Category: Macro Posts

Indian Equities have been recepient of both local ( MF inflows) and global ETF liquidity.India dedicated ETF have been one of the largest recepient of this liquidity( refer to the chart).  Global liquidity has been deteriorating for last 1 month and if MF inflows continue unabated then we might see markets atleast stalling and catching its breath for some time .

Variant Perceptions writes that “Liquidity conditions have deteriorated meaningfully for EM equities. The left chart below shows that the steep drop in G7 Excess Liquidity points to a risk of much lower EM equity prices in about 3-4 months’ time.This materially worse backdrop for EM equities is happening just when investors are piling into EM assets. If we look at the chart on the right, we can see that EM bonds and equities are seeing the largest ETF inflows over the last three months. Although, we are selectively positive on some specific EM markets (such as Malaysia), overall we believe investors should rotate away from broad EM equities exposure”.

https://blog.variantperception.com/2017/05/12/stretched-sentiment-leaves-em-vulnerable/

 

This time it’s some of the most respected minds in the world propagating theories of a “new era” for risk assets. Jeremy Grantham recently wrote a piece arguing that both equity valuations and profit margins have possibly reached a new, higher plateau:

Jeremy Grantham on why stock prices can remain high..

So, to summarize, stock prices are held up by abnormal profit margins, which in turn are produced mainly by lower real rates, the benefits of which are not competed away because of increased monopoly power, etc. What, we might ask, will it take to break this chain? Any answer, I think, must start with an increase in real rates . Last fall, a hundred other commentators and I offered many reasons for the lower rates. The problem for explaining or predicting future higher rates is that all the influences on rates seem long term or even very long term. One of the most plausible reasons, for example, is the aging of the populations of the developed world and China, which produces more desperate 50-yearolds saving for retirement and fewer 30-year-olds spending everything they earn or can borrow. This results, on the margin, in a lowered demand for capital and hence lower real rates. We can probably agree that this reason will take a few decades to fade away, not the usual seven-year average regression period for financial ratios.
Any effect of lower population growth rates is likely to take even longer. No one seems sure what is causing lower productivity growth or what role it has in lower rates, but it would take some very unexpected good fortune to have productivity accelerate enough to drive rates upward in the near term. Income inequality that may be helping to keep growth and rates lower will, unfortunately, in my opinion, also take decades to move materially unless we have a very unexpected near revolution in politics.

 

Inflation is under control, Currency is well behaved, credit growth at multi year low . “The MPC minutes revealed RBI executive director Michael Patra was of the view a pre-emptive 25-basis-point hike in the policy rate was required to prevent the need for ‘back-loaded’ policy action once inflation was already too high. “The minutes of the RBI’s 6 April policy meeting suggest that the next move will likely be a hike, as highlighted by two MPC members,” Nomura economist Sonal Varma wrote”

I have an alternative explanation for RBI turning hawkish and I think the clue to that lies in the following report

J.P. Morgan is offering regional banks some interesting advice:  Partner Up as U.S. Deposit Drain Looms.. 

JPMorgan Chase & Co. has some advice for regional banks: A deposit drain is coming,

The company’s investment bankers are warning depository clients that they may begin feeling the crunch in December, thanks to a byproduct of how the U.S. Federal Reserve propped up the economy after the financial crisis, according to a copy of a confidential presentation obtained by Bloomberg News and confirmed by a JPMorgan spokesman.

JPMorgan argues that some midsize U.S. banks —  could face a funding problem in coming years as the Fed goes about shrinking its massive balance sheet, according to the 19-page report the New York-based bank has begun sharing with clients.

The Fed is currently holding about $4.5 trillion of securities. The way it will get rid of them is by letting them mature and not buying new ones.

(my view…..the same advice holds true for all emerging countries because QE and reinvesting proceeds by US FED is single biggest reason for flow into Emerging markets including India)

Deposit ‘Destroyed’

JPMorgan’s presentation, titled “Core Deposits Strike Back” illustrates how this process will sap bank deposits using the example of a couple who pays off a mortgage that was bundled with other mortgages and sold to the Fed. Right now, when that couple takes that money out of their bank account for that payment, the Fed uses that cash to buy another mortgage bond, recycling it back into the banking system.

A “deposit is destroyed” if the “Fed does not reinvest,” the presentation states. and that is what FED intends to do “shrinking FED balancesheet”

Midsize banks will have an especially hard time growing retail deposits by ramping up advertising and investing in branches, according to JPMorgan’s presentation. That’s because they lack the marketing muscle of mega banks such as JPMorgan itself, as well as Wells Fargo & Co., Citigroup Inc., and Bank of America Corp.( my view ……swap midsize banks with EM central banks which does not have sufficiently high interest rate differentials over US rate).

