Category: Macro Posts

Rohit Srivastava at Indiacharts explains brilliantly the correlation in society mood, Tallest statue and fate of markets

“Yesterday – the Indian Newspapers were splashed with advertisements of the Inauguration of the tallest Statue in the World constructed in the State of Gujarat. A big feat and it was undertaken by this regime in the midst of booming stock market. What can it tell us about the state of the mood in India and what lies ahead for the Indian stock market? At 182 meters this is now the Tallest Statue in the world

This was accompanied by a list of all the previous Statues that held this claim providing an interesting ground for R&D into the importance of these events.

This brought to my mind memories of the multiple articles on social mood written by Robert Prechter on the relationship between stock market peaks and construction of the words tallest buildings. He noted it was not the date of construction alone but the period when it was constructed that was important to know where we are in the long term. Without putting words in his mouth here is what he said in his Elliott Wave Theorist publication.

An interesting chart of the history of buildings near peaks is also below.

With that, let us see where we are with respect to the largest Statues in the World. It is my belief based on the work already done by the Socioeconomics Institute on the subject that the decision to construct the largest Statue in the world by Shri Narendra Modi, marks the strong social mood of the times in India. The confidence that all is well based on what has been a 15 year advance in stock prices. It also marks the final bubble phase of the Indian stock market, and based on my long term chart of the Nifty the 5th wave, in the form of an ending diagonal at the end of a Supercycle degree bull market. That it was completed yesterday is less important than that is was in construction for the past 56 months. The bids started in Oct 2013 and awarded in Oct 2014.

So now the big question is when was the second biggest statue constructed? Right into the peak of 2008 and completed by Sept 2008. The Spring Temple of Buddha though took 10 years to complete. But here is the big catch 3 of the tallest statues were completed in 2008 in months of each other and are all Buddha statues. A lot of tall buildings were getting constructed at the same time as mood was reaching a peak. We seem to have seen that with the statues in 2008.

The Ushiku Daibutsu in japan was completed in 1993 after 10 years of work and within that occurred the Supercycle degree peak in mood and the Nikkei stock index. So work started on it in the midst of the Japanese bubble that popped in 1989 but was completed only years later.

Now the Russian statue The Motherland Calls put up in 1967 a time when there was no RTSI index so it is hard to point to the stock market there. But the Statue of Liberty 1887, USA started construction in the early 1870s. It was a gift from France. That said the stock market rallied into the 1870s and then went into a long consolidation phase. What makes 1870 important is not the US stock market performance alone but that it was at the end of a global boom in railroads. So while US stocks peaked after the 1870s and consolidated for many years it was the UK charts that might be more compelling. As that period was marked by overinvestment in railroads and then banking failures. So here is a chart of the UK market cap performance from 1825-1870. Not the clearest view of the period but a zoom into what happened after 1873 for US stocks.

The next and final chart shows the US from 1950 to date

Lastly what did the railroad boom look like? The pre 1970 UK market boom was put together in one paper by Graeme G Acheson, probably written for Cambridge University but I found it online listed on many websites and am picking the chart from there so you know what it was like before the Statue was gifted to the US.

Now you may consider the evidence here coincidental and you can also think that the start dates of building are way before the bubble peaks. However, the moment I laid my eyes on an advertisement that spawned across the newspapers it appeared as a reflection of the positive mood of the times and it was worth the effort digging into it this morning. I am especially taken up by it because it comes at the end of India’s Supercycle degree bull market that is ending with an ending diagonal in my opinion. And if this tallest statue is a red flag then we have held it up wide and loud for the world to see and note. While most would see it as a sign of confidence socionomic studies see it as the point of maximum confidence just as the tide is about to turn

My two cents

I spend a lot of time understanding society mood and Pessimism leads to skepticism. Skepticism leads to optimism. Optimism leads to euphoria and the cycle repeat itself. The statue is a sign of late Euphoria

T.N.Ninan writes “The question is, how can these current champion sectors sustain their growth without profits to finance further growth? Of all the players in the two sectors, only Reliance has the money to keep investing because of profits from its refinery and petrochemical businesses. Indigo, though slipping into the red, still has a cash hoard. Both companies could play for greater dominance, rather than maximising returns — imitating companies in the e-commerce and other digital businesses that are deep in the red, but early enough in the growth cycle to be able to raise fresh capital that fuels continued growth. But if costs are twice revenue, as is the case with some of the new digital/e-commerce businesses, the story from the perspective of national accounting is of value destruction. The market valuation game tells it differently but, unless cash has ceased to be king, the issue is the same in all three sectors:”

Sustainability.

