Of bats and chats

Almost two months of cricket carnival got over today, anti-climatically as most of the previous tournaments have. Australia won the title for the 5th time, 4th time out of the last five outings in the finals. Clearly, they are a superior team. New Zealand team disappointed in the end. They folded up. Aussie bowling was good. Yet, some inexplicable shots were played. Elliott had some eight overs to hit out. He hit out prematurely, perhaps. Martin Guptill had a lapse in concentration. Played a nothing shot.

May be, if two nations host the tournament again, is it safe to predict that they would be in the final?

The thing that would remain in mind – not the big hitting of Brandon McCullum or that of A.B. de Villiers or that of Martin Guptill. It will be Wahab Riaz’s spell against Shane Watson. Who knows? Had the catch been taken off his bowling at the deep, Pakistan might well have won the match.

I enjoyed the clinical destruction of England total by Sri Lanka. Chased down 300+ wonderfully well. Kumar Sangakkara – waht a great cricketer! IN fact, their team made a match of a target of 377 against this very Aussie attack. Had Chandimal not retired hurt, who knows what might have been possible?

I did not get to watch Brenan Taylor against India. But, what a cricketer too!

IN fact, considering how badly the NZ team folded up both with bat and ball (Southee was not a match for his Australian counterparts), Indian performance in the SF stands out even more. Indians had reduced Australia from 197 for 1 to 248 for 5 by the end of  42 overs. They gave 10 per over in the last eight. India’s top pacers going for 7 per over was a bit much in the end. But, it was about 20 runs too many. That is all. Indians started supremely well. By the end of 12 overs, they were 76 for no loss! Kohli’s temperament was exposed through the induced poor short selection. Mitchell Johnson won that battle of minds.

Suresh Raina succumbed too to poor shot selection. Rohit Sharma showed character in thumping Mitchell Johnson for a six. But, he was felled by sheer pace – no shame on the batsman – the next ball. Again, showed Mitchell Johnson’s resilience of mind.

Given what Pakistan, Sri Lanka and India did against this Australian team in patches, it is clear that this Aussie team is beatable. Well, there is a catch. It requires the rival teams operating at their peaks all the time. Dhoni, the Indian captain, said it well, in his post-match conference after the Semi-final loss to Australia. They pile on the pressure and the pressure makes you do things that you, otherwise, would not.

Therefore, given that it is not possible to play at your peak throughout the match and that Australians keep the pressure up all the time, it is clear that they are way ahead of the rest. One has to give it to them, even if grudgingly, considering their too-aggressive sledging on field. I did not like the send-off that Brad Haddin gave Elliott today.

A team that gives away 4.75 runs per over in the last ten overs in a batting dominated game now has to be the best. One has to acknowledge that. So, well done Australia!

That brings us to the real issue. It is ok to go for shorter and shorter versions. If that is what the masses want, who are we  – the old foggies – to complain? But, should that necessarily be synonymous with the game becoming friendly to batsmen and hostile to bowlers? Simply put, you need bowlers to bowl to batsmen.

If the game drives many away from picking up a ball and we have a shortage of bowlers, how stupid would that be? Isn’t it equal to female infanticide that has resulted in distorted sex ratio in some parts of the world?

The sooner the game’s administrators realise that they are dumbing down the game – not so much with their shorter versions but with their making it skewed heavily in favour of batsmen – the better it will be for the game.

Mark Nicholas, in his presentation, rightly mentioned the names of some great cricketers that have adorned cricketing arenas in recent times – Sangakkara, Jayawardane and possibly Daniel Vettori too. They might be leaving one day cricket, at least. They are truly very good athletes. Salute them.

Was very surprised to read – in a Sambit Bal article in ESPN Cricinfo – the kind of after-cricket lives that cricketers in New Zealand lead.

Good tournament and good for cricket. Good entertainment. But, all good things must come to an end. Now, if only they curb the bats and the chats…

[Postscript: Well, India had a good day on 29th March 2015. India’s woman badminton ace Saina Nehwal had become the World No. 1. Congratulations to her]

Treasury Redundancy

Monetary authorities around the globe are levying a tax on investors and providing a subsidy to borrowers. Taxation and subsidies, as well as other wealth transfer payment schemes, have historically fallen within the realm of fiscal policy under the control of the electorate.

