STCMA – 22nd March 2019

Buying Gold and being bearish stocks is the ‘Trade of the Century’ according to a hedge fund. Personally, I hope they are right.

John Authers defends Jerome Powell for shutting the door on any further rate hike in 2019. I beg to differ. Even if he did not mean to raise rates, there was no harm in keeping markets uncertain. If the Federal Reserve Chairman was worried about a recession, he should also be worried about a stock market that betrays no sign of it. This divergence will make the ultimate pain for the economy all the more longer and greater.

As always, established and prominent figures are dovish in their criticisms of a dovish Fed. Here is Mohamed-El-Erian.

The headline of this article says it all: “Over 80% engineers unemployable for any job in knowledge economy”. If one wished to download the underlying report featured in the article, you can find it here. Have not read the full report yet.

While Martin Feldstein is worried about the looming federal debt crisis, John Authers has a good story in Bloomberg on the 12th March about the corporate debt bloat in the ‘here and now’. The story has many good charts and good arguments (ht Rajeev Mantri). But, John Authers fails to evidently connect this story to his latest missive on the Fed signalling no rate hike. A central bank pre-emptively foregoing its rate increase options does nothing to bring down corporate leverage.

Thanks to my IIM batchmates K.N. Vaidyanathan and Subramanian Sharma, I came across this ‘tweet storm’ or ‘tweet thread’ by Jawad Mian. It is equal to a full credit course on market valuations. It is a salutary lesson in investing at today’s prices.

Demonetisation update 33: highlights from MRF Annual Report 2016-17

From the Annual Report, 2016-17 of MRF Tyres:

The demonetization initiative of the Government in November 2016 caused a ripple effect across the business value-chain and the brunt of the impact was felt by sections of the trade and customers in smaller markets. While it is true that substantial lost ground was recovered by end January 2017, but lingering after effects continue to be seen till the end of fiscal 2017 and likely for some more time.

The tyre industry is a classic derived demand business and is directly affected by the performance of the automotive manufacturing sector, growth in which, in turn, is clearly a function of the overall growth in the economy. The Indian tyre industry grew by a modest 3.6% and is estimated to be around Rupees 55,000 Crore in 2016-17.

The trucking transportation business is somewhat scattered and is driven by small operators numbering nearly 2.6 million. This business, has historically transacted in cash and will face difficulties going forward in a digital era with increasing pressure to use alternate, and modern methods of payments viz. in Digital / Cheques/NEFT etc., to reduce cash dependence.

The Small Commercial Vehicles (SCV) category has seen its previously high numbers take a fall over the years which was further hit during the year by the  demonetization exercise, as this segment is totally dependent on cash for day-to-day running. However, the SCV segment is expected to grow in the future due to zoning and traffic regulations, creating greater access restrictions in urban areas for the bigger vehicles.

Natural Rubber continues to be one of the core raw materials for the Indian tyre industry as against Synthetic Rubber which is the norm in the rest of the world. The high Customs duty on Natural rubber, which makes it one of the highest duty structures on Natural Rubber anywhere in the world, continued to adversely impact the cost structure. …..

…..A permanent solution for the inverted tax / duty structure on Natural Rubber imports has still not been found, thereby creating a situation which will precipitate to alarming proportions, considering the increasing prices of Natural Rubber.

[My comment: This inverted duty structure is a rather peculiar feature of India. If someone can enlighten me as to how India got here – including political economy reasons – I will be grateful.]

The proposed roll-out of the cap on the age of commercial vehicles, will have a significant impact on the segment’s radialisation drive. The New Motor Vehicles Act is also expected to be passed and if it does, it will have significant impact on over loading of vehicles and how tyres and vehicles are configured in the industry to meet geographical peculiarities of the logistics business.

STCMA – 4.6.2017

A long article analysing various scenarios as to how demand for crude oil would evolve. All of them point to the downside from the projected demand. Well written article. Easy to follow.

A very good story on China’ ghost collaterals. Everyone fakes sincerity and everything is normal. It is one big illusion.The IFC comment that it was an isolated case is pure delight.

Millennials and home ownership in America. A distant dream. With their savings, they can afford dogs, though.

A German law professor wants Germany not to have any association with ECB’s Quantitative Easing programme any more. It is scheduled to run up to 2018.

More robots; fewer jobs – the workers appear screwed either way, robots or no robots. Post-2008, it was supposed to be different. Or so we thought.

Yuval Harari paints it stark: ‘​​Are we about to witness the most unequal societies in history?’

Rural America is the new inner city. Poignant reading.

Shankkar Aiyar on the riveting and unending saga of 100 worst districts in India. Riveting, if depressing reading.

