Category: Macro Posts

These days, robots and algorithms are everywhere, replacing not just manufacturing jobs but all kinds of jobs in air-conditioned offices that paid big salaries and fat bonuses.Blackrock, the world’s largest asset manager, with $ 5.1 trillion in total assets has started a shake-up of its stock picking business, relying more on robots rather than humans to make decisions on what to buy and sell.The firm has dominant position in low-cost, passive investment such as exchange-traded funds.But its stock-picking unit – which depends on money managers to choose investments – has lagged rivals in performance and clients have been withdrawing their money.
The company has taken the view that it is difficult for human beings to beat the market with traditional bets on large U.S. stocks. So the firm on Tuesday announced an overhaul of its actively-managed equities business that will include job losses, pricing changes and a greater emphasis on computer models that inform investments.

BlackRock announced a plan to consolidate $30 billion of their actively managed mutual fund activities with funds that are managed by algorithms and quantitative models. As these software robots take over, “53 stock pickers are expected to step down from their funds. Dozens more are expected to leave the firm,” as the New York Times put it.

“We have to change the ecosystem – that means relying more on big data, artificial intelligence, factors and models within quant and traditional investment strategies,” BlackRock CEO Laurence Fink told The Times.The firm is offering its Main Street customers lower-cost quantitative stock funds that rely on data and computer systems to make predictions, an investment option previously available only to large institutional investors. Some existing funds will merge, get new investment mandates or close.

In a similar vein, “robo-advisors” are starting to give a cheap and hot alternative for many customers , replacing human financial advisors. A lot of the grunt work that used to be done during all-nighters by highly paid law school grads in big law offices is now done by computers.

So job destruction due to automation is not a blue-collar thing anymore. It’s everywhere

In India portfolio managers http://www.business-standard.com/article/markets/majority-of-active-funds-lag-benchmark-returns-in-past-one-year-117032700844_1.html are struggling to beat the benchmark, although over long periods they have beaten their benchmarks.

I believe the structure of indian economy has changed and low inflation coupled with lower nominal GDP is the new normal.Where as high inflation leads to lower barrier of entry in any business and thereby more competition and more companies in any business, low inflation with high cost of compliance and tackling bearucracy kills the enetrpreneurship and competition there by leading to few large succesfull oligopolies in any business. GST will further hasten this process.In this kind of enviroment i think this will lead to more and more fund managers finding it difficult to beat the benchmarks and India will also see emergence of passive funds as new asset class.

The Indian real estate market is currently grappling with a double whammy, one from the cash shortage caused by the impact of demonetisation and the second by the imminent introduction of the Real Estate Regulator (RERA). This, along with the increasing refinancing risk, would shake-up the sector, with developers with high leverage losing out.

Come July 1 and leasing of land, renting of buildings as well as EMIs paid for purchase of under-construction houses will start attracting the Goods and Services Tax. Sale of land and buildings will be however out of the purview of GST, the new indirect tax regime.The Central GST (CGST) bill — one of the four legislations introduced, states that any lease, tenancy, easement, licence to occupy land will be considered as supply of service. Also, any lease or letting out of the building, including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services as per the CGST bill. This will further lead to delayed decision making on the part of buyer and add to real estate develops woes.

I think like many other sector this sector is also on the verge of shakeup .Real estate will also have only few winners as debt hangover will lead to emergence of regional and national oligopolies .Private investor (institutional investors) with deep pocket and easy access to cheap funding will be the new landowners of India.

Every year, the world’s economies lose billions of dollars to tax avoidance. Estimates of the sheer scale of the losses fluctuate wildly with the IMF reporting that around $600 billion is lost due to profit shifting every year. A new paper published by UNU-WIDER took a closer look at the issue at country level, finding that the United States loses the highest amount in absolute terms by far.Every year, the U.S. loses an estimated $189 in tax, around 1.13 percent of GDP. China has the second highest annual losses in absolute terms with $66.8 billion while Japan is also badly effected with $47 billion unaccounted for.

India is not far in the list and looses more than 2% of GDP annually to tax avoidance. The cost of avoidance looks more stark when we consider that India is a developing economy and higher revenues with govt can deliver more bang for the buck than when the economy is developed

Some great charts from The daily prophet about market action.