The FED rate tightening itself is not a big deal because it only increases the cost of Liquidity marginally but more importantly LIQUIDITY stays ithe system. Most crisis happens when Liquidity is not available, not when cost of liquidity is going up.US Dollar is the reserve currency of world and the largesse by FED ( in the form of QE and reinvesting the maturing proceds back into market instruments) has allowed liquidity to flow outside US borders into any asset deemed attractive including EM bonds and equities. Now FED is telegraphing its intent to remove liquidity and i think this removal of liquidity is the more important consideration in RBI becoming hawkish and preempting FED by preparing market for a rate hike.

 

 

 

More Investors are watching US data more closely and anything related to china has been relegated to inside pages . Even Yuan volatility is too low to warrant a headline. but by focusing so intensely on U.S. political developments, investors risk missing a silent shift in what has arguably been the strongest driver of global reflation in the last five years and more specifically from US presidential election till march of this year……“Chinese credit”. This driver is now moving sharply in reverse.

 

The relevance of the Chinese credit impulse to global reflation cannot be overstated . China’s massive credit stimulus starting in 2014 initially put a floor under commodity prices and emerging market (EM) growth. Then, the unexpected acceleration in Chinese real estate investment drove both commodity prices and volume demand higher. EM growth subsequently bounced, and with it, global trade volumes. The key driver of realized global reflation, then, has been China – not the promise of fiscal stimulus and deregulation that has helped boost confidence and other soft data in the U.S.

As Victor shvets writes…..Reflation has already peaked; EM O/performance to weaken 

” We maintain that reflationary wave had already peaked in Mar’17, and should weaken through the balance of the year. While China remains the greatest danger, it is also the world’s ‘guardian angel’, with capacity for further stimulus. However, in the absence of much deeper dislocation, we expect China to prioritise stability. As disinflation strengthens, we believe that EMs relative performance will weaken”

 

Middleman Pain is Farmer Gain

The dismantling of compulsory selling to APMC traders has led to the creation of weekly markets with farmers directly selling fruits and vegetables. News reports suggest that there are a few hundred of these markets across the state of Maharashtra. Farmers are very happy in being able to sell to the public directly. There are multiple reasons for the same. First, they get a better price for their produce with the middle men out of the way. Second, they get their money immediately instead of when they sold their produce to an agent at a mandi, up until last year. Third, lesser amount of vegetables and fruits are wasted given that what is produced is sold almost immediately This is also an excellent example of how any government can enable citizens to carry out their work honestly, by getting rid of provisions which hamper the ease of doing business. This is an impact of a decision that the Maharashtra government took in June last year. It basically allowed farmers to sell their produce in the open market. Up until then the farmers could only sell their produce to traders licensed by the Agriculture Produce Marketing Committees (APMCs). This is something that needs to happen throughout the length and the breadth of the country. Farmer markets need to bloom. Nevertheless, as a report in the Mint points out, only “15 states allowed the delisting of fruits and vegetables from APMCs, making it possible for farmers to sell these outside regulated markets.” This tells us that other states are still bowing to the pressure from the trader lobbies.i believe the dismantling of APMC act is a step in right direction will lead to more money reaching the farmer instead of filling the pocket of middleman.

Read More

https://www.equitymaster.com/diary/detail.asp?date=05/02/2017&story=2&title=One-Friday-the-Day-the-Cynic-in-Me-Died-Just-Briefly&utm_source=dr&utm_medium=website&utm_campaign=e-letter&utm_content=recent-articles

The last remaining cheap asset

What’s that line legendary strategist Don Coxe likes to use? “The most exciting returns are to be had from an asset class where those who know it best, love it least because they have been burnt the worst?” Grains and other agricultural commodities have been a vicious bear market in real terms. Technology has caused grain prices to resemble the price decline of a 80386 microprocessor chip. Whether it be from improvements in fertilizer and pesticides, to the introduction of self-driving farm equipment, the modern farmer has become dramatically more efficient over these past few decades. Maybe Monsanto will come up with even better super grain seeds to create the fountain of perpetual food. Maybe we will figure out ways to automate the remaining last few jobs left on the farm to squeeze costs even lower.I just don’t buy that progress can continue at this pace. I have no doubt that farmers will continue improving, but I suspect the large gains are behind us. The moves from here will be incrementally smaller. Great technicians like Peter Brandt are raising the possibility a long-term bottom might be forming. And then, shrewd macro traders like Raoul Pal, are advocating buying grains from a fundamental perspective. But few are talking about the real reason that grains offer a compelling risk reward from the long side. If this Central Bank experiment goes off the rails, we could have a return of 1970’s style inflation. That happens to coincide with the last great bull market in grains.

