Do you want to keep riding the tiger?

Thought for the day

"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

—Will Durant (American, 1885-1981)

Word for the day

Palsy-Walsy (adj)

Friendly or appearing to be friendly in a very intimate or hearty way, e.g., The police kept their eye on him because he was trying to get palsy-walsy with the security guard.

Malice towards none

Is communism truly and totally irrelevant in Indian context?

First random thought this morning

The present standoff between Indian and China is certainly not likely to escalate into a war of any kind, but nonetheless it has reached a stage where stepping back without a face saving formula may not be feasible.

The leadership on the both sides of the border have much to lose, if they appear compromising on this territorial issue. Indian side though has more at stake since our administration has certainly overcommitted on this issue.

I hope we find some face saving escape sooner than later.

Do you want to keep riding the tiger?

The conventional wisdom says when you move up a ladder, usually the easiest, and mostly the best, way to get down is to take the same ladder on your way down. Jumping from the roof involves risk, unpredictability and uncertainty of outcome.

The same is also true for a situation when you travel to an unknown destination. The easiest and the fastest way back is the same way you took to reach the destination. Trying a new way would entail risk, unpredictability and uncertainty.

When you ride on a tiger's back, the best way is to wait and survive till the tiger dies.

To mitigate the impact of the global financial crisis a decade back, the central bankers world over created unprecedented amount of money.

The trick did work wonderfully well.

The markets got unfrozen in no time without any major collapse; 1930 like depression, that looked almost certain at one point in time, was comprehensibly averted; even the thought of hyper inflation that is classical outcome of such liquidity deluge, has not bothered many in last decade; EU did not disintegrate as many Oracles portended; peripheral European countries that were caught in the eye of the storm survived and not doing bad after all.

The conundrum, the policymakers in the developed world now face is how to unwind the liquidity that has been created in past one decade to mitigate the global financial crisis.

Well as I said, the easiest and the fastest way would be to take the same path you took to reach where you stand today.

The central banks should shrink their balance sheets in the same fashion as these were expanded.

But remember, the effort in 2008-09 was a globally coordinated one. All central banks and other policy makers worked together.

The policies have however diverged in past five years, as per the circumstances of each individual jurisdiction.

In my view, if Fed or any other central bank decides to unwind liquidity in isolation, it could be highly disruptive. The unwinding therefore should also be synchronized the way expansion was.

There could be an argument that the circumstances of each jurisdiction are different. The uneven pace of recovery, say across US, Europe and Japan, may not permit a synchronized response.

In my view, this argument does not hold good, since the growth was skewed even before the crisis. US and China were the primary drivers of the growth, while Japan and Europe were mostly lagging.

The other way is to keep riding the tiger, till either of you die.

More on this tomorrow.

Yet another opportunity missed

Thought for the day

"Sixty years ago I knew everything; now I know nothing; education is a progressive discovery of our own ignorance."

—Will Durant (American, 1885-1981)

Word for the day

Anoesis (n)

A state of mind consisting of pure sensation or emotion without cognitive content.

Malice towards none

If elected representatives are public servants, why the rules relating to attendance and conduct in office should not apply to them mutatis mutandis, as these apply to every other person employed in public service!

First random thought this morning

When an elected representative takes oath of the office he has been elected to, he swears by the name of God that he will perform his duties and obligations as defined by the constitution, without fear or favor and without ill-will or affection towards any one.

I want to ask, when an MP or MLA recommends someone for admission to a school or college, or railway reservation, or out of turn treatment at a government hospital, or job - does he not violate the constitutional oath and hence become liable to be disqualified?

Would the Hon'ble Supreme Court like to examine this question as PIL?

Yet another opportunity missed

The decision of Monetary Policy Committee (MPC) of RBI to cut policy rates by 25bps is on the expected lines. In fact MPC was left with little choice after the largest Indian bank, State Bank of India, decided to cut savings rates that impact close to 330 million savings account, a couple days ago.

