Globalisation in a nut shell

Three experiences in a span of couple of hours over a post Christmas shopping trip in and around Oxford Street – left me with a wonderful taste of Globalisation. These three experiences, are actually not something big, they are just average day to day experiences that any one of us have and often don’t merit a second thought. However on reflection, simple experience like these often give a view of things to come while the world economy moves ahead in the current path.

Experience 1: Browsing for a Samsung LED TV.

You would have noticed that the latest LED Smart TVs and the more recent high definition TVs have pushed the old cathode ray TVs into oblivion into the age of the dinosaurs. The amazing clarity of the picture and the internet enabled smart features of the new LED TVs, leave all of us convinced what a pleasure it would be to own this product and have it at home!  Looks like every one wants one of these nowadays. Have we not seen fights breaking out in Thanking Day sales over LED TVs? However, the most amazing thing is not just the quality, but the price. Something like this would’ve cost us a fortune, but thanks to Globalization, a 40 Inch version of it with excellent features and picture clarity is available round about GBP 500 in UK. This leads me to the first main feature of globalization – It makes majority of the junk stuff and occasionally wonderful products available for a fraction of the cost.

Experience 2: Shopping for a Sauce Pan.

Walking through the long aisles of shopping centre space, leaves me wondering why has the world become so complex and why do we have so many products manufactured in Asian factories that are variations of sauce pans but doing essentially the same thing – heating up food? The bewilderment of choice was cut short by sheer disbelief when I came across a boxed set of Le Creuset Cast Iron sauce pan set of three, on sale for GBP 250. Examining it further revealed that this was about 11 kg of cast Iron (approximate raw material cost: 1 GBP per kg of Iron), that has been value added to shape it into three sauce pans for GBP 250 in a factory in France. Obviously, I am not attempting to trivialise the quality of the product or the heritage of this piece of cookware, but this leads me to the second feature of globalization – manufacturing any “stuff” in developed economies costs a ton and is simply not cost effective.

Experience 3: Two course dinner for two at a regular Mexican restaurant.

After queuing up to get a table in a very large but regular and busy Mexican restaurant in city centre, we ended having an amazing two course Mexican dinner over an hour and a half. The dinner for two costs GBP 50 including service and drinks – a good satisfying meal with a lot of feel good factor added in! But this leads me to the third feature of globalization – something which can only be done locally inside a developed country (like a service or restaurant) – will cost a ton and thus will make the local economy further uncompetitive.

So there you go, it appears that globalization has played a significant part in pricing pretty much all of the below day to day experiences.

  • A bright and shiny LED TV for GBP 500.
  • A box of three sauce pan for GBP 250 and
  • A dinner for two for GBP 50.
The hard question it leaves us with is – should a good meal for two in an average restaurant cost one-tenth the price of a good LED TV? Are we justified in pricing three sauce pans for one-half the price of a good LED TV?

 

I don’t have the answers! But, to summarize, globalization has a positive effect of making wonderful products available cheaply, however it achieves this primarily by hallowing out the manufacturing jobs out of the high cost countries. The developed world compensates for this loss by focusing and subsequently raising the cost of services which directly punishes its own people and in turn makes itself further uncompetitive. Isn’t it about time people in developed world pause and think harder about their own purchasing behaviour and prices?

 

Musings on Standard of Living

A common belief in our society is that “standard of living” is directly correlated to the “amount of money you spend on yourself”. In other words …. Higher you spend on yourself, your family or friends – the higher is your perceived standard of living. Conventionally, the one who drives the most expensive cars, lives at the best address, dines in the best restaurants, throws the best party and holidays at the most exotic locales … has the most talked about lifestyle and standard of living. The reality TV circuits globally are full of examples for this type of talked about ‘celebrities’.

The problem with this thinking though is , we are permanently led to believe that we need more money to have a high standard of living. What we have already is either blissfully ignored or taken for granted and what improves our standard of living is that next purchase, that next holiday or that next facebook update that is liked by all.

