SUNDAY WEEKLY ISSUE #20

Hello EveryFinions,

When I spoke to students at Narsee Monjee College of Commerce & Economics, one of the interesting questions they raised was if Bitcoin can end up replacing fiat money. My answer to that question was ‘No’. And there are 2 reasons why – 1) Any medium of exchange should exhibit some level of stability in its value. Bitcoin evidently does not. 2) Governments and central banks rely on controlling money supply to enable taxation and implement policy measures. And this wouldn’t be possible with Bitcoin.

I guess the more prudent question is can Bitcoin replace gold as an alternate asset class? Now this I cannot rule out. But one of the key issues that needs solving is developing a valuation model that can answer one simple question – How much is a Bitcoin actually worth? Is it $50 or $50,000? What is a fair price that we should pay for it? Till that question is answered, its price will continue to witness wild swings.

IN TODAY'S NEWSLETTER

• News in brief
• Inflation and IIP data review
• Cover story - How much would you pay?
• Quiz, thought for the day
• In case you missed it : Perceptions and Expectations

MARKET UPDATE (WEEK ON WEEK CHANGE)

NEWS IN BRIEF

• India’s Twitter imitator app, Koo, got a lot of attention in the media this week – for the wrong reason. French cybersecurity researcher @fs0c131y (Elliott Alderson) made a claim on Twitter that the app was ‘leaking’ a lot of user data. He made similar claims in the past about the Aadhaar database and how their data wasn’t secure either. Users of the app responded to him saying, ‘Ghanta farak nahi padtha’!

• Anurag Thakur, the minister of state for finance, this week said that a new law will be passed in the parliament which completely bans Cryptocurrencies in the country. Cryptocurrency holders will be given a transition time to sell out their holdings and go back to holding Indian rupees.

• Get ready to pay more to fly. Civil aviation ministry this week increased the lower and upper limits on airfare by 10%-30%. The upper limit on a Delhi-Chennai flight has gone up from Rs.15,700 to Rs.20,400.

• Geopolitical relations took a new turn this week. The British media regulator banned China global television network’s license this week. China’s national radio and television administration in turn banned the BBC radio in China, immediately. Relations between China and Britain on Chinese social media are on a ‘free-fall’ reported Nikkei. Boris Johnson meanwhile has applied to join the Trans-Pacific Partnership (TPP) to counter the dominance of the Asian giant.

• Taiwan’s semiconductor manufacturer TSMC was in news for more than one reason this week. The global chip shortage has fast tracked TSMC’s capacity expansion plans and it is building a massive facility in Tainan city in Taiwan. Meanwhile, it also seems to have tied up with Apple to develop an ultra-advanced display based on micro-OLED technology for Apple’s AR devices.

IN LESS THAN 200 HUNDRED WORDS

Inflation and IIP data review

The ministry of statistics & programme implementation (MOSPI) released inflation figures for the month of January 2021 this week. And lo and behold, they were much lower than the numbers we saw in previous months. Consumer food price index came grew by just 1.9% year on year. General price index increased by about 4% which is well within RBI’s inflation tolerance levels. Vegetables witnessed significant price correction in January compared to the year ago period. They were one of the key culprits driving up food prices in the second half of last year.

RETAIL INFLATION - JAN 2021

The ministry also released IIP (index of industrial production data this week) for the month of December 2020. The data agonisingly still says that industrial production declined in the 9-month period ended from April to December 2020 compared to the same period a year ago. December 2020 figures however were marginally up by 1% compared to December 2019 showing hopeful signs that industries are just about starting to produce as much or more compared to pre-pandemic time period. Paper, paper products, textile, furniture and print/recording media witnessed steep declines while computers and electronic gadgets witnessed extremely brisk production growth.

INDEX OF INDUSTRIAL PRODUCTION - DEC 2020

All said and done, fuel prices are starting to go up significantly in the country. Mumbai reported petrol prices of Rs.95 per litre, the highest ever recorded. If this trend continues, safe to say, we will have to shed tears BEFORE buying onions again.

QUIZ

This is the Taj Mahal. I get a feeling you knew that already? 😉 Construction of the Taj Mahal was completed in the year 1653. How much did it cost the Mughal emperor Shah Jahan to build it in today’s equivalent price?

COVER STORY

How much would you pay?

Pricing is a whole branch of study in marketing. Take for instance a company like Hindustan Unilever Ltd. Say they are coming out with a new thin film product which makes your mirrors fingerprint safe. Instead of having to clean the mirror every now and then to get rid of fingerprints, this new thin film when applied to your mirror once will make it totally fingerprint proof. You will never have to clean your mirrors ever again. How much would you pay for it? How much should the company charge you for it?

How much would you pay? - New Fingerprint safe think film for mirrors (Let's call it FINGERSAFE)

There are multiple approaches to pricing consumer goods. The first one is the classic, standard, age-old, most popular technique called ‘cost plus pricing’! As the name suggests, HUL would look into how much it costs to manufacture a single unit of Fingersafe (say Rs.10). They’d then add a % mark-up to it (say 30%) and determine the selling price (Rs.13). Of course, by the time it goes from HUL to the national distributor, down to the regional distributor and finally to the retailer, it might end up costing something like Rs.25. But you get the idea.

A second and relevant approach is to look at what the substitutes cost. Perhaps there is already an equivalent to Fingersafe in the market? And say it costs Rs.50. Then the pricing decision becomes one of should it be more or less than the competition? And by what exact %?

A third and more sophisticated approach is called ‘value-based pricing’. In this method, the folks at the marketing team try and figure out the true ‘value’ of a product like Fingersafe is to its customers. How do you figure that out? Well, think about it this way. Without Fingersafe, you’d have to buy some sort of mirror-cleaning solution at least once a year? Let’s say it costs Rs.5. And if the average lifetime of a mirror is 20 years, then over that time you’d have to spend Rs.100 (20 years * Rs.5/year) just to buy the cleaning solution. Add on to this, the cost of the time involved in cleaning the mirror every few months or so – that must be worth something too. They’ll do the math & perhaps decide that the actual value to the customers is Rs.150 and that’s what they will charge.

Did notice the huge range of pricing values (Rs.13 for cost plus, Rs.50 for substitutes-based and Rs.150 for value based)? Rs.150 is the maximum that you will probably be willing to pay and they will want all of it.

Now, how much would you pay for a 4-bedroom house in the centre of New Delhi? Or for a 40-seater Mexican restaurant? Hit the link to find out how to price them out.

IN CASE YOU MISSED IT...

Perceptions & Expectations

Last week, the RBI released its perception & expectation survey results for the month of January 2021. It is a survey with a sample population of people to get their perception of the current economic/financial condition and their expectation for the future. The results are quite contrary to what the results would have been had the same survey been run with a sample population of stock market participants.

People’s perception of the current general economic situation in Jan-21 was much worse than the year ago period and has only slightly improved compared to May-20.

Read more to find out what people said about income, employment & spending levels.

ANSWER TO QUIZ

$1 Billion

That’s the amount of today’s equivalent money the Mughal emperor Shah Jahan spent to build the Taj Mahal. In 1653, the actual amount spent was roughly about Rs.32 Million rupees – pocket change!

THOUGHT FOR THE DAY

Which currency are you betting on?

READ/WATCH/LISTEN

• Where would you invest $10,000 right now? Bloomberg has a take on it. BLOOMBERG

• AQR’s mid-term capital market expectations report suggests that during the 2020s, many investors may struggle to meet return objectives anchored to a rosier past. AQR

From the writer in me, to the reader in you ♥

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