Category: (KNOW)VIEWS

“Those who fail to learn from the history are condemned to repeat it”. Going by the last week and the events hitherto, Churchill’s quote couldn’t have found a more deserving candidate.

 Goldman Sachs- a torch bearer in the investment banking also holds the dubious distinction of often straying from the “ethical”, “legal” and “compliance” ethos of the financial world. These are the very values that espouse faith and confidence in stakeholders and investors as equal. For several years now, Goldman Sachs(hereafter,GS) has been accused of several misdeeds ranging from the role in 2007-08 financial crisis, involvement in European Debt Crisis, lopsided company culture and market manipulation.

On 22^nd October, GS admitted to its offence and agreed to pay nearly USD 3 billion in penalty for alleged bribery in 1MDB case. Overall, GS needs to shell out more than USD 5 billion for its sheer non compliance across Asia, Europe and America. If the quantum of penalty isn’t surprising, the manner in which the group operates is most certainly is! Why is it that a company almost always finds itself on the other side of the regulations? What makes the company which boasts of a vast talent of specialists indulge in unscrupulous activities? Whether, it’s the greed, winning-at-all-cost attitude, myopic vision or plain foolishness?  

It has been a fairly simple playbook affair for GS. Indulge in “wrongful activities” make “quick profits” and when get caught “pay the fine”. And the cycle repeats! There’s no remorse.  The involvement of GS in many of the major financial scandals in last one decade highlights the arrogance with which the firm has operated.  The rules, regulations and guidelines at best serve as the mitigant but they are not a good deterrent. This is precisely the reason that just by paying a monetary fine (even the hefty ones) GS non compliance juggernaut rolls on.

It’s high time the regulators and the larger investor community must work in tandem to stem the rot. Shareholder activism must not be relegated to the textbooks and a handful few. With the advancements in technology, the sandbox approach to implement dynamic statutes must be encouraged.

With rising non compliance and legal costs, GS and its stakeholders have enough to ponder. Whether GS learns from the history or turns into one is for it to steer. But the consequences of non compliance can be unforgiving for a systemically important bank especially when an uncertain economic environment is looming large.

China’s Central Bank has recently launched an homegrown digital currency as part of its effort to boost up electronic payments system. This also means that China has become the first major superpower to boast of its own digital currency.

According to People’s Bank of China, the intention of digital currency is to limit the cash in circulation with an aim to reign in money laundering and promote digital payments.The trials of digital currency have been introduced as part of pilot project across four cities-Shenzhen, Suzhou, Chengdu and Xiong’an.

The digital currency will have features similar to a “mined” cryptocurrency that uses blockchain technology with distributed ledger . But as the regular blockchain uses decentralized system with anonymity, the digital yuan will be circulated through legal banking channels. The details regarding users privacy remain unclear.

With its research in the area for more than five years and subsequent launch, the digital currency may serve as a key element in establishing what we can term as ‘Chinese might’. A dominant force in global politics and economy, China’s emergence as a leader in global crytpocurrency was but inevitable. The digital currency can be seen as a concerted measure to shore up its efforts to promote Chinese Renminbi(RMB) as an alternative especially to the US Dollar. This can be understood from the following: Firstly, introduction of Chinese Renminbi under IMF’s Special Drawing Rights(SDR) in 2016 alongside US Dollar, Euro,British Pound and Yen. Secondly, use of global financial centres like Taiwan, Hong Kong and Singapore in internationalisation of RMB. As a result of which more and more global indices like MSCI,FTSE have begun to include Chinese bonds and equities. Thirdly, introduction of CIPS(cross border interbank payments system) as an alternative to SWIFT in offering RMB based clearing and settlement services. And finally, the introduction of sovereign digital currency called digital yuan.

As the global economy reels with Covid-19 and a recession as its aftermath, the digital currency move by China can also be seen as a masterstroke in promoting technology as the major enabler in the global financial system. Where does that leave the West and the US? Is it the beginning of an end of USD hegemony? How will the US respond to the challenge?Will there be a Bretton Woods moment in the digital financial system?

As the world stares into uncertainty ,China with the first mover advantage is clearly far ahead than any of its global peers. The Dragon is surely breathing fire.

The spread of COVID-19 has been unabating so far having accounted for nearly 300K deaths and infecting several millions . If the data sources are to be believed , no other nation with a notable exception of China,Japan and South Korea is able to “fend off” the virus,yet. With no vaccine or cure readily available, the policy makers across the globe are actively looking to lift the lockdowns and encourage “economic activities” with “great degree of uncertainty and fear”.

The new motto: Learn to live with the virus- serves as a perfect prelude to kickstart the economy. The world is facing its worst recession since the Great Depression of 1930s and the governments and policy makers are reeling under pressure to restore the economic normalcy.

Will the recession last for several years or be a quick turnaround? Can the world expect more shocks ? Is there a ‘new normal’ in place? What could be the mode of recovery? Will it be a V shaped or “Swoosh” shaped recovery? As the economies reopen, the answer to these questions would be more clear. Though the early signs of recovery from China pose a little encouraging if not an optimistic picture.

Let’s try to find out the “best possible” recovery method that can be attributed to the global economy amidst COVID19:

1. V Shaped Recovery: V-Shaped recovery involves a sharp decline in metrics followed by a sharp rebound to the pre-recession levels. With mostly every industry being battered, a V-shaped recovery can be ruled out in the short term.

2. U- Shaped Recovery: U-shaped is defined by a longer trough. This can last several quarters before the green shoots emerge. The recovery is rather undefined than compared to sharp rebound in V shaped recovery.

3. W-Shaped Recovery: W-shaped recovery is characterized by a period of extreme volatility. It can be best summarized as recession-recovery-recession.

4. L Shaped Recovery: The slow rate of growth and persistent unemployment are the hallmarks of a L-shaped recovery. The economy may never be restored to its pre-recession level.

5. Swoosh Shaped Recovery: The recovery best resembles the Nike logo and is characterized by longer duration of economic growth. It’s longer than the V-shaped recovery and slower than a U shaped one.

The massive impact of Covid-19 on sectors like hospitality,airlines and real estate and its cascading effect on many others severely dims the prospect of a V-shaped recovery. As the virus lingers on and the new social distancing norms take effect, the economic recovery might be a painful one atleast in the short to medium run. In these uncertain times one cannot rule out a U or a Swoosh shaped recovery. Or a new lexicon be added to the economic dictionary?BEHOLD!