Macro Posts – Page 49 – WorldoutofWhack

Charts that Matter

As per Bloomberg…..The Number of Company Earnings Call Mentioning “A.I.” or “Big Data” Dipped in Q3. (This is the first QoQ Decline for A.I. Mentions)

At the same time, the number of transcripts mentioning “tariffs” have spiked: Afterall company executives need a reason if earnings don’t meet expectations next quarter

Below is India’s state of finances which is precarious but there is always a way out known as FINANCIAL ENGINEERING

China seems to be pump priming again and FISCAL STIMULUS coming to rescue AGAIN

Global manufacturing output growth at two-year low

The end of the third quarter saw a slowdown in the rate of expansion of the global manufacturing sector. The J.P.Morgan Global Manufacturing PMI™ – fell to a 22-month low of 52.2 in September, down from 52.6 in August. Although the PMI has remained above the neutral 50.0 mark since March 2016, its level has now declined in each of the past five months.

Commenting on the survey, David Hensley, Director of Global Economic Coordination at J.P.Morgan, said: “September PMI data signalled a further growth slowdown in the global manufacturing sector, with rates of expansion in production and new order volumes both easing to twoy ear lows. The trend in new exports remained especially weak, with international trade flows declining for the first time since June 2016. Both domestic demand and export orders will need to strengthen if output growth is to regain lost traction in the coming months.”

In my view companies had build up inventories and stuffed the channels in anticipation of tariff and hence fall in global manufacturing could be quite severe in coming months.

Policy rate has no relevance at this point, guidance is the key

Tamal writes “Frankly, all three possibilities are real—a quarter percentage point rate hike, a half a percentage point rate hike or even no hike (and let the impact of post two hikes sink in). The market will be surprised—not shocked—if RBI goes for a half a percentage point rate hike or chooses to maintain status quo. And, of course, status quo will mean the current situation in the domestic market cannot be taken lightly.More than the rate action, RBI’s guidance will hold the key. It has hiked the policy rate at two successive MPC meetings, citing future uncertainties, and kept the neutral stance unchanged. It’s time to tell the market little more or change the stance if it wants to preserve the relevance of the policy rate.”

Just before last policy SBI increased its deposit rates to align with market and this time HDFC has just increased the mortgage rates by 10 bp based on its cost of funding. The same has gone up sharply since ILFS and NBFC fiasco so mortgage rates will again rise next month based on previous funding cost.

One more headache for RBI is rising crude prices because it creates a Feedback loop where rising prices are spurring higher inflation and expanding already large current-account deficits, further exacerbating the economic hit. An increasing import bill further widens the deficit, which puts further pressure on currency.

“Oil is definitely a risk for those pressured by current account funding issues,” said Sacha Tihanyi, deputy head of emerging-markets strategy at TD Securities in New York. “If we see oil continuing higher, we’ll have to see further monetary and nonmonetary measures in order to help stabilize the external deficit strain.”

In my view RBI will do a carrot and stick approach.

Provide liquidity when and where it is needed but raise the cost of LIQUIDITY to align with global developments and buy insurance cover against a rising inflation next fiscal year.

Online banks are the new competition for traditional banks

Online banks are more technologically advanced, have less operating cost and hence are able to offer better deals to both borrowers and lenders

as WSJ writes “Many large banks have barely increased payouts to depositors since the Fed started raising rates in 2015. Standard savings accounts at Bank of America , for instance, yield 0.03% a year—and carry $8 monthly fees for deposits that fall under $500.

But more online banks offer better returns as they seek to build up lending businesses. Savings accounts at these banks pay an average of 1.35% per year, nearly six times the average of bricks-and-mortar banks, according to LendingTree.

Britain’s Revolut an online bank, has amassed nearly two million customers and was recently valued at $1.7 billion during its third round of funding thus making it the first ever digital-only bank to attain unicorn status. That’s nearly half as many accounts as those held by the country’s much bigger TSB Bank Plc.It is also the only British digital bank to operate across Europe so far. Strong growth in countries like France, Germany and Switzerland and the Nordic region helped drive its user base up by 50 percent in the last two months. Expansion plans are also underway in India, Brazil, South Africa and the UAE.

It is matter of time that we will see these online banks offering better value proposition in India also like DBS digibank which is offering 7% on saving bank but with limited banking options.

Solar Minimum- Biggest Decline Maybe ever

I know we have a global warming crowd over there but what if it is Global “COOLING” aka mini ice age and not Global “WARMING”we are staring at? both are climate change ..

Martin writes “The sun is entering perhaps one of the deepest Solar Minima in thousands of years. Sunspots (higher sunspots more warmth.. lower sunspot more cooling) have been absent for most of 2018. This is really alarming. Since the start of 2018, there have been totally spotless days for weeks. The sun’s ultraviolet output has sharply declined and this is not going to end well. NASA has conceded that if the current trend continues, this could become a dramatic cold period far worse than many people suspect.

