Author: alearningaday

If you’ve been following the financial news, you’ve probably seen a fair number of articles on the sudden and drastic slide of the Indian Rupee versus the US dollar in the past few days. I must admit I wasn’t paying much interest until I received a forward (one of those that requests you to forward to every friend “if you care”) that said the solution to this crisis was to stop buying non-Indian goods. I laughed.. but my curiosity was peaked about the real causes and decided to do some research.

I was expecting to find a link online that clearly explained the factors leading to the slide but was disappointed so I thought I’d take a crack at understanding the factors involved here and thus, form a thesis on how a currency’s value is determined. I was helped greatly by this excellent resource from Tutor2U.net and I’m borrowing heavily from it.

First, the situation – this graph documents the rather alarming slide of the Indian rupee versus the US dollar in the past months. As you can see, there’s been an increase from 54 rupees per US dollar to 67. That’s a 25% increase in less than 3 months and the slide may not be over yet.

So, why is this happening? Let’s first understand how the value of a currency is determined.

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Simple version

In theory, the right value of a currency (in this case Sterling or British pounds) is an intersection between the supply of the currency and the demand for it. We’ll follow the explanation from Tutor2U for the simple version.

So, how do you determine demand and supply for sterling? (formatted into a table for easier reading)

Thus, the fundamental factors that drive an exchange rate

1. Interest Rates: Interest rates in a country are largely derived by the value of government bonds. If the value of government bonds go down (i.e. if investors are less optimistic about British prospects), interest rates go up.  This is a fascinating process and you can expect a detailed post on how this happens in the next few weeks when we kickstart a book learning series on “The Ascent of Money.”

On the one hand, this could mean more investors put money in as they expect a higher return but on the other, it means borrowers within a country suffer since the interest rates on all home and car loans go up. This in turn means people consume less leading to a chain of potential negative effects for the economy.

2. Economic growth. Countries experiencing a deep recession often find that their exchange rate is weakening because government bond values go down, investors pull out, and speculators bet against the currency.

3. Inflation. When inflation is high, a country becomes less competitive in international markets causing a fall in exports (and thus, demand for a currency) and a rise in imports (a supply of currency overseas). A fall in the exchange rate may be needed to restore a country’s competitiveness in overseas markets.

4. Balance of Payments. Essentially, if a country exports more than imports, it runs a trade surplus and thus is a better place than one in trade deficits (or more imports vs exports).

5. Market Speculators. The consequence of global bond markets and global investors is that they can make it hard for a country performing poorly to recover since many factors are linked to each other. One key mover is market speculators who make money by betting on rises and falls. A feeling of pessimism about a market’s prospects can be very costly.

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Complex version

I won’t go on to explain the complex version in great detail because I can’t claim to understand it fully myself. But, here’s a synthesis – the currency value is indeed determined by 2 factors – aggregate demand and aggregate supply.

Aggregate supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period.

Aggregate demand, however, is a bit more complicated. It is proportional to the following –

1. Consumption or consumer spending
2. Investment
3. Government spending
4. Net export (or Export – Import)

Investment requires a deeper look, however, because it is directly proportional to investment by firms in the country but is inversely proportional to interest rate. This is because increase in interest rates increase the cost of borrowing resulting in a cut down of investment and consumer spending. (equation below)

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How does this explain the decline of the Indian rupee and what are the learnings on currencies in general?

My thesis is as follows –

First, the fall of the Indian rupee – the sudden fall of the Indian rupee is an aggregation of a few factors –

1. Poor financial reform => low confidence in the market. The financial reform announced of late has been received with pessimism. This means government bond values are likely to fall and speculators are like to flee. The economic growth hasn’t given the market reasons to change it’s perspective either.

2. Foreign investors are unwelcome. India hasn’t exactly welcomed foreign investment over the past decade by still subsidising prices in key industries and protecting local industry. That hasn’t helped.

3. Ongoing trade deficit. Linked to above points and unhelpful.

4. Spending and investment affected by above factors. As these factors are all interlinked, consumer and business spending and investment is affected.

5. Strengthening of the US dollar. For the long term investor in government bonds (which is almost all pension funds in the world), the US dollar’s strengthening means a massive shift in allocation of investment. The INR’s weakening means this process can be hastened.

So, how can this be solved? It will require a lot of structural reform to win the confidence of the market. It is possible that the spiral was over exaggerated and the rupee may be worth more than it is now. Time will tell.

My learning from attempting to understand this is that I’m able to appreciate the sheer complexity involved. Financial policy makers don’t have it easy. That said, the underlying principles are sound – if your core financials aren’t sound (e.g. good structural policies and higher money in versus out), no amount of massaging financials can save you from the realities of the market.

