The Recession of Trust

Deepak Shenoy
·Atlas Invested

Trust me.

These two words run the world of money. Finance is a complicated beast, too difficult for most of us to fully understand. So when you invest, you trust the financial pundits or institutions around you, hoping that things will turn out well and that you will get your money back -- and then some.

But these days it seems that your trust may be misplaced.

Advisors offer you ULIPs, omitting the tiny point that 65% of your money might go straight into someone else's pockets. Real estate advertisements hard-sell homes for just 20 lakhs -- but the parking is extra, the paint is extra and the cement is not exactly included.

Buy a house, you might hear; why pay rent? Unless you consider that what you pay the bank as interest is just another form of rent, a much larger figure. The concept only makes mathematical sense if house prices only go up. And they only go up. Right?

It's fascinating how the wizards of the financial world can take something simple and make it utterly confusing and intimidating. Take a simple loan: it used to be "I'll give you money, you'll pay me back more money". Today there are processing fees, pre-closure charges and service taxes. Even the "more money", traditionally known as "interest", is now suitably prefixed with "flat-rate", "monthly-reducing", "floating rate". They'll even loan you money against deposits - the mouth-watering proposal of "Let me lend you your own money and charge you interest". And finally, what you pay back is now an "Equated Monthly Installment", a complicated mix of interest and principal, which has the magical effect that even after you make diligent payments for 10 years, you still owe the bank the same amount.

Stocks are rated based on price-to-book-value, sum-of-parts valuations or discounted cash flow. Markets are compared across ASEAN, BRIC and OECD, leaving us an acronymous lot, as Ramesh Srivats once remarked. Interest rates are going up so you should buy banking stocks and sell commodities. Unless the rates actually go up, in which case you should sell banks, and buy gold. Commodities will go up with bad monsoons mixed with apathetic agriculture ministers. Inflation hurts us, but the world is worried sick about deflation; should we be? India's debt is 75% of GDP, but that's so much better than the US which is nearly 100%, or Japan which is a staggering 200%; or is it?

They say we are an oil-dependent country with a massive oil bill; we use 2.67 million barrels per day of crude oil, of which we locally produce just 0.9 million. Yet, the latest CIA factbook says we're the world's fifth largest oil producer, ahead of Iran, Canada and the U.A.E. How? With the massive refining capacity India has, we produce refined products, like petrol and diesel, to the equivalent of 3.72 million barrels of crude per day, the fifth highest in the world. Refined products have greater margins than crude, so we end up making more money on what we export - about 700,000 barrels of crude equivalent every day. In about five years, we will export nearly as much petrol as we use locally. So we are an oil dependent country that actually exports petrol?

Financial news headlines are another source of awe and wonder. "Markets fall 80 points on interest rate hike", they might say, or "Markets gain 80 points on interest rate hike", sometimes both. There's always a reason for a fact, despite some of these movements being only noise; expected fluctuations that should surprise us as much as "Man puts left leg ahead of right while walking". But it's reflective of us as a society: we desire - no, demand - reasons. And in the process, overemphasize the obvious and underplay the benign. "Markets fall 80 points because they first fell 79 points" is a headline that will, among other things, cause advertisers to instantly withdraw their campaigns. Media incentives apart, it's really up to us to interpret these headlines appropriately.

There is a "huh" factor in everything financial. Shying away from it is ineffective, because our lives are intertwined with money more than ever before. We might have earlier trusted the industry to take care of our money; it no longer seems that's a given. That just means we have to figure things for ourselves. Like a jigsaw puzzle, once you get the key pieces in place, it's a lot more understandable.

That's what this column is about - demystifying the world of money, finance and economics, in an entertaining sort of way. Not about whether this product is good, or if that stock is worth investing in; that would defeat the purpose. It's about what they mean when they say Inflation, or Yield Curves, or Collateralized Debt Obligations That Impact Outer Space. Education, it is said, is all about learning to learn. And as we have noticed recently, just because it's Greek doesn't mean it can't affect us.

Trust me.

Deepak Shenoy trades the Indian markets and writes at Capital Mind. He's also working on an upcoming stock market site. You can reach him at or @deepakshenoy.