Here comes the best part …. where to invest? Agricultural commodities

He concludes … This will be the backdrop to the rise in agricultural prices we see between 2020 and 2024.”

https://www.armstrongeconomics.com/markets-by-sector/agriculture/solar-minimum-biggest-decline-maybe-ever/

How Champions of the Poor Become Tyrants

Hal writes “Since the charismatic champion of the poor is not going to raise taxes on the poor, and the former members of the middle class are now poor, he or she must raise taxes on the rich or inflate. If taxes are raised on moguls and magnates, they will flee the country. Understanding this, the charismatic champion of the poor opts for inflation (see here). To do this, the money supply is increased, which occurs when the champion of the poor directs the nation’s central bank to print new money to buy new Treasury bonds. With each period’s economic losses being pyramided on top of previous periods’, the money supply expands at a geometric pace. This causes the nation’s currency to devalue at an increasing rate.
The moguls and magnates that own commercial, rental, and personal property benefit from the inflation. As the rents they collect grow geometrically in inflation, the real value of their loan principle falls. In a few periods of sufficiently high inflation, inflated rents can be used to pay off loan principle or the equity inflation creates can be leveraged to acquire more property. They can also protect their wealth by purchasing safer currencies or precisions metals, the poor cannot.
The policies that are intended to help the poor — rent control, price ceilings, and the minimum wage — harms the poor, destroys the middle class, widens wealth and income gaps, extinguishes innovation and entrepreneurship, and turns champions of the poor into tyrants.”

https://mises.org/wire/how-champions-poor-become-tyrants

IL&FS: India’s Giant and Insolvent Shadow Bank Needs a Giant Bailout

Hemendra Hazari writes….

In a scathing attack on market participants “Intangible assets which need to be written off from shareholder funds are the culprit, and the significant rise in such assets, which in all likelihood are the losses incurred in the company’s subsidiaries, clearly reveals the problem. How the significance of such a basic disclosure, which is not even hidden in the notes to accounts, can have escaped the board of directors, the auditors, the credit rating agencies, the subscribers of IL&FS debt paper and the regulator paints a pathetic picture of the Indian financial system. Apparently, in all these years, nobody bothered to read the consolidated accounts of IL&FS, which are on the company’s website and hence in the public domain.”

But guys don’t worry Nobody is going to trial, forget jail …..as bureaucrats who sits on co board and who have been recipient of largesse knows ” Baat Niklegi to dur talak jayegi” but you as a common person will pay for this bailout.

https://thewire.in/banking/ilfs-india-shadow-banking-bailout

Flat Inverted or steep…. pick your own yield curve

Yield curve is actually a function of expectations. US is having the flattest yield curve,whereas china, Germany and Japan continues to see steepness in the curve.
The only difference between monetary policy of these four countries is ….. US FED is the only one hiking rates along with shrinking balance sheet, whereas central bankers in other three are still continuing with balance sheet expansion. Investors wants a term premium for longer maturities for these three countries govt debt hence yield curve is steep

India’s govt bond curve has also flattened since RBI has started hiking the rates

Expectation of hiking rates along with real rates in positive territory is akin to containing inflation along with moderating GDP growth. US is hiking inspite of a shit load of debt burden and India will be hiking to maintain the value of currency,but in both cases it is also to make govt debt attractive to investors in face of rising deficit.

Till US and India continues to do rate hikes, long bond yields might not rise and yield curve may actually invert .

what is coming after the yield inversion will be explained once the curve inverts

The art of impossible

Govt Borrowing cut by 70000 cr ……it should lead to lower interest rates right?? No not at all read on

even though 95% fiscal deficit is achieved in apr-aug period. As Satyakam writes … Todays H2 govt borrowing program looks like it has achieved the impossible. Finance minister made following statement on the same day the govt borrowing program was cut (how do you reconcile these two headlines)

Second ,disinvestment target is 80000 cr against current achievement of 9000 cr. Third, expenditure on account of MSP ( 10-15000 cr additional) , Ayushman Bharat ( 10-15000 cr excess), govt subsidy for LPG and Kerosene ( 15-20000 cr) are additional expected outflows. Even then govt can see what we can’t see. Cutting buybacks of Govt security will only make matters worse in 2021-22 where current outstanding is heavy.

We are going back to old ways of pushing the liabilities into the future. Govt will resort to IOU, and this deficit will be funded by leveraging PSU balance sheet and delaying payment to nodal agencies. This will lead to artificial increase in short term credit demand exactly at the time when credit cycle has got stretched because of ILFS fiasco and NBFC funding mismatch.

The deposit creation in banking system is running at 8% YOY and credit demand is around 13%. This additional working capital demand will further widen the gap between deposits and credit, crowding out genuine borrowers.

India and the Emerging Markets

Martin armstrong writes in his blog….As interest rates rise and the dollar, the first casualty will be the Emerging Markets (EM). Because interest rates were driven to absurdly low levels in Europe and the USA, those who need yield ran off to the EM field. This drove capital rushing into the EM sector desperate for yield – especially state operated pension funds.This is why we have a serious debt crisis on our hands. The greenback is STILL going to press higher against the rupee. Just look at the pattern.

This is NOT an isolated high. We are looking at a significant rally still on the horizon for the dollar.

https://www.armstrongeconomics.com/international-news/india/india-the-emerging-market-crisis/