Category: Macro Posts

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.

1.Capacity utilisation crosses 75%. Probably the most important piece of data for Indian economy  ……….why?
Till now govt spending and household consumption has kept the economy growing but both C ( consumption) and G (governement spending) cannot give a long term boost to the economy. It has to come from Private Capex (I) and
once capacity utilisation reaches around 80% I expect Private sector to start putting new capacities and the baton of lifting GDP growth can be passed on to the Private sector which is more sustainable

2.Financial engineering (stock buybacks) have been adding support to the share price of Apple but as Andy Kessler at WSJ writes “Smartphones are now like radial tyres. Everyone has one and they don’t wear out. Phone franchises are fickle. Ask Motorola and Nokia, if you can find them.One near- term sign of distress, Marketing tech products with splashy colours, as steve jobs did with tangerine IMacs is almost over.Apple hopes to make it up in services, but google leads in Maps, Netflix in video, and UBER in transportation. Apple is falling behind in most other growth segments. The company’s destructive seed is its desperate need for a new product category. it won’s be watches”

3.Japan Bond market finally revolted against its central bank resolve and forgot that there is a lid on bond yields.

Japan 10 year bond yield yesterday rose 100% in one day…….. yes it went from 0.06% to 0.12% .
Now with JGB yield rising (It’s frightening how US yields have been pinned down by foreign buying) ,US yields have also picked up. If 3.25% goes in 30yr yields watch out for spill over to other markets including EM bonds.

 

4.Fidelity went to zero fees on their ETF . I mean WOW. I guess they would be making money from SLB ( securities lending and Borrowing). It is a matter of time we will see plethora of low cost ETF in India .

1.Google trends throws one more interesting trend. The search for “Insurance” reach five year low which is a matter of concern more so when penetration levels are still quite low.

2.For the past year, Kyla Jackson has been one of the only teenagers in the world who gets a ride to high school from a robot.When she’s ready to start her day, Kyla summons a self-driving car using the Waymo app on her phone. Five minutes later a Chrysler Pacifica run by the autonomous vehicle arm of Google’s parent company, Alphabet Inc, stops at her home in Chandler, Arizona.
Alphabet is experimenting with prices and finalizing its business model before unleashing its autonomous fleet in Phoenix this year.

3.After five straight months of positive inflows, China saw net capital outflows in June. Further weakness in the RMB could trigger another episode of capital flight. Chinese authorities might become more proactive this time before Capital outflows start to accelerate. Last time when Capital fled China it created a bubble in Real estate from vancouver to Sydney .

India is also seeing its own version of Capital outflows with wealthy Indians leaving India with their money.

1.In an inflationary environment … do NOT expect bonds to act as a hedge to lower equities ( very evident today). As the correlation between prices moves positive modern portfolio theory i.e. long “a diversified pool of assets” will get crushed, especially Risk Parity (Julian Brigden)

2.Dimnishing Returns-Consequences of Excess Debt
One of the most important concepts in the world to understand e.g why debt globally is expanding at 3,4,5X the rate of GDP growth.We might be in awe of china growth but see the sharp fall in GDP created per dollar of Debt.

I wish I had this data for India to compare, although I am pretty sure that our debt productivity is higher than all other economies shown in this chart (because of higher inflation).

3. It seems everybody is long dollar at same time and I think if dollar stalls here, we might see some short term relief rally in Emerging Markets

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4. Great chart from IIF , they have named it “Trade Tantrum”

SBI has again raised deposit rates, not waiting for RBI signal.. albeit marginally,not only for shorter duration upto 90 days but also for longer maturities. They are not only realigning their rates to market but also making a judgement call of taking long term money 50 bp higher than last time.SBI was the biggest beneficiary post demonetisation and had got huge float money.So they never needed high cost time deposits hence they had cut deposit rates deeply so as to disincentivise any deposits flowing to them. In fact the entire banking system was flooded with more than 15lacs crore of almost free money lying in deposits and hence cut the rates deeply to make time deposits unattractive. This, in my view was the biggest reason that disheartened fixed deposit investors went all in to Mutual funds and insurance products.
But I am digressing from the topic. So cutting the long story short couple of things have happened in last one year.
1. The float money which SBI all along thought will become more permanent in nature has all been withdrawn and
2. Credit demand is becoming more durable in nature and higher bond yields are here to stay.
leading to double whammy for banking system and especially SBI.
They are not having enough deposits to fund credit demand …..period.
So they have gone ahead and raised the rates and not waited for RBI rate verdict tommorow.
Infact RBI can only influence overnight rates, not the deposit rates which banking system should be offering to their depositers and that is why what SBI did today is more important then RBI policy decision.
If banking system starts receiving enough deposits (I doubt) at these deposit rates to satisfy credit demand and reduce the gap between deposit growth rate and credit growth rate then this is the top in interest rates, so watch out for that gap more than what RBI is going to do tommorow

