Economics – Page 2 – Al (Aloke) Ghosh

CategoryEconomics

Accounting’s Got Talent

Financial economics, as the title of the discipline suggests, is an embedded field within mainstream economic sciences. Therefore, it should not come as a surprise that quite a few Nobel Laureates in economics are finance professors who have done pioneering work in financial economics.

Closely linked with economics and finance, mainstream accounting research is derived from economics and financial economics. While there are a few strong delineators between finance, economics and accounting, the three fields intermingle and influence one another which is why it is difficult to have a strong grasp of one without at least a basic understanding of the other two.

Yet, accounting has never been considered part of mainstream economic sciences which is why no accounting researcher has won the Nobel Prize. Not to be outdone, the accounting profession has created a list of 100 most influential individuals, thought leaders, and visionaries who are responsible for shaping the accounting profession.

Requirements For Top 100

Gaining entry into the coveted top 100 Most Influential Person in Accounting is a daunting task. The Accounting Today complied the Top 100 list using the following criteria.

Innovator and creator. The individual must have created new ways to market the accounting/auditing professional services.
Educator. The individual must have taught the profession something the profession didn’t know already.
Regulator. The individual must have been involved in enforcing rules which had a game changing influence on the profession.
Elevator. Individuals who help achieve the ideals of the profession, or and those who are actively planning the future of the profession, are deemed the most influential of all.

What is the gender composition? Among the top 100 most influential accounting professionals, 70% are males and the remaining 30% are females.

Top 5

The top 100 most influential accounting professionals then voted to pick the Top 5 thinkers within the profession. The Superstars in Accounting are:

Barry Melancon: President and CEO of AICPA
Tom Hood: CEO and Executive Director of MACPA
Mary Jo White: Chair, SEC
Russell Golden: Chairman of FASB
Ron Baker: Founder of VeraSage Institute

MIA

Surprisingly, no academic made it to the Top 100 list. Although academics meet the threshold requirement as an educator, presumably, Accounting Today does not consider academics to be influential enough to teach something to the profession that the profession didn’t know already. Academics are merely disseminating accounting/auditing knowledge that is already codified by the profession so academics are not deemed as innovators in the field.

We salute the Top 100 Most Influential Accounting Professionals!

Chatham; September 10, 2016

http://pages.marketing.accountingtoday.com/act_unsponsored_75635_sr_lp.html

A Sach of Gold for the Common Man

August 5, 2016 / [email protected] / 0 Comments

Arguably the best financial company in the world, for almost 150 years, Goldman Sachs has served the financial needs of wealthy individuals, corporations and rich sovereign nations. Their business activities include investment banking, serving the financial needs of institutional clients, investing and lending, and wealth management. Because of their ability to attract top talent and pay handsome compensation, their payroll includes the best and the brightest talents that money can buy.

Goldman’s clients include high-net-worth individuals, families, foundations and endowments. What is the Gold standard for a high-net-worth client? Let us start with any positive number followed by a minimum of 7 or 8 zeros. Six zeros may be too modest an amount to get the attention of the Wall Street luminary. What remains indisputable is that Goldman’s business interests do not hinge around a “commoner” with modest income.

Low and behold, the company has decided to rebrand its uppity image. The financial behemoth is now in the online savings-banking business and eager to attract savings deposits as meager as $1. A cataclysmic metamorphosis.

Avant-Garde Acquisition

Recently, Goldman Sachs acquired GE’s internet-banking subsidiary with a total of $16 billion in retail deposits to get a foothold into the online banking business. The company’s online banking business called ‘GS Bank’ is keen to attract even more deposits by offering generous interest rates regardless of the amount deposited.

Online versus Traditional Banking

Traditional banks require an average of above $4,000 in average daily balance for not charging any monthly maintenance fee. Also, a checking or savings account typically pays between 0 and 0.1% in annual interest rate. The benefit is that the deposits are insured up to $250,000 by FDIC regardless of the financial health of the bank, which is intended to avoid a bank run. However, depositors pay a steep price for the benefits of a traditional bank. Customers are slapped with all types of fees/charges and the interest rates on the deposits are measly.

