Lessons from 2021, the year irrationality went viral

Vashistha Iyer

Lessons from 2021, the year irrationality went viral



On today's show, Shray asks Deepak about how to make sense of the past two years in the markets, macroeconomics, and the seeming irrationality of it all. They also talk about how to look at the year ahead. 


  • 2021 bad year with all the lives lost, but it happened to be good for markets with the number of IPOs at an all-time high
  • NIFTY returned approximately 23% and has been positive for the 6th consecutive year
  • India being top-heavy, from the income distribution standpoint caused the kind of market outcomes we saw
  • Small firms got hit the most, and that may not be sustainable in the long run
  • Markets don't care about death and destruction for sure. But what moves the market?
  • We've normalized, letting go of our freedoms, and irrationality could be the new normal.
  • Inflation could actually be a function of supply than demand
  • If the market didn't go down in these pandemic years. How can we make any event-based predictions?
  • The boom in startup funding. Has equity become cheaper than debt?


Shray Chandra: Hi everyone, and welcome to Episode 44 of the Capitalmind podcast with our founder and CEO Deepak Shenoy. As 2021 draws to a close, we and I guess frankly, everyone in India has had a fairly brutal year personally. But when you look at the financial markets, they've behaved very differently and have been on another trajectory altogether. It's been quite a year with some interesting IPOs, great market performance, Deepak was just looking at some of the numbers and I mean, they're hard to stomach. So at this point, we wanted to bring him in and ask him what the past year, I mean, both personally and markets have informed for him as he shapes his thinking for the next year and the years ahead. So Deepak, I'll start with the first question. When you look back at 21, at least everyone in India, I remember the Delta wave in April, May, June and just how horrific that phase was but then I also remember the stock markets and how bizarre that whole situation was. So I mean, what happened or what have you learned from that? How do you think this makes sense in the grand scheme of things?

Deepak Shenoy: In fact, I think of it as a very incredible year in so many ways. So many things happened that we just could not have imagined happened and maybe it's the last two years, maybe. But this year itself, it's a 23 percent return. We are on December 29th, so hopefully when the year ends, it'll be roughly about the same, but it's been a 23 percent year. This is the 6th consecutive positive year for the markets and the last negative year was a very tiny, I think 4 percent year in 2015. And before that, 2011 was the first double digit negative year. So we've had COVID and all sorts of things Delta, you know, Omicron now, all of this stuff and yet 23 percent return, which is the best return since I think 2017, which was a 28 percent odd return. What this actually tells me, and you know, I hate to say this, but the market doesn't care about death and destruction, and this country is extremely top heavy. Let me explain, so the problem in India has been that, you know, we focus a lot on, let's say, most of it and we're talking in English and most of the English speaking public probably meet about 1 percent of the overall or 2 percent of the overall population. This population is probably responsible for 80-90 percent of the GDP. The potential risk is for an English language podcast, and this is the same with companies as well.

Deepak Shenoy: Most of it, probably about the top 10 or top 20 companies probably generate 80 percent of the corporate GDP in the country, and the human capital wise also the top few earners they are less than, I think, 30 lakh people in the country who declare an income tax, income of more than 15 lakh rupees per year. So you know that, but that number adds up 200,000 crores in taxes collected. So that's 32 lakh people paying 200,000 crores of taxes. And the remaining people, which are nearly 5 crore or 4 crore tax payers are responsible for maybe 5 or 10,000 crore of income taxes. So it's a really top heavy country. What's really happened with the delta is that the lowest denominator, which is the the livelihood of literally the lowest income strata of people have absolutely been destroyed and there is something that they don't have, which most of us have, which is a safety net. They don't have a safety net. They live day to day. Sometimes they have wages week to week or you know, sometimes day to day wages and these are the people whose livelihoods have been affected the most. And they're silent because if they don't exist, you don't even hear about them. There's no media articles and it's very sad but our media and our country largely has cared about the problems of the the rich.

