Night lights and India and China growth estimates

Ran into this well-written, sober and reasonable note by Robert Barbera and Yingyao Hu at Johns Hopkins University on the luminosity based growth data and official GDP growth data estimates for China. The note is from December 2018. The good thing about the paper is that they don’t badmouth official GDP growth estimate for the sake of it. They explain how and why the discrepancy between the two estimates arises.

The original paper by Yao and Hu is here. Check out tables 11 and 12. The date of this paper is August 2019. India’s official GDP growth estimates too are overstated but not to the extent that China’s is. Also, the volatility of China’s official growth estimate is too low. We all know that it is ‘too smooth’.

RBI Occasional Paper (July 2019) offers a more granular look at GDP growth and other real-economy measures and how they stack up with luminosity data. It is a good paper too.

India did grow quite strongly between 2003 and 2012 punctuated in the middle briefly by the 2008 crisis but the sustainability of that growth model (or the lack thereof) is illustrated by the subsequent slowdown that is still ongoing. Luminosity data captures that well.

Hard to better this clarity

Stretched asset prices matter more, because they pose the nearest and most substantial danger of a recession. Since the early 1980s, recessions in the West have all been driven by asset price busts, and not by the traditional fear of excessive wage increases leading to inflation. If this is true, monetary policy, and the regulation of capitalism more generally, need to be radically different. [Link]

William Rhodes, former CEO of Citibank wrote this in December 2019:

They are wrong in believing there will ever be a good time to curb financial excesses, as they fail to comprehend that delay now will make action in the future harder and costlier. [Link]

He was commenting on Chinese authorities. Is it true only of the Chinese g government?

This video provides you the ‘answer’.

So, these warnings and that of Gillian Tett in her most recent piece in FT, are likely wasted efforts. Pity.

The triumvirate of indexing

From John Authers:

LSE owns FTSE-Russell, one of the top three indexing groups (with MSCI and S&P Global) which have enjoyed enormous profits from the growth of passive investing. A new paper by Johannes Petry, Jan Fichtner and Eelke Heemskerk outlines how this Big Three has taken on enormous power over markets, with a role as the gatekeepers to equity capital now very similar to the role of ratings agencies in controlling access to credit. Chart below is from John Authers.

The paper that he links (see above) has this abstract:

Since the global financial crisis, there is a massive shift of assets towards index funds. Rather than picking stocks, index funds replicate stock indices such as the S&P 500. But where do these indices actually come from? This paper analyzes the politico-economic role of index providers, a small group of highly profitable firms including MSCI, S&P DJI, and FTSE Russell, and develops a research agenda from an IPE perspective. We argue that these index providers have become actors that exercise growing private authority as they steer investments through the indices they create and maintain.

While technical expertise is a precondition, their brand is the primary source of index provider authority, which is entrenched through network externalities. Rather than a purely technical exercise, constructing indices is inherently political. Which companies or countries are included into an index or excluded (i.e. receive investment in- or outflows) is based on criteria defined by index providers, thereby setting standards for corporate governance and investor access.

Hence, in this new age of passive asset management index providers are becoming gatekeepers that exert de facto regulatory power and thus may have important effects on corporate governance and the economic policies of countries. [Link]

We all know what has happened and is still happening with the ‘oligopoly’ in credit rating. This is one more. Oh, well….

Boeing and financialisation

The Atlantic Magazine had carried a good article some time ago on the tendency to resort to financialisation or financial engineering by Boeing (inclding the shifting of HQ to Chicago – perhaps, WSJ wrote about it). Today, a good piece appeared in FT on the same topic.

A focus on financial performance at the expense of investment in engineering is precisely what Boeing, under previous CEO Dennis Muilenburg, stands accused of.
Between 2013 and early 2019, boom years for the aerospace industry, it paid out some $43bn to investors through share buybacks. In the same period, the annual dividend increase was as high as 50 per cent and never below a still remarkable 20 per cent — even in the aftermath of the two crashes.
Whatever the strength of the company, the optics of such big dividend increases during a crisis are not good. Belatedly, the board has seen fit this year to hold, rather than increase, the first quarter dividend. The share buyback bonanza has also been suspended. [Link]

It would be interesting to see how much was the increase in the median worker pay.

The insistence by the new CEO that the dividend payment would not be cut reminds one of the stickiness of dividends, in general. Companies do not want to be seen as cutting dividends even during difficult times. It sends a bad signal. That is why stock buybacks are preferred. That is one reason. The other reason is that stock buybacks boost EPS by reducing the denominator.

Boeing’s recent troubles stemming in part from cultural shifts including financialisation, etc., would be the stuff of management case studies for a long time to come. However, for a different perspective, you may read this.

Big Market and PE

I was in the Patalganga campus of teh National Institute for Securities Markets set up by the GoI last week to speak at their two-day conference on trends in capital markets. Shri. Ajay Tyagi, Chairperson of SEBI, inaugurated the conference. As part of my preparation for the speech, I had perused the blog post by Aswath Damodaran on the delusions of the big market that infects many start-ups.

