The frenzy in stock markets

The story (before the big rally on Friday):

The S&P 500 has returned 37.7% over the last 50 trading days, making it the benchmark index’s largest 50-day rally in history, according to LPL Financial.

And if history is any indication, there could be more gains ahead.

Looking at the other largest 50-day rallies, the firm found that stocks were higher 100% of the time six and 12 months later. The average 6-month return was 10.2%, while the average 1-year return was 17.3%.

The firm crunched the data going back to 1957, which is when the index moved to a 500-stock model. [Link]

Another piece of news:

Using data from the timesheet company Homebase, University of California professor Jesse Rothstein and colleagues have identified businesses that shut down and are now reopening in real time. “It’s giving us a sense that reopening has gone faster than I anticipated. I would not have guessed that such a large share of firms have reopened at this point.

The most recent update from Rothstein and his colleagues using the Homebase data shows that about half the businesses that did shut down have reopened. “Reopened firms had collectively regained over half of their baseline hours and nearly 60 percent of their baseline employment levels. Almost 90 percent of this reemployment came through rehiring employees who worked at the firms before they shut down, as opposed to new hires,” he said. [Link]

Another piece of news:

Whether deemed essential or not, workers are being pushed by public policy and financial necessity back into restaurants, bars, stores, offices, warehouses, work sites, and factories. [Link]

The reactions:

(1) The jobs report, as an aside, was again skewed by reporting irregularities. Not just that, the payroll pop seems to reflect businesses re-hiring so as to get the PPP loans switched to grants. So put away that champagne! [Link]

(2) The CBO took a butcher’s knife to the 10-year US GDP outlook — $16 TN hit from the pre-Covid baseline trajectory in nominal terms. But hey — buy stocks! The SPX should now be valued on helium per share. [Link]

(3) Just imagine that most regular forecast forward earnings in the S&P 500 of 100 dollars a share. That would mean that at current prices the valuation goes up over 30 times. This is pretty mad. It‘s just an example of how markets are manipulated by central banks through quantitative easing. It’s so extreme, such a grotesque distortion that it’s almost embarrassing. [Link]

The social returns to financialisation?

Envision, one of the largest medical staffing companies, completed a restructuring of its roughly $7bn of debt this month as it moved to stave off bankruptcy. This comes less than 18 months after KKR — one of the oldest and largest US private equity firms with more than $200bn of assets — bought the Nashville-based company for nearly $10bn. The Envision deal highlights one of the stress points in a financial system that is creaking under the pressure of the coronavirus-induced recession.

To fund around two-thirds of the acquisition, KKR loaded the company’s balance sheet with junk-rated loans and bonds — a familiar private equity tactic. Those securities provided fuel for one of Wall Street’s least known but most important debt machines: collateralised loan obligations…..

…. In April, Envision began cutting the hours of emergency room doctors who have been one of the first lines of defence for Covid-19 patients. Bonuses have also been postponed and non-clinical staff were told they would be temporarily furloughed or see pay reductions.

“We are putting ourselves literally on the line, often without the protective equipment we need, to then be told our hours are cut, or that schedules are going to change,” says one emergency room doctor working for Envision in Florida. “It’s frustrating that this large company backed by a very large private equity group can’t find other ways around this that don’t hurt the doctors facing this disease head on.” Envision and KKR declined to comment. [Link]

A report from New York Times:

In July, a report from the Center for Popular Democracy, a progressive advocacy group in Brooklyn, said 10 of the 14 largest retail chain bankruptcies since 2012 involved companies that private equity firms had acquired….

… the collapse of Toys “R” Us in 2017 put a spotlight on how major buyouts by the firms could go sideways. The chain had been burdened with $5 billion in debt from a 2005 leveraged buyout by the private equity firms Bain Capital and Kohlberg Kravis Roberts and the real estate firm Vornado Realty Trust, and it did not have sufficient funds to invest in its stores and e-commerce business during a crucial period of growth for Amazon and Walmart.
 
It was eventually liquidated, and more than 30,000 workers were laid off. The workers were not paid severance — even as creditors, bankruptcy lawyers and consultants received payments — until they lobbied pension funds, which invest heavily in funds managed by private equity firms. The situation galvanised politicians and union activists and spurred public outrage. [Link]

Quite what the economy and the society gain from these transactions? What for?

The contest for Indo-Pacific

Visiting the twitter handle of Rory Medcalf, I came to know of an extract from his recent book, ‘The Contest for the Indo-Pacific’. It is a long one running into seven pages. Worth a read. Found myself nodding my head several times.