Deepak Shenoy: So when Delta affected the rich people is why it was such a big problem and there was overwhelming of hospitals. The poor have always had trouble finding places and hospitals and getting treatment at a relatively low price but now the rich did, and that's when it suddenly became such a big problem. But markets were completely [00:05:00] unfazed because what happened in this case was you eliminated competition from the unorganised small sector, which is usually the most nimble, right? So you got really small entrepreneurs, nimble entrepreneurs who will respond to customer demands much easily, much more easily because they have like three people in the company I mean, in a little shop. What do they have to do? Whereas a large company has to like, oh, we have to hold a meeting in order to hold a meeting in order to hold the meeting kind of thing. So that kind of slowness is what makes them less nimble. Now, when you're more nimble, competition goes away. The less nimble guys are the only ones left in the kingdom of the blind. The one eyed man is king, right? So you effectively got a lot of large companies which suddenly had access to lesser competition, big market, an online market, a safety net and the safety net in the form of RBI gives interest rate reductions. Who does it help? People who can take loans, which is typically the rich companies. The poor companies are still paying 18-20-24 percent from informal sources, the small entrepreneurs paying that much.

Deepak Shenoy: The larger entrepreneurs are getting 6 percent loans from the market because of the liquidity measures and RBI has announced rate reductions. The smaller companies that got eliminated and therefore, and the value accretion to the larger companies just magnified. Now this may not necessarily sustain because in the end, everybody has to make money in order for everybody to make money. So you can't just have one part of it but for this last one year, it was all focused towards, oh my god, my profits have gone up and so on. Think about this, and this is a statistic that just blows my mind. The Nifty when it was 30 percent lower pre-crisis had a price to earnings ratio, and I'm adjusting it away for some other of those numbers that we've seen, of 28 times roughly. I think, 26 or 28 times, and now it's 23 times, even though the Nifty is 23-25 percent higher. That means a more higher Nifty by 25 percent is actually cheaper than it was one and a half years ago. Imagine the earnings, the denominator when as a PE ratio price to earnings, the denominator has grown tremendously. The richest companies, which is the top 50 companies in India, have actually gotten significantly richer in the last 18 months. And that, I think, is a lesson that we're starting to learn.

Shray Chandra: I would also think that it has something to do with the fact that spending opportunities for people were also a little limited, at least for most of the year, were quite limited. So that money went into the market.

Deepak Shenoy: Yes, in fact, inflows increased and we've seen SIPs go up. Retail participation of 40 percent. What do you do? The rich people that wanted to spend did not have avenues to spend. The poor people didn't have any money to spend, but they weren't big spenders and we've talked about this in other podcasts about how this dichotomy existed. So it was a lot of the discretionary spends that otherwise would have gone into, I don't know, travel and hotels and, you know, stuff like that is going into the market simply because you're making the same or roughly the same kind of incomes, you don't have the expenses. So when you have more inflows coming in, all of the stimulus that the U.S. and all had set up, the entire new inflows that have come into market also added up. And I think it's the lesson that I come up with is we all think markets think long term. They impact on the economy, the GDP, they don't care at all. They don't care about death, destruction, livelihoods. The fact that possibly a lot of small entrepreneurs, small families have been devastated through the crisis. They don't care. Markets care only about one thing - short term profitability and short term inflows. As long as those two things are out there, we should stop believing that markets care about the long term.

Deepak Shenoy: It's probably looking at tomorrow, three months, six months at max. So if you're saying, why doesn't the market value this business, that's because the market can't see anything in the next three or six months. Why do you think when you say the market is over valuing something, it's like basically reacting to what everybody thinks will happen in the three or next three or six months? It has nothing to do with, if the business is looking like it'll go bankrupt in one year, its share price might still be high. So a function of inflow is function of, and I think that is clearly, you know, it's not looking at three to six to twelve years. The markets are looking at three to six to twelve months. So if you want your share prices to go up, you've got to find companies with triggers that will actually happen in the next three to six months, not in the next five years. Otherwise, you have to wait for five years until that valuation is recognized and [00:10:00] be ready to deal with it. And don't think that markets will care because there's a bomb blast somewhere there's a war somewhere unless there is a hit to short term earnings. Nobody cares, not the market and definitely not the stock market.

Shray Chandra: I think that's interesting point. I mean, we've had this conversation before it's been said, but I take it. My second question about one of the learnings from last or this this past year is something I've got from your Twitter threads where you've said in the same way the market is very short term, it seems that now increasingly a lot of decisions that govern our lives or that determine our own investing choices or that policy makers and others are making. They also seem to be, in a sense, very short term, very gut feel based, very arbitrary. Can you expand on this a bit and what do you think it means?

