Author: Ritesh Jain

1.In 2014, there were a mere two mobile phone manufacturing units in India. Fast forward to 2017, and India is now home to 123 – bursting onto the scene in an impressive manner. These are only assembly lines but will certainly add jobs

2.Germans are increasingly stashing cash under mattress. They did not get a memo on DEMONETISATION.

3.This chart shows the distribution of global “high-quality” bonds outstanding by yield and product. There is nothing above 3% but pension funds are projecting 7-8% returns. So who will pay the difference?

4.The trade war portfolio has done really well. I guess globalization is not great anymore.

The graph below from Financial express clearly explains the reason for increased clamor for reservations is that govt  pays 2-3 times more than private sector for most jobs, from drivers to peons to electricians… & there is no compulsion to work either.

 

But in a significant statement Nitin Gadhkari today said
“Let’s us assume the reservation is given. But there are no jobs. Because in banks, the jobs have shrunk because of IT. The government recruitment is frozen. Where are the jobs?

In private sector allied financial services like Mutual Funds and Insurance have also created large number of jobs, but in coming years even that will be automated …………………………and

I believe the most underappreciated threat to India stability comes from lack of job creation and one reason why we cant see this threat except in newspaper headlines is because of availability of free data which atleast is occupying an empty mind

But it will not last long

1.Matter of time rising Mortgage and Personal Loan EMI will start eating into household incomes. I expect Mortgage rates to easily cross 9%  so that will be the additional burden on household finances. This in my view will start impacting Urban consumption

2. The Petroyuan… Tiny, Irrelevant, Nothing. Right? But who would have thought OIL will start getting priced in YUAN. China can just bypass IRAN sanction by pricing OIL traded in chinese currency known as PETROYUAN

3.The Fed Accelerates its QE Unwind. Mopping up liquidity. Shedding Treasuries and Mortgage Backed Securities and one thing I have learned hard way. Liquidity creates fundamentals not the other way around and FED is shrinking Liquidity

4. Anybody will get bearish after seeing the above chart of shrinking FED balancesheet but here is the kicker: whereas some traders have voiced caution that August has in recent years been the month with the highest seasonal volatility, and could therefore surprise to the downside, especially with virtually non-existent liquidity…… Goldman has a far more optimistic take on what’s in story: “August is the most popular month for repurchase  (Buybacks)executions, accounting for 13% of annual activity.”So liquidity is still ample for time being

1. why SBI raising rates is more important that RBI hiking rates
2. A contrarion Global view from somebody who shaped my thinking
3. what is inverting and why capital allocation matters

https://economictimes.indiatimes.com/markets/stocks/news/what-i-read-this-week-why-sbi-raising-rates-is-more-important-than-rbi-rate-hike/articleshow/65278235.cms

Fortnightly Macro Economic Dashboard
Some Kep observations
1. Indian economy is doing well on account of consumer spending as reflected in credit growth which is still skewed towards reatil credit.
2. The Govt expenditure surprisingly is under control and they are on track for meeting their fiscal deficit target.
3.Bond yields continues to be stubbornly high and unless deposit growth picks up I expect them to cross 8% in second half of this financial year
4.Purchasing Manager index continues to be in positive territory but one data which is not shown over here is the input price index for companies. More companies are complaining that input prices for raw material is going up.

1.One reason for increased clamor for reservations is that govt pays 2-3 times more than private sector for most jobs, from drivers to peons to electricians… & there is no compulsion to work either. But as Vivek Kaul writes …. Govt is not adding any more new jobs . So what are these people fighting for?

2.More than half the respondents in the RBI consumer confidence survey do not expect any improvement in their income, their employment prospects and general economic conditions in the next one year.The household consumption is too strong for this kind of confidence in economy. So you dont expect conditions to improve but you are still spending ,by borrowing…Hmmm

3. Is US economy strong? Well the Fed described the economy as ‘strong’ for the first time since 2006 and that means more rate hikes are coming

4.Emerging market flows have stabilised and are positive . Some analysts would say EM have become quite cheap and this is possibly the start of return of flows, I would use this opportunity to reduce risk assets.

We are in the most exciting part of a generational cycle for markets where the country having reserve currency status (US) is now trying to absolve itself of the responsibilities which comes with reserve currency.

There are four conditions which needs to be fulfilled to become reserve currency

1. Strongest Military
2. Running high current account deficit
3. Global Confidence in using the Reserve currency for Global Trade transaction like buying OIL
4. Deep and Liquid Markets so that the surplus created out of selling goods and services to the country having reserve currency status can be invested back into that reserve currency.

US fulfilled all these conditions and the world monetary order was set .But the life of reserve currency does not last for ever as can be seen in the chart below

 

The actions of US today like closing of border,putting restrictions on trade, not allowing countries having dollars to invest in US economy, bringing down NFTA,diluting the military umbrella like whats happening with NATO and even GCC countries.These actions do not resemble that of a country which wants to continue with reserve currency status.

US is no more willing to overlook the minor trade friction,a tariff barrier against its exports to other countries or stealing of technologies from its corporations . The reason is OIL independence. US is not only getting self sufficient in oil production but also exporting oil and hence it does not want to keep its military umbrella to keep world safe and sound so that it can secure its oil supplies. On the contrary,a conflct ridden world bereft of US military umbrella will allow US to export Weaponary to the world in which it is already technologically advanced and a world leader.

It does not mean that US dollar will cease to be the reserve currency tommorow , but we have started on that path. Although,I believe in the short term any reduction in US current account deficit coupled with rising FED rate will actually lead to stregthening of Dollar which will be like rubbing salt to the wounds of Emerging Markets.

The bigger issue is, there is no other country which is ready to take on the mantle of reserve currency. Although China has this month, fulfilled one condition which is running current account deficit.

As Saxo Bank writes China is growing up – meaning… current account deficit, more dependence on foreign funding, more open capital account, weaker CNY & deeper capital market but also less “ability” to massage economy – in 2007/08 China ran big C/A surplus but not now.

 

China will take long time to fulfill other conditions but it is reaching closer in military capabilities, using investment under OBOR like US used under Marshall Plan.

This period of vacuum created out of no clear anchor to the world will be the most disruptive period for our generation and will have very few winners who will know how to play with new set of rules.