Thought for the day
"I think fish is nice, but then I think that rain is wet, so who am I to
judge?"
-
Douglas Adam (English, 1952-2001)
Word for the day
Argot (n)
The special
vocabulary and idiom of a particular profession or social group.
(Source: Dictionary.com)
Malice towards none
MSY is groom's grandfather. LPY is bride's father. Their
bonhomie and alliance is understandable.
What this guy Nitish is doing in the family affairs?
Making my life simple
The unconventional methods used by the global central bankers in
their endeavor to stabilize global financial system since 2008, have definitely
complicated the context of financial markets.
To a simpleton like me who:
(a) does not
understand the economics beyond its first lesson which says all economic
decisions involve a trade off and price of things having economic value is
determined by their demand and supply at that given point in time;
(b) does not know how
to play with data on Microsoft Excel Sheet;
(c) likes to discover
investment themes in streets, markets and fields; and
(d) seriously
believes that numbers invariably follow the good story
I find it tedious to comprehend how the movement in global
currencies and bond yields could have material impact on my investment
portfolio which is largely India centric.
But unfortunately, the current state of affair is that movements
in global currencies and bond yields have become an important factor to analyze
in construction and maintenance of an investment portfolio - regardless of
country you live in and asset class you invest in. From precious metals to agro
commodities, from real estate to bank deposits and from equities to bonds the
prices and return on all asset classes across world is being impacted.
It is frustrating to note that the money in my savings bank
account is also not spared. The commodity price disinflation caused by a
fluctuating USD could impact the domestic inflation rate and thus the value of
my savings also.
In order to simplify my life and avoid complications in
investment process, I have made couple of assumptions, which incidentally are
in agreement with the popular view.
With these assumption, I believe, I could live for another five
years without attending economics or MS Excel classes.
1. USD shall
continue to gain strength for next five years
I believe the demand of USD shall materially outstrip its supply
in next five year, thus raising the price equilibrium of USD vs. most global
currencies.
Simply put, the major source of supply of USD to the global
economy are trade and investment.
Negative current account balance of US: when US economy
imports more goods than it exports to the outside world, it bridges the gap by
paying the difference in USD thus supplying USD to the world.
Negative budget balance of US government which is
monetize by printing more USD. The USD so printed could be borrowed by the
domestic investors and invested outside US to take advantage of the yield
differential.
Quantitative easing (QE) program of US Federal Reserve:
To provide monetary stimulus to the US economy US Federal Reserve may print USD
and buy the outstanding debt of the government or private borrowers using newly
minted USD. The USD so printed could be borrowed by the domestic investors and
invested outside US to take advantage of the yield differential.
Similarly, in simpler terms, the major source of demand for USD
could be listed as follows:
·
Governments: Since the USD is reserve
currency for the world, a large number of governments/central bankers maintain
a part of their reserves in USD to ensure adequate supply of currency to pay
for imports and repayment of external debt.
·
Corporate borrowers: Corporates across
the world borrow in USD given the wider acceptance and greater liquidity.
·
Global Investors: The global investors
who invest in cross border assets need the common currency to make their
investments.
·
Money launderers: Given the widest
acceptance and easier access, USD is the preferred currency for illicit cross border
trades & money laundering.
Considering that the traditional sources of USD supply are
drying and demand for USD is likely to remain strong, it is a valid assumption
that USD continue to gain strength in next few years, till the time the global
market paradigm changes and an alternative reserve currency emerges.
(a) The US current
account deficit is shrinking and may even become positive in the following
years given the lesser energy import and rising household savings rate.
(b) US government
budget is slated to attain equilibrium by 2018.
(c) Fed has already
winded up its QE program.
(d) The USD reserves
of foreign governments have bottomed out and beginning to rise.
(e) The repayment
cycle for USD borrowing made by global corporates and governments during easy
money days of 2003-2012 will start in next few years - leading to higher demand
for USD.
(f) The US Federal
Reserve may hike the policy rates from the current near Zero level in the near
future. This shall definitely lead to higher demand for USD, as (a) the
investors and arbitrageurs who have borrowed in USD to invest in higher
yielding currencies may scramble to reverse the trade, and (b) USD assets may
become relatively more attractive with higher yield.
(g) The pressure on
money launderers is rising across the world. Liquidation of physical assets to
return the money to the country of origin may cause higher demand for USD.
To make my simple, therefore, I would factor in a strengthening USD
over next five years in my investment assumptions for all constituents of my
investment portfolio.
2. The cost of
capital could only rise from here
As per various estimates, approximately one sixth of government
bonds across the globe are yielding negative return to investors. Yer,
investors are paying fees to own these bonds.
This sounds unsustainable to me. The condition therefore should
normalize in next few years. Nonetheless, assumption that the cost of capital
could fall further from the current level does not hold good to me.
Regardless of "abundance of liquidity" globally, the
"risk capital" is shrinking fast. The liquidity created through
numerous QE programs chases few basis point arbitrage opportunity through carry
traders. It is seldom deployed in long gestation projects, especially in
emerging markets.
I would therefore like to build in a rising cost of capital for
domestic borrowers, notwithstanding the degree of slope seen on the domestic
yield curves.
A large number of corporates have borrowed in USD in past five
years. Presuming they have fully hedged their currency risk, the cost
differential in INR and USD debt is close to 250bps.
Even if the domestic rates fall by 150-200bps over next three
years, the cost of capital for these borrower will only rise if they are not
able to roll over their current USD debt at current rates.
On the sidelines, cash hordes and dividend yields is more likely
to comeback as an investment theme as compared to Cyclicals who are
undercapitalized as present.
China’s First-Quarter GDP in Four Charts
China on Wednesday recorded its slowest growth rate since 2009,
a time when the global economy was staggering beneath the effects of the
financial crisis. First-quarter growth slowed to 7% on-year from 7.3% last
quarter, a signal that the world’s second-biggest economy has little wiggle
room to meet its annual growth target of about 7%.
Here’s a breakdown of China’s GDP in four charts:
China’s factories are hurting. Value-added
industrial output, a measure of manufacturing production, has hit
financial-crisis levels. Industrial production grew by 5.6% on-year in
March, far short of economists’ expectations of 6.9%, amid weak global and
domestic demand–a dynamic that has pressured prices.
Chinese shoppers aren’t buying. Retail-sales rose
10.2% in March. That’s slower than during the financial crisis.
Big spending is shrinking. First-quarter fixed-asset
investment, which measures money put to big projects and factories, rose 13.5%
on year, below economists’ expectations of 13.9%.
Trivia
In the post independence history of India there are many things
that have been persistently gnawing the conscience of citizens and are in
desperate need of closure.
The deaths of leaders like Netaji Subhash Chandra Bose, Lal
Bahadur Shastri, Shyam Prasad Mukherjee, etc., transactions like Bofors, and
events like partition, accession of Kashmir, emergency are few such things.
The points worth pondering are (a) how much disruption in normal
life can we afford to attain this closure; and (b) whether the political
establishment indeed intend to close these issues once for all and lose
traditionally useful armory to fight the opposition!
Even more critical is to assess the cost and benefits of
indicting Nehru for snooping on Netaji!
