Author: Ritesh Jain

President Trump, as part of his “America First” program, has proposed lowering the U.S. corporate tax rate to 15 percent and close a myriad of loopholes in an effort to simplify the tax code, and encourage  nation’s largest businesses to bring production back home. The proposal represents a tangible shift in the relationship between Washington and big business. In 2014, President Obama’s Treasury Department introduced new measures to crack down on corporate tax inversions, a strategy companies utilized to exploit gaping tax differentials between the United States and other countries. Burger King’s acquisition of Canada’s Tim Horton’s, a coffee and doughnut chain, for example, was motivated in large part by Canada’s more hospitable tax environment.
Back in 2000, America’s 40 percent corporate tax rate, included state and local taxes, was competitive with those of its trading partners. Now it’s not. While the U.S. tax rate remains unchanged, Germany, Japan and the U.K. have all reduced their rates; in some cases, substantially. Germany took there’s down to 30 percent from 40 percent, the United Kingdom knocked theirs down to 20 percent from 30 percent and Japan slashed their corporate tax rate which was pegged at 40 percent to 23.9 percent.

Reducing US corporate tax rate and flattening the tax code would go a long way to boost corporate investment in the U.S. History has shown that companies want to do business in countries with hospitable tax rates. Of the five countries enjoying the highest foreign direct investment as a share of their economies, Ireland, Hong Kong and Singapore, all sport corporate tax rates that are below 20 percent. Among the five countries with the worst foreign direct investment, only one, Russia, has a corporate tax rate below 30 percent.

Tilting the tax tables in America’s direction would undoubtedly boost business spending and investment here at home. American companies are holding $2.5 trillion abroad, an increase of nearly 20 percent over the past two years, according to the latest calculations from forecaster Capital Economics. The total is equivalent to nearly 14 percent of total U.S. gross domestic product.This money is not lying idle but has been lend by the banking system outside US to corporates and Govt outside US.

This tax cut if it were to be implemented could lead to capital flow back from rest of the world(periphery) to US ( core) leading to spike in US dollar and sharply higher US equities 

Dr Arvind Subramaniam ,chief economic advisor to the govt of India, provided his assesment of the Indian economy three years after the Modi government came to power at Peterson Institute on 21st April

Key Takeaways

• Fiscal policy is tight ( central govt is tight but states continue to spend money)
• Monetary authorities wants to tighten Policy when the credit growth is already very low ( clearly govt and RBI are thinking differently)
• Falling inflation and Benign inflation outlook ( RBI thinks core inflation is becoming sticky)
• Twin balance sheet Problem
  • About 40% of corporate debt with firms whose interest coverage ratio (ICR) is
  less than 1
  • Stressed assets as a share of loan portfolio could be as much as 20 percent ( GOOD both govt and RBi are on same page on this)
• Declining public sector investments (this came as a surprise to me) and disheartening private sector capex ( govt is becoming very vocal on this of late)
• Deteriorating export competetiveness due to appreciating INR ( is this by design ?)

Honestly…….. if Fiscal Policy is tight and monetary authorities wants to tighten policy ( MPC minutes) in a falling and benign inflationary outlook, an indebted Private sector which refuses to do capex alongwith appreciating rupee…. I wonder what is the plan to bring back growth

Full presentation below

https://piie.com/system/files/documents/subramanian20170421ppt.pdf

 

Ian Bremmer – 90 Days In: Clues for the Future.
Ian’s Bremmer presentation goal was to present the structural reasons that is going on that ties all of these things together.

