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.

Offence is defence and other China links

The Democratic National Committee has decided to sue the Trump campaign, Russia, etc. for the 2016 Presidential campaign gone wrong. Most extraordinary.

The Congress Party and its allies decided to move to impeach the Chief Justice of India. Most extraordinary. When was the last time it happened?

The reason why the US and the UK have targeted ZTE is not a matter of protectionism. Check this out.

Chinese students studying to be diplomats taught ‘us’ and ‘them’ brand of diplomacy

This tweet shows the people that make up the Confucius Institute in the University of Queensland

The Chinese Communist Party is setting up sleeper cells across Universities in America

China’s GDP growth numbers have not varied by more than 0.1% since 2015.

Prof. Hal Brands on the axis of autocracy versus America

Hong Kong dollar currency peg is not ending anytime soon. But, if interest rates in Hong Kong rise, it is a threat to their hypervalued property prices.

Quitting Finance to invest responsibly

China firms more reliant on foreign source revenues – well, only 13% from about 11% earlier

US weighs emergency powers to restrict China tech investments. The US is not doing this in a scatterbrained manner as is being widely perceived.

This article by Prof. Keith Burnett of the University of Sheffield in the UK is one reason why you should read this Mercator Institute report. I have read both. Notice what the former British PM David Cameron is doing.

27 of 28 EU ambassadors have compiled a report that criticises China’s Silk Road project. Only Hungary has not signed.

Don’t know; can’t know

Every once in a while I visit the twitter handle of Martin Ford (author of ‘The rise of the robots’) to catch all that is happening, not happening or should not be happening (but happening) in the world of technology, robotics and artificial intelligence (AI). I am profoundly sceptical of their net impact on the world. Yes, they may help in criminal investigations, in making some diagnoses for certain diseases, etc. Humans may even live longer, thanks to them. I do not know if it will happen and if it happens, whether it is a good thing. I do not think it is a good thing.

But, on balance, with its impact on employment, on its potential avaialbility only to the rich and the well-heeled, I think AI and Robotics will accentuate the many faultlines in the society.  Also, humans, bored stiff, and having too much time to kill, will actually turn destructive of one another, of the society and of the environment. Sounds bleak,  I know. But, it is just one person’s view. As fallible or as correct as anyone else’s or like any other view that I have held. But, some of the recent links:

Luke Dormehl writes about eight jobs that are under threat from the AI revolution. Non-paying or pro-bono blogging is not one of them.

This WSJ article says that employers are relying on intelligent software to figure out what you meant when you said or wrote something in an employee survey.

Although this article is in the context of the use of robotics and AI for elderly care, this question is relevant in all contexts:

“The greatest danger of Artificial Intelligence,” he writes, “is that people conclude too early that they understand it.”

Any serious discussion of AI’s impact on the aging population must start with Yudkowsky’s implied question: Do we understand it? And if we do, how do we harness it to enhance the lives of our burgeoning population of older adults? [Link]

‘Retailers race against Amazon to automate stores’ is the header of this article in New York Times. You think of a supermarket that is eeriely quiet and there are no tellers at checkout counters. I think humans will forget how to communicate. They will become idiots, I think. In that sense, AI will have triumphed over Real Intelligence or RI because it would have extinguished whatever RI was there in humans.

Stephan Talty thinks of five sccenarios in 2065 with AI but he is not thrilled or that is what I think:

If there’s one thing that gives me pause, it’s that when human beings are presented with two doors—some new thing, or no new thing—we invariably walk through the first one. Every single time. We’re hard-wired to. We were asked, nuclear bombs or no nuclear bombs, and we went with Choice A. We have a need to know what’s on the other side.

But once we walk through this particular door, there’s a good chance we won’t be able to come back. Even without running into the apocalypse, we’ll be changed in so many ways that every previous generation of humans wouldn’t recognize us. [Link]

It is a fascinating, engrossing and scary article. Certainly, I do not want to live in that world. Give me the messiness of humans, any day.

This article proves the point that Stephan Talty makes. It is about AI professors boycotting a Korean University for its killer robots. It sounds nice and brave but the conclusions are sobering and realistic:

Although a boycott against KAIST would be significant, some experts say the campaign to control the development of autonomous weaponry is futile….For Walsh and others, though, the danger is too great to be complacent. “If developed, autonomous weapons will […] permit war to be fought faster and at a scale greater than ever before,” said Walsh in a press statement. “This Pandora’s box will be hard to close if it is opened.” [Link]

Walsh is a Professor at the University of New South Wales.

Rupee on watchlist

I am grateful to MINT Edit for saving me the effort to write on the United States adding India to the watch list for its accumulation of foreign exchange reserves and for India’s bilateral trade surplus with the United States. One finds the American report here.

The report is all of 46 pages long and it is easy to read the portions pertaining to India. The data on India’s national savings rate is most likely wrong. India’s savings rate has stagnated, at best, and declined at worst. The change in the base year to 2011-12 in India and failure to provide a historical time series for the new base year renders comparisons impossible. Same goes for the comparison of growth rates over time. The report acknowledges that India has a rising current account deficit (chart on page 14) but it says elsewhere that India has managed to raise its national savings rate, post-2008 crisis. Untrue.

As per official Indian data, Gross Savings/GPD ratio had dropped to 30.0% in 2016-17 from 34.6% in 2011-12. This is as per the 2011-12 basis. As per the old basis, 2004-05,  the savings rate peaked at nearly 37% (36.8%, to be precise) in 2007-08. This is as per data from RBI Handbook of Statistics. In recent years, RBI has switched to report the savings rates as a percentage of Gross Domestic Income whereas the Government still provides the GDP ratio.

MINT Edit (ht Amol Agrawal of ‘Mostly Economics’) called the decision, ‘scandalous’. It is actually stupid. No one looks at bilateral trade balances to judge a currency’s under or overvaluation. India runs a overall trade deficit. In fact, the rate at which India’s trade and current account deficits are running this financial year, it is possible that the current account deficit reaches 3.0% of GDP in 2018-19!

Of course, the US knows that no one looks at bilateral trade balances. It is yet another arm-twisting exercise except that when it came to China a much stronger case for twisting their arms existed and both Presidents Bush and Obama ducked the opportunity.

The question for India is whether letting USDINR appreciate, in response to the American pressure, is a good thing since the price of crude oil is rising. Will it worsen India’s export performance that is already struggling, in any case? Or, will it suck in more imports? India is already on slippery ground with its external balances and this development does not help.

The Prime Minister should tell the MoF to take this up firmly with the US Treasury and get India off the watchlist. Pushing India to let Rupee appreciate for fear of ‘sanctions’ and seeing India facing a destabilising external balances situation is not in America’s interest. It goes against the geopolitical goals of the United States in the region. There is no co-ordination or consistency of logic in the American actions.