The online banking has changed the thrifty culture of the traditional banks. Normally, online banks do not require a minimum deposit (e.g., CapitalOne 360, Discover bank). Some online banks offer free checking facilities. More importantly, as any traditional bank, the online deposits are also insured up to $250,000 assuming that the online bank is registered with the FDIC (the online page will indicate whether it is the case). Because online banks do not operate physical locations, they do not incur the high costs of managing a network of branches. Consequently, online banks can pass on some of their cost savings to depositors in the form of higher rates.

GS Bank is offering annual interest of 1.05% for all deposits without any minimum balance and time restrictions. CDs are paying around 1.20% for one year term deposits. Compared with borrowing on the bond market, however, it is cheap.

Benefits to Goldman from Online Banking

To finance its investments, Goldman Sachs must borrow from the bond market. The interest rates in the bond market are much higher (between 3% and 4%). Therefore, assuming a constant rate of return on their investments, there is a 2%-3% spread from acquiring funds at a cheaper rate.

Based on its 2015 annual reports (FORM 10-K), Goldman has $97.519 billion in deposits. Additionally, it has 42.787 billion in short term borrowings. If Goldman can replace all of its short term loans with online banking deposits, an extreme case scenario, the annual interest cost savings generated would be around $1.3 billion. Assuming that the savings are in perpetuity, the present value of the cost savings using modest discount rates is around $13 billion. Because presently there are 426.4 million shares outstanding, the potential cost savings alone could generate a pop in the stock price by $30.

As a common Man, are you ready to invest in a Sach of Gold?

Helsinki, Finland, August 5, 2016.

Academics and Central Banks

July 25, 2016 / [email protected] / 0 Comments

A central bank is a public institution charged with managing a country’s monetary policy and regulating member banks. The main objective of a central bank is price stability. By statute, many countries also require their central banks to support full employment. Governments often appoint influential academics as the Chair/Governor of the Central Bank. Ben Bernanke, Professor at Princeton University, served as the Chair of the Federal Reserve, the Central Bank in the U.S., from 2006 to 2014. Stanley Fisher, a prominent macro-economist from MIT, served as the Governor of the Bank of Israel from 2005 to 2013. An academic staff at Trinity College Dublin, Philip Lane was appointed the Governor of the Central Bank of Ireland in 2015.

In 2013, India’s then Prime Minister, Dr. Manmohan Singh, invited Raghuram Rajan, a high profile financial economist and a Professor at the Chicago Booth School of Business, to become the Governor of the Reserve Bank of India for a three-year term. When Dr. Rajan took over the reins of India’s monetary policy, India was grappling with high consumer price inflation, industrial slowdown, a free falling rupee, and a widening current account deficit.

Key achievements

During his short tenure span of three-years, Dr. Rajan is credited to have

Strengthened the Indian currency.
Boosted investor sentiments.
Contained the current account deficit from around 5% to around 1.9% by levying added import duty on gold.
Reduced inflation to 8% from 11%.
Established the “Joint Lenders Forum” to foster greater coordination among bankers and discuss every loan decision above Rs. 5 Crore in forum so that bad loans can be prevented.
Forced the recognition of non-performing loans (bad loans).

Non-Performing Loans

Mr. Rajan’s priority was to purge the banking system of bad loans by forcing banks to remove non-performing loans from their balance sheet. The de-recognition of bad loads forebodes bad news for banks because they would need to recapitalize the balance sheet if their equity cushion fell below the mandated levels. Moreover, banks would be forced to call out the bad players.

In country that wants to open up the economy, India has 27 government-controlled banks which account for 70% of the country’s banking assets. Much of the bad bank loans are confined to India’s state-owned banks. According to the Economist, nearly 17% of all loans need to be written off. Therefore, the problems of bad loans are quire severe.

Colliding Politics and Personalities

The Modi government, which came to power with a huge mandate in 2014, has had major disagreements with Dr. Rajan’s economic policies. The current government is more ‘dovish’ and prefers a low interest rate environment to spur domestic investments while electing to ignore the risk of higher inflation from pursing an aggressive monetary policy. In contrast, Mr. Rajan was more ‘hawkish’ on inflation and, as a result, he was more focused on controlling inflation by keeping the interest rates high even at the cost of choking potential investments. Also, the Central Bank’s aggressive policy to recognize bad loans may have contributed to the disagreement between the government and the governor of central bank.