We are entering a “geopolitical recession” – his new term.
The last time we had a bust cycle in the geopolitical environment was World War II (a geopolitical depression).
Since then, it effectively has been an era of what he calls Pax Americana (Marshall Plan, Japan-U.S., Soviet Union falls apart… leading to an American-lead global agenda) – That’s all kind of just unwound.
Globalization is continuing but Americanization is not.
There was a large group of Americans saying, “Do not be the world’s police force.”
There is another group saying “We don’t benefit from globalization.” NAFTA didn’t help us, Trans Pacific Partnership… not going to help us. Might help the economy, might help Wall Street but it won’t help me.
The U.S. really used to need the Middle East for energy. Suddenly, we’re the swing producer. How much do we really need to care about what’s happening in places like Saudi Arabia and Iran?
So there are these structural reasons why we are entering into a global geopolitical recession: economically, technologically and from a defense perspective… a lot of Americans are saying we don’t want that global role.
We no longer want to support this multi-lateral global architecture that, by the way, we created after WWII.
And then you have the fact that the most important global alliance the U.S. has in defending this global architecture is the Transatlantic Partnership that is at its weakest point because of Brexit, because of the populism, because of the unprecedented refugee crisis across Europe, because of the unprecedented terrorist threat across the continent of Europe.
For all of those reasons, which was making the U.S.-lead globalization stronger suddenly was unwinding.
Then we have China. China rising. Second largest economy in the world is the one country in the world today of size with a global economic strategy. Building global economic architecture… one belt – one road, the Asian Infrastructure Investment Bank, the China Development Bank, which is large in what they invest than the World Bank and the IMF put together.
This is all useful from a global economic perspective but they don’t co-exist easily or happily with U.S.-lead institutions. Because of course the Chinese are not trying to support rule of law, they are not trying to support liberal democracy, they are not trying to support global free markets.
They are not interested in multilateral rules, they want bilateral deals where they can have more influence one on one.

Economic Nationalism, Security Nationalism

For all of these reasons, you would have expected the U.S.-lead global system was going to unwind and indeed I (Ian) had been saying that for the last six years. It came faster than I expected.
The election of Trump, with an explicit endorsement of an America First policy (which is not isolationist)… but it rejects we are doing these things for allies and says we are doing these things for us. It’s actually a very Chinese like foreign policy.
The election of Trump made a lot of people who were questioning under the Obama administration if the U.S. had their backs now say to themselves we need to actively hedge.
Ok – now a new chapter in the geopolitical world but who is going to replace the U.S. in the leadership role. If anyone were to, it might be Angela Merkel but their answer to that question is “no.” There is nobody.
Is anyone going to replace the U.S. as the world’s policeman? If anybody were, I guess it would be Putin. So in other words the answer is “no.”
Is anyone going to replace the U.S. as the global architect of trade? If anyone were it would be Xi Jinping. He gave a speech in Davos that sounded like it came from a U.S. representative. So it would be China but nowhere close to the role that the U.S. had been playing so the answer is “no.”
This means we are in an environment that leadership doesn’t exist, so to the extent that we have a shock, the same degree of safety we might have in place isn’t as strong.
Ian provided an example of the World Health Organization that is only getting half of the funding it received five years ago, you are probably not going to respond as effectively to the next global health outbreak (e.g., Ebola).
If the U.S. and China don’t have the same level of engagement, you probably won’t respond as effectively to the next H1N1 outbreak.
Name your crisis, health, economic, war… the geopolitical resilience is much less than it used to be.
So that is one set of things to help us understand why we are seeing the headlines today. But there is a second set of things – if this one is not top down macro but actually bottom up from the people:

We have an increasing large set of people who look at their government and say, “not fit for service.”
Not legitimate, not effectively representing me. The social contract is broken.
Seeing it in England, the U.S., France, Spain, Italy, etc.
How are you letting these refugees in when you’re not taking care of me.
Some is coming from technology worker replacement.
All of the established governments are getting weaker, except Germany due to the relative success of their middle class. No election concerns from far right movements there…
The big point here is that you have a structural weakening of governments in most of the developed countries (“not fit for service”) at the same time the U.S.-lead global order has unwound.

This at the same time you have strong leadership in China and India with Modi. Globalization is still working for them… for now. Though Ian believes within 10 years as technology replaces workers, they will experience the same angst workers in the U.S. feel globalization has done to them today.

The above concludes Bremmer’s big picture macro view as to why over the next year we are going to continue to see more and more of these geopolitical headlines that will support increased instability and volatility. This is not because of Trump. This is systematic not causal.