Given that SBI touches maximum number of poor households, and account for the largest number of marginal savings account, the decision to cut savings rate must not have been without strong reasons.

In my view, through this move the government has decided to lead the monetary policy. It would therefore be reasonable to expect that lending rate cut, may be little aggressively, will follow. Given the stature of SBI, most other banks may have to follow the move.

Though I will not go full length and question the legitimacy of MPC itself, under the given circumstances, it is certain that the government is more committed to growth rather than inflation at this point in time.

The difference of opinion between the government and MPC on the monetary policy stance is welcome. MPC not listening to the government is also a healthy sign.

But the problem is that this tussle between MPC and the government will likely erode the predictability and data dependability of the policy. This is something that may not be desirable for anyone.

Coming back to the MPC policy statement, I find the following worth taking a note, in India's context:

·         A normal and well-distributed south-west monsoon for the second consecutive year has brightened the prospects of agricultural and allied activities and rural demand.

·         Industrial performance has weakened in April-May 2017. This mainly reflected a broad-based loss of speed in manufacturing. Excess inventories of coal and near stagnant output of crude oil and refinery products combined to slow down mining activity. For electricity generation, deficiency of demand seems to remain a binding constraint.

·         The weakness in the capex cycle was also evident in the number of new investment announcements falling to a 12-year low in Q1, the lack of traction in the implementation of stalled projects, deceleration in the output of infrastructure goods, and the ongoing deleveraging in the corporate sector.

·         The 78th round of the Reserve Bank’s industrial outlook survey (IOS) revealed a waning of optimism in Q2 about demand conditions across parameters, and especially on capacity utilisation, profit margins and employment. The manufacturing purchasing managers’ index (PMI) moderated sequentially to a four-month low in June and the future output index also eased marginally.

·         Surplus liquidity conditions persisted in the system, exacerbated by front-loading of budgetary spending by the Government.

·         Merchandise export growth weakened in May and June from the April peak as the value of shipments across commodity groups either slowed or declined. By contrast, import growth remained in double digits.

·         Business sentiment polled in the manufacturing sector reflects expectations of moderation of activity in Q2 of 2017-18 from the preceding quarter. Moreover, high levels of stress in twin balance sheets – banks and corporations – are likely to deter new investment.

·         With the real estate sector coming under the regulatory umbrella, new project launches may involve extended gestations and, along with the anticipated consolidation in the sector, may restrain growth, with spillovers to construction and ancillary activities. Also, given the limits on raising market borrowings and taxes by States, farm loan waivers are likely to compel a cutback on capital expenditure, with adverse implications for the already damped capex cycle.

·         External demand conditions are gradually improving and should support the domestic economy, although global political risks remain significant.

·         While inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.

·         There is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all.

·         Keeping in view these factors, the projection of real GVA growth for 2017-18 has been retained at the June 2017 projection of 7.3 per cent, with risks evenly balanced.

Broadly, MPC did see material slowdown in growth momentum. It did recognize the need for reinvigorating private investment, especially in view of the rising fiscal constraints on state government due to loan waiver and pay commission payouts.

MPC did also note that some of the upside risks to inflation have either reduced or not materialised.

MPC also recognized that the global rates may move higher as central banks reverse some of their ultra loose policies. This implies that MPC must have discussed that there may not be much scope to cut rates later.

But still in its wisdom, MPC decided by a majority decision to cut the rates by 25bps.

 

 

Beyond Sensex

Thought for the day

"We are punished by our sins, not for them."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Ovine (adj)

Pertaining to, of the nature of, or like sheep.

Malice towards none

If things go as per plan, it will likely be NaMo vs NiKu contest in 2019, and a long European vacation for RaGa.

 

First random thought this morning

Government wants to sell Air India. Good intention.

Government wants to consolidate PSU upstream and downstream petroleum companies. Good idea.

Government wants to consolidate PSBs. Good strategy.

Government will continue to exercise control over management of these enterprise. Poor idea.

Why not make a super holding company. Transfer all government holdings to that company, and let individual companies be managed professionally, without any interference from the government.