Read More

http://biiwii.com/wp/2017/04/28/the-last-remaining-cheap-asset/

Cards and ATM to be redundant in India by 2020

The value of mobile money transactions have more than doubled since the nullification of 86 per cent of India’s cash in circulation in November, while those made with credit and debit cards has fallen, and cheque purchases have barely budged. Mobile payments still make up only a small percentage of overall transactions, but their surging popularity is being noticed.At this rate, cards and automated teller machines could be redundant in India by 2020, predicted Amitabh Kant, head of NITI Aayog.Mobile wallets could be the next example of countries pole-vaulting to the latest technology, in the same way that some emerging markets went directly to using cellphones. More merchants already accept payments from Paytm, India’s largest mobile-payment company, than accept credit or debit cards in India. There are only 2.5 million card-scanning machines in the country, while 5 million merchants accept Paytm through their smartphones.Paytm aims to more than double that number this year. “In the future, everything will be mobile,” said Vijay Shekhar Sharma, chief executive of Paytm parent company One97 Communications. Mobile payments will become “bigger than plastic,” he said.Indian shop owners and consumers can download any one of more than 10 competing apps, of which Paytm is the market leader, with 218 million mobile wallets.The company counts China’s online retail behemoth Alibaba among its backers and is set to receive a new investment of more than $US1.5 billion from SoftBank in a deal that could be announced as early as this week. ( again a case of winner takes all and a privately owned company),While many Indian families have access to a bank debit card, a vast majority only use it to get cash out of ATMs, if ever. Credit cards have been in India for decades, but there are still only 30 million in the country. In 2014, fewer than 5 per cent of Indians over 15 had credit cards, while 60 per cent of Americans did.“Cards had their time,” but they never took off in India, said Vivek Belgavi, partner and financial tech specialist at the Indian arm of PricewaterhouseCoopers.

Read More

https://www.wsj.com/articles/indias-cash-crackdown-prompts-more-to-pay-by-phone-1493467234

Hundreds of Lake but running out of water

When the IT industry exploded, though, the planning seemed to seize up. Or perhaps it simply couldn’t keep pace. In 2004 it was a trip to Bangalore that inspired New York Times columnist Thomas Friedman’s wide-eyed epiphany that “the world is flat.” The city—having raced from obscurity to compete handily with American tech hubs—became Friedman’s go-to mascot for globalization in overdrive. The question of stressed resources, however, rarely factored into Friedman’s columns, and it seemed to figure only casually in the city’s own calculus.BANGALORE once famous for hundreds of lake HAS A PROBLEM: It is running out of water, fast. Cities all over the world, from those in the American West to nearly every major Indian metropolis, have been struggling with drought and water deficits in recent years. But Banga­lore is an extreme case. Last summer, a professor from the Indian Institute of Science declared that the city will be unlivable by 2020. He later backed off his prediction of the exact time of death—but even so, says P. N. Ravindra, an official at the Bangalore Water Supply and Sewerage Board, “the projections are relatively correct. Our groundwater levels are approaching zero.” Bangalore, once famous for its hundreds of lakes, now has only 81. The rest have been filled and paved over. Every year since 2012, Bangalore has been hit by drought; last year Karnataka, of which Bangalore is the capital, received its lowest rainfall level in four decades. But the changing climate is not exclusively to blame for Bangalore’s water problems. The city’s growth, hustled along by its tech sector, made it ripe for crisis. Echoing urban patterns around the world, Bangalore’s population nearly doubled from 5.7 million in 2001 to 10.5 million today. By 2020 more than 2 million IT professionals are expected to live here.

Read More

http://economictimes.indiatimes.com/markets/stocks/news/what-i-read-this-week-is-bangalore-becoming-unliveable-credit-cards-atms-to-be-dead-soon/articleshow/58559982.cms

The value of mobile money transactions have more than doubled since the nullification of 86 per cent of India’s cash in circulation in November, while those made with credit and debit cards has fallen, and cheque purchases have barely budged. Mobile payments still make up only a small percentage of overall transactions, but their surging popularity is being noticed

At this rate, cards and automated teller machines could be redundant in India by 2020, predicted Amitabh Kant, head of NITI Aayog.

Mobile wallets could be the next example of countries pole-vaulting to the latest technology, in the same way that some emerging markets went directly to using cellphones. More merchants already accept payments from Paytm, India’s largest mobile-payment company, than accept credit or debit cards in India. There are only 2.5 million card-scanning machines in the country, while 5 million merchants accept Paytm through their smartphones.

Paytm aims to more than double that number this year. “In the future, everything will be mobile,” said Vijay Shekhar Sharma, chief executive of Paytm parent company One97 Communications. Mobile payments will become “bigger than plastic,” he said.

Indian shop owners and consumers can download any one of more than 10 competing apps, of which Paytm is the market leader, with 218 million mobile wallets.The company counts China’s online retail behemoth Alibaba among its backers and is set to receive a new investment of more than $US1.5 billion from SoftBank in a deal that could be announced as early as this week. ( again a case of winner takes all and a privately owned company)

While many Indian families have access to a bank debit card, a vast majority only use it to get cash out of ATMs, if ever. Credit cards have been in India for decades, but there are still only 30 million in the country. In 2014, fewer than 5 per cent of Indians over 15 had credit cards, while 60 per cent of Americans did.

“Cards had their time,” but they never took off in India, said Vivek Belgavi, partner and financial tech specialist at the Indian arm of PricewaterhouseCoopers.

 

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/