The current BJP party is led by a charismatic leader who is predisposed to governing with an iron hand. The top gun of India’s Central Bank was also a high-powered intellectual, a renowned economist, and a man with strong economic convictions. Fireworks are inevitable!

The Outcome

After some modest ideological confrontations with the BJP party, Dr. Rajan abruptly decided to step down as the Governor of the Reserve Bank of India and not seek a second term. CNBC deems Mr. Rajan as the world’s best central banker because of his commitment to structural reforms and because of his ability to stabilize prices and exchange rate during his short term. Did he deliver? The market believes so!

Unfortunately, India is the big loser in this Bollywood-style drama. The country is deprived of the services of a financial superstar who could have guarded financial markets and helped the Indian government pursue pro-market reforms.

Helsinki, July 25, 3.36P

http://www.economist.com/news/leaders/21699911-proposed-reforms-indias-financial-system-are-welcome-insufficient-banks-and-bureaucrats

The Mexican Wall (Mart) Spectacle

May 30, 2016 / [email protected] / 0 Comments

Wal-Mart Stores, the leading private employer in the world, operates in 25 countries with a strong presence in Mexico. Roughly about 20% of Wal-Mart’s 11,500 locations are based in Mexico. Over the last three years, the Justice Department has been investigating allegations that Wal-Mart paid bribes in Mexico to obtain permits.

A group of beneficial Wal-Mart owners filed a complaint with the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) that Wal-Mart’s auditor, Ernst & Young (E&Y) was aware of the bribery long before the company disclosed this irregularity to U.S. authorities in 2011. According to the complaint letter, E&Y as the independent auditor should have reported the suspected bribery to the SEC as soon as it became aware of such improprieties in 2006.

Bribery Act

The Foreign Corrupt Practices Act of 1977 (FCPA) makes it unlawful for persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. The Act was amended in 1998. The anti-bribery provisions of the FCPA now applies to foreign firms and makes it illegal for foreign companies to pay bribes in the U.S.

The Act levies criminal and civil liability for paying bribes to foreign government officials. The Justice Department has jurisdiction over the FCPA.

Investigations

The Justice Department launched an investigation following a 2012 New York Times article about the alleged Mexican bribes. According to the article, Wal-Mart Mexico unit paid middlemen to obtain permits and that Wal-Mart executives chose not to pursue an internal inquiry into the suspicious payments.

Although the three-year investigation remains incomplete, according to Wall Street Journal, the case could be resolved with a fine and no criminal charges against Wal-Mart executives because the charges may not be as severe as previously anticipated.

Auditor’s Obligations

According to the auditing standards (AU section 317), auditors have a responsibility to design procedures that provide reasonable assurance of detecting illegal acts. In cases of bribery, the auditor is also implicated because bribing a foreign government official is illegal in the US and also because any bribery is likely to have a material effect on a company’s financial statements.

Companies that pay bribes generally record the underlying transactions in their accounting books as legitimate operating expenses to avoid detection. Since bribes often involve disbursements of cash, recording a bribe as a legitimate operating expense results in false reporting of expenses on the income statement.

What are the duties of the external auditor when it becomes aware that its client is suspected of violating FCPA provisions?

The answer may surprise you.

If an outside auditor discovers an illegal act, it is required to notify responsible authorities within the company including the company’s board and audit committee.
The external auditor is not required to notify the government.
Only when the company refuses to take corrective actions or the company’s books are compromised is the auditor obligated to notify the government.

Essentially, the rules and obligations are suggesting that the company has the obligation to correct improper acts and also inform appropriate government authorities.

Top Gun: Tom (Cruise) Ray

According to Chief Tom Ray, past Chief Auditor of PCAOB and my colleague at Baruch College, external auditors are not legally obliged to inform outside regulators about potential scandals except in limited circumstances. Auditors are required to report those acts to management and the board’s audit committee, which is responsible for monitoring financial reporting and disclosure practices. The accounting firm also needs to evaluate whether the bribers would have a material impact on financial statements.

