Sad news for microfinance

John Elliott (ht: Narayan Ramachandran) has a good piece on Dr. Manmohan Singh’s (non) role in India’s economic reforms. On this aspect, Surjit Bhalla got it right. Once he correctly lauded Mr. Yashwant Singh, finance minister in the NDA government, as a more genuine reformer. To an extent, Mr. Chidambaram could also be considered a reformer. He tried a bold budget in 1997.

Sajjid Chinoy tries to shed some optimism on India’s reform prospects. One hopes that he is right.

This is very sad news indeed.  Bharatiya Samruddhi Finance Limited – India’s oldest Microfinance Institution – is on the verge of closure, according to this MINT story. I know Mr. Vijay Mahajan well. I have tremendous respect and admiration for the work he has done at the policy level and at the grassroots level.  I sincerely hope that closure is not eventually required. The Andhra Pradesh Government has burnt down the house to kill a few bedbugs and, in the process, has dealt a heavy blow to financial inclusion.

The sector needed a crisis, alright, to mend its ways but it did not deserve a death blow. Further, the Andhra Pradesh Government has plans to set up its own Non-Banking Finance Corporation. Is that 21st century governance? Should governments be running NBFCs?

As Vijay correctly points out in this news-article, 92 lakh borrowers are now unlikely to get credit from any bank, let alone future MFI. Is that financial inclusion?

I hope this serves as a wake-up call for the AP Government rather than the beginning of the end of the private sector MFI

And, finally, Yeddyurappa resigns.

Eyes closed on executive pay

US Economic data starting with the Chicago National Activity Index, Dallas and Richmond Manufacturing Indices, New Home Sales and Durable Goods orders for June have printed on the disappointing side. Regardless of how this debt ceiling imbroglio ends, the US economic outlook for the second half is going to be nowhere near what consensus forecasts anticipate confidently.

John Kay’s column on Game theory lessons for Greece and for the members of the ‘Tea Party’ is a masterpiece.

Regardless of how this is done, much damage has already been done to the US prestige and its pledge to honour its commitments. The question is not if but when US assets would start to reflect this ‘damage’.

This article on executive pay in the UK (or, for that matter, in the US) is an eye-opener, yet again. But, eyes remain shut.

With this backdrop in the US, I was tickled to read this news in Bloomberg:

Traders betting on gains in China’s biggest companies are pushing options prices to the most bullish level in almost two years on speculation higher interest rates won’t curb the world’s second-largest economy.

The premium investors pay for puts to sell the iShares FTSE China 25 Index versus calls to buy has tumbled to 15 percent from 31 percent on June 22, according to data on three-month options compiled by Bloomberg, and fell as low as 13 percent this week. That compares with the average of 20 percent since the start of 2005 for the U.S.-traded fund tracking Chinese companies listed in Hong Kong. [More here]

Investors should be actually taking note of news such as this, this and this.

US debt default

I had covered this topic quite a bit in my MINT column on Tuesday. I had a long chat with a journalist from Wall Street Journal and he has carried two of my observations:

“The overwhelming belief is that somehow like a Hollywood movie there will be a happy ending,” said V. Anantha-Nageswaran, a Singapore based Asia economic advisor to private bank Julius Baer.

“The consequence of no deal is so unfathomable, it’s best to close your eyes,” said Mr. Anantha-Nageswaran, noting that’s a strategy most investors seem to have chosen. [Full article here]

That said, I recommend this blog post in FT Alphaville. It echoes what I have said above:

But perhaps the biggest problem with efforts to think through this scenario is that they all exhibit a mechanistic way of thinking — this leads to that. To some extent this can’t be avoided, and we do it ourselves here all the time. But given the size and connectivity of the US Treasuries market this seems like an instance where events are unlikely to neatly unfold. The interplay of so many variables probably means a future that can’t be known before it gets here, and might not be properly understood even once it is here.

The blog post that follows this on what the US could learn from Chile is something that even India can and should contemplate. Chile’s management of boom times (in copper and hence in its economy) has been exemplary.

Via this post by Stuart Staniford of ‘EarlyWarn’, I came across this blog post by Kevin Drum and I totally agree with his summary:

Frankly, I’m not really sure what’s going on anymore and I’m not sure anyone else is either. For now, I’m going to stick with my guess that we’ll blow by the August 2nd deadline, markets will go nuts, and we’ll end up with some kind of debt ceiling increase by August 7th. We’ll see. [Full post here]

I agree with Kevin Drum. My only add-on is that it won’t be the same again for the US or US assets, if this happens.

