Two classic understatements

China’s policies have focused on addressing the economy’s significant and longstanding financial vulnerabilities. But the shift in priority toward stabilizing growth may mean slower progress on deleveraging and heightened medium-term risks for China and the entire region. – Emphasis mine [Link]

This one from Barry Ritholtz:

You can have a committee of 10 geniuses that proves collectively to be a moron [Link]

The quote is attributed to Cliff Asness by Barry Ritholtz.

What did America do between 2014 and 2016?

My column in MINT on Tuesday 9th October:

Bloomberg Business Week broke the story of the “Big hack” — how a tiny chip (the size of a pencil tip or a grain of rice) was embedded in servers bought by America’s big technology companies on 4 October. A week earlier, The New York Times wrote that the Chinese government had issued instructions to stop the reporting of negative news in print media and online forums, etc. The directive sent to journalists named six economic topics to be “managed”. Two of them carry interesting implications. One is “local government debt risks” and the other is “the risks of stagflation, or rising prices coupled with slowing economic growth”. It is reasonable to assume that these two remain live issues or risks in China. However, China is not alone in wanting to suppress reality.

I have long been puzzled by the turnaround in the global economy and asset markets in 2016 when it appeared that the bottom was about to fall off for the global economy and asset markets. Everyone assumed that China’s credit taps were opened and that the world was saved. The truth is slightly trickier than that. There are reasonable grounds to suspect that the US had fudged data from 2014 to 2016 to prevent official data from showing an economic recession and that the stock market too was manipulated. The supporting arguments follow.

Between the summer of 2014 and spring 2016, stock prices in many markets declined sharply. Stock indices developed by Morgan Stanley Capital International for the European Monetary Union, Asia-ex-Japan, Japan, Switzerland and emerging markets had declined anywhere between 20% and 40% in that period. Emerging market bond spread doubled. However, the S&P 500 stock index traded sideways. Was it because earnings by S&P 500 companies were stellar? No. For about seven to eight quarters from December 2014 to September 2016, year-on-year (yoy) growth of earnings per share’ (EPS) of S&P 500 companies was negative. Quite how the S&P 500 stock index remained stable in the face of a global sell-off in risk assets and contraction in earnings remains a mystery to be solved.

What happened to the real economy in the US? In the same period, industrial production and manufacturing recorded more months of negative change than positive change—both on a month-on-month and on a yoy basis. Capacity utilization declined. Consumer confidence—University of Michigan consumer confidence indices—declined. Import prices—from China and Mexico—recorded declines on an annual basis. Consumer price inflation came down from 2% to around 0%. All these indicators suggested a recession in America. Real gross domestic product (GDP) growth slowed, but there was no recession.

The price of crude oil declined sharply in this period. It must have helped Asian stock indices and corporate earnings since Asia is largely an oil importer. But, as mentioned above, Asian stock indices fell sharply. The balance sheet troubles of oil producers and companies in related industries eclipsed the positive effects of lower oil prices. None of this showed up in American stocks. In fact, excluding oil stocks, the S&P 500 would have been up. Of course, excluding profits of oil companies, S&P 50 EPS might have experienced growth. That might explain the resilience of the index. However, this does not sound right because the rest of the economy was reflecting the strains that the oil industry was facing. But, not the stock market. Why did the US have to do this?

By 2015, had official statistics reflected the slowdown in the economy fully, it would have been a big indictment of the policies pursued since the crisis of 2008. Short-term interest rates at 0% and three rounds of quantitative easing and repurchase of maturing treasury assets could not produce a recovery that lasted longer than six years. It would have been a huge embarrassment to the Fed and would have emboldened the likes of Ron Paul to demand drastic changes to the charter of the Fed and the trimming of its sails. The other motivation is political.