Deepak Shenoy: You know, my feeling and I will say this quite openly is I think the whole world has lost rationality in this crisis. To a very large extent, rationality has meant, we have thought, you know, as in general, some people may be mad, but the world can't be mad as a whole. But by and large, people will not make decisions that are astoundingly stupid. But increasingly, I feel that no matter how you look at it, certain decisions are totally arbitrary. Whether it was, we believed a lot of advisors who told us oh, this virus is six months or eight months or 12 months. This virus you know you have to wear masks and you'll never get the virus? Oh, no, no, you don't have to only wear masks, you also have to, you know, do. So, all of this stuff came from people who were apparently good at epidemics, but apparently they were not. So advisers themselves said, you know, mask everywhere. It's an airborne virus now, and you still have to mask. A virus can go through a mask. The definition of a virus is really small, so if it's airborne and not, you know, molecule born, the chances that you will get that virus even if you're wearing a mask are very high on it. Once it becomes airborne, it makes no sense. But no, of course, if you wear a mask, it's like if I wear a helmet every day, the chances of my getting a head injury are lower. Period. I can't refute that, but I don't go around wearing helmets every day because I recognize the rationality of saying it is stupid to expect that I will get hit by something on my head on a daily basis when I'm walking around.

Deepak Shenoy: Similarly, a mask that does not prevent me from the virus but could prevent me from maybe one sort of kind of thing of the virus is not rational to, you know, but I can never deny it, right? You can never deny that a mask is helpful. Of course it's helpful. We've shut down schools in India. We've said, no going to schools, but no, we will go to malls. We will allow our kids to, you know, play with other children who are either going to school or going to malls. So chances of them catching it are roughly as 100 percent as going to the school and actually dealing with camaraderie rather than issues with respect to, you know, I mean, you're sitting in front of a screen and you're like five years old, what value does that add to anybody? And it's literally the only the really rich that can do this right? So we've harmed the poorest of children who used to go to school for a mid-day meal, which you can't give because they're not going to school anymore. So there's no interest in going to school who used to who don't have high speed internet to be able to enjoy the facilities of a laptop based school, whether they might be watching on a Jio connection in a tiny little phone where you can barely see the teacher and

Deepak Shenoy: Definitely not see any kind of a white board or whatever it is that might be used and we have normalized this, this is perfectly fine. We are like, oh, shut down the schools, that's fine. Our kids, we've lost two full years of kids schools and it's perfectly rational to do so. There was never a time in history when it was okay to do this other than maybe in an emergency. And we don't call this an emergency. We think it's perfectly normal that, you know, people could do this. We have normalized shutting down cities. We have normalized giving unaccountable power to arbitrary decision makers, building societies. How can they decide who can enter? Who your kids can play with? Whether you can even go for a walk downstairs even if you're wearing a mask? This is unbelievable lack of accountability because people can just do arbitrarily anything and we've allowed them continue to today. Tomorrow, if the government says or if your building society says, I'm sorry, but you're not allowed to meet guests or you have to be locked in in your own house. Nobody will question that power. And this is a huge problem because the democratic society like India, you need the basic tenets of liberty, fraternity and you know equality. You don't have either, and it's perfectly fine we've lost the right to determine or not the right, but lost ability to determine what infringes on basic freedoms because building societies make those decisions, [00:15:00] not people who are otherwise accountable to power.

Shray Chandra: Whatever the concerns, markets don't care about this certainly.

Deepak Shenoy: You know, markets have loved any form of extreme power. Markets always love that. It's not because of anything else, because I mean, even in the emergency, they said the trains run on time and the stock market was up and so on. That's because, you know what, if you threaten to anybody, everybody in saying, if you make a loss, I will shoot you, then the chances are, I mean, you're not saying that, but I'm just saying that if you said that, if you had the power to say that initially stock prices will go up and then of course, they will go down. Problem with this control of power and abuse of power, with the lack of accountability is that you can make a random and completely arbitrary decisions and get away with it. Political rallies happen in the day and they tell you there's a curfew at night. This is fine. Look at this in the market context as well. People now crave a world where these arbitrary decisions do not exist. You might say that people don't care, you know? No, no, we're genuinely concerned about the virus. But I think inherently people are built to say this is not correct. You can't determine my life. So they crave the freedom. Crypto is a form of that freedom. So crypto is taking over the world, if the last few this thing. When people loose freedom in the free world, they seek it in a virtual world.

Shray Chandra: Although just saying there seems to be a lot of arbitrary and not so free stuff there as well. But that's for a separate discussion.

