Category: Macro Posts

Honestly ask yourself … 30 year of ultra low rates in Japan couldnt ignite inflation.One of the greatest monetary experiments in financial history has been the global central bank buying of government debt. This has been touted as a form of “money printing” that was supposed to produce hyperinflation, which never materialized as predicted by economists. Nevertheless, the total amount of Quantitative Easing (QE) adding up the balance sheets of the Federal Reserve (Fed), the European Central Bank (ECB) and Bank of Japan (BOJ) is now around $13.5 trillion dollars, which by itself is 7 times the size of India’s GDP, sum greater than that of China’s economy or the entire Eurozone for that matter.If QE failed to produce inflation, then ending QE may actually produce the inflation people previously expected. Where’s the strange logic in that one? Well you see, it really does not matter how much money you print, if it never makes it into the economy, it will not be inflationary. Additionally, even if it makes it into the economy and the people hoard for a rainy day, it still will not be inflationary.The craziest thing the Fed did was create excess reserves. The bankers complained that the Fed was buying the government debt so they would have no place to park their money. The Fed then accommodated them creating the Excess Reserves facility and paid them interest for absolutely no reason whatsoever. Almost $3 trillion was parked at the Fed collecting interest so this  “printed” money never made it out the door  and hence there was no inflation.The pundit keeps calling for a crash in the stock market but overlooked the fact that retail participation is at historic lows. Why? They were hoarding their money..( in bad times you dont go and spend money you hoard it because you feel scared).

So how does stopping QE actually create inflation?

The withdrawal of the Fed, the ECB and the BOJ from the QE programs will lead to an increase in yields on the bond markets sending the financing costs for the states higher. This will now increase government spending & borrowing much more rapidly even if they fail to increase program spending.
Governments have increased their spending sharply because interest rates were effectively zero and the central banks were buyers. Where the national debt under Ronald Reagan reached $1 trillion for the first time, Obama routinely ran $1 trillion budgets annually.
So the moment of truth is upon us when rising rates will lead to rising inflation. Rising inflation is good for equities and not for bonds. Global outstanding loans and bonds are 4 times the size of globally listed equities and more than USD 9 trillion of listed bonds are still negative yielding making more and more pension funds under funded.

Can you imagine the move in equity markets if some of this money hiding in bonds start moving to equities due to final arrival of INFLATION???

PS  Three markets in G-20 have broken out to new highs ….US equities, German DAX and NIFTY (although they are due for some consolidation/correction)

Singularity University, based in NASA Campus in Silicon Valley is the world’s leading learning-cum-incubator university for innovation and technology set-up in collaboration with NASA, Stanford etc and we had leading Silicon Valley entrepreneurs presenting here including the guy behind Google Maps.

*OBSERVATIONS OF VARIOUS SPEAKERS THERE*

We are witnessing  more disruption in human history over next 10-20 years than what we have seen in the last 20,000 years. Their prediction is that 60% of Fortune 1000 companies will be out of business in just next 10 years.

There is a convergence of exponential development & convergence of technologies and also business models across industries (Blockchain, Artificial Intelligence, Biotech & Genetics, 3D Printing, Solar Energy, Cellular Agriculture etc). These are no longer technologies in the lab, but are already commercialised. So a 10 year old for example will never need to go to college or ever get a driver’s license!

KEY actionable and insights for every business are 1. Organisations built for the 20th Century are destined for failure. Organisations built for efficiency and predictability will fail. They are unable to think and grow exponentially but are predicated on linear growth models. We all come from scarcity mindsets where is the world is moving rapidly to abundance. Ability to rapidly iterate, learn and execute will be required. Today’s 18 year old has the ability to approach the same problem very differently and successfully.

2. People from completely outside the business will end up disrupting these businesses (Zerodha did it to broking businesses without any background). Exponential is when you can deliver price-performance which is 10x better – not 20-50% better. There are several areas and technologies where price-performance is doubling every 12-18 months (Moore’s law from Intel days).