My two cents….

“Look around you… the world of today is “Winners take all“. Till the time stock market continues to reward topline growth and not Profitability,we will continue to see fight for market share at the expense of profitability. This is not only harm full for employment generation but in the end Consumer will have to bear the burden in the form of higher prices to the last man standing.

full article below

https://theprint.in/opinion/everyone-is-growing-but-no-one-is-making-money-in-indias-champion-sectors/141026/

A fantastic Ray Dalio interview with Economic Times

Summary of important points

what is a good business? Over time, most top businesses that existed 10-20-30 years ago, are no longer good businesses. The world changes and I do not think one can just sit on a good business and be comfortable doing that.

How to reduce debt? The first way is austerity (nobody likes austerity… its a bad word). The problem with austerity is when you have too much that, they think one should spend less but when they spend less, one person is spending another’s income and it compounds. But anyway, that is the usual reaction, but it does not work for the system as a whole.

Sometimes it is done by bankruptcy and debt restructuring. Debt restructuring and austerity are both deflationary forces and are negative on the economy. That is because when you have debt write-down you are reducing somebody’s net worth because that one person’s asset being written down is another person’s debt and so you create debt relief but you also reduced the value of the asset and that is a deflationary force. (we are trying that in India unsuccessfully for some time)

The third way of doing it is to print financial assets and have the central bank buy financial assets, quantitative easing it is commonly called now.(Financial markets were living on this for last 10 years)

The fourth way of doing it is to find some way of transferring wealth from those who have more assets to service those who do not.( this is coming next….. universal basic income and taxing the top end known as populism).A lot of the power of the monetary easing through quantitative easing and buying financial assets is behind us than in front of us. There is not as much power to reverse it. You are also in a world in which there is much more populism.

Look at the world reserve currencies, the dollar in a sense is risky, the euro is risky. We are dealing with a whole set of things that makes the euro risky. The Japanese yen is risky in terms of that money. There is a lot of debt around and there is a challenge in terms of that money. And you could be in a situation where that kind of money is not as appreciated and also the nature of assets means that equities and bonds in a sense are tied to that same financial structure. So, gold is a diversifying asset and should make for 5-10% of a person’s portfolio. This share could go up later into the cycle. I cannot tell you exactly where it is but I can say I think we are pretty late ( I would tend to agree and strongly think that by end of 2019 investors should have 25% in precious metals)

We are in a new world which has quite profound disruptions because we built this world in a globalist way, where you could produce wherever it was most cost effective and ship it. Now, that is being disrupted.

 

 

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An important update on market by Russell Napier ( I have highlighted some read portion)