Top gun in auditing, Tom states that only when the company doesn’t take appropriate actions, an outside accounting firm may be legally required to report the problem to a federal agency,

Solipsism

Needless to say, Wal-Mart will become target of lawsuits. E&Y, with its deep pockets, is also likely to become a prime target. However, if the norm is to pay bribes to secure contracts, especially in developing and emerging countries, U.S. companies are at a disadvantage relative to almost all other countries that do not have anti-bribery provisions.

Maybe it is time to have an anti-bribery world statute.

http://www.wsj.com/articles/shareholder-group-ctw-says-ernst-young-knew-about-wal-mart-mexico-bribery-allegations-1432580954

Cookin’ Apple Strudel with Some Cinnamon

May 20, 2016 / [email protected] / 0 Comments

Apple Inc. recently reported its first-ever revenue decline in 13 years. The stock price of Apple has declined by about 30% over the past 12 months. The high flying stock was trading at a high of $135 around May of last year but today it trades around $95. The billionaire investor Carl Icahn announced last week that he had sold his entire stake in Apple citing China’s economic slowdown. He also worries that the government could make it very difficult for Apple to conduct business.

Some financial gurus disagree with the market’s negative assessment of Apple and the company’s future prospects. The Sage from Omaha, the Financial Guru Warren Buffet, does not share the market’s adverse outlooks on Apple. Buffett’s Berkshire Hathaway Inc. declared on May 16 that it had invested $1 billion in Apple Inc. stock earlier this year. Apple stock went up the same day by about 4% which created value of more than $18 billion.

China

Among various Apple products, the iPhone business is the prime driver of Apple’s profitability and global growth. Apple iPhones account for almost two-thirds of its global revenues. China plays a crucial role in propelling Apple’s business. Following the U.S., China is Apple’s second-largest market in the world. Tim Cook, the CEO of Apple, has visited China 8 times since taking up the reigns of the company.

Many investors have serious doubts whether China can contribute towards Apple’s growth. With a slowing Chinese economy, phone sales have declined in China which is a key reason for Apple’s deceleration in revenues. To confront the decay in revenues, Mr. Cook visited China earlier this month and met with senior government and Communist Party leaders. Apple also announced that it would invest $1bn in Chinese ride-hailing app Didi Chuxing to better understand the Chinese market.

Is the China commentary likely to lead to “one bad apple?” Carl Icahn seems to believe so.

Cookin’ With Spices

The solution for Apple is to replicate the Chinese success story with another country with comparable population and one that is hungry for smartphones. Low and behold, Cook landed in India this week just in time for a monsoon wedding. Mr. Cook is hobnobbing with the Indian Prime Minister, meeting with key industrialists, and boogying with the Bollywood starlets. Mr. Cook is cookin’ Apple strudel with a hint of cinnamon!

India accounts for only 1% of iPhone sales. Why? The answer is simple. India’s market is dominated by phones under $75, while Apple’s models start at around $500. As a price sensitive market, it is not surprising that Apple with its expensive iPhones has been unable to make a dent on the smartphone market in India. Apple is now aiming to grab the Indian smartphone market share and resurrect its growth story.

Bilateral Trade

Apple has announced major investment in India. It plans to set up the first development Centre in India in Hyderabad. Apple also announced a “design and development accelerator” in Bangalore. Although, Apple is expected to continue to have its manufacture hub in China, the company had announced last year that it plans to invest $5bn in India to make Apple devices.

But what does Apple want in return for its massive investments in India? According to the Economist, Mr. Cook is hoping that the Indian government will allow Apple to sell its refurbished phones in India, which has the dual advantage of finding an outlet for its used phones and also meet the lower price barrier of smartphones in India.

Future of Apple stock?

Hard to say, but winners like Apple have a way of figuring out how to win even when the odds are stacked against them. They defy all odds, which is why we call them winners.

It is safe to ride the apple wave with the King of Omaha.

New York, May 20, 2016; 12.12P

The Curious Case of Elon Musk

May 13, 2016 / [email protected] / 0 Comments

In the first quarter of 2016, Tesla Motors reported total revenues of $1.15 billion and an adjusted loss per share of 57 cents. Investors and capital markets rely on positive earnings, a measure of profitability, to value companies. Since 2010, the company has reported a loss every year. If positive earnings serve as a barometer for stock valuation, Tesla stock is unlikely to capture your imagination.