Beyond Sensex

"Though stock markets in general are meaningless and indicate nothing in terms of the health of the economy they still function as a form of hypnosis, or a kind of Pavlovian mechanism; a tool that central bankers can use to keep a population servile and salivating at the ring of a bell. As I have mentioned in the past, the only two elements of the economy that the average person pays attention to in the slightest are the unemployment rate and the Dow. As long as the first is down and the second is up, they aren't going to take a second look at the health of our financial system.

Historians and economists often wonder after the fact how it was possible for so many "experts" and others to miss the flashing red lights leading into market implosions like that which occurred in 2008. Well, this is exactly how; within any casino there is an inherent bias towards false hope. Meaning, many people will invariably ignore all negative factors and past experience because positivism is more pleasant." —Brandon Smith (click here to read more)

If I close my eyes to the Sensex graph which is touching new highs every day, believing in the great Indian turnaround story is not that simple. One will have to make tremendous effort to sift out the absolute positives that will make an investor euphoric about Indian economy.

The relative argument — "We are doing better than most others" or "we are the fastest growing economy" — make one comfortable. But when put to litmus test, many of these argument sound academic. For example, Indian economy growing over 7%, the fastest in the world, may be matter of pride. But is the real per capita income of the bottom 50% of the population is also growing meaningfully, leave alone the fastest.

The changes in indirect tax structure and greater transparency in the administration (especially in relation to real estate sector and bankruptcy proceedings) are two major positives, which I could sift out. Most other measures, claimed to be landmark reforms, may not actually qualify to be so.

For example, the scheme to provide LPG connection to BPL families, could easily degenerate into kerosene subsidy type situation, with even larger burden on the exchequer. Similarly, the UDAY scheme to restructure state electricity boards could also degenerate like all other previous restructuring episodes.

The lending rates are falling because of poor credit demand and wide spread with global markets. This is a cyclical phenomenon and would get obliterated by play of market forces. Some businesses will gain and some will lose in the routine process. There is nothing to be structurally positive about this.

The socio-economic divide is widening at much faster rate than ever in past seven decades. That is a structural negative to be worried about. I say it structural because it's a trend in most developed democracies, and none has been able to solve the conundrum.

Unemployment, underemployment and disguised unemployment are all rising at an accelerated pace. This could be cyclical phenomenon, but may create some structural issues like rise in crime rate, cases of depression and other mental disorders, widening regional disparities, etc.

Coming back to stock markets, the following Sensex EPS forecast chart from a research report of BofAML, tells you the whole story.

What it shows is that the analysts have always been projecting a rosy picture of the corporate health. The projections though believed by the market have been seldom realized.

 

 

 

Who needs more investment?

Thought for the day

"Genius may have its limitations, but stupidity is not thus handicapped."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Etymology (n)

A chronological account of the birth and development of a particular word or element of a word.

Malice towards none

Why this pretense that President, Governor and Vice President are nonpartisan?

First random thought this morning

I met a midsized chemical company's management last week. The people were generally very bullish on the prospects of their business in near to midterm.

When asked about "what could be the key risk to their business outlook"; the instant reply was 'Modi not winning election in 2019".

When I asked them what specifically the incumbent government has done to promote their business and that could change if Modi is not re-elected in 2019, I got no reply.

Who needs more investment?

Relative to equities, commodities are trading cheapest in many decades. This divergence is there despite the fact that a large proportion of traders are betting on a global reflation trade since past six months at least.

The primary premise underlying the so called reflation is that the money sloshing around the world will begin to find its way in the capacity building and inflation will eventually rise. The rise in inflation shall lead to lower bond prices and higher equity and commodity prices. This also implies that the commodity producing currencies shall gain and the commodity consumers should lose. The economic cycle thus turn from buyers' dominance to sellers' dominance; and from borrowers' dominance to lenders' dominance.

In past six months—

·         Equity prices have risen considerably in most markets. Emerging markets equities, where growth is visibly higher, have done better than developed market equities which are still struggling with growth.