How small caps are now underperforming largecaps

Treasuries are rallying inspite of FED raising rates. US 30 year yield broke below 3% yesterday .. first time in last 1 month and bank index BKK broke down , after all flattening yield curve is not good for banks. Without banks participating in the Trump rally there can be no REFLATION

For those who have given up on excitement from china ,PBOC added lot of interbank liquidity in last few days as apparently some banks defaulted in interbank markets.

I mean WOW banks defaulting in interbank markets????

https://www.bloomberg.com/view/articles/2017-03-22/the-daily-prophet-stock-market-suffers-bout-of-bad-breadth-j0lfaznu

Let me start by stating the obvious ” inflation is good for equities and deflation is bad for equities“. Historically rising oil prices are good for equities.

1. Higher oil prices lead to lower dollar and more money in the hand of oil producers which  in turn gets recycled into US treasuries leading to lower US bond yields and rising consumer indebtedness (70% of US economy is consumer),or on spending on their population to suppress civil unrest or to buy assets abroad.

2. Higher oil prices lead to rising budget deficits and rising inflation for oil consuming countries. Rising deficits and rising inflation leads to investors buying assets (real estate,equities) to maintain the value of the money

This cycle has continued with some pauses from the time oil has started getting priced in US dollar and this whole arrangement is known as “PETRO DOLLAR”

what if this cycle is coming to an end?

The above is a graph of shale gas curve and US is a big shale producer. The current price of shale production curve is less than the current price of oil. Last week G-20 meeting was historic in that sense where US decided to withdraw from the world stage by touting America first policy. Without Big brother and its current account deficit world has lost an anchor for Petro Dollar and current monetary system.

 

The Indian Sales Managers Index (SMI) for March, shows that the Indian economy is in recovery mode from December’s demonetisation policy. The abrupt impact of demonetisation hit small and medium size businesses hard as they predominately rely on cash based transactions. The March Headline SMI increased to an index level of 62.9 from 60.2 in unadjusted terms. Sales growth, as reported by the unadjusted Sales Growth Index, has improved from 57.3 in February to 61.9 in March and coupled with a strong uptick in the Business Confidence Index suggests that the demonetisation impact has started to wear off.

sales growth Index

Prices paid Index………see how prices are boucing back

Dr Viral acharys was quoted in MINT “I think everyone should keep in mind that the remonetisation is taking place at a very fast pace. We have some way to go, but I think we expect that within two to three months we will reach full currency in circulation. It will be slightly lower, but it is in that ballpark (number),” he said.

I think if full currency with public gets normalised as Dr Viral Acharya expects over next couple of months, RBI will have a problem at its hand of rising inflationary pressures in an economy where only one engine of economy i.e consumption is doing well.

One of the big mysteries in the Indian economy currently is the persistently low credit growth, which fell further after the government’s demonetisation drive in November.
After struggling along at just under 10 percent for almost a year, credit growth fell to under 5 percent starting November, according to fortnightly data released by the Reserve Bank of India (RBI) the value of loans in India increased 4.1 percent year-on-year in the two weeks to March 3rd 2017. Loan Growth in India averaged 12.41 percent from 2012 until 2017, reaching an all time high of 18.70 percent in April of 2012 and a record low of 4.10 percent in March of 2017.

According to Nomura true credit growth is closer to 7 percent. That’s not to say that it isn’t weak. Just not as weak as what the bank credit data suggests.
RBI credit data (3.7 percent year-on-year growth in January ’17) does not capture the impact of bond substitution and State Electricity Board (SEB) loan conversions. The corporate bond book has been growing at 16-18 percent year-on-year for the past 12 months, and Rs 1.7 lakh crore of SEB loans have been converted into bonds under UDAY scheme over the past 6-7 months. Adding this up, they estimate that overall credit growth is 6.7 percent year on year and industry and services credit growth is 5.6 percent year on year (1 percent contraction as per RBI).
While saying that growth in bank loans may be understating the actual demand for credit in the economy, Nomura goes on to say that there are fundamental reasons for subdued credit demand. This includes the deleveraging of corporate balance sheets.
Three sectors – infrastructure, metals and textiles – contributed 30-25 percent of total incremental credit in the financial year (FY) 2007-08 to FY14 period, when bank credit was growing at 17 percent year on year. Adjusting for these sectors, credit growth was closer to 12-13 percent. Credit demand from these sectors (excluding SEBs) is now down to zero, which is bound to impact overall demand for loans.Ambit Capital  points out that banks have lost nearly 5 percent points in market share to bond markets over the past two years. This was partly because of the rate advantage in the markets and this shift from bank loans to bond market will only acclerate thereby pressurising the Net Interest Margin of banking system.