3. Everything which is information based will priced at or move quickly to ZERO. They call this “democratisation” of information (We are seeing signs of this in Equity Research, MF Distribution etc).( In the Dec 2016 quarter, there were more than 450 conference calls held by corporate bodies discussing quarterly results, with discussion note available while I remember less than 50 per quarter a decade ago. Institutional Investors with their superior management access will not offer any distinction in investment performance though may suffer from their herd behavior). The sorry state of mutual fund industry in the US is a prime example in front of us.Entrepreneurs will have to work on alternative revenue streams. Huge implications for all businesses. (Zerodha makes money from float rather than commissions,so is Alipay and so will be Paytm ). Move towards building platforms rather than products. (Google, Apple are platforms whereas Blackberry, Yahoo etc were products).

4. Everything is moving to a Service/Subscription model from a Sales model. Rolls Royce has moved to this model for their aircraft engines! They no longer sell engines. They charge for hourly use and provide analytics on actual usage to optimise for their clients.

4. Large organisations cannot change and do not have the time to change. There is an immune system response, legacy business becoming a barrier and hierarchical structures where anyone over 30 years of age today has very limited clue as to what is happening to the world which will prevent organisations from rapidly transforming.

5. The recommended solution for large organisations is to build teams completely outside their existing business
– which have NO people from existing businesses
– They are given he mandate to build a business model which completely disrupts our own existing business, leveraging these key trends
– to set up a multi-skilled team of 6-7 people which is under 35 years of age, NOT from the existing business or people who are the most willing to challenge status-quo
– Housed independently with no corporate processes at all
– Working on lean startup principles (Design thinking/MVP/Agile)

If such a business turns out to be successful, do NOT bring it back into the Mother organisation. Always keep it independent. In fact, make that the centre of gravity for building new businesses. (Unilever has implemented this globally and 5 of such initiatives/products have become the most profitable of all)

Framework for building Exponential Business Models

Each business needs to drop the vision, mission statement and have a simple Massive Transformational Purpose (MTP) that everyone in the team can understand and aspire to. For example Google has “To organise the world’s information”

Businesses need at lease 4-5 of the following 10 things to create exponential growth.

*S-C-A-L-E & I-D-E-A-S*

S – Staff on Demand (Uber)(How many full-time employees vs Contractors) C – Community & Crowd involvement (Google Maps, Facebook, Quora etc) A – Algorithms (Uber – Matching drivers and passengers, Amazon – recommendations) L – Leverage existing Assets (AirBnB, Uber)(You must never own assets) E – Engagement (Contests, Gamification to driver user engagement)

I – Interfaces (Tech that allows external world to connect seamlessly and easily, example App Store) D – Dashboards (Real-time MIS on key metrics, knowing every key metric in real time) E – Experimentation – (Ability to constantly experiment, iterate and learn) A – Autonomy (How much autonomy to the lowest levels to decide) S – Social (How do you leverage social networks to listen, learn and engage).

We rarely stop to think how important inflation is to the economy. For example, if inflation is sufficiently high, it will slightly offset normal depreciation in values of homes and business properties. Thus, home and business property values will tend to slightly rise over time. If banks can count on values of structures rising, rather than falling, over time, lenders can assume that mortgage loans are fairly risk-free, because the lender can count on getting its money back through the sale of the property, if the mortgage-holder defaults.

This same principle holds when energy and commodityproperties, such as coal mines , steel plants and oil fields, are financed. As long as energy prices keep rising, there is a good chance loans can be repaid. Once energy prices fall, debt defaults become a problem. Oil exporting countries also find that the taxes they can collect fall significantly. As a result, energy-exporting countries are in a far worse economic position once energy prices fall. Exporters of other commodities, such as metals, have a similar problem if prices fall.

In the last two paragraphs, I mentioned the impact on lenders and governments of rising or falling prices. Owners of properties are also affected by rising or falling prices. If prices rise, these owners can sell their assets, and make a profit. In fact, these owners have often purchased their properties with debt. If the price of the property rises, but the amount of debt is unaffected by inflation, the owner of the property can often get a disproportionate benefit of the price rise. Of course, if the value of a property falls, the property-owner is disproportionately affected by the fall of the price.