The Euro over the Gold Standard

I just chanced upon this piece two days ago. It is meant to be a provocative piece and not a defence of Gold Standard. If one could tolerate Euro and its institutional setting, why not tolerate a Gold Standard? That is the question he poses and answers and the question does not answer why Euro could be tolerated or should be tolerated. That argument is not made, looking at costs and benefits.

Telling someone to tolerate random shocks arising out of fluctuations in gold supply and production because they are tolerating random shocks or are forced to tolerate random shocks from member country situations in the Eurozone and the consequent monetary policy responses is not particularly helpful.

In the days of trillions of dollars of capital flows dwarfing trade flows, it makes no sense to motivate an argument based on trade considerations alone. Yes, floating exchange rates do not offer any protection against spillovers and sudden starts and stops of capital flows. But, that does not prove that fixed exchange rates are better. The logic is flawed.

Floating exchange rates may not help. But, fixed exchange rates most certainly don’t. See the difference? Gold Standard is most certainly an extreme version of fixing. To actualise it and make it work for the real economy, one needs to confront the demon of financial flows and, more generally, financialisation.

An example would help clarify things. A this very mature stage of the economic cycle and an even more advanced stage of the market cycle, the SEC has approved a passive ETF on NASDAQ leveraged four times for public distribution. Under these circumstances, no regime would work – fixed or floating or the Gold Standard.

That Matthew Klein is not serious about the Gold Standard is evident from his recourse to the ‘snake oil economics’ of Martin Sandbu. I stopped wasting time on reading that gentleman’s writings more than a year ago. One cannot resort to debt write-downs, as one would do a morning walk every day to stay fit and healthy. Nor is wage flexibility a solution these days, except in blogs. It never probably was a solution except for Britain in the Gold Standard era. That was a different period and the difference was not just about the Gold Standard.

Second, he disappoints with his standard, run-of-the-mill baseless assertion that Draghi saved the Euro and that Trichet almost buried it. Economists who know about policy lags, the impossibility of counterfactuals and the unintended consequences of policy decisions would not make such glib assertions. First, had Trichet used up all the monetary policy bullets, Draghi may not have had many bullets left to fire. Two, we do not know how history would play out and whether Draghi would be reviled or revered. It is still very early days. The lagged effects of ‘whatever it takes’ have not yet played out.

Further, Mr. Klein is surprisingly sloppy with facts. The monetary policy response to German reunification happened in the 1990s before the Euro and ECB were reality. That was the German Bundesbank. They were tight and that led to the two European Exchange Rate Mechanism (ERM) crises including the famous ejection of the pound sterling from the ERM. Indeed, only then, did the Euro project come alive from 1993 onwards.

But for the Bundesbank’s tight monetary policy battling German money supply increase and the temporarily higher inflation, the ERM fissures wold not have been exposed, speculators would not have targeted it, the European currencies would not have come out of their sub-optimal policy straitjacket and economic growth in continental Europe and the UK would not have resumed from around 1994 or 1995.

ECB in fact loosened monetary policy in 2001-02, notwithstanding that the Euro had just plumbed new lows in October 2000. European real short rates were below normal and below average up to 2004 or so. In fact, those were engineered for Germany that was hurting from the collapse of the technology bubble. Therefore, monetary conditions were too loose for Spain, Italy and Greece. Their real estate booms ensued and turned into bubbles later.

With those facts and chronology addressed, let us revert to his arguments on the Gold Standard.

My blog is named, ‘The Gold Standard’. One can appreciate my predilections here. But, even then, I would concede that the enabling conditions simply do not exist for considering the Gold Standard. What the world needs is something far less radical than that but still a very radical departure from the current central bank orthodoxy.

The world abandoned fixed exchange rates (Bretton Woods/Official Global Dollar Standard) in 1973. I has experimented with floating exchange rates and discretionary central banking. The data point in favour of ‘discretionary central banking’ (alternatively, against rule-based central banking) was one – the Great Depression. Now, forty-four years later, the costs have begun to exceed benefits vastly – in many ways – economic, political and social.

Discretionary central banking with unrestrained ability to create reserves providing the basis for unfettered money creation by commercial banks does not make for a stable system at all. Nor is it social welfare enhancing. The blind and empirically unverified faith in the transmission from asset prices to the real economy and the indifference to the distributional consequences of such a faith/belief need to be abandoned.

The onus lies with the Federal Reserve, the intellectual leader in global central banking and the Wall Street alumni who govern other central banks.

The world has walked too far down the path of discretionary monetary and financial recklessness to return to the Gold Standard. Some simple changes, as suggested above, would do for now.

(p.s: Matthew Klein has put up a brilliant post rebutting the arguments of Steve Rattner on U.S. tax cuts. Very well worth a read)

The oil scam

In the years to come, economic or other historians would chronicle the political economy drivers of the slide in the oil price to USD26 per barrel earlier this year and its equally bizarre recovery by almost 100% since then.

