Weekend reading links – 30.04.2016

Financial markets

‘Stupidest idea I have ever experienced’ – says Grundlach of negative interest rates.

According to the latest (March 31, 2016) 7-year asset-class return forecasts of GMO, no asset class today – including their favourite, timber – is priced to deliver satisfactory long-term returns.

The most dangerous bond market in history. A great read.

As always, Jason Zweig is at his perceptive best, talking of why and how we talk of ‘headwinds’ and ‘tailwinds’.

The lonely sane voice of ‘Buttonwood’ from the ‘Economist’ newspaper stable. Rightly, points out the flawed criticism of Germany for doing what it should be doing. An Anglo-Saxon exception.

The hedge fund industry is in the ‘first innings of a washout’ according to a successful hedge fund manager. May the washout continue.

This should be fun.


If global bonds are dangerous territory, can China’s bonds be far behind?

How did the regional growth rates play out in China?

Valuation of Chinese banks’ shares listed in HK are now about 0.63 times book. No one trusts their book. How does it compare with Indian PSU banks’ MV/BV ratio?

Article on China’s bad debt management – gets the overall picture right but the details are somewhat fuzzy.

“Officially, just 1.7 percent of loans are in default. The International Monetary Fund recently estimated that for corporate debt the true figure is nine times higher.”

Carmen Reinhart says that China today reminds her of Thailand in 1997. Currency crash or devaluation to follow? Quite.

Steel prices are rising and Goldman Sachs is concerned about speculation in iron-ore in China.

Panicky banks in Hong Kong refuse to open accounts for foreigners.

A short film on the Mayor of Datong, worth watching for many reasons


‘Why did the SEC not hit Goldman Sachs harder?’ – a great piece on the regulatory capture in the US

Goes very well with the link above. Pity the interviewer ignores the question of favouritism which the author was keen to discuss – a very important book and discussion on what the Federal Reserve during and after the crisis of 2008.

FT has a detailed analysis of Apple results. Revenues show a decline from last year. Sales in Greater China drop 26% from last year. Toys have a shorter shelf-life, in general.

Federal Reserve reiterates low for long and Esther George dissents. Nothing to see here. Federal Reserve is less concerned about global risks. Time for financial markets and China to step up their antics to stop a June rate rise.

In the US, “nearly all of the voluntary clawback policies in place at the Top 100 Companies permit board or compensation committee discretion or enforcement.” – a survey of corporate governance and executive compensation in 2015 revealed.

A great story for Hollywood, Kollywood, Tollywood and Bollywood: Dole doles out bacteria in salads. In case you had forgotten about Theranos, here is a good link. Here is a good timeline and here is the first story that broke the balloon. Not good advertisements for capitalism or private enterprise.

A useless article on how the ‘first-past-the-post’ system favoured Donald Trump. The authors must be embarrassed for writing the obvious.


Saudi Arabia crafts vision 2030 with a price of 30 dollars per barrel for oil in mind.

Times have changed and are changing: a government in the West is featured prominently in the media for spending more.

However, two weeks earlier, the IMF’s twice-a-year Fiscal Monitor warned of deteriorating public finances in most of the world. So, praise could turn to pot-shots at Canada soon.

State-owned Malaysian fund (1MDB) defaults on bond payment. The PM remains in office, but.

A new easy-to-read paper in VoxEU on labour displacement of technology, analysing the effects that electricity had.


Italians eat 1.6 billion pizzas a year but a good chunk of them is made by foreigners.

“The Guardian (newspaper) has long suffered from over-optimism about revenues and an ingrained inability to control costs.” Who would have thought that liberals spend money so freely?!

Half the men in Europe could be descendants of a Bronze Age king who lived some 4000 years ago.

Portugal’s relies on the credit rating from a single Canadian credit rating firm to maintain investment grade rating and be eligible for ECB funding programme. How wonderfully above board all of these arrangements are!


Digital activity of BJP MPs is evaluated. What about visibility through physical presence and leadership?

The news is not news but the news being put out is news – FT writes a positive story on how Indian banks and corporations are taking action on non-performing loans.

Sanjay Joshi of ORF in India thinks it is time to rethink ‘Make in India’. Fair enough. Answers and alternatives, if needed at all, are not provided.

The fool’s market

April ended on Friday for most financial market participants. U.S. stocks climbed in the last hour of trading – funny how so much new information comes in the last hour of trading for stocks to abandon their day-long trajectory. It is also funny that most last-hour reversals are of the positive variety. So much for market efficiency.

What is funny about the Bloomberg article is the statement that stocks have beaten ‘profit’ expectations and therefore the implication that stocks have no business declining. S&P 500 corporate profits are now down for five quarters in a row (based on ‘as reported’ EPS). Clearly, an index trading near its all-time highs has not incorporated this dismal bottom-line.