A paragraph on mental maps:

Mental maps matter. Maps are about power. How leaders define regions can affect their allocation of resources and attention; the ranking of friends and foes; who is invited and who is overlooked at the top tables of diplomacy; what gets talked about, what gets done, and what gets forgotten. A sense of shared geography or “regionalism” can shape international co-operation and institutions, privileging some nations and diminishing others. The late 20th century notions of the Asia-Pacific and an East Asian hemisphere excluded India at the very time Asia’s second most populous country was opening up and looking east. This was not just unfair; it was untenable. The Indo-Pacific fixes that, although it is important to correct the assumption that this way of seeing the world is all about India: it is principally about recognizing and responding to China’s widening strategic horizons.

Does this explain China’s recent belligerence?

For China, in particular, there is a troubling thread between the domestic and the international. For Xi and the Communist Party to maintain their grip on total power, they have found it necessary to raise the Chinese people’s expectations that their nation will be great abroad, and will successfully handle resistance. Yet China’s expansive policies mean that its problems overseas are accumulating, and the chances of a major misstep are thus increasing. In turn, this puts Xi and the Communist Party at particular risk, because China alone among the great powers has staked much of the legitimacy of its political system on success abroad. When things go wrong, the Chinese system could suffer grievously — especially if crises of security, politics and economics intersect in ways hard to predict and impossible to manage.

This is intuitively correct and also accords with what one should expect after a pandemic and with the United States and Europe entering their ‘Fourth Turning’ (that is a subject of another post):

Contrary to turn-of-the-century dreams of globalization, economic interdependence is no longer just about breaking down borders and letting all states rise together: it has become a tool of power and influence, captured in the newly popular catch-all term, “geo-economics.”

This reminds me of pages 313-316 of Samuel Huntington’s ‘Clash of Civilisations’:

China and the US have entered a state of comprehensive struggle, amounting to full-spectrum rivalry. The situation could deteriorate further, through miscalculation or coercion. There have long been four well-known flashpoints in East Asia: Taiwan, the South China Sea, the East China Sea and the Korean Peninsula. But beyond these, there are now signs that conflict is increasingly conceivable in the wider Indo-Pacific. The US is only one of China’s potential adversaries: China-India and China-Japan relations will remain fraught and fragile. The flashpoints may not even be geographic, but could involve interventions in the information realm, such as cyber intrusions or disputes over freedom of expression. A conflict that begins in East Asia could escalate across the region, for instance, through distant naval blockades, cyberattacks and economic sabotage.

Reminds me of my point (3) in my previous blog post:

… given China’s great strategic weight and temptations toward hegemony, the Indo-Pacific idea is empowering for other countries, encouraging them to build new and defensive partnerships across outdated geographic boundaries…..

…..Whatever happens, nations need to build their resilience and harness all elements of their power for a long phase of contestation.

The notion of a ‘Middle Kingdom’ is untenable:

This is consonant with the ancient Asian concept of the mandala, originating from Hindu cosmology, which with many variations defined the universe according to circles and a central point. In the mandala model, as opposed to the “middle kingdom” worldview of China, centrality does not bestow superiority. Rather, the model recognizes a world of many places, many islands. In modern parlance, this equates to multipolarity, equal sovereignty and mutual respect — many belts and many roads.

The book may be worth buying.

The significance of Galwan Valley

A friend of mine sent me Mr. Shyam Saran’s article in HT today. Mr. Shyam Saran was the Foreign Secretary (senior bureaucrat in the Ministry of External Affairs) for the Government of India in the middle years of the Noughties.

(1) I am glad that he did not write, towards the end, that we should not be drawing closer  to the US. Don’t recall what he did when he was the Foreign Secy. But, now it is good. In fact, the only time China had been accommodative of India in recent years has been when India has drawn closer to the USA/the Quad. Therefore, the best leverage India has is to explicitly restrict Chinese investments into India and restrict trade with the nation and move closer to the Quad.

(2) Second, as for denying the encroachments domestically, it does play into China hands and tactics, on the face of it. But, if the Government of India were to concede publicly that it has happened, then the public outrage and  the media outrage in this 24*7 news frenzy world would end up tying policy hands.

(3) Third, therefore, how does India extract and exercise leverage? China makes territorial claims everywhere with respect to Indonesia, the Philippines, Malaysia, Vietnam, Taiwan and in South China Sea, in general. Therefore, the only way they can be blocked is for India (being the largest of them all) to call for an alliance (temporary or permanent) of ‘Associations of Nations Against China’s Covert Aggression, Occupation and Annexation (ANACA) and issue a joint statement calling their bluff or introducing a resolution in UNGA and in UNSC against these moves. It may well be symbolic but highly so.