 

https://www.livemint.com/Industry/bZXX8b7b3K0loAGhKPWs1K/SBI-increases-interest-rate-on-FDs-Latest-rates-here.html

1.It’s time for schools to teach Python, not Java, as their main intro to computer science. Along with being easier to learn and *actually* able to run anywhere on anything (like Basic back in the day), it’s the dominant language of AI and computer vision. My daughter took her first lesson in Python and she really liked it

2.The sector behaviour is extremely ‘weird’ from the last time we were at new highs.
Peak to Peak Analysis:
1. Defensives roaring all the Way
2. High Beta struggling,
3. Rest others are just about very patchy performances. ( Kunal Bothra)

3.Chinese economic data has weakened significantly and in last one week the authorities have blinked and we are back to the escalation of Chinese stimulus / easing .Why should  it matter? Because chinese credit creation is responsible for almost 50% of global credit creation in last 1o years and in my view this will lead to Potential commodities/cyclical melt up and value stocks outperforming growth equities

4. US Nominal GDP (real GDP at 4.1%) came at 7.4%. Rising velocity of money is normally associated with rising economic activity,rising inflation and higher bond yields.So who is putting bets on curve steepening?

1. Burton Malkiel did perhaps more than anyone to popularize the notion that investing expertise is overrated in his classic book “A Random Walk Down Wall Street.” Despite some overwhelming evidence before and after the book’s publication and the rise of passive index funds, the Sohn Conference (where market experts give their best investment idea) is closely followed and attended by thousands of paying investment professionals.In an experiment done by WSJ,the returns by Dart pickers (just random people) beat the returns of some of the smartest investors.

The returns of dart pickers is in blue and investment experts in red

2. See these states colored in RED, well it is such a relief  to say that India has got normal monsoon but these states which will return more than 1/3 of lok sabha members next year are facing serious monsoon deficit….. . I am pretty sure there is one more financial relief package in offing.

3. Congratulation, now you can finally receive 1% for loaning 30 year money to Japan. What a deal!!!!!

4.The global digital health market has been valued at 118 billion dollars worldwide, according to industry research firm Statista. It is expected to reach a size of 206 billion by 2020, driven in particular by the mobile and wireless healthtech market. Managing patient data, telehealth applications as well as fitness and wellness, and consultation or remote control solutions via smartphones and interconnected healthcare devices are all driving growth in this area. Thanks to the robust outlook for this sector, healthtech trends may prove interesting when it comes long-term investment strategies.

1.Public sector projects under implementation are just money Guzzler and they are mostly not viable and never answerable to anybody because GOVT owns them on behalf of you and me . This will only increase the public debt which the govt will repay by either increasing taxes or through inflation.

2.Home Prices in dream city down 5% and if you have cash to pay then probably it is down 15%.I strongly believe Indians are making big mistake of buying houses when rental yields are closer to 2% ,10 year bond around 8% and inflation around 5%.Throw in rising Property and municipal taxes,renting is big winner by margin.

3.WASH RINSE REPEAT
Beijing made it clear that it will work to boost growth in response to the rising risks to the economy. They must be in a bad condition thats why they blinked, monetary tightening is now off the table. The stock market moved higher in response and commodities will follow like clockwork.

4.If you want a weaker dollar, best avoid having one of the strongest global economies, encouraging Capital inflows. You can’t have your cake and eat it too but Trump does not know that right?

5.That was the single most value destroying earnings con call in history.Facebook shares simply collapsed in after hours trading after the company missed revenue and growth forecasts. The loss in market cap was USD 140 billion, more than the market cap of any listed Indian company.