Classical economics would tell us that the pricing distortions created by the current global regimes of QE will lead to a suboptimal allocation of capital and investment, which will result in lower output and lower standards of living over time……

The cost of QE is greater than the income lost to savers and investors. The long-term consequence of the new monetary orthodoxy is likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity. [Link]

Very good piece by Scott Minerd in FT. The full piece is well worth a read.

[Postscript: I quickly checked out his Twitter handle. I am not sure if it is the same thoughtful person who wrote this FT article. Will leave it at that]

As for the impact of QE, if more proof were needed of its short-run mirage of benefits and long-run real costs, check out this Bloomberg story on home prices running way ahead of wage growth and the accompanying charts.

A very pertinent set of observations in that article:

The trend illustrates the limited impact of the Federal Reserve’s decision to include mortgage-backed securities in its unprecedented asset-buying program. The Fed bought more than $1 trillion of those securities to prop up the housing market after it collapsed and helped trigger the worst recession in the post-World War II era.

With the economy improving and home prices climbing, central bankers seem to have achieved at least part of their goal. However, investors have reaped much of the benefits of rising prices, while meaningful wage growth — and with it the ability of many Americans to buy homes — has yet to materialize. That’s been one reason housing has posted such inconsistent progress over the past two years, even with mortgage rates near historical lows.

Transmission denied

The estimates of the speed of adjustment coefficients indicate that the lending rate adjusts more quickly to an increase in WACMR than to a decrease. Similarly, the estimated speed of adjustment coefficients indicate that the deposit rate adjusts downwards when WACMR falls, but not upwards to a monetary tightening.

That was from the IMF’s ‘India: Selected Issues’ March 2015 (Country Report 15/62).  Looks like more than asking the Reserve Bank of India, the government should be asking the banks to pass on rate cuts to borrowers and rate increases to depositors. The full ‘Selected Issues’ can be downloaded from here.

Perhaps, there is even a legal case here against banks for business malpractice, if it is indeed true.

Political Economy of Finance

Avoidance of systemic risk or macro-prudential supervision, as the ugly phrase has it, is a much harder assignment than monetary policy. The authorities have to strive for smart, effective regulations and flexibility without undue burden. Opponents will argue that regulation could reduce financial sector profits or even cut a sliver off economic growth, but this argument should not be a conversation stopper. The cost of another 2008 is so high that such trade-offs must be weighed and debated.

Actions to reduce systemic risk arouse hostility in the financial services industry, which can threaten the independence of the central bank and other regulators if backed by big money and political influence. Brave central bankers—the Paul Volckers of the future—will have to have the courage to raise capital ratios and lower leverage ratios when instability threatens and use selective credit controls to contain asset price bubbles. In the past, threats to the independence of the Fed were diffuse populist reactions to the high interest rates and limited political clout. But recent critics of monetary policy have come from the right, not the left. An alliance of proponents of tighter money with critics of systemic risk regulation could be a well-financed coalition.

Those were the words of Alice Rivlin at the Economic Policy Conference hosted by the National Association for Business Economics. She had received the Association’s Lifetime Achievement Award in January. She was the Budget Director and she was at the Federal Reserve.

Her warnings about those advocating tight money while opposing macro-prudential regulation are relevant not just for the US but for India as it contemplates a new financial legal and regulatory architecture. Financial sector profits be damned and rightly so.

Her full speech is here.

Joust with sanity

  • There are 125 companies in the NASDAQ biotech index which are valued at $280 billion, but posted aggregate losses of nearly $10 billion in the most recent LTM reporting period.
  • The Russell 2000 closed at a new all-time high on Friday (20th March). At its index value of 1266 it is now up 260% from is post-crisis low.
  • It represents a valuation multiple of just about 90X LTM (latest 12 months) earnings reported by the 2000 companies which comprise the index.
  • One year ago, the LTM GAAP earnings for the Russell 2000 was exactly $14.10 per share for CY 2013. So the $14.18 per share reported for 2014 means that the Russell 2000 EPS has gained eight pennies or 0.6% during the past year.
  • The Russell 2000 stock index is trading at 90X based on an earnings growth rate of less than 1%. [Link]

I just wanted to check if these figures were true and I did find this one. It is true that, based on reported PE, the Russell 2000 index is, indeed, trading at nearly 90 times PE multiple. Of course, the WSJ link above will change at least on a weekly basis if not on a daily basis.