·         Emerging currencies have done better than developed currencies.

·         Bonds in emerging markets have also outperformed the developed markets.

But there is nothing to suggest that growth is accelerating to a level where inflationary pressures will kick in.

This raises doubt on the very premise of the reflation trade. Especially when the central bankers across developed market are talking about raising rates and shrinking balance sheets.

The capacity utilization across geographies and sectors is much below optimum. And fiscally most governments are still challenged. The specter of sub-prime loans and froth in asset prices has also started to raise its head again.

Under these circumstances a trade based on presumption of higher investment looks slightly questionable. ....to continue

Literature over history

Thought for the day

"To avoid criticism, do nothing, say nothing, and be nothing."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Harrumph(v)

1. To clear the throat audibly in a self-important manner.

2. To express oneself gruffly.

Malice towards none

Digvijay Singh is doing 3300km Narmada Parikarma and Lalu Yadav's family is performing a variety of religious rituals.

It is comforting to note that in India, still "Secular" does not mean "Non-believer".

First random thought this morning

A number of opposition parties in India facing existential threat. They can clearly see that another term for the incumbent government will materially erode their base. They are therefore naturally in a hurry to unite so that they could at least present a realistic challenge to PM Modi.

The unfortunate part is that in their desperation, they seem to have forgotten that they would need an aggressive development agenda to beat PM Modi. Mere "Modi hatao" slogan may not be sufficient.

Literature over history

The latest OECD Economic Outlook forecast (see here) succinctly summarizes the "New Normal" in just one paragraph, as follows:

"The mood in the global economy has brightened during the last year. Confidence indicators, industrial production, headline measures of employment, and cross-border trade flows have improved in most economies. However, this still-modest cyclical expansion is not yet robust enough to yield a durable improvement in potential output or to reduce persistent inequalities. Financial vulnerabilities could be realised by policy and geopolitical shocks. Compared to the 20-year pre-crisis average against which expectations have been set, OECD per capita GDP growth remains over ½ percentage point weaker and global growth overall, projected to rise to just above 3½ per cent by 2018, also lags. In sum, the global economic outlook is better, but not good enough to sustainably improve citizens’ well-being."

The economic growth for OECD countries is expected to stagnate around 2% level, at least till 2018. Whereas, for non-OECD nations, it's expected to rise to 4.8% in 2018. Overall world growth is not expected to remain stagnant around ~3.5% during 2017 and 2018. Most of the non-OECD growth is coming from just three G-20 members, viz., India, China and Indonesia; though China is likely to continue decelerating from 6.9% in 2015 to 6.4% in 2018. India is also projected to grow at lower pace from 7.9% in 2015 to 7.7% in 2018.

 

 

The OECD outlook report shows that economic inequities in developed countries have risen sharply post global financial crisis in 2008.

...as the real wage growth remains much below the pre-crisis averag

 

Wide acceptance of lower growth and higher concentration of economic power may not be a simple economic phenomenon, in my view. This may likely have far serious repercussions.

For one, it threatens the very core of the developed world, i.e., democracy and free markets.

Two, the New Normal, seeks to accept the dominance of Economic Elite over condescending administration.

Three, it strengthens the social dissent, that is presently manifesting in seemingly irrational socio-political decisions like Brexit & election of Donald Trump and stray incidents of violent strikes. This dissent may at some point explode to take form of a more violent, more popular and much larger movement. I am reading literature written during 1890-1930 to find clues. For history books look inadequate in presenting the true picture....to continue

 

Maintain proportion

Thought for the day

"Do not take life too seriously. You will never get out of it alive."

—Elbert Hubbard (American, 1859-1915)

Word for the day

Uptalk (n)

A rise in pitch at the end, usually of a declarative sentence, especially if habitual.

Malice towards none

Have seen or heard of Digvijay Singh lately?

