Too early and too late

Dr. Roubini might be correct eventually but he is too early with his bullishness for the long-term on Indonesia and too late to be correct cyclically. See here.

Have enjoyed reading James Kynge’ China Shakes the World. One of the best books that give an insight into what a very perceptive observer recently told a gathering in Singapore that the civilisational goal of China was power. I have also had the good fortune of speaking together with James on a couple of Julius Baer forums when  I was employed by JB. I can justifiably claim that I introduced James to JB. Now, I do not have the privilege of reading his FT China Confidential Reports.

His comment in a column in FT on China’s fragile finances has not come a day too soon. In the last two years, James had mostly struck a tone of restrained optimism on China although he acknowledged concerns of Fitch about medium-term financial and economic health of China. In this piece, he signals his concerns more loudly than I had heard him do so in the last year+:

… the pertinent question today is not whether China can once again guide the global economy away from the rocks but whether Beijing retains decisive control over its own economic levers [See here]

When an optimist turns cautious or pessimistic and vice-versa, he/she deserves to be taken more seriously than before.

I have not read this report but I can say that I love it already for its contrarian posture. GEMs companies are not the saviours for stock investors just as China is not for the global economy. It would be nice to get hold of this report.

FT’s ‘Beyond Brics’ links to this ‘Economic Times’ (India) editorial on food price inflation. The edit observes that it is a political problem. Nothing wrong with the diagnosis at a superficial level. But, I think R. Jagannathan  (via BeyondBrics) hits the nail on the head. He calls India’s inflation, ‘Rahul-flation’. See here. The original is here. It is well written. I am yet to read the Urjit Patel co-authored piece (referred to in RJ’ piece) on India’s inflation although he was kind enough to send it to me.

In this piece, RJ draws attention to Prof. Kaushik Basu’s cute suggestion that RBI should be cutting rates to reduce the cost of capital. Turkey tried doing that. Late last year or early in 2011, the Central Bank in Turkey cut rates and raised reserve requirements. They wanted to preserve currency competitiveness by making it less attractive to hold the Lira. So, they cut rates. In the summer as global risk aversion rose, they got more than what they wanted. The currency crashed. Now, the central bank has pushed up interbank rates in Turkey to more than 12%.

Western policymakers’ experiments are making life devilishly complicated for emerging economies. They do not have the room to manoevure.  They have to choose make choices and trade-offs. High growth and low inflation combination is no longer available to them.

This is not to be critical of what they tried. Experiments are needed and must be tried. But, they had to abandon it. Now is not the time for India to try these experiments. As RJ writes in his more recent piece, if the price of dealing with bad politics is sharply lower growth, so be it.

My only question for the Congress Party in India is why would you reduce India to an economic graveyard and then want to preside over it?

Stocks for the long-term?

Bloomberg reports that bonds beat stocks for the 30-year holding period ending September 30, 2011. These are US Treasuries and US stocks. This is the first time that bonds have beaten stocks over a 30-year holding period. Bonds have achieved that distinction over shorter horizons. Over the long-term, the volatility in stock returns that are witnessed over shorter horizons should be smoothed out. Hence, those who can genuinely buy it, shut it and forget it were supposed to be rewarded for their doggedness and willingness to keep stocks as illiquid assets. But, that is in a world where fundamentals matter.

Stocks have become the favoured asset class for various players in the market place for reasons other than sheer investment returns and providing for the future. It is a test of virility and optimism for policymakers and analysts now. They are rewarded for being optimistic not for being rational evaluators of value (which includes ‘growth at a reasonable price’). Stocks have done so poorly  – in relative and in absolute terms – because dividend yields have been marked down, literally and metaphorically. Dividend stocks are boring stuff. Growth stocks are exciting, for analysts. They look like heroes when stocks reach 400 dollars within months of their prediction as Amazon did in 2000. Some of them are now reformed souls, no doubt.

Growth stocks are exciting for firm managers. Their options become more valuable. Returning cash to shareholders is not going to pump up the value of their stock options. What would they do if there is no cash to engage in their macho M&A games that temporarily boost their option values, their image, etc.? So, dividends are for sissies.

Stocks are exciting for investors who seek adrenalin rush in what they do. They satisfy the inherent gambling instinct in us. Dividend stocks are too boring; too safe. No kick.

When would stocks become safer, at least for the long-term?

Not in the near future. Sample this. Either the corporate leaders who issued this statement are stupid or they think we are stupid to believe that political leaders can spark economic growth.

Business leaders from the world’s leading economies are set to press for firm action on growth, trade and social issues at this week’s G20 summit in France, warning of the dangers of political disaffection.

