Nikkei follow-through

The day after its 7% + swan dive, the Nikkei 225 stock index opened higher. The previous close (closing level on 23rd May) was 14483.98 points. It was up more than 500 points soon after opening for trade on Friday. Then, with 75 minutes to go for closing, it was down 502 points from the previous close. At the close, it managed to rise above the previous close by 128 points. In other words, in the last 75 minutes, it climbed some 630 points. That surely is a confidence-inspiring follow-through to yesterday’s drop. Wonder who helped the index recover 600 points in the last 75 minutes. Do you have any guesses? ūüôā

Yesterday, I think I provided the answer to the question posed by HSBC’s Stephen King in his Op.-Ed in FT today on whether financial investors have remained in touch with economic reality.

Run by and for

As I write this at 1400 hours on Thursday, the Nikkei stock index is down 5.5%. Do not ask me for a reason. If I were a financial journalist, I would cook up something and that would be (a) The Fed was somewhat more hawkish than expected; (b) US stocks were down; (c) Japanese government is re-thinking on yen weakness and (d) the latest China PMI indicates Chinese Asian recession. If I am more innovative, I could add that the Thai GDP contracted in the first quarter.

The journalist could use any, some or all of the above and he would sound reasonably erudite.

But, it is non-sense. No one knows why investors have been buying lately and why have they been selling today.

Financial markets today are an asylum run for and by lunatics.

UPA Ninth Anniversary

The two headlines I saw in ‘Business Standard’ email this morning were not recommended reading for me nor for those with history of hypertension. The headlines featured messages from the UPA Ninth Anniversary celebrations. One headline said that India never had it so good. At one level, you could say that UPA leaders have a terrific sense of humour or that they think Indians have a great sense of humour and/or tolerance. At another level, they are deluded beyond description.

Yes, India has never had it this good – unprecedented corruption, unprecedented resignations from the Cabinet, high fiscal deficit with further threat of pauperisation (this government is firm on legislating the Food Security Bill), high inflation rate (consumer prices), high current account deficit, high fiscal deficit, falling and low growth. The list is too good to be emulated by any, even if they try hard. Not that India’s other political parties are incapable of trying.

The Prime Minister has said that India would return to 8% growth if UPA was voted back to power. This statement is a strong contender for the ‘chutzpah of the year’ award.

For an effective antidote, read this MINT edit. Here are the real gems (as opposed to the ‘germs’ above) from that edit:

in 2009, the Congress’s in-house ayatollahs picked up the baton.

it is too much to hope for a political party‚ÄĒespecially with a socialist legacy‚ÄĒto take a long-term view of national interest.

How can one look for solutions from a family, whose head, Sonia Gandhi, actively participated in creating the problem in the first place?

There is reasonable chance that growth will not return to even 7% if UPA were to return to office. To know why, read this and this.

China trade surplus and other links

Bank of America-ML economists have boldly stated that China’s trade surplus (YTD in 2013) is one tenth of what has been reported so far. Naturally, it has implications for the reported GDP growth in the first quarter.

This FT story on Chinese leaders being concerned about rising unemployment is interesting. But, if I am not mistaken, this issue has been raised every year – about students not finding jobs and becoming sources of unrest. The wolf has not shown up so far, at least not to the extent feared.

[p.s: My advance apologies if FT links are not accessible without a paid subscription]

The news about carbon dioxide particles in the atmosphere reaching 400 parts per million – the first time in 4.5 million years – brought forth some articles on what to do about global warming. My good friend Dr. Vidyasagar had one simple question. How could we reliably know carbon dioxide concentration levels 3 or 4 million years ago? Who had kept records and how accurate could they be?

Strengthening his scepticism was Martin Wolf’s reference to 4.5 million years in contrast to Bloomberg putting the figure as exceeding levels that prevailed in 3 million years.

Notwithstanding that legitimate question, I found the Martin Wolf column in FT on the topic of global warming – as to why no action is being taken – well written.

The article on the looming water crisis in China in FT was neatly supplemented by Bloomberg article on India’s water crisis. This earlier Bloomberg article from April on India’s water challenge completes the picture. Both countries are exceptionally vulnerable, I think. ¬†But, I think there is more hope with India’s de-centralised solutions – rainwater harvesting and reviving traditional water bodies. Giant dams are not the answer, I guess. Let me confess – I am no expert on these issues.