It’s the same in life – if you don’t have the skills and character, no amount of personality training can save you. The markets, like life, are tough. Only the fittest thrive.

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A final note – I am not a financial expert or Forex guru. So, while I’m sure the theory is directionally right, the details may not be perfect. I’m sorry if I’ve made any glaring errors.. and I trust you’ll let me know in the comments. Putting this together has been a great learning experience in itself. Hope it helps!

Most new year resolutions fail for 2 reasons –

1. We don’t build in room for misses – for example, we resolve to exercise 5 times a week every week of the year.
2. We hit ourselves so hard when we miss for the first time that we don’t allow ourselves to recover.

1 is not smart. However, that habit can be unlearned over time.

Hitting ourselves so hard when we miss is much harder to unlearn. The next time you do it, remember to tell yourself that it is not the right thing to do. It isn’t going to help you now or ever – you’re only being a coward indulging in sabotage. You’re allowing the resistance an easy victory.

The next time you miss a goal or target you wanted to hit, be nice to yourself. Allowing yourself to recover from a miss is not just the kind thing to do.. in the long run, it’s the clever thing to do.

A man went to his rabbi and asked him what he should do when bad things happened.

The rabbi said – “When things are good, thank the Lord and when things are bad, praise The Lord.

The man asked -“But rabbi, how do I know which is which?”

The rabbi replied – “You are a wise man. Just to be safe, always thank the Lord.”

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Hat tip to Ben and Roz Zander for this great story in their excellent book – The Art of Possibility.

You dreamed about growing up and living on your own income once. You dreamed about living in your own apartment and calling close friends over for a night out whenever you liked. Perhaps you dreamed about seeing your kid go to a great school, receiving a gift from your kid’s first income and having a great time at your kid’s wedding. Or perhaps you dreamed you’d one day travel to a new country or attend a great university.

Look at where you are now.

Sure, some of those dreams haven’t worked out exactly how you pictured them as a kid. Thank god for that. Many of them worked out much better than you could have imagined.

If you believe the media, the world is going down the drain. There’s too much war, too much politics, too much money in football, and too much unemployment. It doesn’t seem like the kind of world where dreams come true.

But, they do. You are evidence of that. They work out much better than you even imagine. So, before you get all cynical today as you dream about yourself 15 years from now, remind yourself that this life, today, was once your dream too. And what a great life it’s turned out to be..

Sure, we have had to work hard for them but let it not be said that dreams don’t come true.. life is the stuff of dreams. Smile, enjoy living the dream, and just for today, actively reach out to someone else to help make their dream come true. If we aren’t helping each other realize our dreams, what the hell are we living for?

If you expect to win or expect things to go well, there’s a good chance you’ll be disappointed. Disappointment often leads to fear which in turn leads to paralysis the next time you play. You don’t want to take risks for fear of disappointment and you prefer inaction to action. The dark side has won.

So, how do you avoid this? Stop pegging expectations to results. Never ever expect to win or lose. Just expect to play. Take it a step forward and perhaps even expect to give it your best shot when you play.

Pegging expectations to the process means you keep focus on things you influence – your preparation, your attitude, and your effort. If the result is good, incorporate the positives into the next game. If the result is bad, figure out what you can do differently. The best outcome of the infinite game is you learning from experiences to become the person you want to be.

Expect to give what you do your best shot.. and enjoy the game. The rest is just noise.

This week’s book learning is from How Will You Measure Your Life? by Clayton Christensen.

When DVR rental giant Blockbuster looked at fledgling internet start-up Netflix in 2001, they dismissed it as a threat. They had billions of dollars of earnings thanks to their DVR renting and lucrative business model that made money off high late fees. The late fees made sense because every check out of a popular movie was how they made money.

Netflix turned it around by charging people per month and mailing DVRs. Netflix made money when people didn’t rent DVRs! But, in 2001, it was making only $150 million in profits in comparison to >1.5 Billion that Blockbuster was making.

The problem was that Blockbuster calculated “marginal increase” of pursuing Netflix. It meant a very small marginal increase on top of Blockbusters existing revenue but what Blockbuster didn’t realize is that this new product would redefine the industry’s future. They went bankrupt in 2011.

It’s not that different in our personal lives. We start on the path of wrong doing by calculating marginal cost or cost of doing something wrong ‘just this once.’ That’s how Nick Leeson started out trying to wipe out a trading loss. The path led him to lose $1.3Bn, bankrupting 230 year old Bearings bank, costing 1200 employees to be laid off, losing his marriage, and being imprisoned for 6 years.

Sketch by EB

No athlete or Enron senior executive started out saying they’d cheat. One small compromise led them down a slippery slope. As Clay wisely puts it, it might seem like one extenuating circumstance but life is just a series of extenuating circumstances…

Clay’s advice is to figure out what your values are and never deviate. You can’t follow 99% of an ideal. It’s 100% or nothing.