Obsession with growth won’t help. Return to realism would facilitate a return to the bottom from which lasting gains can be achieved by owning stocks. Neither investors nor business leaders are ready for it nor are they bothered with their own long-term interests. In a sense, the failure of stocks to deliver long-term superior investment performance mirrors all that has gone wrong with our societies in the last three decades.

Another trigger for stocks to become favoured long-term investments is when Professor Jeremy Siegel turns pessimistic on stocks.

Societies may reform or re-generate but I doubt if Jeremy Siegel would change his views on stocks. He is trapped in a time-warp.

Japan intervenes

It does not come as a surprise that the Japan Ministry of Finance (MoF) intervened to stem yen appreciation. Floods in Thailand have put paid to hopes of recovery in Japanese exporters. Supply chains are disrupted again. Honda is shutting its Thai plant for six months. Last week, the Bank of Japan (BoJ) downgraded growth and inflation outlook for the current financial year and next – 2011-12 (half way through) and 2012-13. With the US dollar weakening against the Euro and with China stalling on Yuan appreciation and with the Korean won weaker against the Japanese yen, the combination might have become a tad too intolerable for Japan.

We do not know if a weak yen is a cure-all for Japan’s problems. We do not even know if Japan has an economic problem – given the ageing and declining population – if one ignores its huge domestic debt, of course. There are limitations to what can be achieved by policy interventions in the face of inexorable demographic trends. However, based on conventional logic, Japan can reflate its economy through monetary stimulus more than other economies are justified in doing so. There is genuine deflation in the country. The BoJ is reluctant to do so. In the long-run, the BoJ Governor is right. In the short-run, he risks being left behind by the Bernankes and the Draghis of the world.

As long as that is the case and as long as the Federal Reserve and the European Central Bank can create more inflation than ageing Japan and a reluctant central bank, it will be difficult to achieve sustained yen weakness. That is not going to prevent the Ministry of Finance from trying, from time to time, as they have done today.

What the intervention signals to us is that it is impossible for all nations in the world to have a weak currency. Some will be able to achieve it – not that it counts as a success – and some will not. The pressure on them to do something about it would rise as those who are hurt by it – exporters – are more vocal than the rest. Something has to and will give.

Interesting reading links on Pakistan

A good friend, over the last three weeks, had shared some interesting Op-Eds.written in International Media and in Pakistan. I provide links to them below.

I commend the piece by Ayaz Amir. Some extracts from it:

What Pakistan has become today, a fortress not so much of Islam as of bigotry and intolerance, is a fruit of these sustained endeavours…. The prevailing mood now is one of unrelieved pessimism……But we are losing faith in the future. Of all our afflictions this is the most terrifying….The idea of Pakistan we inherited has proved a failure. We must be brave and honest enough to admit this. That idea has to be redefined. The Pakistani nation awaits the Galahad who can do this. [Full article here]

Mansoor Ijaz wrote in the FT that it was time to take on Pakistan’s jihadist spies. Which right-thinking person (Pakistani and otherwise) can disagree with him?

Mohammad Malik wrote thus on October 26th, 2011:

The potent mix to justify the hitherto unjustifiable appears to be in place. There is no governance per se anymore, anywhere. Law and order is conspicuous by its very absence. The economy is bankrupt. Corruption has touched unimaginable heights. Incompetence is the sole requirement for landing important government posts. The executive mocks judges. Court verdicts are not worth the paper they are typed on. Thousands of people are being pushed below the poverty line every day, while the ruling elite churns out new millionaires and billionaires by the week. Desperate circumstances have transformed ordinary masses into raving, raging mobs. The disconnect between the rulers and the ruled is absolute, and naked. We are hurtling towards being a failed State. So what is holding the natural ‘unnatural’ consequence from occurring? Concerns about international reactions, or the obligatory weight of a three-year extension? Should it not happen, no matter what? Is this criminalised democracy still the only or the better option available? I do not know, but we may get the answers sooner than we expect. [Full article here]

Praveen Swami wrote in THE HINDU on October 7th, 2011

Less than six months before Admiral Mullen’s dramatic testimony, U.S. Secretary of State Hillary Clinton certified that Pakistan had demonstrated a “sustained commitment to and is making significant efforts towards combating terrorist groups.” Pakistan, she wrote, had ceased support to “extremist and terrorist groups, particularly to any group that has conducted attacks against the United States or coalition forces in Afghanistan.”

Islamabad had also helped, Ms Clinton wrote, in “preventing al-Qaeda, the Taliban and associated terrorist groups, such as the Lashkar-e-Taiba and Jaish-e-Muhammad, from operating in the territory of Pakistan, including carrying out cross-border attacks into neighbouring countries.”