 

 

 

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.” -John Templeton

Jesse felder writes….When looking at sentiment many people like to look at surveys. I prefer to look at what people are actually doing with their money. It’s a fact that we are now seeing record inflows into the global equity markets .

 

The flows into Indian equity and balanced funds also continue unabated although valuations are no more cheap.Real estate and bank deposits have the highest allocation in any Indian investor portfolio .Real estate has been loosing shine as real interest rates ( Nominal interest rates-inflation) is positive and bank have sharply reduced deposit rates post demonetisation as they are flushed with money in an enviroment where credit growth is weak.This is leading to some household savings getting channelised into equity markets through mutual funds.In the long term this will lead to counterbalance to more volatile FII flows and increased domestic ownership of Indian companies .

https://www.thefelderreport.com/2017/03/17/3-charts-that-show-stock-market-euphoria-is-totally-unprecedented/

IceCap Asset Management BELIEVE  “As we approach the last days of winter, we anticipate significant  market volatility heading into the US debt ceiling debate, and then the French/German elections.Political and Interest Rate Pendulums have started to swing away from a place where the majority of the world had grown very accustomed to experiencing.”
March 2017 The Pendulum
These swings will intensify away from most peoples’ comfort zone,reigniting the government debt crisis in Europe, which will in turn produce incredible opportunities to lose money in bond strategies and currencies, while also make money in stocks and USD.
Bonds
No changes to our long-term outlook for bonds. All of our portfolios hold minimum allocations to bonds, with no high yield, no emerging market debt, and no long duration.Current conditions make bonds the riskiest long-term investment.
Stocks
We have neither added nor sold any equity holdings since our last Global Outlook.Despite many negative news headlines about equity markets, our research indicates there is no major risk on the horizon.Stock market sentiment has reached extreme levels, and we’ll once again patiently await for an opportunity to add further to these strategies.

The only reason they are not adding to stocks is current Excessive optimism in stock markets and similar disdain for bond markets ( emphasis mine)
Currencies
Their long-term outlook remains the same – as the global crisis accelerates, they fully expect USD to surge.

http://icecapassetmanagement.com/wp-content/uploads/2017/03/2017.3-IceCap-Global-Market-Outlook.pdf

UBS calculates a global “credit impulse,” showing the extent to which there is a trend toward increasing use of debt. According to their calculations, since 2014, it is China that has been keeping the Global Credit Impulse up. If China is cutting back, and the US is cutting back as well, the situation starts looking like the 2008-2009 period, except starting from greater problems with diminishing returns

Chinese companies are aggresively develeraging. China credit creation=80% of world’s total and a warning to risky assets

Bank credit growth comes to a halt in US

I find it strange that even a relatively less leveraged country like India (as compared to china and US) is witnessing a collapse in credit demand ,where credit growth slumped to 60 years low.I understand why corporates are not borrowing but it is inexplicable why households are not borrowing especially when they are not leveraged

The economy to me is like a type of Ponzi Scheme. In absence of productivity it depends on both rising energy consumption and rising debt to sustain growth. A major function of growing debt is to add wages. Unwinding debt leads to the kinds of problems that we encountered in 2008. It is tempting for world financial leaders to think that they can find a solution to today’s problems by using higher target interest rates to slightly scale back economic growth. I don’t think that this is really a good option .Judging from the complete halt in credit creation and the softening energy prices I fail to understand what will FED achieve by raising the rates.