We are so used to a rising-price scenario that we have little understanding of how a flat or falling price scenario might work .

If commodity prices fall then  a person can see why a commodity-producing country/company might have a big problem, if the price of that commodity suddenly falls. There is huge “balance sheet” impact that doesn’t directly affect current GDP/Balancesheet as reported (since GDP/balancesheet has to do with current value of goods and services produced). But it can have a major impact , as it goes forward, because affected loans are much less likely to be repaid. Lenders often try to be lenient with commodity producing countries/companies, hoping that commodity prices will rise again. But if the drop in prices is permanent, commodity producers must use more and more extreme measures to hide the problem of loans that have a low probability of repayment in a low-priced commodity environment. Eventually, these loans seem likely to default, if prices do not rise sufficiently. China , PSU Banks and many commodity-exporting countries seem to be affected by this problem.

Conclusion

We have kept Global Economy expanding through growing debt use ( china is responsible for more than 70% global credit growth in last five years) and growing energy use.Now there is just too much buildup of debt globally and we seem to be reaching the end of the line. The global economy is getting very close to stall speed.

Central Bankers globally talk about 2-3 percent as inflation target but i am pretty sure they must be silently praying for higher inflation. The Federal Reserve talks about inflation rates above 2% being too high, but inflation rates below 2% are at equally problematic. Somehow, the debt system needs to keep operating for the whole system to work and for it the world needs HIGHER INFLATION NOT LOWER INFLATION.

Read More below

https://ourfiniteworld.com/2017/04/17/the-economy-is-like-a-circus/

 

WhatsApp is the most popular messaging app in India, with over 200 million users — more than it has in any other market. And to capitalize on this, the company is reportedly planning to launch a digital payments service in the country some time in the coming months.

What exactly WhatsApp will offer users isn’t clear at this point, but the move is logical, perhaps even necessary. Since Facebook bought WhatsApp in 2014 for $22 billion, the app has continued to grow in popularity and now boasts more than 1.2 billion users. But, it has yet to find a way to monetize its user base.

Infosys co-founder Nandan Nilekani welcomed popular instant messaging app WhatsApp’s possible entry into India’s digital payments space. According to a job advertisement on WhatsApp’s website, the company is looking to hire a digital transactions lead in India with a technical and financial background and “ability to understand and explain UPI (Unified Payments Interface), BHIM, Aadhar number”. India is WhatsApp’s biggest market, Nandan Nilekani, the architect of biometrics-based citizen identification program Aadhaar, said on microblogging site Twitter: “It looks like WhatsApp is joining the WhatsApp moment in Indian banking!”

Over the weekend i found some interesting snippets “The Prime Minister Narendra Modi announced on Friday the 14th, that 75 cities will be designated cashless/less-cash townships, with an overwhelming 56 of them being in Gujarat.”

I was aware about disruption in banking, but the following comment  by Barclays Ex ceo made me really think that Banking is headed for serious disruption in more immediate future than I initially thought

“18 months ago I gave a speech about approaching the Uber moment in financial services. I suspect we might be beginning to see some Uber moments popping up. For example, branch traffic has almost halved in the last 5 years in the UK, ATM usage is declining, Scandinavian countries are talking about going completely cashless. We’re beginning to see some of these Uber moments happening.”

Jenkins, who was CEO of Barclays from 2012 to 2015, forecast a series of Uber-style disruptions in the banking industry in late 2015. He said that advances in technology could shrink headcount at traditional big banks by as much as 50%, while profitability in some areas could collapse by over 60%.

And this one from an insurance company out of Japan

“A future in which human workers are replaced by machines is about to become a reality at an insurance firm in Japan, where more than 30 employees are being laid off and replaced with an artificial intelligence system that can calculate payouts to policyholders.

Fukoku Mutual Life Insurance believes it will increase productivity by 30% and see a return on its investment in less than two years. The firm said it would save about 140m yen (£1m) a year after the 200m yen (£1.4m) AI system is installed this month. Maintaining it will cost about 15m yen (£100k) a year”

 

 

 

 

 

 

Bill Gross Writes ….Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman. High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era.

