $16 T is not a result of these Entitlements.


If we are going to use an accrual standard to measure Entitlements and their impact on our debt then we have to use the same standard to measure other future obligations of the government and the hue and cry must be just as vicious about paying for those or going “bankrupt”.

Let’s look at three of the other (out of many) accrued deficits:

1. Infrastructure Repair and Upgrade Deficit. By some measures we are reaching dangerous levels here – budgets have been slashed for infrastructure since the 1980’s. The  Accrued Deficit: $5 Trillion (or so, give or take a trillion). See figure for 5-year shortfall in chart to right

2. Education and Training Deficit. Part of our chronic unemployment comes from a neglect of the training of our work force. We need an urgent Repurposing of our Labor pool if we are to compete in the 21st century. If we start now the results will still take many years to materialize so we can’t wait. Tom Friedman, Bill Gates and El Arien of Pimco, to name three prominent people have been screaming about this. Estimated Accrued Deficit: ?? Trillions.

3. Insurance Deficit. Our government has a large national  insurance function. For example. It insures nuclear plants, banks and savings deposits etc. It insures against natural disasters such as hurricanes, earthquakes etc., against major accidents, such as oil spills or coal mining accidents, against disease outbreaks, security breaches, such as terrorism, against unemployment and destitution. You name it. A whopping percentage of the government function is insurance – we need this public good, it seems for without it there can be no power plants, oil drilling, banking or the safety net. But unlike private sector Insurance companies the government does not have to set aside reserves to pay for its future obligations. When these obligations kick in, as during a severe recession (2008-2010), or a natural disaster, big deficits are generated. Net Insurance Deficit: 3-5 Trillions by some estimates – depends on assumptions about future economic conditions also.

OK, I don’t need to name all deficits not explicitly included in the debt of $16 Trillion.

Good News
This is HORRIBLE, you say. Is there any good news that points the other way? Yes, there is. And this is where some of the solutions may lie.

When you account on a Cost Basis you do not distinguish between Expenditures and Capital Investments. Both are treated as an outflow of cash. However, capital investments are not cash merely consumed. They produce future cash flows and other benefits. These future benefits are also not included in a Cash Basis Debt number. So when proper Capital Expenditures are accrued properly the real deficit does not grow as fast as the Cash Basis deficit and the future cash flows produced are unaccounted deficit reducers. Good news, huh?

This fact can be used to mitigate our employment problem and reduce the debt at the same time!

Here’s an example:
Say you want to produce 3 million  jobs per year (as Romney said he would magically do by cutting marginal tax rates). The Government can borrow and spend about $100 billion (per year for as long as it takes – probably one presidential term) rebuilding our infrastructure. Each $billion produces 14,000 direct jobs and about the same number indirect ones. (See my blog here for details). So $100 billion will produce about 3 million jobs. On a cash basis you have just increased the debt by $100 billion/year. But since you have reduced the infrastructure debt by the same $100 billion the net deficit (on a rational accrual basis of accounting) is unchanged. The cost of borrowing: Less than 1%/year for a five year period. Add in gains from: not having to pay unemployment benefits and increases in income tax revenues and this is a hugely beneficial way to reduce the deficit while seeming to increase it.

We need this kind of bold analysis to create policies that have a chance to get us out of our mess.

The second part of the solution can be from technical innovation, productivity increases and a faster growing economy. During the last century the US grew at a compounded rate of 3% for generations because the US developed every new technology worth inventing – airplane, nuclear tech, integrated circuit, internet, satellites and GPS, biotech … you name it.

I saw an interview with Professor Sadoway from MIT working on materials technology (on Steven Colbert’s TV program) who is close to making a battery that can store 100 times the power than today for the same amount of weight. If perfected this technology alone could bring down the price of oil to $20 per barrel (he said) by boosting alternative energy production.

As for our Medicare costs and medical costs in general we are projecting to spend $30 Trillion in the next decade as a nation on healthcare. These could come down substantially in the coming years due to converging technologies that will produce zero-cost diagnostics and personalized cost-effective wellness solutions. See my blog on this here.

This kind of solution has to be adopted by our nation as a matter of policy. If deficit spending is required to increase the chances of such technologies coming to fruition then let’s do it, despite the howling Republican luddites. (OK, they’re not all Republican and that was a cheap dig).

Anyway the point is that the CBO can project burgeoning deficits all they want – they have no way to assess the power of exponentially growing innovation and technologies. If we are unable to continue innovating then, yes indeed, our deficits will be untenable and we will inevitably see a horrible decline in our standard of living.

But what if are able to embrace the vision in Peter Diamandis’ book, Abundance, throw the anti-science medievalists out of our leadership and decide as a country to forge ahead on the vision….. the deficits will vanish.

My fingers are crossed.


Posted in Current Events, Education, Healthcare, Innovation, Investing, Medicine, Money, Politics, Science, Uncategorized | Leave a comment