Yet, investors have driven up the price of Tesla as if they are driving the Aventador, the Italian stallion, on the Autobahn. The stock price of Tesla was around $20 in 2010 and today it is worth $207, which translates into a heart pounding growth rate of more than 900%. If you had bought 1,000 Tesla shares in 2010 for a modest investment of $20,000, the same investment would be worth almost a quarter of a million dollars.

Irrational Exuberance

What is the basis for such irrational exuberance? Are investors assessing “value” of Tesla based on its revenues or expected future profits? The company’s total revenues grew from $117 million in 2010 to $4,030 million in 2015, which is an astounding growth of 3,400%. Estimating equity value based on revenues and disregarding economic profits is like chasing James Bond’s Aston Martin in a Cinderella Carriage. Could investors be arriving at intrinsic value using expected future profits. Sure, I could also win the New York lottery!

Most analysts have a sell recommendation on Tesla yet investors are treating the stock like Malva Pudding served with Witblits. So what is the rational explanation for the fascination with Tesla? Most likely, investors are really betting on the ingenuity and brilliance of Elon Musk.

The Musk of Zorro

Elon Musk is a South African-born Canadian-American entrepreneur, engineer, innovator, and investor. He is the CEO and product architect of Tesla Motors. He is also the founder CEO of SpaceX, co-founder and chairman of SolarCity, co-chairman of OpenAI, co-founder of Zip2; and co-founder of PayPal. As of April 2016, he has an estimated net worth of US$14.2 billion, making him the 68th wealthiest person in the US.

Mr. Musk has stated that the goals of SolarCity, Tesla Motors, and SpaceX are based on his vision to change the world. His desired goals include reducing global warming through sustainable energy production and consumption, reducing the risk of human extinction, and setting up a human colony on Mars. He has envisioned a high-speed transportation system known as the Hyperloop, and has proposed a VTOL supersonic jet aircraft with electric fan propulsion, known as the Musk electric jet.

Tesla Models: Bevy of Beauties

The company caught the attention of the avant-garde driver when they produced Tesla Roadster, the first fully electric sports car. The company’s second vehicle was Model S, a fully electric luxury sedan, which was followed by the Model X, a crossover. Its next projected vehicle is the heavily hyped mass-market electric car Model 3.

The price of eco-friendly and curve enhancing beauties is not cheap. Models S and X are around $100,000. Only Model 3, a Musk gift for the masses, is priced around $35,000. According to Tesla, reservations for Model 3 is approaching the 400,000 mark. The expected shipping date is not until the end of 2017. Many of the later orders fulfilled may not be available until 2019 or 2020. Model 3 should be renamed “Phantom of the Opera.”

Are you ready to test drive a Tesla or invest in the Tesla stock? You will certainly enjoy the “ride.”

Chatham, May 13, 2016; 12.30A

Dragon Versus Tiger: A Growth Slugfest

May 5, 2016 / [email protected] / 0 Comments

Based on World Bank estimates, India’s economy grew by 7.3% in 2015, which was higher than every other major nation including China. For the first time in more than 20 years, India recorded the highest growth rate in GDP. In sharp contrast, according to the numbers released by the Chinese government, China’ economy grew by 6.9% in 2015.

Asian Development Bank (ADB), a Manila-based multilateral bank, projects China’s economy to grow by 6.5% in 2016 and by 6.3% in 2017. Even with excessive monetary and fiscal stimulus, the consensus is that China’s average growth rate in the next five years is unlikely to exceed 6.5%. A more realistic expectation is that the growth is likely to be lower because of the weaker demand from major developed industrial economies.

ADB is predicting India to become the fastest-growing major economy. The projected economic growth rate is 7.4% in 2016 and 7.8% in 2017 propelled by investments in the public sector and lower oil prices.

Dragon Warrior Restrained

With a debt hang, housing glut, and excess capacity in factory production, Chinese officials are projecting tougher years ahead. Fears over a slowing economy and concerns over plunging oil and commodity prices have started to chip away into China’s phenomenal growth rate observed during the last decade.