Deepak Shenoy: It's like, Oh, my arbitrariness is better than your arbitrariness. So where I'm allowed to be arbitrary is fine. Look at regulators. Suddenly they decide that we'll ban Russia from SWIFT. Come on, it's like a massive country. You can't just ban a country from SWIFT just because you feel that. It's just amazing amount of nonsense that can actually will actually fly through. You can ban recurring payments.

Shray Chandra: Which Is painful, but probably a good thing.

Deepak Shenoy: I really think it's a good thing, but maybe there should be a much larger transition period, transition period. And you know what? There are problems that they should be solving. You know, if an RBI says these Chinese loan apps or these loan apps that fleece you, are a bad thing, it would take them roughly 15 minutes to track, shut down and break all of these guys down to the point where nobody does this again. I freeze your account, I freeze everybody you know's account and then, you know, so

Shray Chandra: And now the onus is on you to come and unlock.

Deepak Shenoy: Yeah and the minute you start doing that, for some of these app companies, every app company will stop because suddenly you know that this guy is out there, you know, going against you. I would have liked that kind of arbitrariness in the sense of saying that, listen, we're going to chase people who do really bad things. Instead, we get other stuff which is like, we'll inconvenience everybody for the pain of a few, which is worse arbitrariness. Which is similar to Corona's. Oh you know what, everybody coming to Bangalore from Maharashtra has to quarantine themselves for 15 days. Like wait wait, I used to come and go in the same day in the morning plane and go back by night. So I can't do that anymore? No, no, I'm sorry you have to quarantined for 15 days. Why? Well, I don't know, because Maharashtra has 691 cases. Doesn't Maharashtra have a lot of people. Well, of course, but 691. No that's like 0.001 percent of the population. No, no, don't ask me for rational rules. I have to appear like I'm doing something, so therefore I'm doing something. It will not matter if we've done so many mad things and we have normalized this madness. And you know what, if I keep saying I'll cry wolf in the end, when someone really steal something valuable to us, our freedoms, I mean, till now, our freedoms have not been so valuable. Ok, theek hai, lock us at home. But then you are locked in for home for six months and then we start crying wolf. Nobody will listen because, hey, you know what? You're OK with a few days of lockdown. Why can't you be open for six months? This is a problem, and I think this is the lesson learned is we are amazingly rational beings in the face and especially when faced with the crisis, we believe the irrational is the new normal.

Shray Chandra: Trying to tying this back to the economy and markets. What do you think? I mean, what you're saying, you're certainly not the only person to say this. I mean, people have mentioned this. So how does this change behavior for us listeners of the podcast as investors or as or how do you think that when people look at this and new normal, as you've just pointed out, how do you think this changes their behavior with its consumption investing so on and so forth?

Deepak Shenoy: In a way, markets have always been irrational and we knew that. The difference between now and then is that, you know, the whole world has changed in this way. One particular behavior that I have started to see is that life is short. The recognition that life is short has never been more obvious to us than now. And because somebody who's 32 years old dies of a heart attack, somebody who is 40 years old dies [00:20:00] of COVID almost with no relation to health or wealth or anything of that sort so it's arbitrary. Behavioral changes are quite powerful. And one of the things that is happening is that the information flows that we are seeing everywhere have increased dramatically. And why am I saying this that life is short. If people somewhere go to hospital because of Omicron? The whole world gets to know in like a flash. There are people are making videos about, Oh my god, I saw this guy with Omicron. He was bleeding out the nose and, you know, and stuff.

Shray Chandra: But this time kids are getting sick, which was, I think, which..

Deepak Shenoy: Which yeah, which was the fear or, you know, some kids got sick somewhere and therefore, so we extrapolate. The knowledge flow and the information flow, I don't even know if there's knowledge, but information flow is absolutely obscene. It's off the charts. Because of that, market crashes have become very, very short-term. So I'll give you, you know, in 2000, a market crash lasted what 2 years. It was 2000 to 2002 was the market crash. In 2008, when the markets fell between 2008 January and maybe 2009 March or April, 15 month kind of down cycle. In 2013, that was 6 months, less than 6 months and the market recovered and in 2020 with one of the greatest crises of the world. We've had a 6 to 8 month kind of cycle to come back. Why has this happened is, I think, two things. The information flow around panic spread fast with markets crashed fast and the information flows around, oh my God, the market's fallen too much. Come on, the whole world needs to rescue this, and therefore it will get rescued. That information also flowed fast and the market recovered fast. So I think market crashes have become shorter because of information flows. If you take away information flows, you might see longer term down trends, but I think we should start looking at the markets and saying if the market's going to trend downwards, it better trend down really fast. Fast moving panic based down trends are actually better for the market because it eliminates and comes back up really fast.

