Morning smiles from India

India topped global FDI rankings in the first half of 2015 after coming in at an impressive no. 5 in 2014. Good stuff. PM’s foreign visits are helping. Even if there is no link between the two (hard to believe), it is a fact that his critics would have broken out into a song and dance had the opposite been true. (ht: Dr. Vidyasagar). From a mundane perspective of growth accounting, hope these numbers show up in Gross Capital Formation even as they won’t in Bank Credit Growth which many of us follow because the data is available. That is not the full picture of funding availability in the country.

A.K. Bhattacharya of ‘Business Standard’ had a good piece on Mr. Suresh Prabhu, the Minister for Railways. Reminded of the fact that he was perhaps the first Railway Minister who announced no new railway lines or trains:

His maiden railway budget had a string of creditable firsts to it. In the history of Indian railway budgets, he will perhaps be the first railway minister not to have announced either a single new train or a new railway line. That must have taken a lot of courage. What he spurned as the railway minister was a political opportunity to nurture his or his party’s vote bank by showering goodies — one new train to connect his own constituency or a new railway track for the constituency of his boss. He did nothing of that sort either for himself or for his boss and none for anybody else. [Link]

I am really doubtful that many of us paused to think and write about this act of deliberate renunciation and good governance.

This is from MINT on ISRO achievement:

On the day of the ASTROSAT launch, Indian Space Research Organisation (ISRO) marked another landmark achievement. With the launch of six foreign satellites on Monday, ISRO’s workhorse rocket, the Polar Satellite Launch Vehicle, has put more than 50 foreign satellites in space. The latest mission also included four US remote sensing satellites—the first time ISRO has launched satellites for the US.

During the summer, India had launched five UK satellites, as I reminded David Pilling of FT here.

On the issue of the levy of Minimum Alternate Tax (MAT) on foreign businesses with no permanent establishments, the government might have scored a self-goal earlier in the year. It used the opportunity to clean up the mess and has cleaned it up well.The government appointed the Justice A.P. Shah Committee to go into the matter. The Committee recommended that the government withdraw the notices. Now, not only the notices for payment of MAT on FII are to be withdrawn but all foreign businesses which have no Permanent Establishment in India and/or which are residing in countries that have a Double-Taxation Avoidance Agreement with India. This is a good move.

A note for critics: if one does not write about both the good and the bad stuff, it is ok. If one wrote about the bad stuff, then it is basic decency to write about the good stuff. Third, if one wrote about a specific wrong thing done and if it were fixed later and fixed well, all the more obligatory to mention it, to achieve proper closure. Otherwise, there will be no credibility and objectivity can legitimately be questioned.

Lest I forget – Reading Links

Moody’s downgraded France’ credit rating from Aa2 to Aa1.

S&P downgraded Japan two days earlier on September 16

Japan’s Parliament approved overseas military expansion

Indonesia decided to abandon its high-speed rail project. Sensible decision. Something for India to think about.

Oops! I wrote that last one too early. It is back on track!

Is Saudi Arabian Sovereign Wealth Fund history? Curtailment of Saudi finances for overseas causes (hint, hint) cannot be bad news at all.

Widening bond spreads cannot be good news for the economy and for stocks in the US; if so, for stocks everywhere. Junk bond yields crossed 8% in the U.S.

China’s industrial profits declined 8.8% y/y in August. Biggest since 2011. Not news to me. News is that they had a stock bubble going without any support from corporate bottomline.

Deutsche Bank reports that liquidity in currency trades is drying up. Not good news either.

The dark side of globalisation – weaponisation of everything.

Harvard Endowment’s Annual Report for 2015 warns of potentially frothy conditions in illiquid markets.

Janet Yellen, Fed Chairpeson, went to my Alma Mater, the University of Massachusetts, Amherst, and warned that rates cannot go much below zero (?!). Also, said that keeping rates for too long below zero could endanger financial stability. Too late. The horse fled the barn a while ago.