This Reuters news-story on Italian poverty makes for sad reading. Also, was not aware of third day of riots in the Swedish capital Stockholm. Was not aware either that youth unemployment in Sweden is above 25%. Meanwhile, investors are busy sending European stock indices to record highs.

Frankel churns fiscal waters

Came across this blog post Jeff Frankel at Harvard who wants commentators to train their guns on Alesina and his co-authors for their work on ‘expansionary austerity’ rather than on Reinhart and Rogoff. Frankel, of course, concedes that even Alesina and his co-authors did not make extravagant claims about ‘expansionary austerity’ as headlines might suggest.

What is interesting to note is  that Frankel notes that one of the co-authors of Alesina + has recanted:

Currency devaluation, reduced labor costs, and export stimulus played an important part in any instances of growth, for example, the touted stabilizations of Denmark and Ireland in the 1980s. His conclusions: ‚Äúthe notion of ‚Äėexpansionary fiscal austerity‚Äô in the short run is probably an illusion: a trade-off does seem to exist between fiscal austerity and short-run growth‚ÄĚ and so ‚Äúthe fiscal consolidations implemented by several European countries could well aggravate the recession‚ÄĚ (2013b, p.10). To me, this is a more powerful indictment of the reasoning behind recent attempts at fiscal discipline during recession than is a spreadsheet error or a too-flippant line about Keynes‚Äô sexuality.

One can understand that it is mighty difficult to isolate the effect of austerity or stimulus on short-run growth, given that a lot of other things go on in parallel such as currency devaluation, wage freeze, external demand, export stimulus, etc. It is rather obvious and yet, an obviously overlooked fact that ‘other things are simply not equal’ or ‘cannot be held constant’ in economics. That is why such policy prescriptions have to be made with a lot of care and humility.

[Policymakers too should be rather wary of going for the maximalist approach. Something, one must mention in passing, that Indian policymakers have been guilty of, with their various fiscal interventions and constitutional rights-based entitlement schemes].

This whole debate reminds one of blind men trying to feel an elephant. Sample this piece in Bloomberg, for example. The article states that the answer for the shortage of so-called ‘safe’ assets is to increase deficits and ‘crowd in’ private investment.

I am lost. In my book, one of the reasons why assets that were safe once are not safe any more is the size of the deficit. How would increasing the size of the deficits make them safe?

Second, ‘safe’ assets have no yield because central banks have boosted their prices beyond justification through their asset purchase programme. If they step back, their prices may find a more natural level, making their yields attractive. One does not have to increase the supply of safe assets to depress their prices. One can withdraw the artificial demand for them. Then, interest rates along the safety-risk curve will go up. Cost of capital will rise for businesses. The increase in pain will lead to invention and innovation as, after all, necessity is the mother of invention. One might add, she is the mother of innovation too.

Why do economists make thing so complicated or confusing? It is because economists allow ideology and their pet peeves to contaminate policy approaches. Feasibility, sustainability and efficacy should be the guiding principles of policy interventions rather than ideology.

The second best solution is, perhaps, even better: Economists should simply shut up.


In two of my recent weekly columns, I looked at the performance of developed nations on the question of ‘re-balancing’. The verdict is that they have hardly done any. The second and final part of the investigation on re-balancing appeared today. The link to the first part is here. The MINT newspaper has gone behind a subscription firewall, by the way. Hence, these links may be accessible only after you become a subscriber. I am not recommending that but merely warning against disappointment.

Coincidentally, Simon Johnson has a good piece in Bloomberg on whether the Federal Reserve in the US is afraid to regulate big banks.

Sequel to ‘Ninan explodes’

One friend wrote to me that I was quite direct and sharp in my last two blog posts. Perhaps, I was, in the case of the post on Dr. Sen’s case for the Food Security Bill.

As for Dr. Manmohan Singh, I did not do much except to copy and paste what others had said.

If one wanted to read a sharp critique, one should read Kanchan Gupta in ‘Pioneer’. M. J. Akbar has written another good piece in Times of India, coming up with a new word for the combination of corruption and arrogance: ‘corrugance’. Bibek Debroy is dismissive of the Prime Minister but in a somewhat understated manner, in contrast to Kanchan Gupta.