Deepak Shenoy: If you have slower things, that's different. But the thing about life is short is also that we have realized one thing, we can't overpower the virus. We can't. We just simply, there's nothing we can do. At some point it's a lottery about when you get it, it's going to be really bad or it's not going to be really. You can take vaccines, but, you know, post vaccines also, people have had issues. What does that force you to do? I think the answer to that is spend your money, which was what money was designed to be for. But it's never been more apparent than today that you're not going to be able to leave it behind for any meaningful use. Spend on travel. There is already some bunch of revenge spending happening. Today you can't travel abroad, simply because you know there are restrictions, quarantine. There is going to be a time when all countries open up and Singapore is already apparently said we don't care about Omicron, we don't care about the impact of this virus, we seem to have enough vaccinations. If things get bad, we will then lockdown. But till then we weren't allowing people to transit through Singapore, I'm changing that rule. We didn't allow people to come into Singapore without quarantines, institutional quarantine. So if you fly from Chennai to Singapore, there's no quarantine or Singapore to Chennai and back, there's no quarantine as these rules open up

Deepak Shenoy: The first thing that happens or will happen because of the the lack of spending over the last 2 years and a recognition that life is short. I think there's going to be a large amount of revenge spending, where that's going to come from? The stock market. Yeah, you know, you made your money, parking the money you didn't spend in the stock market. When you need to spend, you're going to take it out from right there. It's a little bit of a feedback loop. So what happens when people take out money to spend, the market goes down declines. U.S. has seen that. So when the U.S. markets, you know, here's the interesting thing, the U.S. stopped its dole of $600 a week, payout of $600 a week to anybody, including those who didn't need it on September 30th. From October 15th, the Indian markets have started to see a downtrend. The U.S. markets are still relatively OK. It's still about 3 or 4 percent only from that all time high. But it's actually not beaten that it is not gone up any significant amount. That's because A) this extra money that they were getting people who didn't need it were getting was going into the stock market so there's a lack of inflows, but also slowly people are saying, listen, if you don't give me that, I need money to spend, and if you're not going to give me all that money or take it out from wherever I had it.

Deepak Shenoy: And as the economy comes back, there are more movies releasing suddenly. We had 3 movies this month. There was a Matrix on, there's a bunch of others, so that will just cause us to spend, even if perhaps we didn't. I mean, I might have said, okay, you know what? I'm going to not watch it in the theater. I'll wait till it goes on these OTT things and then watch it. Now I am saying, no, I got to see it in the theater because you know what some Omicron, something else, they'll lock down the whole world again. Let's go [00:25:00] and enjoy it before we, you know, I don't know, get hit again. I think that point where we start saying, let's take out the money and spend it is a inflection point for the market. And where we are is roughly the spends will increase GDP. Because till now, you invest money it doesn't actually increase GDP Ok, so you spend money to increase the GDP. But if you take it out from the stock markets, the stock market declines. So if you think that the GDP to stock market ratio was 1.5 and 2, whatever it was that so usually it should be one is to one or hundred percent. Stock market should be a hundred percent of GDP. I think you're going to see that GDP goes up, stock markets, you know, kind of correct and come down, at least for the really short term.

Deepak Shenoy: So you'll see this kind of a correction. It's already probably happened to a large extent. You see some stocks, they're down 50 percent from the top. Although the headline index are only about 10 percent from the top. Some stock, most index stocks are down about fifteen to twenty percent from the top. And that's because this situation that I'm talking about is already happening. It's happening right now in the markets, and it might continue a little bit while longer, but crashes, deep, strong crashes won't last too long. You might at best have, a small, you know, 6 month to 8 month deep crash. But you could, of course, you could have a long term, you know, kind of boring stagnation kind of thing, but you won't have a you're unlikely to see a very deep crash last too long. Last 6 years, continuous up markets for almost for every year in the last 6 years. And if you don't count for that four percent loss in 2015, for the last 10 years, 2011 was the last double digit decline in the stock market. So one year, suddenly your time frame for earlier it used to be oh you've got to be invested for five years, then only you'll make a profit. Now it's like can be invested for one year and you'll make a profit. It's almost scary that that's the case.

Shray Chandra: Yeah, and surely money will double every year.