The Chicago Fed National Activity Index fell very sharply in August. What gives?

Labour vs. Capital. Time for the pendulum to swing in the other direction? We are going to hear a lot more of this in coming years.

Finally, the haze in Singapore shows no signs of leaving.

The ‘values-free’ GDP

Teaching students at Singapore Management University this month, into November. Today’s session was on Macro-economic concepts. Came across a review of the book, ‘The Little Big Number: How GDP Came to Rule The World and What To Do About It’ by Dirk Philipsen (Princeton University Press) recently. You can find it here.

The reviewer had cited these lines from the book. Great lines:

a pill-dependent smoker who, on the way to his divorce lawyer, crashes his oversized car into a school bus because he is texting about an impending derivatives trade

All of these activities boost GDP!

I had already blogged about the review article here.

The Volkswagen story

Q&A: Why would VW cheat emissions tests? [Link]

VW cheated emissions tests, says EPA [Link]

VW emissions scandal is reality’s revenge [Link]

How VW’s ‘defeat device’ cheated on EPA emissions tests [Link]

Q&A: what VW vehicle owners need to know [Link]

EPA surprised by scale of Volkswagen’s deceit [Link]

Martin Winterkorn resigns as VW boss over emissions scandal [Link]

Volkswagen’s deception is a warning to every company [Link] – very good article

VW emissions scandal is personal for many Germans [Link] – yes, indeed, it is a huge damage to German reliability.

I cannot help wondering what Indian car manufacturers have been and are doing. That Pandora’s Box must be opened. It is not enough if India ordered only VW cars tested in India.

It does raise huge questions over European vs. China or Asian data, reliability, etc. Good news for Japan car makers? Or not?

Raises questions on private sector, capitalism, market economy, etc. It is a blow to capitalism, its powers of self-regulation and a blow to the supposed virtues of market economy. Without a bedrock of trust and integrity, there is no capitalism. These are often ignored.

If true emissions were 20-40 times more than test results, imagine the damage caused to the inhalers around the country, around the world. Diffuse losses and concentrate gains – very similar to what the banking industry in advanced countries did before the crisis of 2008. That is no good advertisement for capitalism. That is kleptocracy.

(post-script: all articles are from FT. Some could be behind paywall. Apologies).

Asian and Chinese NPL

From JP Morgan via this FT Alphaville blog post

  • “We estimate peak NPLs of 5.5% in China, or 8.2% including WMPs; 8.0% in Indonesia; 6.4% in Thailand; 4.8% in India; and 4.4% in Malaysia.
  • We also try to estimate how much provisioning is still to come, by subtracting the past 18 months of write-offs already taken & current levels of excess reserves in the banking system. This argues for an additional provisioning of 370-640bps in China; 570bps in Indonesia; 400bps in Malaysia; 390bps in Thailand; and 320bps in India.
  • Using previous cycles as a guide, we find it takes 11 quarters for NPLs to peak. Given the write-offs seen thus far, this argues that we’re still less than halfway through the cycle in Asia, and in some cases (e.g. Malaysia), at the very beginning.”

Prof. Chris Balding at Peking University thinks that the peak NPL ratio of 5.5% for China is conservative.

He quotes extensively from the prospectuses of at least two banks. Worth beholding.

Huishang Bank:

Our loan classification and provisioning policies may be different in certain respects from those applicable to banks in certain other countries or regions.

We cannot assure you of the accuracy of facts, forecasts, and statistics derived from official government publications contained in this prospectus with respect to China, its economy, or its banking industry.

Shengjiang Bank wrote in their prospectus:

Our historical non-performing loan ratios may not fully reflect the actual changes of our asset quality due to government-sponsored disposals and write-off of non-performing loans in the past that were not in the ordinary course of business….we cannot guarantee that the government will continue to help us dispose of and write off our non-performing assets.