The whole idea behind polling expectations is that market prices reflect consensus expectation. Hence, when expectations were lowered, stocks should have dropped sufficiently enough for them to rise when actual results turn out better than expectations. That does not work. The market is rigged to go higher, for the most part.

Check out this Deutsche Bank settlement on gold and silver:

Deutsche Bank AG agreed to settle U.S. lawsuits accusing it of conspiring with other banks to manipulate gold and silver prices at investors’ expense, court papers show…. Deutsche Bank also agreed to help the plaintiffs pursue claims against other defendants. [Link]

On its part, monetary policy has ridden to the rescue of financial markets countless number of times in the last three decades. It is no longer a joke that the Federal Reserve has a S&P 500 target. Indirectly, Raghuram Rajan made the same complaint, nearly a month ago.

In an otherwise well-written article, John Authers tries to end on a hopeful note, ignoring empirical experience of over 15o years. How can earnings now rise, after seven years of recovery? It is time for a downturn. But, he wants to end on a hopeful note:

If companies demonstrate that they can generate the earnings needed to deal with their leverage, there should be a rebound for the market, and a period of underperformance for dividend-yielding stocks. Until that happens, the anxiety will continue. [Link]

The article by John Authers has a great chart on trends in US corporate debt and EBITDA. Digest it.

Digest the chart on retail sales growth and retail sales employment from this post too and the question posed at the end of the link is a fair one. I have posted the chart below.


Small but significant

Apparently, Indian companies now have more than fifteen identification numbers (ht: Narayan Ramachandran). The idea is to consolidate them into one. Each company should have one Company Identification Number and it would facilitate huge flow and sharing of information between departments. The multiplier effect could be quite considerable. But, notice the warning sign in the report:

While the MCA is trying to expedite the exercise, various government departments involved in the process including directorate general foreign trade, labour department are trying to reach a consensus on the most acceptable identification number.

That is why Ministers/Secretaries must follow through on their idea to the last yard/inch.

The other day (Tuesday) as both he and I made a presentation each on India and China economies respectively at the Vivekananda International Foundation, I heard Neelkanth Mishra saying that the proposed plan in the budget speech to replace smokey chulas with LPG cylinders could do wonders for carbon emission, for the productivity of households, of women, for their health, etc.

The Prime Minister should include it in his monitoring dashboard.


Very proud of ISRO

A regional navigation satellite system with just seven spacecraft and in civil domain is unique to India. The three global versions of other countries offer worldwide commercial coverage and are operated by their militaries.

IRNSS (Indian Regional Navigation Satellite System) will be to the subcontinent what the GPS is to its users worldwide, but with far greater precision and in Indian control, according to the Indian Space Research Organisation. It is expected to provide position accuracy of better than 20 m over Indian region and also an area extending up to 1,500 sq. km around India.

The well-known GPS is owned by the U.S. Air Force; Russia has GLONASS and China is expanding its regional BeiDou into a global system, also operated by its military. Europe’s GALILEO is a civil global system. They each have between 28 and 35 satellites. [Link – cached version]

The current version of the page in THE HINDU appears to have changed and it does not have the above information. Pity

‘Equal Opportunity’ offence

In this piece that I wrote last week for MINT, I noted that Raghuram Rajan, RBI Governor, was an equal opportunity offender with a purpose. In this podcast posted on IMF site, he says that IMF is more likely to view policy innovations in emerging economies as ‘crankiness’ on the part of the government and the Governor rather than being appropriate for the circumstances. Whereas, it was more likely to accept innovations coming from developed world. Presumably, he was alluding to the acceptance of QE, negative rates, etc., being accepted and even endorsed by the IMF.

I am not sure if  they think of it as ‘crankiness’ but surely there is less tolerance, let alone understanding, of emerging economy circumstances, priorities and capabilities. May be, the Governor was hinting that the policies of the developed world were all cranky. If so, it is a fair observation.

Business Standard reported it here and the podcast is here.

China according to Corint

I do not remember now as to how I came across this site. But, I did some time ago. So far, it is free and accessible. Their latest weekly commentary seeks to draw a distinction between catastrophising foreign commentary on China with their ‘source inputs’ from the Chinese Communist Party Central Committee except that I do not see much difference between the two and hence, not much reasons to take ‘respectable’ potshots at the ‘foreigners’ commenting on China under Xi.

Specifically, Corint says that ‘outside analysis of China’ believes in these two:

China’s government seeks greater “control” across any number of policy areas, ranging from border security to minority affairs to the internet.


Xi Jinping has reneged on the CCP’s promise to pursue more market-oriented economic reforms.