Ninan explodes and other links

In his latest weekend comment, T. N. Ninan has ripped into Dr. Manmohan Singh and it is about time too. A fortnight ago, chatting with a good friend visiting from India, I had remarked that the case of Dr. Manmohan Singh has been like solving a whodunit puzzle. Every one – from the main players in the plot to the audience – is shocked when it is finally revealed that the good guy that every one trusted and shared information with turns out to be the culprit. That has been Dr. Manmohan Singh’s strength. No one had the slightest suspicion that the man was above board and meant well for India. Every successive bit of evidence against these two assumptions were either ignored or explained away, just as Dr. Manmohan Singh himself did throughout the last nine years. Read T. N. Ninan on this:

Along the way, as he lost ministerial colleagues to scandal at the rate of about one a year, Dr Singh could plead helplessness in the face of “coalition dharma”, or “arm’s length” ignorance even after Andimuthu Raja kept sending him letters. He could be silent when the country’s aviation rights were gifted to the Arabs, and do a neat side-step by seeking to pin the blame on the finance minister for spectrum mispricing though he himself had called a crucial meeting on the subject. Now, in 2013, he is protecting a minister of law who seems immune to any sense of propriety, though it is plain that the minister (of law, mind you) tried to derail the inquiry by the Central Bureau of Investigation (CBI) into the coal-mine allocation scandal, and then lied about it. There will be even less Teflon left if the Court asks the joint secretary concerned in the Prime Minister’s Office to testify who instructed him to vet the CBI’s report to the Court.

Dr. Manmohan Singh, unfortunately, has become a perverse role model for those who are aspiring for a career in crime and want to make it big: if you are after power and its aggrandisement, be patient, work hard at building a reputation that you have a profound distaste for both, manipulate your way to get to power and then watch the Till overflow. Simply put, build trust enormously and then abuse it. The only commendable virtue in this scheme is enormous patience.

[If you had missed out on these Ninan’s columns, it is never too late to read them]

Recently, M. J. Akbar wrote another hard-hitting blog post/column on why India has never appeared as helplessly weak as now. This is what he had to say on Dr. Manmohan Singh:

An indecisive Prime Minister spreads uncertainty along every artery of power. He does not speak, and when he does silence seems the better option. He appears to suggest that clich√© or evasions are a solution. He demands justice from Pakistan after Sarabjit’s deliberately authorized murder in a Pak jail, unable to comprehend that India is still awaiting justice for Hafiz Saeed, mastermind of the Mumbai terrorist attack. Pakistan will do nothing beyond raising the occasional flurry of dust; and Dr Singh is unlikely to do anything after the customary waffle.

In the same vein, ‘Business Standard’ wrote an edit on the ‘Incredibly Shrinking India’. It concluded that UPA would pay heavily for destroying India’s image in the next election. I sincerely hope they are right.

Although this MINT editorial talks of the ‘Great Corruption Chronicle’, it did not list the corruption scandals in UPA as I did in my piece for Pragati published yesterday. I argue that minor things like the ‘Cabinet Committee on Investment’ will not turn the investment cycle in India around. The problems go far deeper than that. Analysts who ignore politics as a factor in India’s economic outlook have a huge ‘omitted variable’ problem and do not seem to take notice of that. India’s economic slowdown is not a typical business-cycle excess inventory/higher inflation induced slowdown. It is far more insidious than that.

This MINT editorial also notes that scandals have begun to stick to Dr. Manmohan Singh.

Consequently, it is only appropriate to end this blog post by noting R. Jagannathan’s call for the Prime Minister to make a ‘graceful exit’. ¬†The time for a graceful exit is long past. It is just time for a ‘merciful exit’ – i.e., mercy for the nation.

Sen’s many sins

It is one thing to commit a crime and it is another thing to abet it. It is difficult to say which one is worse. Economist Amartya Sen is clearly guilty of the second, if not the first too. Apparently, even as the Congress-led UPA government introduced the Food Security Bill in the Parliament, he had pontificated on the irresponsibility of allowing deaths to happen if the Food Security Bill was not debated and passed. We did not know that he was a Bollywood script writer before he became Economist. Perhaps, it is the other way around.