Read More

http://www.cmgwealth.com/ri/radar-handle-extreme-care/

Honestly ask yourself … 30 year of ultra low rates in Japan couldnt ignite inflation.One of the greatest monetary experiments in financial history has been the global central bank buying of government debt. This has been touted as a form of “money printing” that was supposed to produce hyperinflation, which never materialized as predicted by economists. Nevertheless, the total amount of Quantitative Easing (QE) adding up the balance sheets of the Federal Reserve (Fed), the European Central Bank (ECB) and Bank of Japan (BOJ) is now around $13.5 trillion dollars, which by itself is 7 times the size of India’s GDP, sum greater than that of China’s economy or the entire Eurozone for that matter.If QE failed to produce inflation, then ending QE may actually produce the inflation people previously expected. Where’s the strange logic in that one? Well you see, it really does not matter how much money you print, if it never makes it into the economy, it will not be inflationary. Additionally, even if it makes it into the economy and the people hoard for a rainy day, it still will not be inflationary.The craziest thing the Fed did was create excess reserves. The bankers complained that the Fed was buying the government debt so they would have no place to park their money. The Fed then accommodated them creating the Excess Reserves facility and paid them interest for absolutely no reason whatsoever. Almost $3 trillion was parked at the Fed collecting interest so this  “printed” money never made it out the door  and hence there was no inflation.The pundit keeps calling for a crash in the stock market but overlooked the fact that retail participation is at historic lows. Why? They were hoarding their money..( in bad times you dont go and spend money you hoard it because you feel scared).

So how does stopping QE actually create inflation?

The withdrawal of the Fed, the ECB and the BOJ from the QE programs will lead to an increase in yields on the bond markets sending the financing costs for the states higher. This will now increase government spending & borrowing much more rapidly even if they fail to increase program spending.
Governments have increased their spending sharply because interest rates were effectively zero and the central banks were buyers. Where the national debt under Ronald Reagan reached $1 trillion for the first time, Obama routinely ran $1 trillion budgets annually.
So the moment of truth is upon us when rising rates will lead to rising inflation. Rising inflation is good for equities and not for bonds. Global outstanding loans and bonds are 4 times the size of globally listed equities and more than USD 9 trillion of listed bonds are still negative yielding making more and more pension funds under funded.

Can you imagine the move in equity markets if some of this money hiding in bonds start moving to equities due to final arrival of INFLATION???

PS  Three markets in G-20 have broken out to new highs ….US equities, German DAX and NIFTY (although they are due for some consolidation/correction)

Singularity University, based in NASA Campus in Silicon Valley is the world’s leading learning-cum-incubator university for innovation and technology set-up in collaboration with NASA, Stanford etc and we had leading Silicon Valley entrepreneurs presenting here including the guy behind Google Maps.

*OBSERVATIONS OF VARIOUS SPEAKERS THERE*

We are witnessing  more disruption in human history over next 10-20 years than what we have seen in the last 20,000 years. Their prediction is that 60% of Fortune 1000 companies will be out of business in just next 10 years.

There is a convergence of exponential development & convergence of technologies and also business models across industries (Blockchain, Artificial Intelligence, Biotech & Genetics, 3D Printing, Solar Energy, Cellular Agriculture etc). These are no longer technologies in the lab, but are already commercialised. So a 10 year old for example will never need to go to college or ever get a driver’s license!

KEY actionable and insights for every business are 1. Organisations built for the 20th Century are destined for failure. Organisations built for efficiency and predictability will fail. They are unable to think and grow exponentially but are predicated on linear growth models. We all come from scarcity mindsets where is the world is moving rapidly to abundance. Ability to rapidly iterate, learn and execute will be required. Today’s 18 year old has the ability to approach the same problem very differently and successfully.

2. People from completely outside the business will end up disrupting these businesses (Zerodha did it to broking businesses without any background). Exponential is when you can deliver price-performance which is 10x better – not 20-50% better. There are several areas and technologies where price-performance is doubling every 12-18 months (Moore’s law from Intel days).