Deepak Shenoy: That is the problem but yeah, I mean

Shray Chandra: To sort of tie the loop and close this conversation out with the original point. Can you tell me a bit more about your thoughts on the human capital front and in particular, what's the take on productivity and inflation? Which has everyone's been very interested in how inflation will I mean, even crypto folks use it to fuel their arguments and so on and so forth. So just on that productivity inflation, how do you think those are going to play out over the next year or so? And how should we care as investors?

Deepak Shenoy: This is very interesting because inflation till now has been a function of few other things like, you know, cell phones and stuff like that. Now it's actually gone to wages because the government paid so much money, not so much in India, but in the U.S. Yeah. So when they paid so much money, add this to the life is short argument and people said, I want a better quality of life and they've moved out of some of the cities and gone to smaller towns and said I'll work for maybe a lesser wage, but my net earning, maybe actually higher. In some of these places with a good quality of life. Add these two up, and suddenly it appears that people are unwilling to work at the same wages for the same conditions that they used to earlier. You made it difficult for people to hire people. Now this is not necessarily good because wages going up is a good thing for some people, but some businesses simply cannot afford higher wages and therefore what happens there is that they go into productivity, which means I'll buy a machine to replace a human being and the machine is actually less expensive today because it's been produced using the capital that was relatively cheap or free. So whether it was the spreadsheet that destroyed the physical accountant or now the guy who used to run a spreadsheet now is like one some AI machine that's actually doing some of this accounting by almost by itself. You might actually find that increase in these wages because it's so expensive to hire people

Deepak Shenoy: Increases in productivity are going to be all over the place now. India was always a culture of labor arbitrage, cheap labor. It's not cheap anymore. So even India is going to see massive amounts of labor arbitrage. And I hope to, my hope is that the wages of the lowest income people that the maids and you know, guards, drivers, construction workers go up. But I don't think that's going to happen because they're the most affected in this crisis. They'll take anything. The money, all the increase in salaries have come to the upper middle class who have skills, and therefore that wage increase at some level has, will result in inflation. However, inflations in India is very complicated because it's just food ok, so the physical measure of inflation is food, 50 percent. So in India, food [00:30:00] has this, it's very sensitive to production changes and we produce way more than, you know, required. Other than maybe these tomatoes and once in a while, they'll flare up and how fast tomatoes price fell down in two weeks the price was down. And I actually said at max because the cycle and I tweeted about this, I said the cycle of growing a tomato is three months. If people see 100 rupees price today within three months, that price is going to come down to 40, 30, 20 and it was down. It goes down to 10 bucks as well. I don't think because of this potential productivity changes in agriculture and the fact that we do produce way too much, I don't think we will see a meaningful increase in inflation, headline inflation at least for the next one year.

Deepak Shenoy: Wage driven inflation is not so common in India because we don't even collect wages for half of the places. But most places which may have increased prices have also been increasing because of supply side problems and supply side problems because supply chains have not been normal. So supply chains, I'm talking about worldwide supply chains. So I'll give you an example you're in China, you were shipping to the whole of the world, a lot of bunch of things. Now Chinese ports are full and they're not letting people in, they shut down the ports because of Omicron or whatever it is. Suddenly people are saying, guys, I was buying all this stuff from China. Can I buy it from some other place now because the ships aren't coming? So this other place tends to be for an Indian company, like, is there anyone local? I don't want a ship coming in here because things get delayed at ports. Can I buy something from someone local? So local person comes up, builds up a factory, expands capacity and you've got capacity now in India for stuff that did not need any capacity earlier because we're importing from China or from Europe or something like that. The whole world has gone down this way. Everybody has revived their steel plants because China wasn't exporting steel. What happens when supply chains come back? Is that the slowly supply chains are unwinding because all these blockades at ports are going away.

Deepak Shenoy: You're going to go out of the virus. When you open up from this, that extra capacity that you've created now becomes oversupply because I'm both getting stuff from the ports and from my local guy. Prices have to fall. So this, according to me, starts evolving in 2022. And whether it was chip shortages raising, creating price rises of some dramatic extremes or whether it was a shortage of, I don't know, vegetable oil. Anything that had a supply side shortage, but demand remained the same will probably see a much lower price next year because supply side capex increases in certain areas, in certain areas will result in those products becoming lower priced simply because the demand hasn't grown at the same level. We think this inflation is a function of demand, but it's actually a function of supply. What is also interesting is this fact that the U.S. is raising or talking about raising interest rates and how this might change. My original thought process was about how you know, when you have the lowest cost of capital and I met with good friend Mohit Satyanand today and I was talking to him you know, how come is it? How is it that the largest companies in the world in a situation where there is no, there's no cost of interest. I mean, almost no interest cost whatsoever. How come the largest companies in the world have no debt? This is why it's very interesting to me, and this is, you know, so if you look at companies that used to do use intellectual capital like Google and Microsoft and all of these guys was this company use physical capital like machinery and land and so on.