Read this portion of an extract from a new book by Rory Medcalf:

Consider, for instance, the possibility of a different quadrilateral: Japan, India, Indonesia and Australia. All four have serious differences with China and reasonable (and generally growing) convergences with each other when it comes to their national security. They happen to be champions of an emerging Indo-Pacific worldview. And they are hardly passive or lightweight nations. In 2018, the four had a combined population of 1.75 billion, a combined gross domestic product (or GDP, measured by purchasing power parity, or PPP, terms) of US$21 trillion and combined defense expenditures of US$147 billion. By contrast, the US has a population of 327.4 million, a GDP of US$20.49 trillion and defense spending of US$649 billion. For its part, China’s population is 1.39 billion, it has a US$25 trillion economy and its defense budget is US$250 billion.​1 (This assumes, of course, that official Chinese statistics regarding economic growth and population size are not inflated, and there is reason for doubt.)

Project the numbers forward a generation, to mid-century, and the picture of middle players as potent balancers become starker still. In 2050, the four middle players are expected to have a combined population of 2.108 billion and a combined GDP (PPP) of an astounding US$63.97 trillion. By then, America is estimated to have 379 million people and a GDP (PPP) of US$34 trillion. China will have 1.402 billion people and a GDP of US$58.45 trillion. Even just the big three of these Indo-Pacific partners — India, Japan and Indonesia — would together eclipse China in population and exceed it economically. By then, their combined defense budgets could also be larger than that of the mighty People’s Liberation Army. Include one or more other rising regional powers with their own China frictions, such as a Vietnam that may have about 120 million people and a top 20 global economy, and the numbers are stronger still. Even the combination of just two or three of these countries would give China pause. [Link]

(4) Four, economically, the public and the private sectors in India should be prepared to import from elsewhere or make at home or go without products that we import from China. That calls for a national sacrifice and short-term inconvenience, no doubt.

The Last Second Half Dance

Below are recent comments from Park Aerospace’s CEO, Brian Shore (fiscal Q4 2020 earnings call). We’ve followed Park Aerospace and Mr. Shore for many years and have found him to be one of the most honest and straight-shooting CEOs within our possible buy list. We thought his comments on the second half recovery summarized what we’ve been hearing from many corporate executives—visibility is limited and second half results are far from certain.

“Q3 and Q4, just don’t know, there are so many variables. We don’t know about Q2 either. We’re guessing. I just want you to understand that…we could be wrong. Q3 and Q4, we’re not even going to guess because there’s so many considerations that could affect Q3 and Q4, like what happens to the aircraft industry. Does it start to get a little bit better? Is there a little bit of light at the end of the tunnel? I know, now there’s no light at the end of the tunnel. It’s kind of almost sad, and I shouldn’t say pathetic, but it doesn’t really reflect well on these analysts because next week, they’ll have light at the end of the tunnel. This week there’s no light at the end of the tunnel. So I guess, maybe that’s the lesson…don’t listen—don’t spend a lot of time listening to the analysts.”

Source: The Last Second Half Dance

Fear the Dragon

Listing all the moves that China has made in the month of May, Shankkar Aiyar writes in ‘New Indian Express’:

In a cold and calculated move, China has sought to muscle in its hegemony under the cover of the chaos wrought by the COVID-19 pandemic.  [Link]

He is right. 

An article in ‘Wall Street Journal’ makes the same point but somewhat differently:

Mr. Xi has made establishing control of territory China claims an integral part of his agenda, and now faces mounting pressure from the public—as well as from more hawkish elements of the political elite—to make progress on those goals as the pandemic limits economic advances he also pledged, experts on Chinese politics say. [Link]

Matthew Klein (again, ht: Rohit Rajendiran) writes for Barron’s that China’s trajectory could follow that of the old Soviet Union. The latter appeared to catch up with America’s only to falter. Same afflictions are there for China too: aging population and debt dynamics. Read the article here.

In the meantime, Andy Mukherjee writes for Bloomberg that Mukesh Ambani’s planned listing of Reliance Jio in Nasdaq could become easier if the cold war between China and the United States worsened.

Two articles from Wall Street Journal provide a good perspective and information on the importance of Hong Kong to China. One provides the overview and the other backs it up with data.

Being a traitor

My friend Rohit Rajendran shared the article by Sebastian Mallaby in ‘Foreign Affairs’.

Essentially it is about the fear of the return of inflation and whether the central bank would be able to stop it. But, it is not about the President of USA vs. Chairman, FRB of USA. It is about Wall Street/Asset Prices/Boomers who are breathing down hard on Chairman, FRB. Will he/she stand up to them as well as the President of the USA? That is the salient question. By posing the question as one of President vs. Chairman, FRB, he grossly oversimplifies the problem although not atypical of the scholarship of the times.