This one is by Jeremy Grantham of  GMO who has been bleeding assets for not changing their tune with rising markets(i.e., clients are defecting) as they did in the late ‘90s and also in 2007. Putting out a chart of projected future returns, such as the one below GMO recently published, isn’t great for either business development or client retention—certainly not in a relentless bull market, at any rate.Look at the following chart closely

A recent analysis by the highly respected Mark Yusko found that there has been a 97% correlation between what GMO has projected and how things like US stocks, emerging market debt, et al, have actually performed in the fullness of time. Ergo, investors should definitely pay heed to what GMO is saying presently, despite their recent “out-of-syncness”.Although there are no specific targets for India but GMO expects Emerging markets equity to return approx 4% over next 7 years.

https://www.janus.com/insights/bill-gross-investment-outlook/

India’s might be fastest growing economy in world beating china by whisker but the population growth is 2 times that of china. As the 12th Five Year Plan (2012-2017) document pointed out: “One hundred and eighty-three million additional income seekers ( 18.3 crores) are expected to join the workforce over the next 15 years.” This essentially means that a little over 12 million individuals will keep joining the workforce every year, in the years to come. This works out to around one million a month. And at this rate, the Indian workforce is expected to be larger than that of China by 2030. India urgently needs promised demographic dividend

India’s govt debt to GDP is low as compared to rest of the g-20 countries and that means in absence of corporate capex , either Govt creates conditions for Foreign money to invest in India or GOVT will have to expand its balancesheet ( which will lead to higher inflation)  if it wants employment for its people and raise their standard of living.As per Andrew Stotz India could expand per capita GDP for decades if helped by Govt policy .

This is as per Mckinsey …….which states that India’s domestic capital-goods sector is under-developed, weighed down by low investment in technology and talent. That may be changing and it will help both employment generation and increase in per capita GDP

As India has emerged as the world’s fastest-growing large economy, it’s no surprise that demand for capital goods has more than doubled in the past decade. Yet one-third of this demand has been met by imports: India imported machinery worth more than $30 billion in 2015, making it the fourth-largest import category after crude oil, electronics, and gold. For a $2 trillion economy, the country’s capital-goods sector remains relatively underdeveloped, offering a significant business opportunity for both Indian and foreign original-equipment manufacturers (OEMs).
India’s domestic capital-goods industry is weighed down by low investment in technology and talent. Most companies focus on low-value-add fabrication and assembly work, unable to move up the chain with their designs or technology. Value addition represents only about 22 percent of total output, or $13 billion, and the capital-goods sector as a whole accounts for just 0.6 percent of India’s GDP, compared with 4.1 percent for China, 3.4 percent for Germany, and 2.8 percent for South Korea (exhibit). The output of domestic capital-goods players grew by an average of 2 percent annually from 2010 to 2015, trailing the overall average of 7 percent annual economic growth.

Mckinsey report further states that If the capital-goods sector develops as we envision, it could deliver annual earnings of about $3 billion to $4 billion and create up to five million jobs.

Full report below

http://www.mckinsey.com/global-themes/india/seizing-indias-capital-goods-opportunity?cid=soc-app

Martin Armstrong writes a very interesting phenomenon happening in west where govt are looking at reasons to increase Taxes because they are bankrupt and what better assets to tax than real estate because it is easy to tax immovable property.

India has also seen a residential boom which contributed significantly to tax revenues of state government. Already high value property registrations have come down significantly across states and this will lead to higher deficits for the state govt budgets. This in turn will lead to rising property taxes as it is easier to tax something which is immovable.