Look at the highlights of the September ‘Oil Market Report’ (OMR) of the International Energy Agency (IEA):

Global oil demand growth is slowing at a faster pace than initially predicted. For 2016, a gain of 1.3 mb/d is expected – a downgrade of 0.1 mb/d on our previous forecast due to a more pronounced 3Q16 slowdown.

Recent pillars of demand growth – China and India – are wobbling. After more than a year with oil hovering around $50/bbl, the stimulus from cheaper fuel is fading. Economic worries in developing countries haven’t helped either. Unexpected gains in Europe have vanished, while momentum in the US has slowed dramatically. The result has been a slump in oil demand growth from a robust 1.4 mb/d in the second quarter to a two-year low of 0.8 mb/d in the third.

OPEC crude production edged up to 33.47 mb/d in August – testing record rates as Middle East producers opened the taps. Kuwait and the UAE hit their highest output ever and Iraq lifted supplies. Output from Saudi Arabia held near a record, while Iran reached a post-sanctions high. Overall OPEC supply stood 930 kb/d above a year ago.

OECD total inventories built by 32.5 mb in July to a fresh record of 3 111 mb.

Our forecast in this month’s Report suggests that this supply-demand dynamic may not change significantly in the coming months. As a result, supply will continue to outpace demand at least through the first half of next year.

OMR from IEA is released only with a lag for the public. It is a premium product for subscribers. The highlights of the October 2016 too are now available to the public but not the full report. Here are the key highlights of the highlights!:

Demand is forecast to expand by 1.2 mb/d this year, with a similar gain expected in 2017. Growth continues to slow, dropping from a five-year high in 3Q15 to a four-year low in 3Q16 due to vanishing OECD growth and a marked deceleration in China. (my comment: oh, yes! this economy is growing at 6% to 7% per annum, of course)

This is a good short, non-political take on what happened to the price of oil in the last two years:

To be sure, the rapid rise of US light tight oil (LTO) and OPEC’s free-wheeling strategy triggered dramatic changes in the world of oil. The price of crude fell from triple digit highs to below $50/bbl. Lower prices at the pump initially fuelled strong gains in demand, but growth has since slowed markedly after subsidy cuts in emerging markets, economic headwinds in some countries and demand saturation in the developed world. On the supply front, relentless growth from non-OPEC – particularly US LTO – has swung into contraction, as forecast in our previous reports. At the same time, production from OPEC – driven mainly by low-cost Middle East supply – has risen to all-time highs. The net result is a massive oil inventory overhang that is keeping the market under pressure.

Even with tentative signs that bulging inventories are starting to decline, our supply-demand outlook suggests that the market – if left to its own devices – may remain in oversupply through the first half of next year.

Both the slide and the subsequent recovery have been orchestrated – big time. Lance Roberts has an explanation for the latter, though:

The Federal Reserve is trying very clearly to accomplish several goals through their very confusing ‘forward guidance:’

1. Keep asset prices above the recent lows to avoid triggering a rash of potential ‘margin calls’ that would fuel a more rapid price reversion in the markets.

2. Talk down the “dollar” to provide a boost to exports (which makes up roughly 45% of corporate profits)and commodity prices. The Fed-assisted boost in oil prices also gives TBTF banks the room necessary to off-load bad energy-related debt exposure before the next price decline and run of defaults.

3. The Fed also realizes they cannot allow market prices to overheat to the upside and, therefore, use offsetting language to quell expectations.

Weekend reading links – 21.05.2016


An analyst thinks that Deutsche Bank’s problems are insurmountable

In Florence, Italy, the top earners among the current taxpayers were found to have already been at the top of the socioeconomic ladder six centuries ago.

German law professor suing ECB to stop QE; warns of legal surprises in coming weeks

Western nations realise that low rates do not create inflation. Some of us understand why but most don’t want to know.


Former London Mayor Boris Johnson invokes Hitler as debate over Brexit debate heats up. David Cameron invokes Churchill in arguing against Brexit.

Allister Heath of Telegraph on why he would vote for Brexit. A good read.


Andy Mukherjee questions India’s myopia in blocking foreign banks taking stake in Indian privately owned banks.

MINT writes an edit on the shifting balance of power in favour of judiciary in India. Not a good development.

Janmejaya Sinha suggests a roadmap for creating a globally weighty banking system

Mukesh Butani in MINT calls the Modi government glass more than half full, at the end of two years.

MINT uses statistics to show that fewer A-rated movies are made in India but that censors are still demanding ever more cuts. Is that so?

A new Little India in New York.

HSBC to cut branches in India almost by half.