India’s monetary policy

Short, concise and good comment by Ajit Ranade in MINT on why RBI should hike rates today. 25-basis points is baked in the cake since that is what RBI’s review of macro-economic developments suggest, at the minimum.

The central bank’s comments on the fiscal policy stance of the Federal government are worth noting:

The total fiscal slippage for the Centre from oil sector, could thus be about 1 per cent of GDP. In addition, there could be spillover in fertiliser subsidies. Therefore, for durable correction in revenue account, tax buoyancy must recover to the pre-crisis level and administered pricing of diesel, kerosene and LPG needs to be phased out at the earliest. Besides, fertiliser subsidies need to be contained.

The Central Bank is much more sanguine on the finances of State governments:

Overall, States seem to be committed to bring their finances on a sustainable path in the medium-term and the present pace of fiscal consolidation appears to be in tandem with the path suggested by the Thirteenth Finance Commission. Thus, the fiscal position of the States appears encouraging, but the challenge lies in translating intentions into outcomes of fiscal consolidation, while not compromising on the quality of the fiscal correction process.

India’s external trade charts on page 15 of the report are reassuring. Dependence on various products and export locations has become more broad-based and less concentrated.

Very encouraging to note that the FDI Inflows into India have picked up in the first two months of the current fiscal year (2011-12). It is 7.8 billion dollars compared to 4.4 billion dollars in the previous year. Outbound FDI remains sizeable, however.

The table on page 29 based on trailing P/E ratios shows that Indian stocks remain the most expensive in the region, followed by Indonesia.

Chart VI.1 on page 38: Are Indians eating more junk food? What is ‘Others’? Consumption share of fruits and vegetables has remained stagnant. Disappointing.

Chart VI. 11 on page 45 is an excellent on rural wage growth over inflation. It compares two years: 2009-10 and 2010-11. Wage growth in 2010-11 has far outstripped inflation in almost all states except in Manipur and Tripura whereas in 2009-10, it was trailing inflation in 11 states.

On the inflation situation, these sentences are apt (page 45):

High inflation over several months has not led to price induced supply response in many critical commodities; in turn input cost pressures have spilled over to output prices. These trends necessitate structural reforms to enhance supply response while anti-inflationary bias of monetary policy anchors inflation expectations.

On reading this report, I get the impression that they should raise rates by 50 basis points and not just 25 basis points. We will know soon.

Postscript: Lo and behold, within minutes of my uploading this post, RBI announced a 50 basis point increase in the repo and reverse repo rate. Well, I am impressed. Not with myself. But, with RBI. Good job. No doubt, Mr. Surjit Bhalla will have a different take altogether on this.

Straws in the wind

There are quite a few straws in the wind that need to be connected. When connected, they give a good idea of the nature of risks that the world faces today. Needless to add – and in the personal opinion of this author – financial markets have not priced in these risks adequately.

One is the shoot-out in Norway. The ramifications require reflection. At one level, it might push back popular parties that espouse mild-to-strong anti-immigration line. They might tone down their rhetoric. Per contra, centrist and liberal parties might become fearful and become less liberal, in the process.

This morning, the FT features a news-item on Chinese fighter aircrafts repelling a US reconnaissance plane, briefly entering Taiwan airspace. With the US still unable to come to an agreement on its debt ceiling increase and with China holding huge amounts of US Treasuries, this US domestic issue has the full potential to become a geo-political flashpoint.

I have tried to address this in some detail in my latest MINT column today. One glaring omission in my piece is that I have forgotten to mention that Gold would be a big winner in the event of any default – no matter how low the probability is, currently. Conversely, gold would shed some of its recent strength if an agreement is reached. I view any setback for Gold to be short-lived, given the current geopolitical environment.

In fact, I should have also added that India too would, on balance, be a relative beneficiary. It has very little US dollar assets in its reserve holdings. The drop in oil price – even if temporary – that would ensue would help India’s balance of payments and fiscal deficit.

While I am not too concerned by the job cuts in investment banks, it is a signal, nonetheless, of waning global economic activity. If capital spending were firing on all cylinders, investment banks would not be cutting back on jobs.

A sign of hubris at Apple Computers. Time to shun them and look for the next innovator. From an innovation engine they are now turning predators.

This news item in Bloomberg on the demand for the so-called commodity currencies – at the expense of correlations with underlying commodities themselves breaking down – is an interesting one.

