The Two Most Important Charts In India

JC Perets writes…..The Bottom Line: The major Indian indices extended their losses late last week, with many of them closing at or below our tactical risk management levels on the long side. Despite the sector rotation we’re seeing under the surface, the dominance of large-caps continues to suggest a lack of risk appetite and weakness in the largest sector, Financials, continues to drag the market lower. Until we see stabilization in these two charts, we’re unlikely to see a resumption of the Nifty 500’s structural uptrend.

https://allstarcharts.com/two-important-charts-india/#more-86237

 

 

 

Bigger Guys will win this battle also

Telecom got its catalyst in the form of disruption from JIO. MF and NBFC have got their disruption in the form of current liquidity crisis which will affect their ability to attract investor and tap the market when in need of money .

“When it comes to India’s non-bank finance companies, the bigger they are, the faster they recover. That’s according to Andrew Holland, CEO of Avendus Capital Alternate Strategies who believes larger NBFCs will have a better chance of a comeback than their smaller peers.”(EXACTLY)

Only Large NBFC/HFC will now be able to tap the bond markets for sometime leaving smaller ones hanging dry. This in my view is a kind of disruption for Non Banking Finance Sector. if this funding disruption continues for long enough time, like reliance JIO smaller NBFC will have no choice but to selloff or merge with big guys 

Institutional Investor will again tighten their norms to invest only with large AMC’s which are mostly a part of big conglomerates and the Mutual Fund industry which is already concentrated among few players will get more concentrated.

As I had written before, more and more industries in India are seeing increasing concentration of market share among very few companies (oligopoly) which is neither good for consumer or employment generation in long run.

 

The ‘Indian Flu’, or Why the Crash of the Economy Is Imminent

Completely disagree with this opinion on economy by Prem Shankar Jha. There are two ways of reducing the corporate debt which has built up over the years
1. Inflate the debt away by allowing higher inflation which automatically reduces the value of money and debt and increases the value of asset. This is what crony capitalism is about, this is when transfer of wealth happens to rich from poor. This is what successive govt have done till we instituted inflation targeting. Mr Jha is advocating going back to currency depreciation to gain competitiveness
2. The second way is the road less travelled known as inflation targeting. it is the single most important reason that we see our yesterdays corporate icon not able to pay their debt. lower inflation reduces the value of asset and increases the value of debt. But it also leaves purchasing power intact in hand of people. Yes it is also leading to stagnating economy but it is not a cause of stagnation.

you can decide yourself which one is better

https://thewire.in/economy/the-indian-flu-or-why-the-crash-of-the-economy-is-imminent

Crude oil is starting to price itself out and erode its own demand ?

The combination of high oil prices and a weak Indian rupee means Indian crude prices are 47% more expensive this year in rupee terms according to Reuters. To cope with the higher cost, India is considering cutting imports and relying on stockpiled crude according to two refinery sources with knowledge of the matter. The chairman of India’s biggest oil refiner Indian Oil Corp, Sanjiv Singh, confirmed the plan to cut imports in favour of stockpiled crude was discussed at a September 15th meeting attended by refinery officials. The head of refiners at Bharat Petroleum also said India was “looking at various options to contain the costs including reducing our inventory. This will be a coordinated effort among refiners”.With energy prices rising, crude oil is increasing sucking away all the dollar from Energy importing economies like India

This would effectively mean the oil is starting to price itself out and erode its own demand. In emerging market currency terms, oil is just 1.2% off its all time high and is up nearly 200% from its 2016 low.

 

Unemployment among young and highly educated Indians highest in 20 years

The problem in India is lack of data and when a study  like this comes our way, we generally try to ignore it and political class use it for their own benefit depending upon who is in the power.
According to some estimates India has the highest number of unemployed in the world. if I were to connect dots then educated and unemployed youth is a lethal mix and it is a matter of time India would be staring at SOCIAL CHAOS.
This is when demographic dividend becomes a liability
https://theprint.in/economy/indias-high-economic-growth-has-failed-to-translate-into-jobs-study-finds/124528/

How the cycle turned for Non Bank lenders

Simple answer….. first gradually and then suddenly

Banks found an easy way to fund credit through consumer funding and lending to NBFC’s. Mutual Fund who couldn’t believe their fortune in wake of demonetization used inflows into their debt schemes to fund NBFC/HFC’s. In fact if SEBI would not have come out with sector wise limits,some MF were happy lending the majority of their unitholders money to this sector.

Interest rate cycle started turning late last year but MF and banks were still having enough short term liquidity to fund Non Bank financiars ,but these lenders started shying away from extending long term funding few months back. NBFC had to alter their funding and accept funding mismatch otherwise cost of borrowing had started rising sharply and this is when the seeds of current problem were sown.
System liquidity has now completely dried and MF are only seeing outflows along with banks who are struggling to attract deposits.

NBFC require funding and long term funding otherwise situation can get out of hand

(only when tide turns you come to know who is swimming naked)

Read More

http://Tighter Liquidity And Lower Trust – The One-Two Punch For India’s NBFCs

Charts That Matter

1.Brent Oil jumps to the highest level since Nov2014, >$81,following Opec meeting where the cartel agreed to no immediate supply boosts here. OPEC gives tepid response to Trump’s demand for lower oil prices. Saudi Arabia says the market has all the oil it needs for now. Pump prices in India getting ready for their next big hike. This will certainly eat into discretionary demand and I foresee a slowdown in household consumption

2.Sell off in Bonds continue. US 10y yields rise to 3.09%, highest since May, German 10y yields jump above 0.5% mark, highest since May as well.Indian 10 year bond yield also traded above 8.10%

3.Gold is set to soar above $1,300 an ounce, Bank of America says. Growing budget gap in US is viewed as ‘pretty positive’ for bullion. Historically, rising US deficit is accompanied with rising Gold prices.

4.Trump’s overconfidence may bring ‘major miscalculation,’ JPMorgan warns. The more US Stock-market remains resilient more are chances of major miscalculation. Potential error on sanctions could be ‘tough to calibrate

The gathering storm in Treasury Market

Change in Interest rates effect economy more than change in any other asset class .Macromon has written a must read post on that Giant sucking sound of US treasury crowding out emerging market capital flows.

We hope you take the time to give it a thorough read. We think it important and will soon be at the center of the market’s radar.

Summary
Our analysis provides kind of a Grand Unified Theory (GUT) of what is currently taking place in global financial markets
The massive borrowing by the U.S. Treasury is crowding out emerging market capital flows
The structural factors that have kept long-term interest rates low and term premia repressed are fading
The U.S. budget deficit is exploding
The Treasury has to increase its market borrowing as the Fed rolls off its SOMA Treasury portfolio
Social security has moved into deficit and borrowing from its trust funds to finance the on-budget deficits is over
Globalization is under threat, and foreign capital flows into the U.S., particularly the Treasury market, are declining
The yield curve is flat for technical reasons, and we believe term premia will increase
We expect a measured move in the 10-year Treasury yield to 4.25 to 4.40 percent, much sooner than the Street anticipates
Crowding out in the emerging markets will continue

https://macromon.wordpress.com/2018/09/24/the-gathering-storm-in-the-treasury-market-2-0/