TINA is ephemeral

Thought for the day

"It is amazing how complete is the delusion that beauty is goodness."

—Leo Tolstoy (Russian, 1828-1910)

Word for the day

Propinquity (n)

Affinity of nature; similarity.

(Source: Dictionary.com)

Malice towards none

My Gotra and Caste is asked every time I conduct a religious ritual - from birth of a child to death of an elder.

So what's wrong in this, if it changes nothing in terms of conduct of rituals or cost of ritual?

And why the government should interfere in this, if

First random thought this morning

Extensive media coverage of Chennai deluge has drawn global attention to the city. There is rush to help the marooned people. It always feels good to see so much concern for fellow countrymen and humanitarian efforts.

What I do not know is what is the condition in other coastal areas, especially small villages. Are those poor people getting adequate help?

TINA is ephemeral

Yesterday I highlighted that there is a debate as to whether TINA (there is no alternative) puts India in a advantageous position to draw larger share of global investment; or this actually makes India more vulnerable to incremental deterioration in the global economic conditions? (see here)

This debate is prominent as India's peer largest EM group (BRICs) are facing serious economic challenges.

Brazil is in the midst of a dramatic economic downturn that’s left the country to suffer through the worst inflation-growth outcome (i.e. stagflation) in more than a decade.

Unemployment and inflation are soaring (annual headline IPCA inflation at 10.28%, unemployment at 7.9% in August, up from just 4.7% a year earlier) while output is plunging (IBC-Br monthly real GDP indicator down 6.1% Y/Y in September) and the market is losing confidence in the government’s ability to end a political stalemate on the way to shoring up the fiscal books and hitting primary surplus targets.

 

 

Russia is in crisis again, having been hit with the double whammy of plummeting energy prices and heavy sanctions laid on by the West over Putin’s foreign policy.

Given that the country has been in recession for over a year as $40 oil doesn’t pay the bills country’s struggling economy, the probability of a Russian default cannot be as low as the CDS pricing is indicating.

 

(Source: Bloomberg)

China has reached “peak debt”. Additional borrowing will not only prolong the Ponzi and thereby exacerbate the eventual crash, but won’t even do much in the short-run to brake the current downward economic spiral. That’s because China is so saturated with debt that still lower interest rates or further reduction of bank reserve requirements would amount to pushing on an exceedingly limp credit string.

To wit, at the time of the 2008 crisis, China’s official GDP was about $5 trillion and its total public and private credit market debt was roughly $8 trillion. Since then, debt has soared to $30 trillion while GDP has doubled. And that’s only when you count the massive outlays for white elephants and malinvestments which get counted as fixed asset spending.

So at minimum, China has borrowed $4.50 for every new dollar of reported GDP, and far more than that when it comes to the production of sustainable wealth. Indeed, everything is so massively overbuilt in China——from unused airports to empty malls and luxury apartments to redundant coal mines, steel plants, cement kilns, auto plants, solar farms and much, much more—-that more borrowing and construction is absolutely pointless.

Though the market may like to work on TINA basis for few months. But in my view this is a bad news for India. As I mentioned a few days ago (see here), in past one decade the export destinations of India have changed in favor of emerging markets from developed markets. The share of North America and Europe has fallen in India's export basket whereas Asia and Africa have gained. Besides USA, China (including HK), UAE and Saudi Arabia are now amongst our top five export destinations.

Many of these economies might be in a midterm downtrend due to correction in commodities cycle; hence the export demand from these economies may not pick up in hurry. In fact these economies account for much of "invisibles" also, and could be an additional cause of worry on that count too.

I believe, weakness in emerging markets, especially China, is rather a bad news for Indian economy.

...more on this next week

What's amiss?

Thought for the day

"One of the first conditions of happiness is that the link between Man and Nature shall not be broken."

—Leo Tolstoy (Russian, 1828-1910)

Word for the day

Winkle (v)

To pry (something) out of a place.

(Source: Dictionary.com)

Malice towards none

Heard many parts of the parliamentary debate on intolerance.

(a) Found the entire debate intolerable.

(b) Failed to understand what MPs were actually debating about.

First random thought this morning

I feel the whole problem lies in the assumption that our elected representatives are demigods and therefore infallible.

Half the intolerance and frustration will go if we change our assumption and accept that the politicians are normal human being like ourselves and would do whatever it takes to protect and promote their vested interests.

The next logical step would be to elect only those people whose vested interests are aligned to common men and not those who promise to 'provide for common men' from the riches they will make through their political election and social elevation. If it sounds like Marx, it's ok.