Martin concludes “This is why I rank property in the last category for investment. It should NEVER be everything. The population of Rome collapsed from 180AD because taxes kept rising and people were just forced to walk away. History does repeat so caution is advisable with real estate. We need a place to call home. It should not be 100% of your assets. It should be limited to a portion of your portfolio that you can afford to walk away from and survive.”

https://www.armstrongeconomics.com/markets-by-sector/real_estate/why-real-estate-should-never-be-the-majority-of-your-portfolio/

Manish Bhandari at Vallum Capital writes some very interesting points on equity investing in his annual Letter

“I must bring an interesting observation I have been having for some time to your notice. India is likely to witness shortage of quality investable companies in the future. The seeds were sown few years back with the scrapping of press note, allowance of 100% FDI in most of the sectors, buy back by listed MNCs and regulatory arbitrage available to do buy back rather than paying dividend. Moreover, in many cases Initial Public Offers are from companies that have been, private equity funded leaving less room for upside for secondary market players. All these factors are compounding the valuation for high quality companies to stratospheric height, leaving less room for error, if forecasted earnings are not met. Moreover, my observation is that in many areas, MNC with technological edge, global relationship, brand, superior business processes have an edge, emerging as leaders or have gained dominant markets share in respective field. Many such, not represented in the listed equity universe of India.

This also reminds me of sharing with you how fast the sources of alpha generation are waning away with each passing decade in our markets, and how we are challenged to find newer sources. The first decade of evolution of market Year 1992-2002 were dominated by insiders, assets managers flashing management access and making a living out of it. With no material detail available in Annual report to dissect for analysis by ordinary soul, and make an informed judgment on the business. This waned in the decade starting Year 2004-2014, with improving regulatory supervision, publishing of quarterly earnings coupled with superior disclosures in the annual reports. We should call this phase democratization of information. To stay afloat and succeed in investing, one is required to have a finer framework of business evaluation and solid framework of valuation.

The coming decade will demand deeper understanding of global macroeconomics coupled with superior skill of business evaluation due to disruption dots impacting literally every industry.

The democratization of information will pose a serious challenge to money management business. Recently, my team brought to my notice that in the Dec 2016 quarter, there were more than 450 conference calls held by corporate bodies discussing quarterly results, with discussion note available while I remember less than 50 per quarter a decade ago. Institutional Investors with their superior management access will not offer any distinction in investment performance though may suffer from their herd behavior.  The sorry state of mutual fund industry in the US is a prime example in front of us.

Full letter below

https://connectvallum.wordpress.com/2017/04/11/vallum-capital-annual-letter-2016-17/

Tesla shares rose to $313.38 this morning, giving the company a market capitalization of about $51 billion, surpassing GM for a moment as the most valuable American automaker. This left some industry insiders wondering about tulip bulbs.

“It’s either one of the great Ponzi schemes of all time, or it’s all going to work out,” mused Mike Jackson, CEO of AutoNation, the largest dealer group in the US. He was speaking at a conference hosted by the National Automobile Dealers Association and J.D. Power. “It’s totally inexplicable, as far as its valuation,” he said.

As the chart chart illustrates, Tesla’s numbers don’t really match its valuation yet. The company produces a fraction of the number of vehicles that GM and Ford produce; it trails in revenue and has yet to become profitable. Tesla’s current valuation is driven by the belief that the future of mobility is electric and that the company has enough of a headstart to eventually dominate that future.

Wolf Richter writes that Tesla is ludicrously overvalued. But it’s not “inexplicable.” It’s perfectly explicable by the wondrously Fed-engineered stock market that has long ago abandoned any pretext of valuing companies on a rational basis. And it’s explicable by the hype – the “research” – issued by Wall Street investment banks that hope to get fat fees from Tesla’s next offerings of shares or convertible debt.

The amounts are huge, going back ten years: Last month, Tesla raised another $1.2 billion, after having raised $1.5 billion in May 2016. There will be more. Tesla is burning a lot of cash. Investment banks get rich on these deals. The bonuses are huge. So it’s OK to hype Tesla’s stock and sell it to their clients. Everybody wins in this scenario – except for a few despised short sellers who’re hung up on their silly notion of reality.

As long as shares continue to rise, the whole equation is perfectly validated: Let the doubters and short sellers stew in their own juices. Shares will rise because stock jockeys expect them to rise, and with that expectation, they buy them and drive up their price. Buy-buy-buy turns into a self-fulfilling prophecy. It won’t last forever. But until then, market share, profits, or anything else vaguely linked to reality simply don’t matter.

Tesla’s stock is the perfect thermometer of a stock market that has become such a bubble that even the Fed is getting antsy. But if history is the guide, you’re on your own.