First random thought this morning

"Good is a noun. That was it....Good as a noun rather than an adjective is all the Metaphysics of Quality is about. Of course, the ultimate Quality isn't a noun or an adjective, but if you had to reduce the Metaphysics of Quality to one sentence, that would be it." — Robery Pirsig in LILA

I feel that this book should be made mandatory for all politicians, media persons and civil society members. "You have done much worse than me" should not be tolerated in defence of any action or argument.

A decade and counting

Thought for the day

"There is not in the universe a more ridiculous, nor a more contemptible animal, than a proud clergyman."

—Henry Fielding (English, 1707-1754)

Word for the day

Glocal (adj)

Of or relating to the interconnection of global and local issues, factors, etc, e.g., a glocal conference on community development.

Malice towards none

Waiting for some sermon on Gita and Unpnishada from Rahul Gandhi!

 

First random thought this morning

If data is a weapon, than H. D. Deve Gowda and Dr. Manmohan Singh could be in possession of the most potent ones of all.

While HD presided over the "Dream Budget" that let the animal spirit of Indian entrepreneurs loose, something that the watershed 1991 budget could not do. The two terms of MMS (2004-2014) saw India's growth galloping from sub 5% in 2004 to over 9% in 2008. The data also shows that he steered the economy remarkably well through the global financial crisis.

But this, as I said, might just be that Data. Nothing more. Those who love to use data to show the unprecedented performance of the incumbent government are advised to read the time series from 1991 at least.

And guess what, P. Chidambaram may emerge as unlikely champion of growth, and Yashwant Sinha a close second.

 

A decade and counting

Exactly a decade ago, during the second week of July 2007, S&P downgraded US$7.3 billion of securities sold in 2005 and 2006. A few weeks later, Moody’s Investor Service slashes ratings on 691 securities from 2006, originally worth US$19.4 billion. Some 78 of the bonds had Moody’s top rating of Aaa. The securities were backed by second lien mortgages that included piggyback mortgages. Moody’s stated that the cause for the downgrades was the dramatically poor overall performance of such loans and rising default rates. Fitch also downgraded subprime bonds sold by Barclays, Merrill Lynch and Credit Suisse.

This was beginning of, what would become a global financial crisis in no time. The crisis which would annihilate some of the leading financial institutions like Lehman Brothers and Merrill Lynch, threaten the solvency of some of the most powerful empires in history, namely Portugal, Italy, Greece and Spain (Inappropriately clubbed under acronym PIGS), lead to erosion of trillions of dollars from global wealth, cause millions of job losses, imperil the unity of European Union, and push the world into a prolonged period of low growth.

Surprisingly, the stock markets did not react to the crisis immediately. After a small jerk in July 2007, stock markets across the world rose dramatically. Except for Chinese equities that corrected in October 2007, most markets rose sharply till January 2008. This was perhaps the sharpest bear market rally, in my view. And then came the inevitable crash. From last week of January to March 2009 was one of the worst periods in decades in terms of stock returns.

The challenging times call for tough measures. But that was not to happen in this case. The central bankers across the world got united to bail the world out of this crisis through an "unconventional method" - quantitative easing, an euphemism for printing more money.

"Whatever it takes" was the new paradigm. The mints across the world ran overtime. Centrals banks printed enough money to buy all the junk available on street, bail out profligate governments & errant banks, and splurge concessions on consumers to boost consumption.

To their credit, the gigantic effort did help in unfreezing the global markets, stabilizing the global financial system, forced a certain degree of fiscal discipline amongst the profligate government, pull out the global economy from recession (that was widely feared to snowball into a worldwide depression, worst that the 1930 episode)

The strategy however created a New Normal in the global economics. Something that was not there in the economic text so books.

The unprecedented monetary and economic stimulus failed to bring the inflation back. The commodity producers continue to struggle. The economic growth potential for most developed economies scaled down materially. The investment demand therefore seems unlikely in foreseeable future. The bond yields remain close to their lows, despite talks of imminent talk of policy reversal. Reflation and bond correction are two trades that have deceived millions of traders following old text books....to continue