Investors buy into that, pushing valuations into stratospheric zones and eventually reality sinks in. It hapened to Wework, Uber and Slack, according to Prof. Damodaran.

What struck me as interesting was his advice to policymakers:

3. Governments and Market Regulators In the aftermath of every correction, there are many who look back at the bubble as an example of irrational exuberance. A few have gone further and argued that such episodes are bad for markets, and suggested fixes, some disclosure-related and some putting restrictions on investors and companies. In fact, in the aftermath of every bursting bubble, you hear talk of how more disclosure and regulations will prevent the next bubble. After three centuries of futility, where the regulations passed in response to one bubble often are at the heart of the next one, you would think that we would learn, but we don’t. In fact, over confidence will overwhelm almost every regulatory and disclosure barrier that you can throw up. We also believe that these critics are missing the point. Not only are bubbles part and parcel of markets, they are not necessarily a negative. The dot com bubble changed the way we live, altering not only how we shop but how we travel, plan and communicate with each other. What is more, some of the best performing companies of the last two decades emerged from the debris., a poster child for dot com excess, survived the collapse and has become a company with a trillion-dollar market capitalization.  Our policy advice to politicians, regulators and investors then is to stop trying to make bubbles go away. In our view, requiring more disclosure, regulating trading and legislating moderation are never going to stop human beings from overreaching. The enthusiasm for big markets may lead to added price volatility, but it is also a spur for innovation, and the benefits of that innovation, in our view, outweigh the costs of the volatility. We would choose the chaos of bubbles, and the change that they create, over a world run by actuaries, where we would still be living in caves, weighing the probabilities of whether fire is a good invention or not. [Link]

One can have a day-long seminar debating the pros and cons of his advice. To a degree, I can understand what he is trying to say. Authorities must carefully weigh the pros and cons of interfering and also must weigh the pros and cons over a relevant time horizon. What is that horizon? No one knows.

I would like to leave two points for consideration:

Authorities may not want to actively intervene to prick bubbles and deflate them but the question remains as to whether they actually fan it.

Two, what are the social costs of allowing bubbles (that boost asset prices) to grow and expand? Especially every subsequent bubble creates more debt on top of the previously accumualted debt (that fanned the previous bubble) and hence, weakens the system and its capacity to grow in future.

The article by Joe Nocera on the PE investment in a grocery chain in New York makes for sad reading. So, Professor Damodaran might want to revisit his (facile) advice to policymakers, especially to central bankers and their monetary policy decisions, instruments, etc.


Amidst all rumours, panic reactions, just wanted to highlight two pieces that I had read recently. One was in WSJ and one was in Nikkei Asia Review.

“We have a new coronavirus emerging every 10 years,” Dr. Sheahan said. “As we come into contact with animals that we didn’t come into contact with before, I think we’re going to see this more and more often.” [Link]

The article in Nikkei Asia Review lauds China’s preparedness, swift actions and information transparency this time around, compared to SARS in 2003:

In the past two decades, China has rapidly strengthened its capacity to prepare for and respond to public health threats and, in the face of the latest challenge, moved swiftly to investigate the cause, isolate patients and trace their close contacts. Authorities also closed the implicated market and are conducting environmental assessments. [Link]

But, the article also makes this important point:

Our surveillance teams identify, on average, two disease outbreak events every week, and the context in which these events occur is far more complex than before, due to rapid urbanization and dramatic increases in the movement of people and goods. In addition, climate change has increased the frequency and impact of natural disasters and expanded the geographic reach of epidemic-prone diseases. As a result, the region is being impacted by diseases, such as MERS and yellow fever, that seemed unlikely just a few years ago. [Link]

Digital currencies

I read a few good pieces on China. Two on their plans for digital currency and one on returning scientists. I am focused on their macro and financial sector vulnerabilities. But, they do get things right in other areas. The article that I read remind me of that.

Andy Mukherjee does a very good job of taking the readers through the implications of China’s digital currency initiative and that digital currencies, in general. His two-line explanation of blockchain is a gem:

When Peter in Vancouver agrees to send money to Paul in Singapore, they’re forced to use a chain of interlinked intermediaries because there’s no ledger in the world with both of them on it. Blockchain’s distributed ledgers make trust irrelevant. Paul devises a secret code, and shares its encrypted version with Peter, who uses it to create a digital contract to pay Paul. A cumbersome and expensive network of correspondent banks becomes redundant, especially when it comes to the $124 trillion businesses move across borders annually. Imagine the productivity boost; picture the threat to lenders.  [Link]

While it could and would end banking as we know it (should anyone shed tears?), Andy does point out its downside:

Token transactions will be pseudonymous: If the central bank wants to see who’s spending where, it can. Anonymity disappears when cash does. While that will make life difficult for money launderers and terrorists, it could also become a tool to punish political activism. Meanwhile, currency as a foreign policy weapon loses some sting. [Link]