What's amiss?

The recent data about India's economic growth has triggered three debates:

(a)   The disaggregated data does not corroborates the headline growth number. How to reconcile these two? Is there a subterranean current in the economy which the disaggregated numbers like corporate earnings, credit growth, PMI, capacity utilization, business confidence, investment demand, gold demand etc. are not able to capture; or there is some error in capturing the headline growth numbers?

(b)   The new methodology is globally more accepted and better measure to capture the economic activity. But whether the jump it is showing in economic activity is really due to incremental improvement or merely on account of the change in method? Some analysts have highlighted that "perhaps deflators have been underestimated in the new GDP series because services deflator has been pegged more to WPI than CPI. Correcting the CPI/WPI ratio since the start of the new national accounts series, real GVA growth could possibly be overestimated".

(c)    Indubitably, the BRIC peers of India are going through a challenging economic downturn. Same is true with most other meaningful emerging markets. The debating point is whether TINA (there is no alternative) puts India in a advantageous position to draw larger share of global investment; or this actually makes India more vulnerable to incremental deterioration in the global economic conditions.

I am not an economist and I certainly do not understand much of the economic jargon. But I can confirm on the basis of what I have seen during my frequent travels to various parts of the country in past few months (including remote villages in Bihar Seemanchal area, rich farmlands of Western UP, Punjab and Haryana, tribal areas of Chhattisgarh & Jharkhand, industrial estates of Gujarat & Maharashtra and trading hubs of Delhi, Mumbai, Hapur, Rajkot, & Surat etc.) that most traditional businesses and households are facing multiple challenges and are seriously stressed.

From media headlines I find that the new age businesses, mostly technology based start ups and e-retailers are throwing some big numbers, both in terms of fresh investment and incremental revenue growth. I am not sure how much these matter in the bigger picture of a US$2.5trn economy comprising 1.26bn people.

The good part of the data is that the 32bps QoQ jump in GVA was mostly contributed by the higher government spending. The government getting back to investment business is very encouraging. However, I will watch it for two more quarters to confirm whether it is sustained or dissipated due to higher revenue spending and political expediency.

From what I see, I may say that our economy may not deteriorate much from here. However, I may not necessarily agree with view that we are already in the "middle" of a recovery. At best we are just beginning to recover and continue to remain fragile and vulnerable to potential global shock......to continue

Negawatt more valuable than Megawatt

Thought for the day

" I sit on a man's back, choking him and making him carry me, and yet assure myself and others that I am very sorry for him and wish to ease his lot by all possible means - except by getting off his back."

—Leo Tolstoy (Russian, 1828-1910)

Word for the day

Quixotic (adj)

Extravagantly chivalrous or romantic; visionary, impractical, or impracticable.

(Source: Dictionary.com)

Malice towards none

The developed nations' stance on climate control - नौ सो चूहे खा कर बिल्ली हज को चली!

First random thought this morning

One can understand politicians to preach tolerance to people so that no one raises voice against their misdeeds.

But thinkers, writers, artists, who have always lead revolutions from the front, wanting people to be tolerant is little perplexing.

सबसे ख़तरनाक होता है
मुर्दा शांति से भर जाना
तड़प का न होना सब सहन कर जाना
घर से निकलना काम पर
और काम से लौटकर घर जाना
सबसे ख़तरनाक होता है
हमारे सपनों का मर जाना
(Avtar Singh Sandhu 'Pash')

Negawatt more valuable than Megawatt

The government's desired path of double digit GDP growth would require energy consumption to grow at around 7% annual rate, even allowing for the trend growth in energy intensity.

As IEA stated in a recent report, despite gradual rise in domestic production, the import of energy by India would continue to be rise in next decade.

Moreover, in achieving sustained higher growth double digit growth target, the challenges to protect the environment will also intensify. It will be necessary to evolve mechanisms through which a suitable balance can be struck between the energy requirements of development and the environmental needs.

The government resolve to change the energy mix by materially increasing the share of energy from renewable sources is commendable, but the imperative need to achieve higher level of energy efficiency besides focusing on augmentation of domestic supplies of energy cannot be ignored.

The domestic consumption of electricity in India is about one fourth of the total. In past decade per capita availability of electricity for households has improved significantly, but is still abysmally low in global comparison. However, the steadily rising household income and village electrification program is leading to accelerated rise in demand for electricity.

Currently, in India, 14 out of every thousand people own a car as against 20 in China and 140 in Brazil. Developed countries like Germany, UK, Japan and US have a ratio of 400 cars per thousand people. The rising household disposable income has led to conspicuous increase in the total addressable market for the passenger cars.