An economic recession and a stock market decline would have sealed the verdict on the Barack Obama presidency and would have effectively nullified the chances of the election of a Democrat as president in the 2016 elections. Perhaps, a Republican victory coming on top of an official economic recession and stock market collapse would have made Democrats unelectable for a long time to come. In the end, they did not succeed because public sentiment could not be manipulated. They were hurting because of the sham recovery. Hence, apart from the traditional Democrat bastions along the coasts, the rest of the country voted Donald Trump to the office of the president.

What are the implications of this? By not allowing the American stock market to correct meaningfully in that period, policymakers have not allowed the pressure valves to function. Pressure has built up as the stock market then began to climb from 2016 onwards. So, the “bottled up” pressure is now immense. Stock market stability followed by a steep ascent since end-2016 means that excess risk had been taken by companies, funds and investors. We cannot pinpoint before the fact where they are. We will all be wiser after the fact as we were, after 2008 only to forget the lessons in short order. Recently, the chief economist of the European Central Bank expressed fears about the degree of leverage in the financial system because of shadow banking. It had taken just 10 years to come back a full circle. A truly bizarre world.

V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at


First Published: Mon, Oct 08 2018. 09 09 PM IST

Breaking the hiatus: RBI, Michael Pence

I had joined the IFMR Business School as its Dean, as of October 4.  It is located at Sri City in Andhra Pradesh. I arrived at Sri City campus on October 1 and the last week has been a blur. But, blogging is a refuge. I think I had mentioned it once before.

You can watch the interview I gave to ET NOW Television on RBI monetary policy decision on Friday. I was part of a panel. I did not fault their rate decision on Friday. It was a fine call. They took their chances. The stock market appeared not to like it. But, it has fallen the day before too. In any case, it was so rich in valuation that it deserved to fall. Establishing causation for such short-term action when the market was anyway overvalued is problematic. Did the market expect RBI to cut rates or raise rates?

But, I felt that they should have offered more substantive comments on the IL&FS, if not on Friday, but on another occasion.

Before the interview, I managed to go through the monetary policy report and the press statement in the long car ride from Chennai city to Navalur in Kancheepuram District (OMR).

Michael Pence’s speech on China requires careful reading. I had not done so yet. It is an  important and calculated escalation.

We can do without headlines of this nature. The Federal Reserve Chairman does not exist to serve the stock market investors.


India’s ‘perfect’ financial storm

Andy Mukherjee has been tracking IL&FS zealously and professionally. That the news of their financial distress broke out as the world was ‘celebrating’ the tenth anniversary of the collapse of Lehman Brothers is indeed a rather remarkably unfortunate coincidence.

Andy Mukherjee’s columns on their travails can be read here, here and here.

Andy’s piece on RBI’s five messages – including one message to itself – is an interesting piece. IL&FS’ distress again reflects poorly on RBI’s regulation because they are regulated by the central bank:

All of India’s finance industry ought now to feel the RBI’s regulatory heat, including Infrastructure Leasing & Financial Services Ltd. and its empire of 169 subsidiaries, associates and joint ventures. The IL&FS Group is systemically important, though it doesn’t take public deposits. Now that the infrastructure lender is defaulting on debt, it’s become painfully clear that the RBI hasn’t done enough to rein in that institution’s freewheeling ways. [Link]

However, his column was about the non-extension of the tenure of Rana Kapoor, YES Bank Chairman & Managing Director by RBI.

While many have applauded the RBI decision on YES Bank C&MD’s tenure being cut short, some have still questioned RBI’s terse communication on the matter, without explaining the decision. See Amol Agrawal’s blog post on that.

Back to IL&FS. Shankkar Aiyar wrote that fear has no bottom. Well, fear has. The worst that value can go to is zero. It is that exuberance has no ceiling! On Friday, 21st September, for a while, it did appear that fear had no bottom in Indian stocks. Intra-day drop was nearly 1500 points. Heavy buying by institutions stemmed the rot but that is no often good news. Indeed, the pressure is bottled up to be released later. On Monday, the Sensex Index shed 546 points (1.46%).

The shareholding of IL&FS should make us all worry about LIC. They have bailed out disinvestment from ONGC; IDBI Bank and they are now neck-deep at IL&FS. Who will shore up IL&FS Equity Capital? What is the true portfolio value at LIC?