While you are at it, read the Kenneth Rogoff piece in ‘Project Syndicate’:

when China announces its new digital currency, it will almost surely be “permissioned”: a central clearing house will in principle allow the Chinese government to see anything and everything. [Link]

Further, Ken Rogoff also puts in perspective the potential (o, the lack thereof) for the yuan to displace the dollar:

America’s deep and liquid markets, its strong institutions, and the rule of law will trump Chinese efforts to achieve currency dominance for a long time to come. China’s burdensome capital controls, its limits on foreign holdings of bonds and equities, and the general opaqueness of its financial system leave the renminbi many decades away from supplanting the dollar in the legal global economy. [Link]

It’s Mostly False

We have the January update of IMF (see the blog header) global macro economic growth forecasts. Amusing reading. No mention of financial market exuberance, financial stability risks and vulnerabilities.

Monetary policy can remain accommodative because inflation is quiescent. Yaah, right! That is what we learnt from the 2008 crisis. Macroprudential tools can help to mitigate financial stability risks. Again, yaah, right. Neat. They can sleep peacefully at night, having paid their homage to the risk factors.

Macroprudential works only in conjunction with interest rate policy. if interest rate and monetary policy settings are providing ample liquidity, macroprudential policies are dead on arrival. Worthless and useless.

Because It’s Mostly False, It’s Mostly Futile too.

Economic and market cylinders

Jeroen Blokland’s twitter handle (@jsblokland) is a great resource. So, according to his recent charts, US housing starts are rising fast; US consumer comfort index is quite strong; US retail sales is growing. China’s leading index is turning up as is China’s money supply. Citi Economic Surprise Index for the US is back above zero. SPX (S&P 500) Price/Sales ratio is at its highest – more so than it was in the technology boom years of 1996-2000.

Under normal circumstances, central banks would be pre-emptively hawkish with such a confluence of economic data and developments. Not only is the Federal Reserve adding liquidity at record rates but it is expected to leave rates unchanged for 2020 with the next move as likely to be up as it is likely to be down.

Are any further comments required?

The psychology of social media networks

A friend shared a relatively short but no less incisive and thoughtful article by Jonathan Haidt in ‘The Atlantic’ on ‘The Dark Psychology of Social Networks’. Some key sentences that I found thoughtful:

Social media, with its displays of likes, friends, followers, and retweets, has pulled our sociometers out of our private thoughts and posted them for all to see…..

……Human beings evolved to gossip, preen, manipulate, and ostracize. We are easily lured into this new gladiatorial circus, even when we know that it can make us cruel and shallow. As the Yale psychologist Molly Crockett has argued, the normal forces that might stop us from joining an outrage mob—such as time to reflect and cool off, or feelings of empathy for a person being humiliated—are attenuated when we can’t see the person’s face, and when we are asked, many times a day, to take a side by publicly “liking” the condemnation…….

……..A multiplicity of forces are pushing America toward greater polarization. But social media in the years since 2013 has become a powerful accelerant for anyone who wants to start a fire………..

……….Even though they have unprecedented access to all that has ever been written and digitized, members of Gen Z (those born after 1995 or so) may find themselves less familiar with the accumulated wisdom of humanity than any recent generation, and therefore more prone to embrace ideas that bring social prestige within their immediate network yet are ultimately misguided………….

………..Many americans may think that the chaos of our time has been caused by the current occupant of the White House, and that things will return to normal whenever he leaves. But if our analysis is correct, this will not happen. [Link]

To me, the last extract I have posted above is as important as any that preceded it. Perhaps, the penultimate extract is equally important. We consume what is easily available. Youth are especially vulnerable to the superficial trends that bring social prestige and popularity.  Or, in economics terms, there is the opportunity cost to time. They will not have time or energy to peruse ‘the accumulated wisdom of humanity’ as Jonathan Haidt puts it.

Other lessons: Technology has provided an avenue (well, more than one avenue) for our worst instincts to be displayed and played out in public. That is why technology cannot be the answer to our behavioural problems. Indeed, the advent of social media, its spread and embrace have shown that they accentuate our worst behavioural instincts.

That is why sometimes social restrictions and conventions help in keeping our worst ideas, imaginations and thoughts private. In a way, ‘fake it until you make it’ works. That is, if one is forced to practise reasonable communication all the time because tehre is no avenue to practise and spread unreasonable communication, two things happen: (1) reasoable communication becomes a habit and (ii) we do not infect others with unreasonable communication. There is a positive social multiplier effect too.

This takes time. But, what we have seen is that the painstaking work, accomplished over centuries, of making us ‘reasonable and responsible’ could be so easily undone within a decade or two.

Saurabh Mukherjea’s Marcellus Investments shared the speech by Sacha Baron Cohen delivered when he recevied the ‘ADL International Leadership award’. There are many convergent points between his speech and some of the issues that Jon Haidt highlights. His reference to the ‘Silicon Six’ makes one think. The question is if it would make them think.