China is transitioning from being an investment- and industrial-oriented economy into a consumption economy, which is a key indicator of a major developed and industrial economy. China’s government is expected to encourage this transition which bodes well for consumers in China. Nevertheless, the ever so competitive China might consider various ways to augment its growth by relying on deficit financing.

China’s stock market volatility is also likely to have some negative repercussions. The stock market observed a massive run-up followed by the gut-wrenching plunge, which reflects underlying uncertainty.

Tiger Unleashed

Bullish on India, the International Monetary Fund has projected a robust growth rate of 7.3% for 2016 and 7.5% for 2017. IMF welcomes India’s emphasis on public infrastructure spending, reducing subsidies, improving the labor and product markets, and enhancing the strengths of financial institutions. As one of the world’s largest oil importers, India has benefited from low oil and energy prices, which has been a major factor in propelling current growth and is a key factor in explaining future growth rates.

A key source of concern in India is that the country’s banks, especially the public banks, have a disproportionately high percentage of “bad debts” on their books which have yet to be written down. According to Reserve Bank of India, about 21% of all loans to large Indian companies were “stressed” as of June 2015, up from about 17% in September 2013.

The data on the growth rate in India must be taken with a pinch of salt and lots of spices. Most worldwide investors are often mistrusting of India’s growth numbers because of the unreliable process by which data are gathered and assimilated. Therefore, the stock market may not reflect the renewed economic optimism as foreign direct investments may decline if institutional investors do not believe in the growth numbers.

For U.S. investors, both India and China continue to appear as attractive investment opportunities especially considering the weak growth rate in the US and Europe.

New York, May 5, 2016; 12.52P

Kingdom Turns to Goldilocks Capitalism

April 30, 2016 / [email protected] / 0 Comments

The Saudi royal family controls the world’s biggest oil reserves in Saudi Arabia. The riches from the black gold is the basis of the royal families’ power, influence, and legitimacy. The family is considering to take Saudi Arabia’s Oil Company (ARAMCO), which is a state owned enterprise, public. ARAMCO is one of the world’s most secretive oil companies which reveals almost no information on revenues and offers only limited information on its hydrocarbon reserves.

According to media speculation, Crown Prince Salman, who is the son of the current King and often considered the power behind the throne, made public statements about the sale of ARAMCO shares. The Prince claims that the IPO is being initiated to confront corruption and usher in transparency. In a monarchical autocracy, which is renowned for lack of democratic freedom and beholden to absolute power, it remains unclear how he intends to deliver on his promise.

So the billion-dollar question is why consider an initial public offering (IPO) at all and then why now when the oil prices are rock bottom?

ARAMCO

The value of ARAMCO is derived from its massive reserves of crude oil, which the company claims to be around 265 billion barrels. The cost of oil extraction is around $4 per barrel, which happens to be the cheapest exploration cost compared to the extraction cost anywhere else in the world. In the United States, lifting that same barrel of oil could cost anywhere from $25 to $80 per barrel. The efficiency with which the Saudi company can extract oil is faster than any of its rivals. According to Forbes, ARAMCO can mine as much as 13.5 million barrels of oil a day, which equals 15% of the world’s daily oil needs.

The IPO

If ARAMCO goes public, it is estimated to have a market capitalization as high as $10 trillion, which easily exceeds the market value of the world’s largest publicly traded energy company ExxonMobil. If ARAMCO were to float just 5% of its shares in an IPO, it would raise somewhere around $500 billion. Any IPO by ARAMCO would make history as the largest IPO in the world.

The investment banking industry must be doing the belly dance in anticipation. The standard IPO fee for an investment bank is 7%. Even for a 5% IPO of the oil company, an investment bank would collect around $35 billion.

Why Now?

The Economist writes that when they asked whether Saudi Arabia was undergoing a “Thatcherite revolution”, Prince Salman replied “Most certainly.” However, it certainly does not make obvious financial sense. Why cash-in on your hidden treasures and then do it when the price of that treasure is at a historic low.

Is there some rational reason for the colossal decision? Considering how deftly the royal family has managed to retain power for the longest period in the world’s most volatile region, the answer most definitely is yes.

So what is that hidden reason? Is the explanation for the IPO a financial, political or geo-political one? Only time shall tell the hidden story …… Until the story unfolds, we can only keep guessing.