ILFS shareholding

This is the source for the above chart. This story captures the importance of IL&FS to the Indian debt market.

Is the IL&FS situation a wake-up call for the Insurance Regulator? But, LIC is 100% government-owned. So, effectively, it is Government of India’s fiscal risk. To the extent that IMF re-calculates projected budget deficit for China to take into account the contingent liabilities of the Central Government in China, shouldn’t it be doing the same for the Indian government’s contingent fiscal liabilities? Of course, the topic of China, IMF and its Article IV report is the subject of a separate blog post. I am digressing.

Finally, I met Saurabh Mukherjea (ex-Ambit Capital) in August when we both were speakers at a conference in Coimbatore. We spoke that night by phone on the vulnerabilities of India’s shadow banks since they had become both aggressive lenders and borrowers in the wake of the torpor of public sector banks. He did warn me then India’s NBFC would be the next domino. He was prescient. Again, on September 8, he had written this post about India’s exposed financial system and it was published by moneycontrol on September 23.

A Chinese company perspective on the trade war with America

Business Review and Outlook

10 years ago, the U.S. printed money like crazy and exported U.S. dollars all over the world. Now, the U.S. has become a global enemy, trying to bring back the exported U.S. dollars (the U.S. dollar debt of the emerging market in the first quarter was close to 3.7 trillion) and supply chains, as well as to undermine the asset markets of other countries and the global supply chain order. No wonder the U.S. has made a lot of enemies. Fortunately, Trump does not have the same wisdom as Mao Zedong in making alliance with one while fighting another. He wants to fight the world. But to defeat the U.S. hegemony is not an easy task. The history told us that those who wanted to kick out the big brother would run the risk of being wiped out. Nevertheless, Chinese are savvy and resourceful. Deng Xiaoping said, “we should grope our way across the river, going one step at a time”. Jiang Zemin said, “keep a low profile to make a big fortune”. Han Xin demonstrated his immense ability to endure humility in order to preserve his existence for future accomplishments. Such wisdoms contributed to the creation of incredible historical achievements one after the other.

Today, the U.S. is pushing the trade war to the limit. Yet, it is not easy to cripple the China model, even with Trump’s wisdom. With a looming war, there are risks as well as opportunities. Therefore, the Group’s established policies will remain unchanged. While some projects are delayed pending for the government’s new plan, the Group will always ensure that Shareholders’ benefits are well taken care of.

Source: Half-yearly interim report of the China Properties Group Ltd. (1838 HK) [Link]

Summer of discontent in China and Europe

Nikkei Asia Review had some excellent articles on Xi Jinping’s political troubles this summer. He is not executing the trade war well. All the media pundits who ‘egged him on’ cannot really help. The simple math that Trump relied on – I import more from you than you import from me and therefore, I can hurt you more with my tariffs – seems to have eluded many complicated economists and pundits. The summer chastisement of Xi by party elders therefore makes for interesting read. You can read them here, here and here.

This captures a lot of things:

The revised regulations stipulate the importance of “resolutely upholding the core status of General Secretary Xi in the Chinese Communist Party Central Committee and the entire Party.” This sentence holds significant meaning and marks a step forward for Xi. Earlier, the party had only talked about “resolutely upholding the Central Committee with Xi Jinping at the core.” The revised disciplinary regulations strengthen the wording regarding “core,” giving the impression that Xi, not the party’s collective leadership, is being highlighted. Now anyone who makes light of Xi faces punitive action. [Link]

South China Morning Post has a story on how it is not just trade but even Chinese investments that are now threatened because the rest of the world has wisened up.

Some interesting and unresolved long-term dilemmas crop up in the tension between European Union and Hungary. The European Parliament has censured Hungary. The censure motion got the required two-thirds majority. But, does it smack of hypocrisy and inconsistency? Hungarian people had voted him back to office just few months ago with a bigger mandate. He is pursuing policies that he had done before and which the voters have approved. So, is the European Parliament censuring him for being faithful to his people’s preferences?