3. Everything which is information based will priced at or move quickly to ZERO. They call this “democratisation” of information (We are seeing signs of this in Equity Research, MF Distribution etc).( In the Dec 2016 quarter, there were more than 450 conference calls held by corporate bodies discussing quarterly results, with discussion note available while I remember less than 50 per quarter a decade ago. Institutional Investors with their superior management access will not offer any distinction in investment performance though may suffer from their herd behavior). The sorry state of mutual fund industry in the US is a prime example in front of us.Entrepreneurs will have to work on alternative revenue streams. Huge implications for all businesses. (Zerodha makes money from float rather than commissions,so is Alipay and so will be Paytm ). Move towards building platforms rather than products. (Google, Apple are platforms whereas Blackberry, Yahoo etc were products).

4. Everything is moving to a Service/Subscription model from a Sales model. Rolls Royce has moved to this model for their aircraft engines! They no longer sell engines. They charge for hourly use and provide analytics on actual usage to optimise for their clients.

4. Large organisations cannot change and do not have the time to change. There is an immune system response, legacy business becoming a barrier and hierarchical structures where anyone over 30 years of age today has very limited clue as to what is happening to the world which will prevent organisations from rapidly transforming.

5. The recommended solution for large organisations is to build teams completely outside their existing business
– which have NO people from existing businesses
– They are given he mandate to build a business model which completely disrupts our own existing business, leveraging these key trends
– to set up a multi-skilled team of 6-7 people which is under 35 years of age, NOT from the existing business or people who are the most willing to challenge status-quo
– Housed independently with no corporate processes at all
– Working on lean startup principles (Design thinking/MVP/Agile)

If such a business turns out to be successful, do NOT bring it back into the Mother organisation. Always keep it independent. In fact, make that the centre of gravity for building new businesses. (Unilever has implemented this globally and 5 of such initiatives/products have become the most profitable of all)

Framework for building Exponential Business Models

Each business needs to drop the vision, mission statement and have a simple Massive Transformational Purpose (MTP) that everyone in the team can understand and aspire to. For example Google has “To organise the world’s information”

Businesses need at lease 4-5 of the following 10 things to create exponential growth.

*S-C-A-L-E & I-D-E-A-S*

S – Staff on Demand (Uber)(How many full-time employees vs Contractors) C – Community & Crowd involvement (Google Maps, Facebook, Quora etc) A – Algorithms (Uber – Matching drivers and passengers, Amazon – recommendations) L – Leverage existing Assets (AirBnB, Uber)(You must never own assets) E – Engagement (Contests, Gamification to driver user engagement)

I – Interfaces (Tech that allows external world to connect seamlessly and easily, example App Store) D – Dashboards (Real-time MIS on key metrics, knowing every key metric in real time) E – Experimentation – (Ability to constantly experiment, iterate and learn) A – Autonomy (How much autonomy to the lowest levels to decide) S – Social (How do you leverage social networks to listen, learn and engage).

We rarely stop to think how important inflation is to the economy. For example, if inflation is sufficiently high, it will slightly offset normal depreciation in values of homes and business properties. Thus, home and business property values will tend to slightly rise over time. If banks can count on values of structures rising, rather than falling, over time, lenders can assume that mortgage loans are fairly risk-free, because the lender can count on getting its money back through the sale of the property, if the mortgage-holder defaults.

This same principle holds when energy and commodityproperties, such as coal mines , steel plants and oil fields, are financed. As long as energy prices keep rising, there is a good chance loans can be repaid. Once energy prices fall, debt defaults become a problem. Oil exporting countries also find that the taxes they can collect fall significantly. As a result, energy-exporting countries are in a far worse economic position once energy prices fall. Exporters of other commodities, such as metals, have a similar problem if prices fall.

In the last two paragraphs, I mentioned the impact on lenders and governments of rising or falling prices. Owners of properties are also affected by rising or falling prices. If prices rise, these owners can sell their assets, and make a profit. In fact, these owners have often purchased their properties with debt. If the price of the property rises, but the amount of debt is unaffected by inflation, the owner of the property can often get a disproportionate benefit of the price rise. Of course, if the value of a property falls, the property-owner is disproportionately affected by the fall of the price.