There is ,of course, nothing wrong in spending on yourself. This is one of the most basic form of self-preservation. What is important to see is the motivation behind this spending. Broadly there are three categories of spending worth exploring:

  • Spending on needs: This is the basic life preservation spend. The most important of this category is the food-house-shelter spending needed for security and well being of an individual. Anything on ensuring continuity of life or preservation of these basic needs (eg education, transportation, healthcare… etc) are also in the same category.
  • Spending on wants: These are on what you ‘miss’ but are actually not already included in the ‘needs’ category above.  As a society gets richer, majority of the spending is on the ‘wants’ category.  To be in the business, Advertisers have learnt the trick of making you miss more, so you’d start consuming more. For example – I miss the comfort/experience of ‘seeing my favourite v-music awards show in 55 inch LED TV with Bose speakers’ or I miss/need the ‘bragging rights of a new Paris holiday/Armani dress among my facebook friends’ – so what do you think I would do next, other than buying my misery away with the above purchases?
  • Spending on everything else: This is the most dangerous of all – impulsive spending on things you don’t need or don’t care – and it usually ends up in you feeling foolish, guilty or broke!
Measure your “standard of living” by what you can spend on the “spending on needs”.  If you have no problem spending on your ‘needs’ and can do so irrespective of what the future holds in store – earthquake, job-loss, global-warming, ill-health etc – your “standard of living” is beyond comparison and you should really start noticing that you have come a very long way! The hardest thing, of course, is in totally believing this against all the marketing efforts of the multinational-corporations!

 

Are you able to distinguish between wants and needs

What amazes me very often is what people think as ‘basic necessities’. For the sake of this post – let me analyse three spends of people that people claim are ‘needs’ and I wonder why:

  • Spend on Personal Transportation.
  • Spend on Anniversaries/Celebrations.
  • Spend on Latest Smartphones/tablets.

Personal Transportation: Going by a Black cab in London, a Taxi in Manhattan or an Auto in Madras – all are now considered ‘basic necessities’. Mind you, these are not the well-heeled socialites shuttling between appointments, these are normal people (just like you and me) going about their day to day life. Looking deeper there is a sense of entitlement in these seemingly “practical”, “every body does it” type of day to day activities.

Undoubtedly, there are a variety of situations when taxis make absolute sense – where not using taxis is false economy or is outright foolish/dangerous. The real question is how often are these situations? Is there an option to take a combination of walk, bike, share-a-ride or take a cheaper public transport that was clearly written off in the name of comfort?

This underlying argument can be used on all ‘premium modes’ of transportation – air, train or taxis equally. The underlying characteristic is picking an expensive transport option and justifying when there are other trade-offs available.

If a need for a taxi (or a premium mode of transport) is frequent or the norm, rather than the exception it probably means only one thing – the sense of entitlement is too strong.

Anniversary/Celebrations: This is clearly another scenario where emotion hijacks reason… and the difference between ‘basic necessities’ and excesses blur.

When people spend when they are happy, there is a marked tendency to over spend. You have seen the splurges all too often before marriages or maternity. The sense of optimism generated by the happiness or the occasion tends to make people stretch far beyond their reach. I am not questioning this tendency to stretch during genuine happiness/anticipation; what I am referring to here is our ability to create shallow “Anniversaries/Celebrations” too often.

One can commonly see justifications like – This is my 5th Anniversary, I need to book a seaside resort vacation in Maldives or this is my daughter’s 9th birthday, I need to give her an iPad!

Clearly, these events give us an impression of things ‘happening’ in our life. New photos, status updates – It happens to all others and we see that in Facebook, don’t we?  It costs a bit, but surely, we are entitled to these..!

Latest Smartphones: The marketing guys in phone companies must be laughing their way to the banks! Interestingly for them, smart phones are now used by everyone – the rich, the poor, the old, the young, the employed, yet-to-be-employed, the toddlers, the infirm – everyone.

Any problems? Absolutely not, they do satisfy people’s needs! However the real question is should you upgrade a smartphone every time (or nearly every time) a new model is available?

There may be many reasons to change the current phone – it is slow, scratched at the edges, has low memory/slow processor, has low end camera – but it still works doesn’t it? And it is probably better than your previous phone by a mile! So why should you still upgrade? The real reason you want to upgrade is not probably any problem with the old phone or any cool feature about the new phone – it is to get the “visible sense of upgrading something” in your life. You are after all entitled to good things in life right? Of course, upgrading anything else in a lot of hard work, so why bother?!

Okay, picked a few random expenses and have said that they are all due to sense of entitlement, so what?