Her empirically ill-founded declaration enabled the U.S. administration to continue funnelling aid to Pakistan, even as its army paid proxies to kill American troops. [Full article here]

Why and what makes Americans do this repeatedly? There mus be other goals that they have whose putative benefits outweigh the ever-present and ever-rising cost of supporting Pakistan. What is it (or) what are they?

Burying India

I have disagreed and continue to disagree with Surjit Bhalla on his monetary policy prescriptions for India. But, this piece of his in IE recently is a gem. It is a MUST-READ.

There are three big corruption scams in India; well, there are several, but these three are likely the biggest. And coincidentally, all three big-time scams have occurred under the watchful eye of India’s oldest political party, the Congress.

The real lie, and the real tragedy, is that state-administered, state-directed, in-the-name-of-the-poor programmes are the croniest of all. Not surprising, because the best way to sell corruption is if it is disguised with a human face. This administration, this government, and the ruling party, yes the Congress, have been involved in spreading the anti-market lie disguised as gospel.

He echoes clearly what Mr. Sharad Pawar had said in his ‘Idea Exchange’ Interview with ‘Indian Express’.

Sharad Pawar: The Food Security Act is being prepared. The BPL debate is underway and the final decision will be taken by the Planning Commission. According to me, the government is taking on a massive burden. My estimate after handling the ministry for seven years is that the food subsidy will be around Rs 1.15-1.20 lakh crore and this will affect the overall economy. I am worried that the subsidy will almost be the same for fuel, around Rs 80,000 crore for fertilisers, and NREGA is another Rs 40,000 crore. If so much is spent on subsidies, what is left for development?

While a new thing is opposed in Bihar, that is not done by Modi. Modi always asks for things to be explained, to be evaluated for its benefits for society, for Gujarat, the country. So, I think his model is about going forward with eyes open. I am only speaking about development here. [The full interview here]

Tavleen Singh completes the trilogy with her column on the unceasing efforts of Mr. Jairam Ramesh in halting all development projects in India, in the name of protecting the environment.

In the spirit of ‘Breaking India’ written by Rajiv Malhotra on the work of Christian Missionaries operating in India with their conversion agenda, it is time for some one to chronicle the efforts of the Indian National Congress at burying India.

Just wondering

… whether Sarkozy had seen this draft report or the Bloomberg news report on Chinese cyber attacks before calling up Papa Wen or Uncle Hu in China for funding. Just what would China seek or ask for or take it without asking is something that Europe has not thought about or not thought about too seriously or is not letting the rest of the European public on. That is a shame.

This extract should disturb any head of Government even if he/she does not find it outright chilling.

The Chinese military also has been focused on its U.S. counterpart, which it considers too reliant on computers. In a conflict, the Chinese would try to “compromise, disrupt, deny, degrade, deceive or destroy” U.S. space and computer systems, the draft says.

“This could critically disrupt the U.S. military’s ability to deploy and operate during a military contingency,” according to the draft.

Other cyber intrusions with possible Chinese involvement included the so-called Night Dragon attacks on energy and petrochemical companies and an effort to compromise the Gmail accounts of U.S. government officials, journalists and Chinese political activists, according to the draft.

Often the attacks are found to have come from Chinese Internet-protocol, or IP, addresses.

Businesses based in other countries and operating in China think that computer network intrusions are among the “most serious threats to their intellectual property,” the draft says.

The threat extends to companies not located in China. On March 22, U.S. Internet traffic was “improperly” redirected through a network controlled by Beijing-based China Telecom Corp. Ltd., the state-owned largest provider of broadband Internet connections in the country, the draft said.

In its draft of last year’s report, the commission highlighted China’s ability to direct Internet traffic and exploit “hijacked” data. [The full Bloomberg report here].

Half percent

Japan’s potential GDP growth is estimated at 0.5%. That is what the Bank of Japan tells us in its October report on the outlook for growth and prices. It has downgraded its growth estimates for the current fiscal (2011-12) and 2012-13. Simultaneously, it has also lowered its inflation projections. No surprises that it chose to boost the purchase of Japanese Government Bonds (JGB) with additional 5 trillion yen. However, it is no match for the ‘wall of money’ that Mr. Sarkozy is happy about, in Europe. The yen would strengthen further unless Bank of Japan sheds its reluctance to match its Western allies in running the printing press.

The financial market exuberance has been extraordinary. They are clearly living for tomorrow. The immediate crisis in Europe appears to be handled. US economy has bounced back or at least pockets of it appear to have. There is not only plenty of liquidity to go around but there is promise of more in the pipeline. What? Me? Worry?