The relatively low cost, energy savings and carbon emission reduction potential that could come from improving energy efficiency in buildings, transportation, industrial processes etc. is yet to be fully exploited; though there has been a conspicuous interest in renewable energy.

Therefore, while endeavoring to increase the production of energy through conventional and renewable means, it is also critical to promote energy efficiency. The efforts like promoting LED lamps for lighting are encouraging indicators.

A unit of energy saved by a user is greater than a unit produced, as it saves on production losses as well as transport, transmission and distribution losses. Thus a “Negawatt”, produced by a reduction of energy need has more value than a Megawatt generated.

I would be delighted to see government setting a target of 10,000 Negawatts of energy efficiency in next four years, besides 20GW target of renewable energy production.

2016 Budget Speculations - 1

Thought for the day

"All happy families resemble one another, each unhappy family is unhappy in its own way."

—Leo Tolstoy (Russian, 1828-1910)

Word for the day

Nocturne (n)

Music: a piece appropriate to the night or evening.

(Source: Dictionary.com)

Malice towards none

GST may be a good beginning, but by no means it's panacea for all that ails Indian economy.

First random thought this morning

The Congress Party disrupted the entire monsoon session of the Parliament insisting that EAM Sushma Swaraj, MP CM Shivraj Singh and Rajasthan CM Vasundhra Raje must resign before the Parliament transacts any business. The winter session has begun and we are not hearing any such demand. What should we infer from this?

(a) Congress Party is not serious about the issues it raises. (b) The Party was actually bargaining for some something else and resignations were not the real issue. (c) The government has offered something really meaningful to Congress for not raising the issue of resignations again.

In any case where do the People of India come in the whole picture?

2016 Budget Speculations - 1

The government looks determined to make laws and procedures relating taxation simpler, transparent and predictable. The objective is to promote ease of doing business, improve compliance level, minimize litigation and disputes, and augment revenue collection through better Tax-GDP ratio.

Everyone acknowledges it is going to be a tall order. It may lead to higher incidence of tax in the short to medium term. For many who are used to exploiting the loop holes in the extant system or have managed to stay out of the taxation net, the process may rather excruciating.

Some of the most garrulous supporters of the tax reforms may actually not savor the actual implementation of taxation reforms, inasmuch as the tax reform for them usually means more exemptions & lower incidence of tax.

In my view, the process of taxation reforms may actually impact the sentiments in stock market negatively.

Though I sincerely believe that the government may not want to rock stock markets when, inter alia:

(a)   The global markets are entering a period of turbulence with rate hike by US Fed;

(b)   The government might need to raise much higher amount of resources through sale of public sector equity;

(c)    The public sector banks may need to raise resources to meet capital adequacy and growth requirements;

(d)   FPI flows could turn materially negative due to unwinding of US carry trade and risk-off conditions in global markets.

From the bytes I have gathered from the ministers and officials at North Block, in particular the following tax proposals in the Union Budget for FY17 could rattle the sentiments of market participants:

(1)   Abolishing the complete exemption of long term capital gain on sale of equity share and equity mutual funds. This may not have much revenue impact, but may be considered critical for improving compliance, especially in light of the recent SEBI probe into blatant misuse of this provision for money laundering and tax evasion.

(2)   High service tax to align service tax rates with proposed GST rates.

(3)   Withdrawal of a multitude of exemptions for business class assesses so that the marginal rate of tax could be brought down to target 25%. This will definitely result in higher incidence of taxation of business.

(4)   The implementation of 7th Pay Commission and OROP will leave a large hole in finances of governments (state and center) and railways. The hole may be sought to be filled partially through higher effective tax on discretionary consumption and lower subsidies.

(5)   The government may also consider some sort of "smart city cess".

Nifty: Fear and greed indicator peaking

Thought for the day

"If you want to be happy, be."

Leo Tolstoy (Russian, 1828-1910)

Word for the day

Gormandize (v)

To eat greedily or ravenously.

(Source: Dictionary.com)

Malice towards none

Besides PK, Arun Jaitely, Amit Shah, Satish Mishra, Jairam Ramesh, et. al. have all enjoyed the status of master election strategists in past one decade.

First random thought this morning

To fulfill his poll promise, Nitish Kumar has expressed his intention to ban consumption of alcohol in the state of Bihar from next fiscal year. Gujarat has prohibition in force since the formation of the State in 1960. Nagaland enforced complete prohibition in 1989. Manipur and Lakshdweep have enforced prohibition in select parts of the respective states. Kerala government has also proposed similar law. Andhra Pradesh, Tamil Nadu, Mizoram & Haryana have implemented but later repealed prohibition laws.