Well, if there is a confusion between ‘basic necessities’ or ‘needs’ and ‘wants’ – it is probably because of your heightened sense of entitlement! Animals are smart enough not to assume anything, they go about their life meeting their needs as best as their surroundings allow. If you want to clearly see the difference between a ‘need’ and a ‘want’ – try challenging the belief that the world owes you something :)

Long term Inflation on Big Mac

If I were to tell you Indian Rupees (INR) will weaken significantly and 1 USD which currently buys 50+ rupees will buy 100+ rupees by 2030 would you believe me? Probably not! Read on…

Exchange rates are complex and depends on various parameters like export/import (demand/supply), balance of trade, inflation, growth and money supply. However what is the impact of persistent high inflation in some of the developing countries like India?

Take two countries for comparison – England and India. India seems to have a 25 year average historical inflation of 7%-8% and UK has about 2%-3% during this period. If these inflation rates continue for the next foreseeable future, where does the Big Mac end up at?

Let us start with the approximate 2012 costs – Big Mac costs roughly GBP 2.40 in the UK and the corresponding Maharaja Mac costs about INR 100 in India (equivalent of 1.1 GBP). The graph below examines the cost of Big Macs increasing every year at the historical rate of inflation in India and UK (converted to common currency GBP)

If inflations continue the way they are, it appears that by 2030 Big Macs will cost the same in India and in the UK!  Will this happen? Intuitively this is hard to fathom and doesn’t seem plausible. So, where is the flaw here?

  • It appears that the assumption Inflation rates will remain the same over next 20 years can be challenged. Now, that is true, but while governments focus on growth, there is no real effort to keep inflations in check. So it is not too sure if Inflations will change significantly from the long term average, this is a safe assumption!
  • Countries like India and UK have significant trade balances against them and is not changing in a hurry by 2030 due to the Gold/Oil dependency of India and lack of manufacturing focus in the UK. Balance of trade will continue to be against these countries.
  • So, the most likely explanation for Big Mac prices in the UK being higher in the year 2030 is to be found in the Foreign Exchange rates. This means, the current FX rates which are around 85 INR = 1 GBP is likely to weaken, perhaps to 160 INR = 1 GBP by the year 2030.

Of course, we don’t have a magic crystal ball and one cannot guess what the exchange rates are likely to be, but it looks likely that in spite of all the quantitative easing across the world, currencies with persistent high inflation like India are likely to weaken significantly.

So are you better off keeping your assets in developed economies currencies for the long term?

Is early retirement right for you

You can have hundreds of reasons for an early retirement. Among other reasons one or more of the following situations in your life might make you long for an early retirement:

  • My work-life balance is horrible. In fact my friend (cousin, uncle etc.) died young due to the stress/long hours, I don’t want to end up like him! What you really need is a slower paced job, not an early retirement!
  • Have a job, but I cannot tolerate  - my job/office politics/co-workers/boss! Well this one is slightly tricky – all jobs/relationships come with an element of discomfort at some point or the other. Your best way forward is to grin and bear it or move on to some other job for some temporary relief, not an early retirement!
  • I need time for my round the world travel – or volunteering/ hobbies/ studies etc – and I cannot do this with my job! Well, of course you can! You can find ways to work around the constraints and demands of your job. These may not happen as often as you wish or on the days you want to, but it can still be done along with your job. Perhaps all you need is a ‘sabbatical’, not an early retirement!
  • In spite of my rich experience, I am not getting the jobs/promotions that I really want/deserve. Hmm … this is happening often nowadays, thanks to the economic crisis. This one hurts – as one of the biggest benefit of a job is the sense of ‘fulfilment’ it brings and if your job makes you feel inadequate, you do have a strong reason to get frustrated. I would still discourage an early retirement in this case. This can be solved in at least two different ways – Firstly by some expectation re-setting (consciously accepting the new reality) or Secondly by looking for an alternate job or business opportunity.

Often, a wish for an early retirement is nothing more than an expression of dissatisfaction with status-quo. Dealing with this dissatisfaction might be a better strategy, than retiring early.

There may be hundreds of reasons you can give for an early retirement, however, there is only one reason for you not to retire early – Inflation! A steady income with work/business is the easiest inflation hedge you can build.

Am I against early retirement? Hell, No! All I am trying to say is – early retirement is not easy, its probably not necessary and if taken, it must be done only for the right reason!

Should you educate your kid in private schools

Got a call from a colleague living in India today enquiring about some schools in London. His daughter is 6 years old and he is contemplating putting her in a 10,000/year nursery school in London.