It was this insight that made me realize that my laissez faire attitude towards online piracy media content was not in congruence with my values – I’ve been a very happy iTunes customer since!

(“Aage ya peeche” in Hindi stands for “Front or back?”)

I was at a Saturday league football (read soccer) game a couple of hours ago. This was only my second game with the team and I was taking corners. I put 3 hopeful corners in but we didn’t have much luck – no goals. The team weren’t really sure where the ball would land and I wasn’t really sure where they’d be standing as well.

As I walked out for the 4th, a teammate screamed – “Rohan. Aage ya peeche?”

“Aage” (front i.e. closer to the goalkeeper) – I screamed back.

Now I knew where to put the ball in. I did. He was there on cue and scored.

Of course, the scoring won’t happen every time but boy, did we help our chances with a simple bit of communication! Seasoned teams know and understand where their teammates put corners in and don’t need this sort of communication. But, for us, it was just perfect. So simple, so obvious, and yet.. it took us a while to do it.

I’ve taken back a big lesson here – communication is the life blood of a team. So, over communicate if you must and ask the simple question. We don’t need “out-of-the-box” thinking or piercing insights to move mountains. Simple questions that move the needle and help us understand each other is what moves mountains in the long run.

What makes a service a social network? My assumptions are –

1. Ability to connect with others
2. Ability to share photos, videos, and life events
3. Ability to communicate in real-time
4. Ability to organize offline events for more connection
5. Ability to funnel content/speak to sub groups of the overall network

While Facebook excels at 1-4 and does an okay job of 5, Facebook became a victim of it’s own success – it became too big. Path bettered the idea with a smaller and more private social network that does some of this well. LinkedIn occupies the niche of a professional social network so we won’t bring it in for the purposes of this discussion.

Over the past year, however, I’ve observed one social network climb to the top within my social group – Whatsapp. What started out as a way to send free text messages between iOS, Android, and BlackBerry platforms is now much much more than that. Whatsapp allows me to connect with folks in my phone book (i.e. my network), share photos, videos, and events in real time, and communicate better than any other. It then takes organizing offline events and sub-group communication to a whole new level.

Most folks in my social group wouldn’t even think twice to create a Whatsapp group to plan for the next weekend. In fact, they probably don’t need to do that because they’ve probably got on going groups for their football, get togethers, friends, and family. It’s a continuous stream of communication.

As far as my social group goes, Whatsapp is the undisputed leader of the social network group. It has it’s work cut out to stay that way but I thought I’d congratulate the team for iterating continuously to bring forth a fantastic and much loved product. Facebook team, I hope you’re watching..

Patricia Ryan Madson, author of Improv Wisdom, says principle #5 of Improv is “Be average.” She says it’s important to be prepared to be average because you might never get around to doing anything if you’re waiting for the day you’ll roll out a perfect performance.

Improv requires you to be prepared to fail simply because we don’t perform our best when we put ourselves under tremendous pressure.

So, if you’re walking into an interview/client meeting/presentation today telling yourself “this is my only shot and better work,” stop. You’re putting the sort of pressure on yourself that will cripple your performance. Calm down. We get many shots at the things we really need and if this doesn’t work, it’ll work out just fine.

Be prepared to be average at first. That’s how we get better. For all his emphasis on perfection, even Steve Jobs oversaw many products at Apple that were, at best, average. That’s just life. We just need to learn to be our best and enjoy the dance.. no matter the result.

Look at all your key fulfilment factors – career, finance, health and fitness, relationships, mental and learning, and life and happiness – and you will find that all is hardly ever well. On average, you will always have 1 that is going bad, one that needs attention and the rest will be relatively smooth sailing.

Life is a careful balancing act and we learn over time that neglecting other factors to get one right is damaging in the long run. So many of us neglect our health and relationships in pursuit of success in our careers and this regularly comes back to haunt us. What’s the point of success if we are diagnosed with high blood pressure in our 30’s or have no one to celebrate our “Employee of the year” award with?

Even if you put in the right amount of effort to tend to each of these, all will hardly ever be well. Life will throw up a challenge to keep us interested. No point getting down. No point being unhappy. No point worrying. And absolutely no point not having fun. The challenges never stop. So, if you find yourself smiling a lot less than someone you know very well or worrying too much to have fun, then it’s worth stopping what you’re doing and taking stock. Everyone around you has similar sorts of challenges.. some just choose to rise above them and make the best of life.

It doesn’t matter what the situation is in your life right now – you have the power to make it better, to smile, to be happy, and to spread your happiness. Equally, you have the power to do the opposite and spread unhappiness. That’s a lot of power. Use it well.