Deepak Shenoy: The guys who do physical machinery have to usually take on debt, and those are the companies we wanted to promote in a way by saying listen your debt is going to get cheaper. You can then therefore invest more and then create more jobs and grow the economy. And on the other side, the intellectual capital guys were like, you know, we can just hire more people, raise equity capital instead of debt and use that equity capital to grow a business which can eventually become great. The difference between these two is and Mohit put it in a very interesting way. He said when you do fixed income when you take on debt the cost of that debt is an overhang that lies on top of you today. That means you have to service that debt every month. Principal plus interest. You will earn tomorrow but you pay today. You'll earn much more tomorrow, and you have to have the visibility throughout, so it can't be like four years of nothing and, you know, one year of visibility, but so you can't take too much risk, you have to have certain defined outcomes. So it's expensive, and people should take debt versus equity because equity had this thing of, oh god, if they give equity out, this guy is going to be there on my cap table forever.

Deepak Shenoy: He's going to question every decision I make. He's going to sit [00:35:00] and ask me for quarterly reports, monthly reports, this, that, that, this and all that stuff. Switch to what's happening now. Equity capital comes at a ridiculously low price because valuations have gone up and everybody's into the game. Equity Capital also does not need a reward right now or a payment right now. So there's a reason for this, when you hire a person for intellectual capital, you pay him a small salary and give him stock options. The stock options make him rich later. That means you pay for this person, but you pay it later, and he generates the value, which also makes money later. That means you don't have to pay upfront for intellectual capital as much as you do for physical capital. So this means that even though money is cheap, what has also changed is your reluctance to take equity was because investors wanted to be on your cap table. I think now and Mohit puts it nicely is that investors don't demand anything. They're like, listen, make me human in a way, I mean, I'll give you the stats, but we're talking about another thing today, earlier itself. So a fund that wants to invest in you if you give it 100 rupees and it wants to make a 20 percent return over the next 10 years. A 20 percent return is roughly three. You double your money every three and a half years.

Deepak Shenoy: So for a 10 year return, you're doubling your money at least three times, which means eight times so hundred has to become eight hundred for them to give you a 20 percent return and 20 percent is the bare minimum that you'd want to invest. You want as return, right? So that means if you give a hundred, it has to become 800, and that makes the fund manager of the startup investor some fees. So the startup investor actually takes the hundred and keeps 20 aside for his fees for 10 years. He has only 80 to invest that 80 has to become 800. That means he needs a 10x return. Now add GST on the fees and this and that and all that stuff. He actually needs a 12 extra ton. If you go to a VC with a 5x potential, I mean, sir, give me one million dollars, I'll make it five. He's going to laugh you out of the room because he's like, dude, 12x is my minimum, my average. That means I need each company to at least potentially have a 25x outcome. So if I give you a million, you got to make it twenty five million dollars at the minimum for me to be able to meet my IRR criteria over a 10 year period. That's when I make decent returns. I'm not making phenomenal returns. 20 percent is you know, nowadays, loans are twenty four percent for the underprivileged right? So you've reached a point when you're at that stage and when investors are giving you money to make a twenty five extra ton.

Deepak Shenoy: The answer to I found a company that can make a 25 x return is, now I'm going to get out of the way. I don't want to stop this guy and ask him for monthly reports or quarterly reports, or ask him why he's doing what he's doing unless he screws up big time because the landscape is his or hers. They've given me this potential 25 x return. Why should I even come into their way? Equity capital just got even more cheaper. So that means the largest beneficiary of this last 10 or 12 years has been this massive equity capital loop, and that allows people to take more risk, create more ways to get more productivity. According to me, that is also going to impact the inflation. Tomorrow I mean, we never thought we would get a robot to mop our homes, and now we do. And somebody invented a robot that was cheap enough to be able to mop or will invent maybe, it's not yet done. It's not very cheap yet. Yeah, so maybe it's going to come to a point where you know that that becomes your cheap thing. But you would, it's like you would never have had a Tesla possible unless there was globs of money to throw at a problem that was very difficult and behavior change was very difficult. Suddenly, now you're sitting back and say, Oh, it was obvious that electric vehicles will eat the world, but it wasn't when he started off and look what where he's gone. Uber