The Federal Reserve Bank of Atlanta does ‘nowcast‘ing of GDP. It is updated with each piece of macro economic data that is released. Orders for durable goods in the US for the month of January were released last night. Goldman Sachs called it a touch ‘softer’. Well, it printed -1.4% vs. consensus forecast of 0.2%. Data for the previous month was revised down as well. It was not ‘soft’. It was bad. FRB Atlanta’s ‘nowcast‘ for GDP growth in Q1 is not much different from zero.

US stock indices normally rally on bad news because the only things they focus on (or, at least for the most part) are interest rates and liquidity. For a change, they reacted to bad economic data negatively. We should not hold that against investors. They should be permitted their rare joust with sanity.

Now, watch for the change in tone and content of the discussion on US rate hikes. There may not be any normalisation because what we have now may well be the normal, for the US. They mocked at Japan’s lost decade or two. They are sliding down that path. Interest rate normalisation will slowly turn into talk of another round of Quantitative Easing. These are early days for that. But, watch this space.

A leveraged gilded age

Business Standard deserves to be applauded for putting out this story on corporate leverage in India. This is a story on the debt of India’s private non-financial corporate sector. Here are some key points from the report:

Since 2003-04, Indian companies’ outstanding debt has increased at a compound annual growth rate (CAGR) of 24.8 per cent, more than double the 11.4 per cent rate for India’s public debt during the period.

The outstanding corporate debt is now equivalent to over a third of India’s GDP (34 per cent in 2013-14), up from 14.8 per cent in 2003-04. As a ratio of revenues, India Inc’s combined debt was equivalent to 57 per cent of revenues last financial year, up from 37.3 per cent in 2003-04.

Based on the combined figures of India’s top 1,000 listed non-financial companies by revenues in each of the past 11 years since 2003-04 — these companies accounted for an average 95 per cent of revenues and assets of all listed non-financial ones — shows the combined debt of these firms jumped nearly 10 times in the past decade. It stood at Rs 35.6 lakh crore at the end of 2013-14, compared with Rs 3.9 lakh crore at the end of 2003-04.

Towards the end of the article, there is a conclusion attributed to Dhananjay Sinha, Head of Institutional Research, Emkay Global Financial Services. He says the following:

“Not all corporate debt is due to growth or for funding PPP projects. In the past few years, many companies have borrowed only to make up for losses in their operations or to fund working capital,” says Dhananjay Sinha, head of institutional research, Emkay Global Financial Services.

This has made corporate indebtedness crucial to growth revival. In most sectors, companies now hold the key to capex revival but their hands are tied by stretched balance sheets. “Unless there is a meaningful deleveraging by India Inc, it will be tough for the government to revive growth cycle,” says Sinha. [Emphasis mine]

While much attention has focused on the shenanigans of the previous UPA government – they were huge, no doubt about it – a free-pass has been given to the Indian corporate sector. I do recall commenting about the extent of India’s external borrowings in my presentations in 2013. That is when the rupee plunged as Indians’ external debt financing requirements balooned. They had borrowed close to USD50.0bn in barely 4.5 years up to 2013 first half, if my memory serves me correct.

For all the borrowing, India’s capital formation – in the private sector too – has been rather poor. In fact, it looks like there has been a good correlation between the rise in the corporate leverage and the rise in the wealth of India’s corporate promoters. I am not saying there is a causation. But, there is a prima facie case for some good research into the application of all this debt. Where did it go?

From a policy-making perspective, it only shows the importance of the Government stepping up to the plate on spending. In that sense, the Indian government got it correct in the budget. Also, it bolsters the case for fiscal spending that my friend made in his email. See my previous post here.

India needs public investment, since the private corporate sector had gorged on debt and does not seem to have much to show for it.

A bit late

Indian Finance Minister blamed the previous UPA government for bad fiscal management. Correct. But, he said it some one-year too late. This news-report in Business Standard opens with these observations:

Finance Minister Arun Jaitley on Thursday accused the previous government of compromising with the quality of fiscal consolidation by postponing expenditure, saying the quality of the deficit was as important as its numerical figure. [Link]

All that he should have done, on becoming the FM, is to call a few economists from Mumbai and ask them to speak, in confidence, about the quality, the viability and the desirability of 4.1% deficit target that he had inherited from the previous government in May 2014.

In a daily comment for clients issued on 23rd March 2015, Neelkanth Mishra of Credit Suisse wrote this:

We continue to believe that the current bout of weakness in the economy is driven by fiscal contraction…

I agree with him.