There are those in financial markets who believe that Mike Pence’ s bellicose speech at The Hudson Institute a few weeks ago was merely sabre rattling ahead of the US mid-term elections. Sadly your analyst could not disagree more. That speech, reported in the last Solid Ground newsletter, has now been followed by the United States’ threat to withdraw from the Intermediate-Range Nuclear Forces Treaty (INF) with Russia. For those who still believe this has nothing to do with China, the US President made it clear on October 22nd that the withdrawal from the INF is as much about countering a threat from China as it is about countering a threat from Russia:
“Until people come to their senses, we will build it up…” “It’s a threat to whoever you want and it includes China, and it includes Russia, and it includes anybody else that wants to play that game. You can’t do that. You can’t play that game on me.”
This has huge geo-political implications and clearly huge investment consequences for those countries in Asia supposed to accept the new United States missiles that will stop China ‘playing that game’. Can the United States’ Asian allies accept US missiles and remain free to trade openly with China, invest in China and accept investment from China?Still unconvinced? The following is a lengthy extract from an interview between Nick Robinson of the UK Radio 4 Today Programme and Professor Matthew Kroenig. Professor Kroenig’s official biography indicates that he is well placed to explain the reasons behind the threat to scrap the INF: ‘he has served in several positions in the U.S. Department of Defence and the intelligence community, has testified before Congressional committees, and regularly consults with U.S. government entities.’ The interview begins with Professor Kroenig answering a question as to why the United States has threatened to end the INF:
Professor Kroenig:
Moreover we’ve got other issues to deal with in Asia. We have the growing Chinese threat and having more firepower, that these missiles would provide us, would allow us to better deal with the threat from China in Asia……I think the interest in the United States is really to build conventional armed missiles in this range mostly to deal with the threat in Asia. I don’t think there is any desire to deploy these systems in Europe.
Interviewer:
You talk of the threat in Asia. Does this mean that the real new deployment is likely to be facing towards China rather than Russia?
Professor Kroenig:
I think that’s right. If you look at the balance in Asia it’s really shifted in China’s favour over the past couple of years. China has thousands of ground-based missiles within this range. I think 95% of China’s missiles would be in violation of the INF treaty… So the US is in a bad situation in Asia to compete with Chinese missiles….. being able to deploy ground-based missiles on the territory of our allies in Asia would increase our firepower and give us the ability to better counter the growing Chinese threat in that region.
Interviewer:
Finally Mr. Koenig, there may be people who say despite your soft diplomacy the talk of an arms race with China, an arms race with Russia, and one led by Donald Trump fills them with real alarm.
Professor Kroneig:
Well, I understand that. I think the only thing worse than an arms race among the three is an arms race that the United States is sitting out. The United States and American military power has provided stability in Europe and Asia for several decades. Russia and China are becoming more assertive, building up their military capabilities so this arms race started several years ago. It’s only in the news today because the United States is finally coming up to the starting line a little bit late, so the only thing worse than the arms race would be the United States losing…
The United States’ allies in Asia will be expected to accept US missiles, conventionally armed but perhaps also including nuclear warheads, as part of the United States ‘coming up to the starting line’ in an arms race in which policy makers perceive China to be ahead. While market watchers can continue to believe that this is just more of that geo-political ‘stuff’ that really does not impact companies and their money-making abilities, it is time to think more clearly about what is going on.
The world has changed and the era of private sector determination of capital flows, trade flows and, ultimately, even pricing is ending. The Solid Ground has long argued that it ends because peoples and politicians will want some of that power back; some people like to call that populism, others prefer democracy. Now it is also clear that some of that power will be brought back to form part of the armory of the new cold war.
Many Asian countries have lived under the US defense umbrella while freely trading with and investing in China. This was a wonderful combination as defence spending could be kept low, but those same countries got to enjoy all the benefits of trading with a large and rapidly growing economic behemoth. This was a recipe for economic success that has now ended as the new Cold War, a war explicitly aimed at containing the China ‘threat’, has been declared. Before you think that this is just some macro threat of higher taxes and government spending in Asia, consider what this new policy means for trade, capital flows and technology transfers. (including India)
You don’t have to be that old to remember the last Cold War. For those of that vintage who remember the USSR and its satellites, it would have been inconceivable for either protagonist in that ‘war’ to permit capitalists to move capital freely between the chilled belligerents. From the perspective of the west, such use of private capital would have been seen as virtually treasonous in supporting the economies of ‘enemies’, while from the perspective of the USSR such private capital was unwelcome in a country where private capital existed, if at all, at the behest of the state. If capital flows between the belligerents were virtually impossible, trade flows were also almost impossible.