John Kay ‘writes’ to Martin Wolf

Financial markets are desperate to be bailed out, with the support of Tim Geithner, in his capacity as ambassador for US investment banks. The decisive action they all seek is not really a European solution at all. It is that the German government should write very large cheques – or underwrite very large borrowings.

Whenever you assert responsibility for issues you do not have authority to tackle, you risk a crisis of credibility that undermines the authority you do have. Europe’s leaders see themselves as mustering resources for a war with the markets: a war which they will lose, not just because they will never find sufficient resources to defeat the markets, but because they are really fighting reality. [The full article here. Behind subscription firewall]

In a sense, John Kay responds on behalf of Mario Draghi to Martin Wolf

Vasan Shridharan is a very astute follower and analyst of financial markets and a good friend. He ‘consults’ for a leading international and successful global macro hedge fund. This afternoon, in one of our regular conversations on financial markets, he said something very funny and profound at the same time:

European leaders do not like the problems they face nor do they like the solutions.

Martin to Mario

I had no problems with the prescription that Mr. Wolf had suggested to Mr. Mario Draghi. This is the note on which he concludes:

To any sensible observer, all this screams that ECB policy has been far too tight. If the eurozone is to enjoy any hope of adjustment with growth this must change, and now.

The eurozone risks a tidal wave of fiscal and banking crises. The European financial stability facility cannot stop this. Only the ECB can. As the sole eurozone-wide institution, it has the responsibility. It also has the power. I am sorry, Mario. But you face a choice between pleasing the monetary hawks and saving the eurozone. Choose the latter. Explain why you are making the choice. And remember: fortune favours the bold.

I cannot say whether the ECB monetary policy has been too tight. Perhaps, for some countries. But, not for all. What did the ECB achieve by being too loose in the first part of the last decade? The Eurozone crisis.

Mr. Wolf writes that broad money growth is a meagre 2% and that Eurozone nominal GDP ha stuttered. Isn’t it possible that the Eurozone has real structural problems in growing that monetary policy alone cannot help resolve?

So, the answer, according to Mr. Wolf is that Mr. Draghi should not defer to hawks. I might not agree with it but I concede that Mr. Wolf has the right to make that suggestion. What disappoints me more is the absence of qualifiers to his suggestion. Mr. Wolf makes it sound almost as though such an easy solution has been staring in ECB’s face and that they have been ignoring it all along.

If only policy-making was so easy, why are we here now at this point, the world over?  The problem with those who advocate loose and accommodative policies is not that they advocate such policies but that their advocacy stops short of the hard work required to show why their policy prescription is the best (or the least worst) of all options. They are being too lazy.

Savour the quotes

“In the short run, it would help if the authorities would say they refuse to provide publicly funded money for the payoffs of derivatives,” he said. “This is like using public funds to support your local casino. It is difficult to see how this is good for society in the long run.”

Walker F. Todd, a research fellow at the American Institute for Economic Research and a former official at the Federal Reserve Bank of Cleveland, cited in the New York Times article on French and Belgian governments making all creditors of Dexia whole. One bad act (bailing out all AIG creditors) begets another.

Yellen said the view is “erroneous” that the Fed’s expansion of its balance sheet through additional bank reserves will fuel inflation because the central bank can raise the interest rate paid on reserves. The Fed eventually plans to shrink its assets once it judges inflation is a risk, Yellen said.

Yaah, right. Inflation at 4.0% is not a risk and real short rates at -4.0% is not a risk, already.

The record of the last 20 years shows that the Chinese monetary and banking authorities have a habit of taking an ostrich approach to the informal financial sector, pretending that they are regulating the sector until serious problems emerge. This approach cannot last forever, and changing it means acknowledging the backwardness of the formal financial sector and taking remedial action. An immediate step that the authorities should take, as many economists have argued for years, is to allow the saving rate to reflect the cost of investment. [Full article here]

Quite. Coming from a Chinese economist based on China, it is something. He has hit the nail on the head.

Despite the current negative environment for Brazil as discussed above, the country remains one of the best emerging market destinations on the planet, relatively speaking, of course.  Brazil can boast of solid demographics, huge commodity resources and more flexibility with their monetary and fiscal policies than almost any other economy of comparable size.  The domestic story may have slowed but it’s far from dead.  In fact, over the long haul, Brazil’s population of 200 million consumers will keep demanding a better diet, higher quality education and better housing.  With this in mind, investors would be well-served to use these downturns to scoop up bargains in the domestic sector.

Perhaps that buying opportunity isn’t today, we’re still a long way away from the Great Reset.  But in a world where fiat currencies are devalued and consumers over-leveraged, it’s going to be commodity rich Brazil and their young population that will do the best on a relative basis.

Amen to that. The full article on Brazil in the global context is here.