Confidence not QE matters for Capex

Chalk that one up for empirical evidence in favour of confidence about the future and not low interest rates boosting capital expenditure. After Trump came to office, deregulation through executive action and (may be) ‘America first’ policies boosted business sentiment (check out NFIB Index of Optimism among small businesses). Corporations too are happier. Hence, despite interest rates rising, tax cuts are going into capex and not stock buybacks which is what Ben Bernanke achieved. One caveat: this is preliminary evidence.

This is what the ‘Small Business Economic Trends’ (March 2018) report says:


The Index of Small Business Optimism slipped in March to 104.7, 2.9 points below the February reading of 107.6, the second highest level in its history. The Index has been higher only 20 times of the last 432 surveys.

  • Taxes received the fewest votes as the #1 business problem since 1982, falling from 22 percent reporting it as their #1 business problem in November to 13 percent in March.
  • Labor quality remained the #1 problem for the third straight month.
  • Reports of improved earnings trends were the second best since 1987.
  • Reports of compensation increases held at the highest level since 2000.
  • Reported job creation posted another solid gain, best since 2006.
  • The net percent of owners reporting higher selling prices continued to rise, reaching the highest level since 2008.

Overall, the small business sector has responded very positively to the new management team and its economic policies, leading the economy to what appears to become 12 months of 3 percent GDP growth, much better than the eight years under the previous administration. [Link]

The post-Trump jump in sentiment among small businesses and its persistence has gone largely un-reported in mainstream media. One can bet the last dollar that it would have been prominently aired had the sentiment gone south.

Indeed, one can go to the extent of arguing that QE and extraordinarily low interest rates actually deflate confidence as the behavioural messaging of such unconventional policy is one of pessimism about future demand and hence deflation. Why would anyone invest in capex with such a bleak scenario? This elementary logic has eluded the highly qualified academics-central bankers.

In India, this is the message that the NDA government has failed to grasp throughout its four years. Even the PM is guilty of hurting confidence with his redistributive logic and the Kafka-esque tax department is still doing its more than fair share of the ‘good work’ of undermining confidence. The confidence so undermined is not showing up in data because data on capital formation in the non-financial corporate sector is garbage. Just check out the numbers:

These are the figures for investment in machinery & equipment (at current prices, 2011-12 basis) by private non-financial corporations:
(Rupees crores)

2011-12:            551588

2012-13:           601014

2013-14:           676594

2014-15*:         664398

2015-16#:        757069

2016-17@:       880387

These data make no sense. When everything else pointed to a drop in growth in 2012-13 and 2013-14, capex by non-financial corporations (pvt. sector) jumped more than 10%. Then there is a 15% jump in 2015-16 and in 2016-17. Just have to look at excise duty collections in those years, hiring intentions of the industrial sector and employment prospects as perceived by households to realise that these data are not credible.

Bad policy; bad data = bad political and economic outcomes.

Poetic justice?

From a recent Bloomberg report:

At 80 percent, the proportion of S&P 500 firms exceeding analyst estimates is higher than at any time in the past 25 years. Yet their stocks rose a paltry 0.3 percent on average in first-day reactions. [Link]

Two things to note here:

(1) Beating expectations is a con game. Sequential and annual improvements are the key.

(2) Stocks did not go down much (if at all) in 2014 and in 2015 when profits cratered.

So, this is nothing to wail about.

Media changes its own climate

Actually, Jamil Anderlini has not written a truer sentence than the second sentence of his article. He was writing about the actions of President Trump with respect to China. He wrote that Donald Trump was right and that one would not read those words (‘Donald Trump is right’) every day in FT. Jamil Anderlini is right.

In another article in FT which discusses the index of ‘Reporters without borders’  and the worsening press freedom around the world, the picture chosen is that of Donald Trump. There are far, far worse heads of governments and leaders whose picture would have fitted the story and the header. Hint, hint…

Yet, the FT chose to put his picture for this article when not a day passes without any of the mainstream media, very much including FT, attacking him viciously. That has gone on relentlessly since he took office and before that too. The media has done its bit in spreading the ‘climate of hate’ against the American President. FT has been in the front and centre of it. In fact, putting his picture on that story is proof of that!

What is inexplicable is that the media has been thoroughly out of touch with the feeling of the people. The monthly Harvard-Harris polls must be eye-openers. But, rarely do we see mainstream media discusses the mood of the nation captured by that poll, month after month.

The March poll reveals the public’s mood in the United States with respect to China, on transfer of technology to China from the US, on Trump’s actions with resepct to China, etc. In the survey, 52% said that the mainstream media covers mostly negative stories on Trump. In such an environment, shoiuld it be a surprise that there is a climate of hate against the mainstream media? Have they not put in more than their fair share of hard work to earn that?

Who is out of touch?

From the March 2018 edition of the Harvard-Harris poll:

23% of Americans polled said that China was an ally while 35% said China was an enemy

45% considered India an ally and 8% said India was an enemy

Favourable-Unfavourable rating for Narendra Modi (25% vs. 16% – 58% had not heard of him or were unsure)

Favourable-Unfavourable rating for Xi Jinping (22% vs. 45% – 33% had not heard of him or were unsure)

47% felt that the United States had been hurt by free trade while 53% felt that it had benefited the country

55% said America’s trade agreements cost jobs and only 45% said that they created jobs

On asked whether they personally benefited or were hurt by trade agreements, the response was a dead heat at 50-50

48% of those polled approved of the tariffs on steel and aluminium while 52% opposed them

61% approved of the American President leveraging the threat of tariffs to win more favourable terms for America from trade agreements

57% (vs. 43%) felt that America should push China back by working more closely with other allies