It is a lie straightaway. India has an existing Public Distribution System (PDS). Food grains and other essentials are being distributed already through PDS. For the most part, the system is flawed. It is corrupt and it is inefficient. It hardly benefits the target population. It is siphoned off to feed those who can pay a lot more for the PDS food grains, oil and sugar. This has been documented year after year in Economic Surveys of the Government of India and in Planning Commission studies.

All that the Food Security Bill does is to build on this massively flawed structure, to centralise it and to expand its scope to even more undeserving segments of the population. By itself, ‘Right to Food’ does not mean that those who deserve to get their food and nutrition dignity get it. After all, it is almost a decade since we have had the ‘Right to Information’. Indian governance and bureaucracy have not become more transparent and accountable. Information is still being denied and withheld. This could have been one most potent weapon against bad governance and corruption. But, it is off the radar of people, intellectuals and the media (the separation is deliberate).

R. Jagannathan at FirstPost had written a very good article attacking Dr. Sen for his flagrant disregard for facts, for financial sustainability of the Food Security Bill and for his most shameful use of emotions and drama for wrong ends. (Check out Vivek Kaul’s article in Firstpost too)

Government finances are not just for arm-chair intellectuals and economists to dissect. Budget deficits cannot continue for ever. Ordinary people pay for it with more taxes or higher cost of living or both. Government borrowing has to be paid off or reduced through stealth or both. Higher taxes and higher cost of living hurt the poor in a country where they number at least 300 million by some definition. Doesn’t it cause deaths, misery? What is the number that Sen is willing to put on these?

Higher taxes are a burden on the future society. It is a burden on our children and grand children. Hence, food security today is about putting food on the plates of parents by removing it from the plate of their children and their children. Isn’t that a crime? Which parent would prefer to starve their children?

R. Jagannathan misses the plot completely in the end when he tries to educate Dr. Sen about the real purpose of the Food Security Bill and how it is a plot by the Congress to shore up its electoral prospects. He gives a rather wide berth to Dr. Sen’s motives. I am guessing that Jagannathan knows the truth but does not say so out of respect for Dr. Sen’s stature. That is precisely the danger. These people exploit their halo and stature to get away with utter irresponsibility and crass selfishness. Dr. Sen’s propaganda on and his support to the Food¬†Security¬†Bill is part of the Congress plot. He is as guilty as the Congress Party is in putting personal and party interests above that of the nation.

His sins are many:

Placing crass emotionalism in service of a flawed goal is undignified;

refusal to take cognizance of the burden on several generations of Indians from the Food Security Bill and other hare-brained schemes of the National Advisory Council  (NAC) is a crime against the nation;

ignoring years of accumulated empirical evidence on government failure to deliver on the objectives of its social goals because of flawed design and corrupt and inefficient implementation is professional incompetence and

failure to address the concerns raised by Ashok Gulati on the costs of the Food Security Bill is academic dishonesty.

Every right thinking Indian should sign a petition on the winding up of the NAC or, at the minimum, on Dr. Sen’s resignation from the NAC.

Even PBoC does not believe export data

China exports seemingly rebounded in April. The country posted a trade surplus. Asian investors duly pushed stock prices higher. No one believed that China exports rebounded except ‘brain dead’ stock market investors. This news-item in Reuters is a good explanation of why the People’s Bank of China (PBoC) was neither impressed nor amused by the trade data.

On Wednesday morning, during a routine call to primary dealers in China’s interbank market, dealers told Reuters that regulators had queried them for demand for three-month bills.¬†Hours later, after markets had closed, the PBOC said it would auction 10 billion yuan ($1.6 billion) of three-month bills on Thursday.¬†

The move suggests that the PBOC is preparing to make systematic longer-term cash drains from the money supply to blunt the impact of hot money flows, with a potential knock-on impact on interest rates, market sentiment and economic growth.¬†The announcement came days after the country’s foreign exchange regulator released new rules to crack down on inflows of hot money disguised as trade payments.

Further, these export figures flew in the face of weak manufacturing data (Purchasing Managers’ Index – PMI) and a long strike in the Hong Kong port. PMI showed that new export orders contracted in April. Yet, according to the trade data released yesterday, export to Hong Kong jumped 57% in April!