New York, April 29, 2016; 10.07P

http://www.economist.com/news/middle-east-and-africa/21685529-biggest-oil-all-saudi-arabia-considering-ipo-aramco-probably

Discord in Brazilian Samba

April 21, 2016 / [email protected] / 0 Comments

The fifth largest country in the world, exceeded in land size only by US, Russia, Canada, and China, and home to a population of nearly 200 million people, Brazil is one of the most vibrant, multicultural, and multiethnic countries of the world. The country’s government is organized as a multiparty federal republic with two legislative houses. The country of samba, soccer, carnival, haute cuisine is in the vortex of a multibillion dollar embezzlement scandal. The incumbent President Dilma Rousseff was impeached on Sunday by Brazil’s lower house for allegedly violating financial responsibility laws.

Putin Style Caipirinha – Shaken and Stirred

Prior to Ms. Rousseff, Luiz Inácio Lula da Silva, also known as “Lula,” was the President of Brazil from 2003 to 2011. Lula is the founding member of the Workers Party, a left-leaning socialist party regarded as a champion of unions and the working class. The Party is dominated by trade unionists, intellectuals, Trotsky-style communist thinkers, and church activists. President Lula pumped billions of dollars into social programs, which largely explained his unprecedented popularity. He increased the minimum wage well above the rate of inflation, which is quite high to being with, and also started began a state funded family grant program, the Bolsa Familia, which benefited nearly 44 million people and thereby cemented his support with the poor and the working class. In 2010, Time magazine featured Lula as one of the 100 Most Influential People in the World.

Unable to run for office for a third term constitutionally, Lula got his hand-picked former Chief of Staff Dilma Rousseff elected into office in 2010 using his popular mandate at that time. Regrettably, Brazil is being rocked by a multibillion-dollar corruption scandal involving alleged kickbacks from the state-run oil company, Petrobras, and some of the country’s largest construction firms.

Operation Car Wash

The probe by the Brazilian prosecutor dubbed “Operation Car Wash” has led to arrests of dozens of businessmen and politicians including high-ranking Congress members and executives at state-owned oil giant Petrobras, major construction firms, and individuals in Latin America’s largest investment bank, BTG. Prosecutors claim that the individuals were involved in a scheme to defraud Petrobras by awarding inflated contracts and then paying the excess cash as bribes to executives and funneling money into campaign contributions of political parties, especially the Workers Party.

At least 53 politicians are under investigation. The federal judge Sérgio Moro indicated that he believes former president Lula had profited from the scheme. Those facing criminal charges include the former treasurer of Ms. Rousseff’s Workers’ Party and politicians close to Lula.

Proverbial Coup d’état

After the police raided Lula’s home and prosecutors sought his arrest earlier this year, President Dilma Rousseff, his protégée and successor, announced in March that she was appointing Lula the Chief of Staff. By acquiring the rank of a government minister, the Economist claims that Lula was hoping to achieve partial immunity from any prosecution including a criminal one. As a member of the executive branch, only the country’s supreme court could try him.

Recently, a court judge suspended Lula’s appointment as a Chief of Staff in the Rousseff government which means investigations and incriminations will proceed with full force.

Discord in Brazilian Samba

Under Ms. Rousseff, Brazil has a deficit equal to 10% of GDP, which is the highest in the world. Brazil’s GDP growth rate has fallen from 7.5% in 2010 to -3.5% last year. Rousseff’s approval rating has collapsed from a high of 60% in 2013 to a meagre 11%, an approval rating mimicking those of current US Congressional members.

In a Wall Street Journal op-ed article, Ruchir Sharma, Head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment Management, opines persuasively that even an impeachment is unlikely to solve Brazil’s current economic quandaries for the following reasons.

Brazil’s GDP growth rate track commodity prices more closely than any other nation in the world which is a key concern.
While the country has some internationally competitive private companies in auto parts, aerospace and other industries, they are busy dodging a growing bureaucracy that smothers the rest.
Spending by local, regional and national governments amounts to 41% of Brazil’s GDP, the largest for any country in its middle-income class.
Brazilians face the heaviest tax burden of any emerging country, with collections amounting to 35% of GDP.
Public pensions have increased from 3% to 7% of GDP. Brazilian men typically retire at age 54 and women at 52, earlier than in any major European country.