This is what they write:

Unambiguous Rejection of Capitalism: There is little sense anywhere within China that, should economic conditions improve, China would return to reforms purely intended to emulate the economic systems of capitalist economies. Xi talks of Marxism as the study of political economy; the goal of studying political economy is to seek alternatives to the contradictions and failures of capitalism. Private enterprise, and charities, will gain ground in China only grudgingly — under Xi there is no willingness to further engage the private sector except as a resource for supporting CCP-directed agendas and economic institutions.

I do not see a big difference between the two. The difference is one of degree and the ‘seeming’ permanence of the rejection of capitalism. If the society had been fed a different medicine (capitalism with Chinese characteristics) before Xi arrived, it remains to be seen if it would accept the Xi medicine of ‘Socialism with Chinese characteristics’. Therefore, it is fair to comment on ideological distortion and polarisation in China.

Long story short, Corint’s source information corroborates ‘outside analysis of China’ and sharpens it a bit rather than contradicting it.


Did you know…

… that data from the Ministry of Statistics and Programme Implementation on India’ Gross Fixed Capital Formation shows an estimated 3.6% growth in GFCF in current prices for 2015-16 and 5.3% in constant 2011-12 prices?

Did you also note that the Federal Reserve Bank of Atlanta has now a page on China’s macroeconomic data? Here is the link.

The real one-eyed king

The first estimate of US GDP growth for the first quarter was released last evening. It was 0.5% (q/q, annualised). The Federal Reserve Bank of Atlanta’s nowcast got it right. It predicted 0.6%. Barely a fortnight ago, the nowcast estimate was 0.1%. The improvement came through more government spending, more private consumption expenditure and a lesser drag from trade, mainly through sharply lower imports. Let us see how the reality stacked up.

Contribution to GDP growth

Personal consumption:            1.27% vs. 1.31% (nowcast model)

Non-residential structures:  -0.30% vs. -0.27%

Equipment investment:          -0.53% vs. -0.15% (big miss, in the context)

Residential structures:              0.49% vs. 0.36%

Net exports:                                -0.34% vs. -0.45%

Government spend:                     0.20% vs. 0.27%

Change in private inventories:  -0.33% vs. -0.61% (big miss)

Once again, FRB Atlanta, take a bow! FRB New York tried to compete. Its model predicted 0.8%. They should direct their efforts elsewhere.

On to some simple analysis:

US has two back-to-back quarters of contraction in non-residential equipment investment. Same with exports.

Real GDP growth is 2.0% y/y. It is supported by personal consumption expenditure (PCE), investment in residential properties and government spending. No advertisement for QE. Savings rate is stuck at around 5.0%. Health care spend constitutes a good chunk of PCE.

Core PCE price index is up 1.7%. Core PCE price index, based on marketable prices, is up 1.5% y/y. No deflation here. No excuse for the Federal Reserve to hold back.

An economy that is a pale shadow of what it was in the second half of the 1990s. Once again, investment in residential property is driving growth. Was the purpose of QE and 0.0% interest rate policy to boost property investment?

America looks better only in comparison to anaemic Europe and Japan. If the stock market crashes, as it must, even that relative glory would be gone.

Finally, after splurging on debt that saw it surge across the developed world for over three decades resulting in economic growth being artificially boosted and brought forward, Americans are still debating secular stagnation. I am really curious about the model in Bernanke’s head.

Turkey now, India later?

Eight days in India. Returned Wed. morning. One day in Chennai. Three days in Coimbatore. Two in and near Jaipur and two in Delhi. Singapore feels balmy, on return. It is all relative. That is what Raghuram Rajan said and received opprobrium for saying so. Unfortunate. However, the Governor too spoilt his copybook by dragging it out a bit, unnecessarily in my view, with his comments at the convocation at the National Institute of Bank Management. He should have exhaled longer and deeper.

If Raghuram Rajan were not to be reappointed in September – the chances of that event appear to have gone up considerably and one can ‘guess’ or ‘sense’ dismay on both sides – many would see a comparison with the development in Turkey and that is not particularly flattering for the NDA government. A fortnight ago, I would have dismissed the Turkey precedence for India. But, now?…

In my view, the Government can gnash its teeth in private, have a chat with the Governor and then reappoint him with smiling faces in front of the cameras. That will be good for them too. In fact, the sooner they do it, the better it is for them and for the government’s relationship and image with ‘institutions’. That will enhance their image too, immediately and bury their controversy. Of course, both sides have to bury the hatchet first.

However, my gut-feel tells me that this episode would have crystallised minds on both sides not to renew the relationship. As of now, I think that is bad news for India.

If it turned out that way, the pink and other English language press in India will raise the bogey of ‘intolerance’ again. This time, it will be about this government’s intolerance of intellectuals and with some justification too.