So perhaps we are not going back to an era when jeans and recordings of The Beatles traded only through the black market but free trade between Cold War belligerents is highly unlikely – we have already entered such a deteriorating relationship with Russia, and China is next.
This is not a spat with China about trade; it’s about the unwillingness of the US to concede influence in Asia to China or as Mike Pence put it more bluntly on October 4th at The Hudson Institute, “China wants nothing less than to push the United States of America from the Western Pacific and attempt to prevent us from coming to the aid of our allies. But they will fail.” This is not an environment in which economic relationships remain unchanged.
One practical example of how this relationship is changing is technology. In Pence’s speech he made it clear that technology transfer was one of the key areas in which the United States administration was pressuring US CEOs to consider when investing in China. The technology that flows freely between countries will no longer flow so freely between those involved in the new cold war – Russia, China and the United States of America. While there are many reasons why technology stocks are falling, the dawning of this new relationship between business and the state is a key driver for lower share prices.
For those seeking a tangible example of such restrictions, the following from Mike Pence’s speech should serve as a warning – “For example, Google should immediately end development of the Dragonfly app that will strengthen Communist Party censorship and compromise the privacy of Chinese customers.” That’s a fairly broad definition of the technology that can be used by a Cold War enemy in pursuing their victory. Many, if not most, companies can find their activities in China construed as supporting the Communist Party given that the Party’s influence extends widely through the Chinese economy.
Investors simply cannot reasonably expect to continue to have the freedom to play their game while the United States of America seeks to stop China from playing what President Trump considers to be ‘that game’ – a missile build up in Asia. Mark Carney (Governor of the Bank of England), speaking in Bali on October 14th at the Group of 30 Conference, tried to spell out the consequences from the new Cold War when he referred to the growing “weaponization of finance.” Carney was careful not to use the phrase weaponizing the US dollar, a phrase that most readers of  The Solid Ground seem to accept represents the new normal.
What Carney talked about, ‘Weaponizing finance’, is something much broader than weaponizing the US dollar. ‘Weaponizing finance’ is weaponizing you! Your analyst finds that those on the front line of this new Cold War with financial assets as a key weapon still don’t even know they are on the front line. Their ‘game’ continues to be to guess whether the next quarter’s corporate earnings will be higher or lower than the level management had previously suggested. That’s a ‘game’ in its own right, but in an age of the ‘ weaponization of finance’ one can’t help thinking that it’s more of a parlour game than the key game in which fiduciaries seek to protect and grow the wealth of savers.
Asset prices are acting to reflect the new Cold War and the weaponization of financial assets. While other factors are operating to cause the collapse of financials share prices (The Solid Ground has been highlighting these for the past few years) the newly accelerated collapse recognizes that such companies are increasingly in the front line of the new Cold War. In a world where the state plays a much bigger role in the allocation of capital, whether under the guise of macro prudential regulation or to support a cold war, it is not realistic to expect private sector corporations to be paid a high fee to accept those state directions.(absolutely)
Capital so directed by the state has more of the features of a utility, and management fees for utilities are never high and are often regulated. While standard analysis sees the ETF as the key enemy of the active manager, it is a shift to more state-directed capital flows that is a bigger risk for the capital management business. Investors should continue to avoid investing in both commercial banks and investment management companies while the market fully digests the scale of this structural change.
So, apart from avoiding investing in financial service companies, what is an investor to do if he/she wants to keep managing money in the new Cold War? Well, it begins by avoiding those countries where the free lunch is being withdrawn. It is unrealistic to expect the countries of Asia under the US defence umbrella to continue to get the use of that umbrella while trading freely with China. The end of that relationship means not just lower growth but higher risk premiums as any Cold War inevitably entails some hotter episodes where those pursuing the conflict meet. (does it ring any bell)
In terms of shorter-term financial implications, your analyst continues to believe in a strong USD, exacerbated by further weakness in the RMB and de-leveraging in EM – well covered in quarterlies from 4Q 2017 to 3Q 2018. At some stage that squeeze creates an illiquidity crisis, particularly in the bond funds that have swelled in size during a primary issuance boom but now find themselves with insufficiently liquid holdings to meet redemptions. If this is correct, the short-term implications continue to be much more deflationary than inflationary for the world, and portfolios should be constructed accordingly.
As we enter the new Cold War none of us can know how hot it might become. Those of us old enough to remember the last one can remember some sleepless nights in Europe, and in some parts of the world real wars were very hot and deadly indeed. All of us hope that we won’t have to read that book again, for as Gordon Lightfoot reminded us, at the height of the last century’s Cold War, when relationships sour it’s a world of heartaches, few if any heroes and it’s more than the endings that are just too hard to take.