Even if Ms. Rousseff is inclined to pushing serious reforms, it is questionable whether she has any political cache left to make radical economic changes needed to reduce the colossal size of Brazil’s government programs and to get the economy back on track. With taxes already high, and commodity prices at bottom low levels, the government is unable to afford welfare programs. The country’s deficit is bound to increase in size unless it initiates major cut-backs on social programs.

Mr. Sharma interjects that to revive and diversify its economy and control government spending, Brazil needs a powerful reformer—a Brazilian Deng Xiaoping.

China – A Triumphant BRICS Story

Relative to the BRICS countries, which also includes India, Russia, Brazil and South Africa, China has been the sole Dragon Warrior worthy of accolades. From a country grappling with economic deprivation, poverty, inadequate infra-structure and illiteracy even a few decades ago, China has confronted its basic ills with Confusion wisdom into an economic and political giant.

The American diplomat and political scientist, Henry Kissinger, who served as the Secretary of State under Nixon and Ford, had the brilliance and prescience to comprehend the true potential of China more than 50 years ago and began the rapprochement between the two countries then.

For the rest of the BRICS countries, unfortunately, it remains a story of unfulfilled promises. If only the BRICS country-governments would consider emulating China by focusing on investments in infra-structure, primary and secondary education, health-care and not pander for votes by providing short-term government subsidies, or higher taxes on wealthy, these countries would begin to harness their “incredible” latent potential.

New York, April 21, 2016; 12.55P

http://www.wsj.com/articles/impeachment-wont-save-brazil-1461021625

GE, The Illuminati

April 7, 2016 / [email protected] / 0 Comments

General Electric, the giant American industrial conglomerate, filed its 2015 annual report (10-K) with the Securities and Exchange Commission (SEC) on February 16, 2016. The annual report document contains 276 pages of text, numbers, tabular presentations and pictures. Large accelerated filers, or large public companies, are required to file their annual financial reports, also termed as Form 10-K, within 60 days of their fiscal year-end unless they are smaller public firms in which case they have either 75 days (accelerated filers) or 90 days (non-accelerated filers) to file depending on their market capitalization.

In an effort to make annual reports more understandable to investors, in a game-changing disclosure strategy, the company released its first ever “Integrated Summary Report.” The key objective is to provide a comprehensive yet concise view of the company using the lens of the Board and management. The compact report contains only 66 pages with pertinent information from several mandated documents including 10-K, proxy statements, and sustainability report. The document establishes links between strategy, performance, board oversight, compensation and sustainability but it remains outside the realms of the heavily regulated financial reporting.

The Illuminati

Navigating through any 276-page document can be challenging for an individual, let alone one that is derived from a complex set of accounting rules and regulation. The Chairman and CEO of General Electric, Jeff Immelt, said “our priority is to provide meaningful information that all investors can readily access. For investors to make investment and voting decisions, we don’t believe that more information is necessarily better. Instead, we’ve challenged ourselves to provide better information. Over the past several years, we have already been enhancing our reporting in response to feedback from investors, and they have told us how much they like it. This year, we are taking it even further.”

According to a GE spokesman, investors downloaded the integrated and summary report 2,300 times in the first 24 hours after it was published. In contrast, GE’s combined downloads of its 10-K and proxy reports 24 hours after they were filed last year were only 638.

Contents

The integrated summary report includes a discussion on the following subjects:

Chairman’s Letter
Strategy and results
GE’s Businesses, Portfolio & Capital Allocation
Margins and Financials
Risk, Governance and Compensation
Audit
Shareowner Proposals
Sustainability
Annual Meeting
Forward-Looking Statements

Simplification

It remains uncertain whether other large companies will follow GE’s pathway and start disclosing similar condensed annual reports. The SEC has been deliberating ways to simplify financial reporting so GE might become the vanguard of simplified annual reporting.

New York, April 7, 2016; 2.40P

http://www.ge.com/ar2015/integrated-report.

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Al (Aloke) Ghosh

Distinguished Professor of Accounting, Belk College of Business, UNC Charlotte

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