Another Bloomberg news story on hedge funds struggling to maintain performance and George Soros’ quantum fund raising its cash holdings has two interesting observations on ‘governments’ influence’ on markets. I doubt if they are made in a positive sense:

Part of the uncertainty stems from the fact that so much of what happens in global markets is dependent on government actions, which can distort prices and affect supplies.

“Most of our funds are in an uncomfortable position in that the fundamentals are bearish, but the governments are intervening,” said Harold Yoon, chief investment officer at Hong Kong-based SAIL Advisors Ltd., which invests in hedge funds on behalf of clients.

Ramachandran answers Ramachandran

I have not been a big fan of Mr. Guha’s writings on contemporary India. I have viewed with disapproval his easy inclination to paint BJP and Mr. Narendra Modi as guilty of committing fundamentalist crimes while giving a free pass to the Congress and others. He held Hindu fundamentalism as the greatest danger to India – a proposition that I strongly disagree with. Now, he has labelled corruption as the greatest threat to India’s superpower ambitions – if it has one, in the first place.

I am going to be lenient towards him on this one. I think he gave the title (or did the newspaper do it?) to provoke a debate. I doubt if he really held corruption as a big stumbling block to superpowerdom for India. People have argued that the US was corrupt (and is now rediscovering it on a bigger scale with relish) and so was the UK. Well, it is difficult to compare and rank the levels of corruption, even as many institutions do so, with varying degrees of conviction and persuasion. The contexts are different.

China is rife with corruption and it has not stopped the nation from marching on seemingly towards superpower status.  Corruption, per se, may not be a block but we have to ask ourselves whether corruption played a role in quashing Argentina’s potential at the beginning of the 20th century. I do not have the answer. I do not know Argentina’s history well. Readers are welcome to add their comments.

Brahma Chellaney’s comments on Guha’s post are well made. The real stumbling block to superpower status or any status at all is the absence of electric power as my friend Narayan Ramachandran has argued in his latest column in MINT.

Printing orgy on its way

Blogging has been a bit erratic lately because of some unexpected travel to Mumbai (Aambi valley) last week and because I was leaving my employer after 5 years and nine days. Yes, I have left Bank Julius Baer as of July 19th, 2011. I am not joining another financial market or capital market institution. I think I won’t for a while. But, never say never. Given my personal expectation of turbulent times in financial markets in the next two years, I thought it would be better to be a ringside observer than a participant. It was not a surprise to read about the myopia of the banking industry here.

It was a pleasant surprise to find TGS mentioned in the directory of best Indian blogs. My fellow bloggers at the INI have been there before and done that. It was a good motivation to begin and complete this blog post.

Today being the first ‘off-day’, I decided to resume blogging since I had not posted any comment after the US employment data. On getting up, was surprised to read that US stocks have rallied 200 points (DJIA). The ostensible reason is that the US Congress and the government seem to be reaching an agreement on deficit reduction and a rise in debt ceiling. Good news for the US. But, with the US Treasury bond yields never budging from their lows recently, I wonder if the market was already pricing in a bad outcome. It was not, in my view. But, silly me. Since when stock investors have needed rational arguments to ramp up asset prices?

By the same token, I am not sure why housing starts rising in the US should be good news when there is so much inventory of unsold homes left. Just as the rise in the Chicago PMI in June was due to auto producers producing more cars for inventory (ht: Vasan Sridharan).

With the UK economy in doldrums and with political support for David Cameron peaking and coming off, it is a matter of time before the Bank of England pursues another round of quantitative easing. The European Central Bank – if it wished to preserve the single currency project – must, somehow, engineer a weaker Euro. That would squeeze the Switzerlands, the Singapores, the Brazils and the Japans of the world real hard. Their currencies – rising inexorably already – would soar. They have to join the quantitative easing party.

The big daddy of ’em all – the United States – will not be sitting quiet and watching. After all, it has got a free pass so far on dollar debasement. If the room gets crowded, it has to find new tricks to keep the dollar from rising against the rest.Gold dropping 20 dollars overnight sounds like a terrific summer sale opportunity! (Caveat emptor, of course)

No surprises therefore that the price of crude oil (Brent crude) is not too far below recent highs. Check out this news on the rise in Saudi oil consumption. Stock investors know how to ignore inconvenient news until it is too late to ignore them, that is. My latest MINT column talks about frogs basking in the warm glow of boiling water.

Niranjan has a very succinct reminder of the inflation risks here:

The current mess means that Western central banks have an incentive to maintain loose monetary policies and keep interest rates low, even if these policies impose huge costs on economies in our part of the world through inflows of speculative capital and high commodity prices.

I must concede that Niranjan’s column this morning in MINT makes this blog post redundant.