The dark fortnight is little longer this time

Thought for the day

"You can learn more about human nature by reading the Bible than by living in New York."

—William Lyon Phelps (American, 1865-1943)

Word for the day

Myrmidon (n)

A person who executes without question or scruple a master's commands.

Malice towards none

Trump says he has engaged the best dealmakers in the country to run the government.

Good dealmakers are always on look out for opportunities.  They never shut the door on anyone or anything.

First random thought this morning

Budget 2017: It would be a great idea to leave lot of cash in peoples' hands. Lower direct tax, direct transfer of subsidies, cash incentive for buying first house, incentive for monetizing 200gms of gold, no fee on credit card usage, interest free 10yr loan for higher education of one girl child, etc are some suggestions.

Refrain from hiking service tax pending GST implementation.

The dark fortnight is little longer this time

I have written it couple of times before. The historical correlation between inflation, interest rates, currency exchange rates, terms of trade, demand and supply of credit, risk & cost of credit, fiscal policy, trade competitiveness, economic growth, commodity prices, etc. have weakened considerably, in past one decade. Economic forecasting, and investing & trading on that basis has become all the more difficult.

During this period, some European countries audaciously threatened to default on their debt obligations; defied many conditions of the bailout agreement and brought the global financial system on the verge of collapse; on more than one occasion. Even after 5-7yrs of bailout, these economies are nowhere close to be able to move out of ICU walking on their own feet. The sovereign bonds of some of these countries lost 50-80% of their value in the aftermath of 2008-09 global financial crisis (GFC). Some of these countries have been able to sell 30yr bonds at miniscule yield.

An unprecedented amount of money has been printed in the developed world, since first round of quantitative easing (QE) in 2009. In conventional sense, with this deluge of money, we should already seen couple of episodes of hyperinflation. But, what we have seen so far is episodes of disinflation. OPEC is producing much below its potential. Chinese factories have been shut down. Australian and Latin American mines are either shut down or producing below potential. On global basis, the unemployment is higher - not what Keynes would portend.

We witnessed a colossal amount of debt trading at negative yield. But it has apparently not catalyzed any amount of economic growth. Leave aside lot of opportunistic buybacks by many global corporations (to make their RoEs look great and consequent rallies in stock markets), the cheap credit has not led to any real investment. Only bond & stock prices have rallied. The world is still awash with huge unutilized capacities.

The threat of tiny economy like Greece exiting EU; or even smaller Iceland defaulting on a few billion dollar worth of debt, shattered global markets wiping off hundreds of billion dollars from asset prices. But when a larger and relevant economy like UK has decided to exit EU, the markets are mostly sanguine (after reacting nervously for couple of days).

Conventional and non-conventional monetary policy tools used by the large global central bankers are becoming increasingly redundant. Consequently, many leading currencies are presently valued far from their economic value . For example, even with persistent deflationary pressures, negative bond yields, and almost no economic growth - BoJ has to struggle a lot to weaken JPY. Despite enjoying trade surplus with most of its trading partners, China is able to devalue its currency.

I strongly believe that the present breaking of economic correlations is transitory in nature and order will be restored in due course. However, it is difficult to see that happening in next 4-5yrs.

Remember the famous dialogue of Hindi film Aandhi - Is baar Amavasya thodi lambi ho gayee (The dark fortnight is little longer this time)

This time India is in playing 11

Thought for the day

"There is a strange reluctance on the part of most people to admit they enjoy life."

—William Lyon Phelps (American, 1865-1943)

Word for the day

Draconian (adj)

Rigorous; unusually severe or cruel

Malice towards none

UAE Army contingent in Republic Day parade, when ex Pak army chief Raheel Sharif is leading the Saudi led military alliance - interesting times.

First random thought this morning

Budget 2017: After so much threatening and posturing, it would be totally in order, if the government introduces some meaningful incentives for promoting voluntary tax compliance in the forthcoming budget. Materially lower tax rate could be ne such incentive.

This time India is in playing 11

In past one century, the global community has done many experiments to find a suitable global order. The year 2017, marks 100yrs of two very important global events.

In 1917, Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of USSR. In the following decades, many smaller independent European states would become subservient to a mighty Russian socialist army, and together become one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, USA decided to join the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, USA would evolve into a formidable military and economic power, that would lead the democratic allies to become the second pole in the emerging bi-polar world.

The imperialist global order that existed since past couple of centuries, began to dismantle. Many colonies of European empires would get freedom. The British empire that was built in three centuries and covered almost one fourth of the world population and area before the War, would completely dismantle in the following three decades.