More than two-thirds (67%) said that the United States should punish China for forcing American companies to give up technology secrets

72% were either concerned or very concerned about the United States losing technological supremacy to China

75% said that the United States should take steps (including tariffs) to correct the USD375bn trade deficit with China

58% supported the imposition of tariffs on Chinese goods. Contrast that with the response on steel and aluminium tariffs

57% said that alliance and treaty obligations not in America’s best economic interests should be reconsidered and renegotiated

71% approved of America blocking the takeover of Qualcomm by Broadcom

72% said that President Trump should continue to insist that NATO members pay their fair share

70% said that the United States should foster a closer economic and security relationship with Taiwan even if it upset China

62% said that they either approved somewhat or strongly approved President Trump’s ‘America First’ foreign policy direction

68% said that the American government should buy America-made goods and hire Americans

63% said President Obama was warm to dictators and 57% think that President Trump is warm to dictators

57% said President Obama did little against dictators and 54% said the same thing about President Trump

61% believe that there is a ‘Deep State’ that operates independently of elected officials and 52% felt that mainstream press was only covering negative stories against President Trump

In spite of these responses, their overall rating of President Trump on foreign policy was unfavourable and a good majority felt that America is less respected overseas now than before. Mainstream media’s relentless negative coverage has an impact.

EM Central Banks 1 – DM central banks 0

A brief news-summary in Bloomberg talks of how central banks in so-called developed nations ‘surprise’ the market the least and those in major emerging economies surprise the markets the most – i.e., deviating from economists’ forecasts of their monetary policy actions and interest rate decisions, etc. If so, EM Central Banks 1 – DM central banks 0.

The full report is available to Bloomberg subscribers. I do not have the access yet.

This brief summary says:

Central banks in developed economies signal clearly to the markets. [Link]

It is not a sign of independence. It is a sign of capture by financial markets and financial interests. There are no economic welfare gains to be captured by signalling policy moves to financial markets. Only more bonuses to the industry folks. Major central banks should be embarrassed about it. In contrast, policy surprises enhance policy effectiveness and impact on the real economy.

‘The House of cards’ trilogy

Mr. TCA Srinivasa Raghavan suggested that I read the trilogy, ‘House of Cards’. The books were ‘un-put-down-able’ while I was reading them. Well, I did not put down my iPad since I was reading them on the Kindle app in my iPad.

He is a very good, if very cynical, story teller. May be, very British too.

The first book did not impress me much because it was simply a case of FU (very creative name) using the information gathered in his role as the party Chief Whip to blackmail his rivals in the party.

The second one was better than the first – the thrust, the moves and the countermoves by the King and FU were interesting. It was good that he allowed King and his press secretary to emerge stronger and superior at the end of it. May be, that too was a very British thing to do – the superiority of the Constitutional Monarchy over the elected (or, unelected, in this case) public official.

His story telling reaches a peak in the third of the trilogy. It builds up slowly but surely and steadily to its climax with many strands woven and neatly handled to produce a grand finale, although one begins to anticipate it a bit, towards the end.

But, at least in fiction, one would like the story to end with morality emerging victorious and not only smart and wicked people emerging on top. Michael Dobbs does not allow that. That is why I call him a cynic.

To destroy Tom Makepiece in the way he does, in the end, is cruel. He also does not paint the Greek Cypriots with his climax that well versus the British for all the wrongs they had suffered.

FU keeps saying that he knows only to fight and he knows only this thing and nothing else. So, the author could have given him the glorious speech but ended with another twist with FU not getting a place in the history book because, after all, he was just a rank manipulator.

The PM’s wife basically does side deals for personal benefits – his Library – and barters away national interests. She escapes scot-free.

It is not fair.  May be, it is quintessentially British in that sense.

​Michael Dobbs’ women are smart, intelligent, pretty and ambitious and are prepared to sleep around to realise them. You might say that he is sexist and I could not possibly comment on it. 

For ‘budding’ politicians, the trilogy is an important reading manual for they might be missing a trick or two. FU or Michael Dobbs is the best teacher they can find.

In the final analysis, Michael Dobbs had put up a grand political theatre in his ‘House of Cards’ trilogy.

Next BoE Governor

There is an article in FT that discusses both Brtish and non-British candidates that Chancellor Hammond might consider to replace Mark Carney. Raghuram Rajan figures in that list. An interesting mention. The article correctly mentions that he might not be interested in the job. He should not be.

He has strong views on the conduct of the post-crisis monetary policy – of the sort and brand that Carney has practised and which, unfortunately, Andrew Haldane endorsed – too much of easy money for too long. That may not endear him to the British establishment including the financial establishment.

Some bankers may not have forgotten the comment below that Rajan made when he delivered the first Andrew Crockett Memorial Lecture in June 2013:

No wonder bankers today, and unfortunately, have a social status somewhere between that of a pimp and a conman. [Link]

British politics and economy are delicately poised. There are too many risks with the potential for unpleasant outcomes. Politicians might be looking for scapegoats when things go wrong. A brown skinned India-born, Indian national BoE Governor might be too good a scapegoat-candidate for British politicians, financial interests, to resist. In retrospect, his job in Reserve Bank of India might appear like a stroll in the park. In that sense, this job is a poisoned chalice.

Rajan should consult Michael Dobbs first, if he is at all interested in the job.

Of course, it might be the ultimate irony if Raghuram Rajan were to become the Governor of the Bank of England. The citizen of the colony that was the jewel in the British crown becoming the master of the erstwhile colonial master’s money might be steeped too much in symbolism for a Chancellor of the Conservative Party – that is pursuing Brexit – to appoint him.

May be, this post is the effect of having just finished reading the ‘House of Cards’ trilogy.