We are so used to a rising-price scenario that we have little understanding of how a flat or falling price scenario might work .

If commodity prices fall then  a person can see why a commodity-producing country/company might have a big problem, if the price of that commodity suddenly falls. There is huge “balance sheet” impact that doesn’t directly affect current GDP/Balancesheet as reported (since GDP/balancesheet has to do with current value of goods and services produced). But it can have a major impact , as it goes forward, because affected loans are much less likely to be repaid. Lenders often try to be lenient with commodity producing countries/companies, hoping that commodity prices will rise again. But if the drop in prices is permanent, commodity producers must use more and more extreme measures to hide the problem of loans that have a low probability of repayment in a low-priced commodity environment. Eventually, these loans seem likely to default, if prices do not rise sufficiently. China , PSU Banks and many commodity-exporting countries seem to be affected by this problem.

Conclusion

We have kept Global Economy expanding through growing debt use ( china is responsible for more than 70% global credit growth in last five years) and growing energy use.Now there is just too much buildup of debt globally and we seem to be reaching the end of the line. The global economy is getting very close to stall speed.

Central Bankers globally talk about 2-3 percent as inflation target but i am pretty sure they must be silently praying for higher inflation. The Federal Reserve talks about inflation rates above 2% being too high, but inflation rates below 2% are at equally problematic. Somehow, the debt system needs to keep operating for the whole system to work and for it the world needs HIGHER INFLATION NOT LOWER INFLATION.

Read More below

https://ourfiniteworld.com/2017/04/17/the-economy-is-like-a-circus/

 

WhatsApp is the most popular messaging app in India, with over 200 million users — more than it has in any other market. And to capitalize on this, the company is reportedly planning to launch a digital payments service in the country some time in the coming months.

What exactly WhatsApp will offer users isn’t clear at this point, but the move is logical, perhaps even necessary. Since Facebook bought WhatsApp in 2014 for $22 billion, the app has continued to grow in popularity and now boasts more than 1.2 billion users. But, it has yet to find a way to monetize its user base.

Infosys co-founder Nandan Nilekani welcomed popular instant messaging app WhatsApp’s possible entry into India’s digital payments space. According to a job advertisement on WhatsApp’s website, the company is looking to hire a digital transactions lead in India with a technical and financial background and “ability to understand and explain UPI (Unified Payments Interface), BHIM, Aadhar number”. India is WhatsApp’s biggest market, Nandan Nilekani, the architect of biometrics-based citizen identification program Aadhaar, said on microblogging site Twitter: “It looks like WhatsApp is joining the WhatsApp moment in Indian banking!”

Over the weekend i found some interesting snippets “The Prime Minister Narendra Modi announced on Friday the 14th, that 75 cities will be designated cashless/less-cash townships, with an overwhelming 56 of them being in Gujarat.”

I was aware about disruption in banking, but the following comment  by Barclays Ex ceo made me really think that Banking is headed for serious disruption in more immediate future than I initially thought

“18 months ago I gave a speech about approaching the Uber moment in financial services. I suspect we might be beginning to see some Uber moments popping up. For example, branch traffic has almost halved in the last 5 years in the UK, ATM usage is declining, Scandinavian countries are talking about going completely cashless. We’re beginning to see some of these Uber moments happening.”

Jenkins, who was CEO of Barclays from 2012 to 2015, forecast a series of Uber-style disruptions in the banking industry in late 2015. He said that advances in technology could shrink headcount at traditional big banks by as much as 50%, while profitability in some areas could collapse by over 60%.

And this one from an insurance company out of Japan

“A future in which human workers are replaced by machines is about to become a reality at an insurance firm in Japan, where more than 30 employees are being laid off and replaced with an artificial intelligence system that can calculate payouts to policyholders.

Fukoku Mutual Life Insurance believes it will increase productivity by 30% and see a return on its investment in less than two years. The firm said it would save about 140m yen (£1m) a year after the 200m yen (£1.4m) AI system is installed this month. Maintaining it will cost about 15m yen (£100k) a year”