Making sense out of Chaos
Unemployment down, small business which generate employment….booming, order backlog at 14 years high….wages are still contained, consumer spending weak but business spending rising and on top of that Corporates lining up to buy back USD 1 trillion of their own stock. If u look at these charts ….US economy has never looked stronger compared to Emerging markets Capital is always fungible and mobile so why shouldn’t the capital move back to US from Emerging markets
Dollar return is essentially what international investors see . In 2017, the average country ETF return was +28%. This year so far: -0.3% and India return in -5.3%
On the day when US prepares to collapse the nuclear accord, Iran find itself very vulnerable. The economy is in shambles, inflation and unemployment running high….regular public protest breaking out against government and currency collapsing . The official exchange rate is 1Usd=42000 rial but there is a serious shortage of dollar in Iran so the black market rate ( below graph) is running almost 40 % higher than official rate Needless to say Iran needs this deal more than ever
Indian households it seems are no longer happy with only credit card and personal loan so it was but natural that we will lap up any other way of leveraging. Payday loans is basically a western concept of discounting future wages/salaries and there are shops in prominent neighbourhood in US/UK etc because it is a very profitable business . India is seeing mushrooming of payday lenders backed by private equity money and NBFC are also becoming aggressive in lending The Advertisements for payday loans make them seem like a fast, easy, no-nonsense way to get money when you’re in a financial bind. They tell you getting as low as 1000 rupees is as easy as showing a recent pay stub, a copy of your driver’s license, and a blank check. Little do people realise this is one more way of getting into debt trap
….a country which has defaulted on its foreign obligations time and again and have also seen currency devaluation and hyperinflation raised 100 years money from international bond markets last year around 8% . The liquidity coming into EM was so strong last year that this issue was oversubscribed and the bond even traded at premium. Now the liquidity is turning away from Emerging Markets and as warren Buffett says You only come to know who is swimming naked when the tide turns
India has become rich but most Indians have not participated in this growth. Stark concentration of wealth in india represented by Body mass Index (poor state of nutrition)which is lower than Philippines, Pakistan and Morocco
Three things matter for economy to sustain …….liquidity, low interest rates and credit growth. There is almost a 100% probability that FED will hike the rates this week. Liquidity is still abundant as ” A Goldman Sachs index of financial conditions that takes into account credit spreads, equity prices and other market gauges, this month suggested the easiest conditions since early 2015, before the Federal Reserve began lifting rates. Another measure of stress in US money markets fell to near its lowest in seven years, while measures of expected stockmarket swings have been at the lowest in a decade”.
Global credit growth is where we need to be concerned but first back to memory lane http://worldoutofwhack.com/2017/05/08/global-credit-impulse-goes-negative/
The below chart was published by UBS earlier this year where they noted …. back in Jan ’16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China’s contribution is -0.3% of global GDP).
But this freshly baked chart from UBS Kapetyn nail it on credit growth front when he writes , the global credit impulse is still falling. And yes, it matters because the correlation of this global credit impulse with global domestic demand is 0.61.”From peak to trough the deceleration in global credit growth is now approaching that during the global financial crisis (-6% of global GDP)
UBS writes further
Over the last 6 months, the culprits are the US and China (given large GDP weights) but the size of the declines in, Germany, Italy, and Mexico are notable. And the message from the impulse response functions is basically that global Industrial Production and import volume growth have peaked.
I have also been watching the auto sales numbers and credit card defaults in developed world and it seems consumers are getting tapped . SO, unless govt expands it balancesheet , global economic growth has peaked for this year and FED might be hiking rates at wrong time.
Monetary Policy Committee (MPC) decided to: keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent.Consequently, the reverse repo rate under the LAF remains at 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.50 per cent.The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
Five members were in favour of the monetary policy decision (this is a hawkish MPC) willing to overlook near term fall in inflation . If the configurations evident in April are sustained, then absent policy interventions, RBI believes headline inflation is projected in the range of 2.0-3.5 per cent in the first half of the year and 3.5-4.5 per cent in the second half. (We are talking about 200 basis points of real policy rates).