In fact,  a friend – he would prefer to remain anonymous for now – wrote me this on India’s fiscal strategy:

Abandon fiscal consolidation and take up massive fiscal expansion to deliver infrastructure and jobs. Win 2019 and then take up fiscal consolidation. Improving the economy and putting it on a solid footing will only deliver NDA 10 years lease in 2019.

Lots of food for thought:


Lee Kuan Yew 1923-2015

At the age of 91, Singapore’s first Prime Minister and the strongman of SE Asia passed away on Sunday (March 22). India’s Prime Minister will attend his funeral on 29.3. Tributes have poured in for him. Well deserved. Of all things, what stands out is his readiness to stand up for his convictions and not flinch. He made no apology for the way he governed the country and the proof of the pudding is in the eating. Many in the Opposition parties in Singapore might have different thoughts and different things to say and some with justification. But, for the most part, for the ordinary Singaporean, he delivered and how! His was a truly transformative leadership.

May his soul rest in peace.

At the same time, it is not right to engage in comparison of the present government in Singapore with his. The global context had changed completely. Economic growth in a reconstructing world economy was easier then. An open economy benefited easily from it. Now, it is hard pickings for economic growth. Capital flows are immense. They can overwhelm a small nation. Singaporeans have climbed the steps of material affluence in the Maslow hierarchy. More existential challenges and steps await them. They are not easy to cross or climb over.

The next 50 years will be a lot different and more difficult than the first fifty years for Singapore. That is inevitable, for the most part.

p.s: In one of the many articles that appeared in FT, this one relating to China and Mr. Lee Kuan Yew had me thinking.

Lee, who spoke Mandarin Chinese, rejected the idea — held by some in the west — that China might some day embrace a form of western-style democracy. While they were “likely to move towards a more participatory form of government”, the idea of one person, one vote was unrealistic for China, he believed.

“How do you canvass 1.3bn people?” he said in his last book, One Man’s View of the World, published in 2013 when he had turned 90. [Link – may be behind a subscription firewall]

That set me thinking. What is the best model of governance for nations with population of a billion plus? Structured, strict rules, strong governments down the line or ‘Democracy with possibly managed chaos and free-wheeling evolution?’

Who or what is the ‘market’?

This blog post in Real Time Economics says that in the tussle between the Federal Reserve and the Market, the Market won big. The post refers to the Federal Reserve revising down its expectations for policy interest rates in the coming years. It sets the policy rate! It is quite possible that keeping expectations of how far it would go to normalise interest rates high was, for the Federal Reserve, a form of escapism from the current abnormal monetary conditions, it is maintaining. It is similar to the resolutions that we all make: “I will get up early from tomorrow and exercise (Let me go back to sleep today)”.

Once the ‘tomorrow’ drew closer to ‘today’, the Federal Reserve blinked. So, we all know where the resolutions stand. The Federal Reserve is trapped. We wrote about it yesterday. The ‘market’ has won because it has trapped the Fed into a stance that it wants or kept it to a stance that the ‘market’ thinks is good for the ‘market’.

I have one problem with that post. If the ‘market’ had a darker vision of growth and inflation, why is that the equity market valuation does not reflect that? Is that because it is no longer a market and nothing but an incestuous insider club underpinned by financial engineering (stock buybacks)?

Buying one’s way to a bubble

Some important pointers from a Bloomberg article on stock buybacks in the US

  • Corporations and investors have switched positions as the bigger buyer of stocks. Inflows from equity funds exceeded corporate buybacks every year in the late 1990s, contributing a total of $640 billion over the three years through 2000. That compared with $418 billion from share repurchases.
  • Companies have since taken the lead, with buybacks setting a record $589 billion in 2007. Last year, corporations beat all other groups as the biggest source of fresh cash to the stock market, according to a January report by Goldman Sachs Group Inc., which tracks money flows from pension funds, foreign investors and ETFs.
  • Repurchases by U.S. companies averaged $46.1 billion a month in 2014, compared with $7.1 billion in ETF and fund inflows.
  • Investors have pulled more than $10 billion out of equity funds in January and February and sent $38 billion to bonds — even as companies announced $132.7 billion more in buybacks. February’s total of $104.3 billion was the highest on record, according to TrimTabs Investment Research.
  • Buybacks will boost per-share earnings, with the potential of helping avoid the first back-to-back profit contractions since 2009, according to Yardeni Research Inc.
  • Profits from S&P 500 members will decline at least 3.2 percent this quarter and next, according to analysts’ estimates compiled by Bloomberg. For the full year, growth will be 2.3 percent, down from 5 percent in 2014.