It took three decades for the new order to consolidate. The new order was characterized by UN, NATO, WARSAW, Mao, Israel, NAM, Bretton Woods, World Bank, Cold War, energy cartel (OPEC), et. al. The globalization that was a norm prior to the first War, was completely overpowered by the forces of nationalism and protectionism.

The new order lasted till the German Wall fell and USSR disintegrated. This unleashed a new wave of globalization. Global Trade (WTO), Internet, dematerialization of assets, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control and global financial crisis, dominated this phase.

The recent events, especially in the past one year, give an impression that the extant global order may be crumbling under pressure, as the forces of nationalism and protectionism are rearing their head again.

There are two prominent debates that are currently going on.

The first debate seeks to challenge the very premise - "whether the current state of globalization is reversible at all?"

The second debate accepts the inevitability of the de-globalization, and is therefore focusing on the shape of the new order that would be emerging in next few years.

On previous occasion, when India was mostly a controlled and closed economy, we just suffered some collateral damage. This time our exposure to the global economy and geo-politics is little higher and deeper; and so would be the impact. I would like to share my views on this in a later post

Expect occasional "Attaboy" and few cookies

Thought for the day

"If I were running the world I would have it rain only between 2 and 5 a.m. Anyone who was out then ought to get wet."

—William Lyon Phelps (American, 1865-1943)

Word for the day

Etiolate (v)

To cause to become weakened or sickly; drain of color or vigor.

Malice towards none

RTI for BJP: How many BJP members have questioned the #Demonetization move?

If none, then the party is in serious need of introspection, as the very core of democracy may be weakening.

If there are voices of dissent, why don't people hear it?

First random thought this morning

Budget 2017: To promote investment and entrepreneurship, the government must introduce greater deal of predictability in policy and tax regime. It should definitely lay to the rest all scope for speculation about the policy matters.

One good beginning would be to irrevocably specify the treatment of capital gains on transfer of securities for next 10years, whatever it may be.

Expect occasional "Attaboy" and few cookies

The next two month are likely to be one of the most interesting phases in the global financial markets. The markets participants shall be keenly observing what the US president elect Donald Trump would say (won't say) or do (won't do) after his inauguration on the coming 19th January.

The participants shall also be keeping a close watch on the US Federal Reserve Chairperson Janet Yellen and Chinese leadership, especially the premier Li Keqiang.

It is widely expected that we may almost immediately see a trade war between US and China; build up of tension between White House and FOMC; rise in protectionism leading to disruption in global corporations; and realignment of US strategic partnerships. Drastic changes in policy towards foreign workers and capital flows are also feared.

The unusual personal bonhomie between President Trump and President Putin is also keeping the analysts busy.

A number of reputable experts have warned that a trade war with China could drag the world into 1930s' like severe recession.

FOMC meets on 31 January and 1st February and then again on 14-15 March. So far, the Chairperson Yellen has not been supportive of the fiscal profligacy proposed by the President Trump. A higher than warranted rate hike by Fed, could actually damage the fragile recovery US economy has witnessed in past 6 quarters. The bond market appears to be already factoring higher deficit, and hence higher yields in midterm.

A dramatic tightening of VISA rules and immigration policy, could hugely disrupt the businesses, especially the technology business that depends hugely on low cost skilled foreign workers and construction business that is supported by low cost foreign labor (including illegal immigrants). A temporary demand-supply mismatch in labor market, at a time when businesses will have incentive to relocate manufacturing to US, may lead to materially higher wages.

Intuitively, I am not losing my sleep over it, as of now.

In my view, a lot of Trump rhetoric may remain just that, rhetoric. Like Arvind Kejriwal, he will spend a better part of his 4yr term in managing the numerous conflicts of interests and personalities.

From India viewpoint, I feel - a US-China trade war could possibly benefit India, as Trump cannot expect to win this war without help from India, Russia, Japan, UK and many others.

A stronger USD, consequent to higher rates would eventually be deflationary, helping India on current account.

In his acceptance speech Trump, said if you are not with us, you are against us. We Indians are more than eager to be him. Expecting occasional "Attaboy", and few cookies would not be unreasonable.

In between, we have union budget for FY18 on February 01 and MPC, makes a monetary policy statement on February 08.

May also read:

"What Trump can do or cannot do"

"Why INR may remian resilient to the Trump Trade"

"US bonds: Possible long -term trend change"