The following is the main reason they are not changing the bias of monetary policy
The risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers. At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission’s award are upside risks. The date of implementation of the latter is still not announced and as such, it is not factored into the baseline projections.
The current state of the economy underscores the need to revive private investment, restore banking sector health and remove infrastructural bottlenecks. Monetary policy can play a more effective role only when these factors are in place. Premature action at this stage risks disruptive policy reversals later and the loss of credibility. Accordingly, the MPC decided to keep the policy rate unchanged with a neutral stance and remain watchful of incoming data.
My view
RBI is clearly unhappy with loan waivers which will not be restricted to maharashtra or UP ,but other states will also be under pressure to announce waivers in run up to 2019 lok sabha election. Farm loan waiver is a kind of QE in itself hence absence of any additional monetary policy support will not hurt equity markets although stretched valuations remain a concern .Bond yields are more influenced by rate action and we will not have any more rate cuts in this cycle ,hence Govt bond yields should be bottoming out in next few days .
what will happen to growth and asset prices if govt of India spends 300000 ( roughly 2% of GDP) crore in a quarter? Well… This is the amount of liquidity as a % of GDP which US treasury unleashed into the money markets when it let the cash balances of the US Treasury run down so the government wouldn’t breach the debt ceiling. At the same time, the Fed was trying to tighten financial conditions by hiking in December 2016 while the Treasury unintentionally floods money markets with $400 billion ( roughly 2% of US GDP) in cash in the 1st quarter of 2017.In reality, the US Government actually spent US$400bn which ended up in deposit accounts which were not simultaneously drained by sales of Treasury Bills.
So…the system was flush with an additional US$400bn of dollar reserves.
Think what this high powered money can do to asset markets and there you have ……markets after markets making a new high
US Treasury Cash Balances at Federal Reserve Banks plummet to prevent a breach of the debt ceiling. (chart below)
Now we know what created the liquidity mirage, weakened the dollar, and sent EM & precious metals rallying through the first half of the year
At some point in near future when Americans will solve their debt ceiling problem, US treasury will have to replenish this liquidity by issuing Treasury bills/notes and that would be the time we will have tightening of dollar liquidity and bid under US Dollar.
R jagannathan writes ……The case for a rate cut has never been stronger. So, when the Monetary Policy Committee (MPC) meets on 6 and 7 June, it should recommend a 50 basis points cut in the repo rate.
The last two policies saw the MPC and the Reserve Bank of India (RBI) turning cautious. They have been fretting more about inflation and less about growth, with the February policy shifting the central bank’s credit stance from “accommodative” to “neutral”. The April policy maintained status quo.
Luckily for the Indian economy, the demonetisation of high-value notes in November last year created a huge cash surplus with the banking system, enabling them to cut deposit rates and also lending rates on retail loans.
My view
I believe we will see a change in policy guidance ( neutral to dovish) from RBI and although i do agree with some points made in the article https://swarajyamag.com/economy/governor-urjit-patel-must-take-a-deep-breath-and-offer-a-50-bps-rate-cut-on-7-june by R jagannathan , I think it is too early to call for a rate cut although this would possibly be the small window of opportunity opened just before GST kicks in and dismal US NFP (employment) data. Banks flush with money from demonetisation have not only slashed deposit rates but lack of credit demand has led them to slash consumer loans and mortgage rates aggresively. Even market determined rates ( bonds and cp) have come off sharply since demonetisation. The only rates which have not fallen is Govt securities and SDL ( state development loans) and that is owing to excess ownership and supply of paper rather than demand.The corporate credit demand has been muted for sometime because companies are running down their inventories as there is uncertainity of GST impact of these inventories and hence that is one reason even working capital demand is weak.RBI can always give a reason that they will take a call on monetary policy after they see the impact of GST on inflation.
India needs growth momentum to sustain and in absence of corporate capex either Govt will have to expand its balancesheet and continue spending like it did in Jan-Mar quarter or monetary policy needs to make consumer borrowing (mortgage and other consumer borrowing) and value of assets more attractive by cutting rates .
( I must point out here that i am not in favor of leveraging household to generate growth without corresponding increase in employment opportunities and wage growth)
We will come to know in this policy whether RBI is willing to take this risk and share Govt’s Burden