It's a noble thought. I hope Bihar government will learn from the mistakes of other states and enforce an effective law. To test the waters he should prohibit GA legislatures and all seniors officers of the State from consuming alcohol with immediate effect.

Nifty: Fear and greed indicator peaking

Historically, one of the most successful, though intuitive indicator of greed overtaking the fear in market is outperformance of small cap stocks over large cap stocks. On this parameter market is ripe for a major correction.

In past an outperformance level of 25-35%, in a given period has marked the cycle peak for the market. The correction thereafter have been sharp, painful and very broad based. In one year post peaking, the broader market corrected much more sharply as compared the benchmark indices.

In last instance the outperformance peaked in January 2008 and broader markets corrected over 80% in the following one year as compared to ~60% for the benchmark indices.

 
The outperformance of BSE small cap Index during past 24months is not as sharp as it was during 2006-08, but if we adjust it for slower economic growth this time and substantially poorer corporate earnings performance, the outperformance might not only look sharper but ominous also.
 

 
I therefore sincerely believe that it is reasonable to raise guards against a potential sharp correction in broader markets in next few months. 
 

Shaken not stirred!

Thought for the day

" Realists do not fear the results of their study."

—Fyodor Dostoyevsky
(Russian, 1821-1881)

Word for the day

Uxorious (adj)

Doting upon, foolishly fond of, or affectionately submissive toward one's wife.

(Source: Dictionary.com)

Malice towards none

Who is bigger enemy of Congress Party?

(a) Manishankar Aiyer

(b) Rahul Gandhi

(c) Digvijay Singh

(d) Salman Khurshid

(e) Other (Pl specifiy)

First random thought this morning

Amir Khan enjoys a serious love hate relationship with right wing activists. First came Sarfrosh (1999) and Lagaan (2001) - Amir was a top nationalist and patriot. Then he decided to sit on dharna with Medha Patkar Narmada Bachao Andolan during promotions of Fanaa (2006) - he was suddenly an anti national, obstructionist and traitor. With 3 Idiots (2006) - Amir again became a youth icon, everyone wanted to emulate Rancho. In 2014 PK made him blasphemous. His decision to share with public a byte of his bedroom talk with his wife has now turned him a top rated traitor. In the meantime he has made a lot of people cry with him on his TV show Satyamev Jayate.

Quite a roller coaster! What the heck!!!

Shaken not stirred!

Post Paris attacks, the hostilities in Europe are rising by the day. This is developing into, inarguably, the largest geo-political crisis since Iraq invasion led by US led allied forces in 2003.

The economic data in US is encouraging for Fed hawks. December 4 non-farm payroll report (NFP) is widely expected to provide final thrust for the eventual Lift off on December 16. (see here)

The recent report of virtual crash in Australia's private capex (long considered a proxy to Chinese hunger for raw material) suggest that despite all assurances, all might not be well with China. (see here)

These three factors may be sufficient to stir a perfect storm for global markets in next three months, likely causing sharp correction in almost all assets, and a deep cut in risk appetite.

At this point in time it is rather difficult to assess the potential damage as the conditions are quite different from 2008. For example consider the following:

·         The market participants are more prepared and well bunkered for a disaster as compared to 2008-09. In 2008 the storm struck when most participants were drunk and partying in the open.

·         The central bankers are much more experienced in handling the liquidity crisis as compared to 2008 and perhaps enjoy more credibility insofar as disaster management capabilities are concerned.

·         The global economy is much weaker after a persistent struggle with deflation for over five years.

·         The global economy is estimated to be burdened with over US$200tn of debt, a large part of which could be perpetual and may never be repaid. QE may therefore not be as potent a weapon this time as it was in 2008-09.

·         The engine of global growth in 2008, viz., BRIC, is out of steam and perhaps backfiring.

·         The political cooperation seen during 2008-09 may not be seen in 2016 due to a variety of reasons.

·         The disaster will impact much larger governments as compared to smaller PIGS in 2008.

These thoughts do shake me but I am not stirred. I continue to believe that the world is not entering any major war. The threat of ISIS in its present form may get neutralized sooner than later. US liftoff will be smoother than most anticipate, much like tapering. China perhaps has already landed hard, though official data may not admit. Commodity super cycle is over and prices may hit the rock in next few months.

For me the recovery in Indian corporate earnings is the foremost concern.