Interestingly, heard a talk by Dr. S. Jaishankar in Singapore last afternoon. He was India’s foreign secretary. He said that the alliance between Italian Deputy PM Matteo Salvini and Orban of Hungary was the talking point of his meetings in Europe two weeks ago.

A comprehensive survey of people’s attitudes towards public institutions like military, parliament, financial institutions and the media, towards immigrants, etc., was published by Pew just two months ago. Europe is conflicted. For example, majority in many countries say that immigrants contribute to economy. But, the vote for the question of whether immigrants increase terror risk runs very close. Germany, in fact, has a net positive score. That is, the proportion that says immigrants increase terror risk exceeds those that say that immigrants don’t increase terror risk by 9 percentage points, followed by 4% points in Italy. Surprisingly, of the other countries, Sweden has the lowest negative differential: -6%.

On immigration, one has to interpret positive sentiments with a bit of scepticism. Respondents want to project themselves as open-minded. But, the truth is that negative sentiments and scepticism run deeper. The proof of the pudding is in the way the vote has swung in Sweden and in the rising popularity of AfD in Germany. No wonder Europe experienced a heat wave this summer.

Attitudes towards the European Union’s dominance in national policy discourse – more power should be returned to national governments – is uniformly negative. Indeed, 73% in the UK feel that more power should be returned to national governments. Even more than in Italy. Those who want to put Brexit to a second vote should note.

Financial Institutions are not trusted (either not at all or not too much) by a substantial majority in Italy, Spain and France. It is 46% in Germany and in the UK. But, distrust of media is uniformly high in all countries (not trusted at all or somewhat not trusted) with the exception of the Netherlands, Sweden and Germany. In the trust quotient, media scores lower than financial institutions! That is some achievement.

The lesson is that the so-called centrist and mainstream politicians and elites are failing in walking the fine line between acknowledging as real people’s perceptions and grievances and in appearing to be legitimising extremist political parties. The challenge lies in doing the former without doing the latter. It takes a lot of hard work, deft communication and repetitive messaging along with tangible measures on the law and order front, etc. It is hard work and, out of laziness, many mainstream politicians are taking the easy out: lumping all sentiments as xenophobia. So, they turn it into a lose-lose situation. They lose their people and they lose to their more extreme alternatives.

Who is really ‘isolated’ in the end?

A rather interesting article in the FT titled, ‘China fears an emerging united front’. You can read it here.

A good article and must have been a difficult decision for a FT journalist to write and for the paper to publish it because from declaring Trump ‘isolated’ to now admitting (even if only reluctantly) that it is China that is getting isolated, must have been too big a pride to swallow.  FT needs to be complimented for taking an ‘in-principle’ decision to swallow pride.

That said, they had decided to  eat their pride but not swallowed their ego because the article (1) fails to acknowledge that how things unfolded could well have been a deliberate strategy on the part of President Trump – they cannot even get around to countenancing that possibility (2) falls back on the habit of ‘but, still…’.

For example, how does it matter what a ‘senior European banker’ thinks on this geopolitical strategy? He points to Trump’s tweets on WTO as evidence of Trump’s erratic behaviour and therefore, his inherent lack of trustworthiness. This goes back to point (1) above.

I can provide a counter-example to the banker’s ‘erratic behaviour’ argument. The American relationship with Mexico appeared to fall off the cliff but they have quietly
renegotiated NAFTA.  Time and again, whether on Trump or on the larger issue of the responsibility for the rise of the ‘so-called’ populism and ‘nationalism’, conventional wisdom is failing to acknowledge that its priors, logic and its framework could simply be wrong. They refuse to admit that. The article is a faint contrarian evidence to the charge above and, to that extent, it is welcome.  While it has succeeded in crossing that first hurdle, it has failed at clearing subsequent hurdles because it is marred by many other habitual bad biases.

Two useful links on China and Africa from one of the comments posted under the article.