Deepak Shenoy: We never thought we would get away from a yellow and black taxi or whichever city you're in, and suddenly now anybody is a taxi driver in income. So this risk-taking effort, and what has this done is, I mean, they're not necessarily lowered prices, but they've created opportunities and stuff like that. So today, if you ask a small restaurant, can it survive without a Swiggy or a Zomato? The chances are it'll say no, because people aren't coming. They're not coming to the restaurant in volumes that can justify their existence. So they're like, no, no, I won't even do it. But if because they exist, they become an alternative source and perhaps even 50-60 percent source of their revenues for a hotel. The more hotels can be set up. And therefore, that is also why whenever you open these things, there are new restaurants popping up the wazoo. This [00:40:00] is productivity effectively, and this is eventually going to result in lower prices. I just don't know when, I mean, just what it is. So long answer short, the short question is I think inflation is not going to go up because of food being such a big part of it and longer term because productivity benefits come in and we are forcing people to get more productive because of higher wages. I think prices will find an upper limit. And of course, supply chains coming back have a role to play.

Shray Chandra: And in the genetic investment gyaan or advice or whatever you want to say. I think all we can do is stay invested, right? I mean, whatever you do for the year to come. No matter how uncertain it is and the fact that we're coming off six years of as you said positive returns, that has very little predictive power, it would appear. And so if you have money today, you really have no choice but to invest and take the good and the bad.

Deepak Shenoy: I mean, if the market didn't go down in a year like COVID what chance does any other year have to be able to have predictive power? I mean, if in a year like COVID, you weren't even down one percent, you were up 15 percent by the way. So it was in 2020, and 2021 is 23 percent. So if in such years the market wasn't down, how can I believe anybody who predicts that, oh, you know what? The market never goes up seven years in a row. It's been six years already, it's going to fall. Fine, you've 50-50 chance of being right and a 50-50 chance of being right. You got to have one foot in the investing door. So even if you say, I'm so afraid and maybe Omicron is going to destroy everything, you still have to keep some money invested because you could be wrong. Experts have been wrong. The world is irrational. Markets are irrational. They could continue to go up from here and fight you forever. So if you aren't invested, you're making unnecessarily ridiculous predictions based on nothing and at Capitalmind we've always said, you know, don't predict react. So if you aren't invested, I look forward to all of these things supply chains unwinding if they don't unwind.

Deepak Shenoy: It still doesn't matter because markets have gone up even when supply chains were in bad shape and the supply chain companies were in bad shape. PVR didn't have a movie on for, I don't know, six to eight months. Its price went down, but it doubled or tripled from that low price as well. When that can happen, what predictive power does, a few words have or, you know, anything. So I think the big point about being invested in a market like this is that you don't have to make the decisions about markets going down before they actually do go down. And if you see them going down 30 percent, we are going to see a very quick rollback. Most likely going to see a very quick rollback backup simply because information flows are so fast. So what I would say is if you're praying for a fall, pray for a very steep fall right now, otherwise stay invested. There's nothing else to, you know, nothing else to really do or alternatively invest in. You might say the answer is crypto. I don't think so. I won't get into details.

Shray Chandra: That deserves its own conversation?

Deepak Shenoy: Yes. And you know, but if you're betting on irrationality, you might as well bet on anything that's irrational, including crypto.

Shray Chandra: As you said once, if you would only look the market on Jan. 1st, 2020 and then December 30, 2020, the pretty mediocre year, it was just good. Not too much happened, right? So theek hai. So thanks so much Deepak. On that note, let's wind up today's episode. So everyone, thank you so much for listening. If you made it this far, please take note of the Discount Code CMPODCAST for a 10 percent discount on the Capitalmind Premium membership. You can see more of our episodes at capitalmind.in/podcast. And while you're on our site, you can learn more about our Do It Yourself and fully managed Portfolio Management Service at capitalmindwealth.com. Deepak has a book out called Money Wise, it's available on Amazon and Flipkart or at shop.capitalmind.in if you want a signed copy. And if you have any feedback, suggestions or topics for our next episode, please send over an email to podcast@capitalmind.in. See you everyone in 2022.

Deepak Shenoy: Thanks and Happy New Year to everyone. Welcome to 2022 and goodbye 2021.


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