Loan may be unrecoverable despite a favourable court judgement due to our failure to apply to the court for enforcement before the applicable deadline” or “no loan contract (agreement) has been signed with the borrower, or the original loan contract (agreement) has been lost, and the borrower refuses to confirm the loan…

Handling China

On September 18, Bill Bishop had a series of tweets on Bloomberg ‘handling’ China:

Wonder how Bloomberg’s private much conference this wk 4 visiting China state council information office delegation went.Should help w visas [Link]

Textbook relationship repair by Bloomberg.Fired winkler & “offending journos,got right consultants”, showed proper obeisance.Visas/biz flows [Link]

When china unblocks bloomberg’s website we will know the restoration to good graces with the propaganda ministry is nearly done. [Link]

But the grovelling, pandering and self-censorship to appease china will have to continue, esp now that Bloomberg has proven it has no spine [Link]

Bloomberg will go down as a too case study for how to repair china government relations. Very well done [Link]

A tweet from China.ORG.CN

China and France agree to set up a joint fund to invest in projects worldwide. [Link]

This is Chris Balding’s response to the above news on France-China joint fund:

Yet more reason for the cheese eating surrender monkeys to talk about how great the #China economy is [Link]

Chris Balding RT Amanda Lee tweeting this Reuters’ article and Balding links France’ support for China inclusion into SDR to this story.

UK Chancellor says that UK and China ‘should stick together’ and that UK should be ‘running towards China’, etc. [Link – could be behind a paywall]. He proclaimed the advent of a golden decade in relations with China.

There are plans to link up Shanghai and London Stock Exchanges and he was bullish on the China economy. [Link]

Someone should tell George Osborne this:

That China’s overall Non-Financial Sector (Private and Government) debt/GDP ratio had climbed by over 87 percentage points (from 152% of GDP to around 240% of GDP) in about 29 quarters from the end of 2007. That is unlikely to be very bullish for future growth prospects. He can check out BIS statistics in this regard.

Nick Butler, a visiting Professor at King’s College, London wrote the following in an article in FT on the UK Government asking China to take over a nuclear power plant and run it! Yes, you read that right. Desperate people do desperate things, it seems:

Whatever the truth behind the government’s public nuclear policy, its grovelling behaviour towards China on this and other issues is extraordinary. [Link]

But, the rest of the paragraph made no sense and bore no relation to this line above.

Also, one presumes someone in George Osborne’s office showed him this news-item:

The Office of Personnel Management on Wednesday said hackers stole much more sensitive information from its servers than originally believed, disclosing millions more fingerprint records were stolen than previously estimated.

John Garnaut has this excellent piece on how bureaucrats in Australia are frustrated by America’s handling (or, shall we say, lack of spine) in responding to China.

Fantastic case study

In an era when financial markets continue to blackmail policymakers into keeping rates low and liquidity high and think that they are succeeding, this case study of Master-Limited Partnerships (MLP) of energy companies cannot be reiterated enough.

This sudden and punishing bear market for MLPs shows what can happen when a prevailing belief system, or narrative, falls apart. As we have commented to a number of clients, if the highest quality MLP enterprise (there’s that hint again) can fall 40%, pushing its yield up to 6% when it bottomed (hopefully) week before last, imagine what can happen to the small cap ETF—yielding only 1.4% and increasingly exposed to outrageously priced small biotech stocks—when it begins to tumble. Presently, the meme of a strong dollar benefiting small caps is dominant but that’s not going to prop them up forever.

Nor is the much vaunted concept of an equity risk premium (ERP) in a low interest rate environment likely to save the day. The idea with this is that when interest rates are very low, stock prices should be high. Yet, as you can see below, MLPs now yield 500 basis points (5%) more than 10-year treasuries and that hasn’t supported them, until very recently. [Link]

I did run into the blog of Evergreen-Gavekal before. They write good stuff. Wish I visit the blog more regularly.