When it comes to kids and schooling, there is clearly one common trait across the world – people are passionate about this and will go any lengths/do anything to fit their lives around a supposedly “good” private schools.

It appears that these “good” private nursery and high schools share a few common traits that sets them apart from other schools:

  • The schools are highly selective and admit kids only after a rigorous elimination process.
  • They offer seats to kids who can play Piano/Violin very well.
  • They teach horse riding at school.
  • They have a wonderful uniform.
  • They have interactive whiteboards and latest gadgetry in all classrooms.
  • They have a media centre/in house TV studio.
These “quirky” selection criteria and supposedly “good” reputation challenges the competitive spirit of the parents who bend over backwards and jump various hoops to get their children admitted.
There are many opinions, anecdotes and case studies for both sides of the private school vs public school debates, however, looking at it from a purely financial cost-benefit analysis perspective, where does it stand?
  • It costs approx. 150k for 12 years in a private school in UK. In a flat-world, this child still needs to compete with other kids across the globe who finish their 12 years in schools at less than one-tenth of this cost.
  • Private schools, in general, give better quality education. Like every school system, not all kids are equally benefited - the real question is, was it worth 10-15 times as much others are paying?
Life can often be crude – what matters is not who has been leading throughout, but who was top on the last lap of the race.  A private nursery or private high schools give you a great run in the early laps.  Would this expense not be better served for your child when it matters most – during an Ivy League College admission?

 

 

Why do you want to retire early

Many of us dream of an early retirement – we imagine drinking endless Martinis while lazing in the beach and outsourcing the hard work of earning money to our investments.

While these dreams are great water cooler talk or motivates you to get up on a Monday morning, you need to ask yourself honestly – what is my real reason/motivation for an early retirement?

Why is it important to understand the real reasons? Because, quite frankly, early retirement is a bad idea! Now, this is such a strong statement, so a few explanations are needed here.

  • A job gives you, the best inflation hedge. To get an inflation adjusted salary of $3000 per month, you need a corpus of at least $1.2 M (assuming a 3% withdrawal rate and a 1% real investment return)
  • Having a job, on an average, keeps you in a better physical, mental, and emotional health by giving you something worthwhile to do for 8 hours. This may or may not be true in your particular situation, but in general, there are known positive health benefits to constructive work.
  • Retiring before or during the age of peak earning potential (roughly 35-50 years) – can significantly impact the overall net worth of the individual. Do you want to retire early and count pennies for the rest of your life?
  • Your social standing can take a hit. A CxO level person or a Director understandably has better social standing and influence than a young retired person.
  • The biggest problem with early retirement is that after an extended career break, often it is next to impossible to return back to same levels of earnings – so we have smaller chance to recover from any of life’s late curve balls.
With all these odds stacked against the idea of early retirement, it is very important to understand your real motivation for early retirement. For most people, taking an early retirement is similar to treating a symptom rather than the cause of an illness. Are you interested in early retirement for the right reasons?

Which type of rich person would you be

There are four types of rich people.

  • The wealthy who are Asset Rich but Cash-Flow Poor.  A large percentage of these are the ‘old money’, people who are born into riches or those who inherit large fortunes of money. They have large assets often earned over generations – properties, land, precious metals, antiques, paintings, alternate investments and stock portfolios, but do not have income streams proportionate to their ‘social statuses’. A more common member of this group are the elderly retired who own a property at a prime location.
  • The wealthy who are Cash-Flow Rich but Asset Poor. Last couple of decades of economic prosperity and globalization of corporations have successfully created vast numbers of this ‘new money’ category of rich people all over the world. These are commonly, the corporate crowd that have a large income (thanks to their job) but have not managed to accumulate large assets yet.
These two categories form the vast majority of the wealthy – however, these two categories are on a greasy pole (or slippery slope) when it comes to staying rich over extended periods. Of course, they can stay rich, but only with careful planning and significant asset re-allocation.

If you are cash flow poor, chances are, you may have to liquidate assets to meet some of the curve-balls life can throw at you. If you are asset poor, consistency of your income stream is now the highest risk. Added to this, socially mobile people in general, have higher ‘costs’ to maintain their life style and statuses which surely doesn’t help to preserve their wealth.

So where do the other types stand?