NOURIEL ROUBINI

Although the global economy has been undergoing a sustained period of synchronized growth, it will inevitably lose steam as unsustainable fiscal policies in the US start to phase out. Come 2020, the stage will be set for another downturn – and, unlike in 2008, governments will lack the policy tools to manage it.

NEW YORK – As we mark the decennial of the collapse of Lehman Brothers, there are still ongoing debates about the causes and consequences of the financial crisis, and whether the lessons needed to prepare for the next one have been absorbed. But looking ahead, the more relevant question is what actually will trigger the next global recession and crisis, and when. The current global expansion will likely continue into next year, given that the US is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path. But by 2020, the conditions will be ripe for a financial crisis, followed by a global recession.

There are 10 reasons for this.

First, the fiscal-stimulus policies that are currently pushing the annual US growth rate above its 2% potential are
unsustainable. By 2020, the stimulus will run out, and a modest fiscal drag will pull growth from 3% to slightly below 2%. ( exactly because tax cuts is leading to buybacks not increase in capital creation. In case of India the fiscal stimulus is already over ,so called consumption is weakening and capex is not going happening. RBI can extend the cycle by expanding its balance sheet or we can go with a begging bowl to NRI’s)

Second, because the stimulus was poorly timed, the US economy is now overheating, and inflation is rising above target. The US Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020, and that will likely push up short- and long-term interest rates as well as the US dollar. Meanwhile , inflation is also increasing in other key economies, and rising oil prices are contributing additional inflationary pressures. That means the other major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates.(FED raising rates makes US assets more attractive vs other countries)

Third, the Trump administration’s trade disputes with China, Europe, Mexico, Canada, and others will almost certainly escalate, leading to slower growth and higher inflation.( they will not back down. An energy independent US doesn’t give DAMN to rest of the world)

Fourth, other US policies will continue to add stagflationary pressure, prompting the Fed to raise interest rates higher still. The administration is restricting inward/outward investment and technology transfers, which will disrupt supply chains. It is restricting the immigrants who are needed to maintain growth as the US population ages. It is discouraging investments in the green economy. And it has no infrastructure policy to address supply-side bottlenecks.(India will also see STAGFLATION simply because of rising input costs which cannot be passed on because consumer does not have buying capacity)

Fifth, growth in the rest of the world will likely slow down – more so as other countries will see fit to retaliate against US protectionism. China must slow its growth to deal with overcapacity and excessive leverage; otherwise a hard landing will be triggered. And already-fragile emerging markets will continue to feel the pinch from protectionism and tightening monetary conditions in the US.(Oh absolutely, free trade allows inefficiencies to be explored and used for everybody benefit and reverse is also true)

Sixth, Europe, too, will experience slower growth, owing to monetary-policy tightening and trade frictions. Moreover, populist policies in countries such as Italy may lead to an unsustainable debt dynamic within the eurozone. The
still-unresolved “doom loop” between governments and banks holding public debt will amplify the existential problems of an incomplete monetary union with inadequate risk-sharing. Under these conditions, another global downturn could prompt Italy and other countries to exit the eurozone altogether.(This is a big risk to the eurozone and it was good till lasted.The way a country needs a strong leader to unite , Europe also needs that leader. Angela merkel has got weakened by recent election losses and Macron’s popularity is fading … by mid 2019 it would be clear that Europe is on the verge of disintegration)

Seventh, US and global equity markets are frothy. Price-to-earnings ratios in the US are 50% above the historic average, private-equity valuations have become excessive, and government bonds are too expensive, given their low yields and negative term premia. And high-yield credit is also becoming increasingly expensive now that the
US corporate-leverage rate has reached historic highs.( and Powell prefers main street to wall (dalal) street, Market is underestimating the resolve of a different FED governor who wants to bring down the asset prices to reality)

Moreover, the leverage in many emerging markets and some advanced economies is clearly excessive. Commercial and residential real estate is far too expensive in many parts of the world. The emerging-market correction in equities, commodities, and fixed-income holdings will continue as global storm clouds gather. And as forward-looking investors start anticipating a growth slowdown in 2020, markets will reprice risky assets by 2019.(In India the central govt leverage is still low (debt/gdp) as compared to other EM. So Govt can still decide to spend more by borrowing from future but govt spending in India is only for revenue expenditure ( instant gratification) and not for income generating assets)