  • The third category, a small minority, have both large assets and large cash flows either by accident or by design and in general live sensibly, making them the most stable and uninteresting of the lot. They have tons of money, they know it and others know it. Money is no longer the driving factor in their life. This is the population of the Bill Gates and Warren Buffets of the world.
  • The fourth and final category of rich are those who have balanced their – Assets, Cash-Flows and Life-Style Costs.  In simple terms they have enough diversified assets invested to generate cash flows (income streams) needed to maintain their life style costs at all times. Having three levers to manipulate means that you don’t need to have millions of net worth to be ‘practically’ rich. This also means that if you are looking for external societal validation to define whether you are rich – this is not the option for you !

The fourth approach is surprisingly simple, because it gives everyone a fair chance or shot at becoming rich.

Which type of rich person can you realistically become in this life time?

Income vs Saving

As a society we’ve been conditioned to chase higher income.

  • Employers love it – as long as people follow this religiously, it makes it is straight forward for firms to recruit and retain talent.
  • Employees love it – in addition to the illusion of hikes ,which are often nothing more than yearly inflation adjustments, there is now a prospect of real growth relative to society.
  • Governments love it – their tax revenues are going up.
  • Banks love it – Lifestyle inflation and keeping up with Joneses syndrome ensures that higher income is automatically translated to as higher spending and economic activity.
  • Corporations love it – they can now increase their price of goods, right?
Everyone seems to love it, so where is the problem? It is a problem depending on what you wish to do with your life – move from place A to B or run faster on a treadmill at the same place.

 

Chasing higher income has moved you on to a higher gear/speed on a treadmill but has it moved you closer to your destination? All you may have done is started running faster, increased your costs through life style inflation and may now need to earn more just to sustain your lifestyle. In US media we often come across instances of families earning $200k+ in New York and being a few pay checks away from bankruptcy if they stopped working.

 

The simple alternative? Chasing higher savings! (even if Bernake keeps interest rates close to zero!) This is a more pragmatic approach to wealth creation, ie. moving from place A to B. It helps to have a higher income, but that is a means rather than the end! The trick to wealth is to reach an optimal mix of higher earnings and lower lifestyle costs which results in the largest savings (and thus investments) that is sustainable over a large time frame.

 

It doesn’t matter what you earn, what matters is what you bank!

Do you need 100 shoes

Ok, we need not have chosen to discuss shoes, it can as well be 100 shirts, 100 ties, 100 tea coasters, 100 wine glasses etc., the same arguments still hold good.

No number of shoes is enough, 100 shoes are an absolute must, should be a fairly obvious conclusion. Why bother to have a debate about this? Anyway, let me start very rationally to talk about the utility and the need for such a collection.

  • They are so practical and useful! I need a separate shoe for running, office party, red dress, tennis, purple gown, skiing,  floral dress, peach costume, ballet etc… etc.
  • They are so beautiful, they go with all my dresses. I am seen as someone in my group who has a great fashion sense and wears impeccably!
  • Well some of my shoes are given for charity events, they sell well!
Okay, we may have one too many and diminishing returns have set in … may be not all of the shoes are as useful and I don’t ski more than twice every three years. Darn!  If someone doesn’t see the usefulness of 100 shoes, let me see if a societal view sways the opinion:
  • Every one has some pet spending peeves, some spend on take-away foods, some on cars, some on cigarettes, why not on shoes?
  • We discuss shoes during our weekend parties. Everybody loves to hear where I found the (bargain or) designer shoe that I am wearing.
  • You can never have enough shoes, can we? (says one of the fashion magazine…)

Not convinced? Which planet are these people from? OMG, they probably don’t have a Facebook account too! They obviously, don’t take any serious effort to fit-in. Where do they fill their emptiness? Well, this one never fails, we are living in a free world, let me use this argument and end this once for all.

  • It makes me happy and I can afford it, so whats the problem? We are living in a free society, how can you argue against individual choice which doesn’t affect anyone or is not illegal?

So that’s it then. Cut to the chase, It all boils down to one reason – “my choice“.  While you are exercising this great responsibility of choice – can you consider choosing something that:

  • Goes easy on your own pockets and saves you from an endless cycle of work-to-consume?
  • Does not force the joneses from keeping up with you in this case?
  • Does not leave the planet with 100 extra pair of shoes to make into petroleum? Your shoes and the planet, unfortunately survive longer than you!
  • Does not send thousands of low paid workers in the east hurrying everyday to shanty factories and abusive corporations to keep up with the insatiable need for shoes?