Eighth, once a correction occurs, the risk of illiquidity and fire sales/undershooting will become more severe. There are reduced market-making and warehousing activities by broker-dealers. Excessive high-frequency/algorithmic
trading will raise the likelihood of “flash crashes.” And fixed-income instruments have become more concentrated in open-ended exchange-traded and dedicated credit funds. and this will lead to higher volatility and lower forward returns).In the case of a risk-off, emerging markets and advanced-economy financial sectors with massive dollar-denominated liabilities will no longer have access to the Fed as a lender of last resort. With inflation rising and policy normalization underway, the backstop that central banks provided during the post-crisis years can no longer be counted on.

Ninth, Trump was already attacking the Fed when the growth rate was recently 4%.Just think about how he will behave in the 2020 election year, when growth likely will have fallen below 1% and job losses emerge. The temptation for Trump to “wag the dog” by manufacturing a foreign-policy crisis will be high, especially if the Democrats retake the House of Representatives this year.

Since Trump has already started a trade war with China and wouldn’t dare attack nuclear-armed North Korea, his last best target would be Iran. By provoking a military confrontation with that country,he would trigger a stag flationary geopolitical shock not unlike the oil-price spikes of 1973, 1979, and 1990. Needless to say, that would make the oncoming global recession even more severe.(of the top 5 weapons manufacturer in the world , 4 are from US and this will be US next big export)

Finally, once the perfect storm outlined above occurs, the policy tools for addressing it will be sorely lacking. The space for fiscal stimulus is already limited by massive public debt. The possibility for more unconventional monetary
policies will be limited by bloated balance sheets and the lack of headroom to cut policy rates. And financial-sector bailouts will be intolerable in countries with resurgent populist movements and near-insolvent governments.

In the US specifically, lawmakers have constrained the ability of the Fed to provide liquidity to non-bank and foreign financial institutions with dollar-denominated liabilities. And in Europe, the rise of populist parties is making it harder to pursue EU-level reforms and create the institutions necessary to combat the next financial crisis and downturn.

Unlike in 2008, when governments had the policy tools needed to prevent a free fall,the policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis. When it comes,the next crisis and recession could be even more severe and prolonged than the last.

 

Dhananjay writes…-India H1 net tax revenue at 40.1% of BE was seen to be the lowest since FY15. The growth has slowed to 7.5% yoy. The mop up in indirect tax collection have been much lower than expected at 1.9% yoy growth. Now with excise duty cut on petroleum products, we expect even a lower indirect tax collection – however the pace of expenditure strengthened to 13.5% yoy primarily due to stronger revenue expenditure at 13.8%. While capital expenditure slowed to 10%. -overall states expenditure also remained strong this year- with revenue growing at
14% and capital at 17%

Outlook: scope of fiscal slippage
With deficit reaching over 95% of BE and capital spending also being at 54% of BE, there is a limited room to curtail capital spending to meet the fiscal deficit target of 3.3% of GDP. With petroleum excise cut, higher revenue obligations especially from subsidies, expected lower tax collections on economic growth peaking out in Q1, rising cost are all likely to increase the pressure on fiscal deficit. Also the impending state and general elections might compel the governments to retain the reflationary path, notwithstanding the narrowing fiscal headroom. Earlier GoI announced lowers market borrowing for H2FY19 by Rs 700bn, which we believe will rebalanced by higher other
borrowings. With fiscal deficit likely to exceed the BE, we believe that the overall borrowing will be somewhat higher.
India G Sec yield has softened in recent days (10 year at 7.87%); this we believe is largely on the back of slower credit demand induced by the NBFC turmoil. we think this may be a temporary.

My two cents…. Market is underestimating the extent of Fiscal slippage and I had already written before that Household consumption is also slowing down simultaneously http://worldoutofwhack.com/2018/10/24/india-sales-managers-index-suggest-slowing-growth/ . Govt is caught in a catch 22 situation because slowing consumption in absence of capex will weigh down on revenue collection and there is not enough space left in Fiscal to do extra spending. Expect slowing growth with stubborn inflation