Anil Padmanabhan in MINT questions the Election Commission’s show-cause notices to the two major political parties in in Tamil Nadu on their populist poll promises. He is right.

Tunku Varadarajan makes a brave attempt to understand a Supreme Court judgement text in India. But, Andrew Haldane of Bank of England at least, admits to the problem of verbosity and incomprehensibility (oops! That is quite long)


Rana Foroohar of TIME voices her concern over financial engineering by US corporations

U.S. Senate passes legislation that would allow individual families to pursue Saudi government officials for 09/11. America revealed that Saudi Arabia holds about USD116bn of U.S. Treasuries.

Life expectancy for top 1% and bottom 1% diverge greatly in the US (news from April)

Only one tech. company has done IPO this year in the US.

U.S. corporate balance sheet concerns – a good read

CIA ‘mistakenly’ destroys copy of a 6700-page torture report.


Wall Street Journal says that the US and Japan are heading for a stand-off on yen devaluation. America’s objections are hard to fathom

G-7 disunity over a country that was not present in Tokyo

Is there really someone in charge in G-7?


World Bank decides to abandon use of the distinction between ‘developed’ and ‘developing’. Plus, lots of other useful information

‘Atlantic’ magazine discusses if there is free will. No mention of Lord Krishna who resolved the dilemma neatly several millenniums ago.

Google’s AdSense places advertisements of multinationals on a jihadi website

This says it all: “Not only did we just experience the hottest April in 137 years of record keeping, but it was the 12th consecutive month to set a new record…. So far, 15 of the hottest 16 years ever measured have come in the 21st century.” – so, it is not just about El Nino.

Martin Sandbu on the Western double standards on corruption in developing economies. He gets it right.

Entries for this year’s photographs of the year contest for the National Geographic magazine.

One macromolecule to kill all viruses – in the works

Michael Lewis reviews Mervyn King’s book – both are MUST-READs.

Gold and Oil

Goldman says oil glut has vanished (for now).

Bloomberg says that gold surge signals waning confidence in central banks


Chinese banks operate at the margin between regulated traditional banking and lightly regulated financial services.

China City Construction Holding Co. wants the People’s Bank of China to provide debt guarantee.

China’s industrial production, retail sales, fixed asset investment for April miss analysts’ estimates. How can it be?

Zhang Dejiang assures Hong Kong it will not be absorbed by mainland China

The US has paved the way for the imposition of duties of as much as 500 per cent on Chinese cold-rolled steel, used to make cars and washing machines, as a backlash escalates against a glut of Chinese steel flooding global markets.

A ‘Global Halal Park’ in China?

The European Parliament passed a non-binding resolution urging the European Union not to grant market economy status to China. China, by no stretch of imagination, is a market economy.

Apparently, China creates 488 million fake social media posts a year to distract critics of China.

China’s desire for headline growth may hide longer-term risks, says Moody’s. Phew! We did not know that.

China is ready if the United States stirs up conflict in South China Sea. Earlier, Pentagon reported an unsafe China interception of a routine air patrol in international air space and Pakistan’s General Sharif visited Beijing during the week.

Weekend links – 14.02.2016


American productivity is not low because it is not being measured properly, according to a new working paper. I agree with the authors’ main conclusion.

Southern California does not have the expected rains from El Nino.


I have no idea from where the money comes. ChemChina (of course, a SoE) bids for Syngenta. Price: USD43.0bn. Missed it in last week’s missive.

Harish Damodaran in Indian Express on the implications for India of the acquisition.


Brahma Chellaney on India’s Pakistan Policy under successive Prime Ministers. Singularly incapable of learning or, more precisely, personal glory triumphs national long-term interest (Feb.1, 2016).

Tufail Ahmad’s piece on many shades of Hindutva, already covered widely by others, recorded here for future reference.

This piece on Indian export competitiveness could and should be used for a discussion in classrooms. But, the proposed solution is debatable at bet and unhelpful, at best. (Appeared on Jan. 22, 2016)

RBI Governor presents a good update on the Indian authorities’ approach to the problem of bad debts in government-owned banks. Media focuses only on ‘deep surgery’ but not on ‘ghost towns’.

Hafiz Saeed, founder of LeT, threatens India with more attacks.

India protests US Government’s sale of eight F-16 planes to Pakistan. Not sure how India’s protests would hyphenate India and Pakistan, as Sushant Singh writes.

Swapan Dasgupta on the growing strain between the BJP and Indian capitalists. I doubt if it would change soon. Fault is not with the BJP for the most part.

G. Parthasarathy says that interminable delays in the building of major projects overseas, such as the Parliament Building in Kabul, have destroyed India’s reputation abroad.

Majority of Railway workers backs a strike call from April 11. Some of their demands are patently unreasonable.


Indonesia removes many items from the negative list for foreign investment. FT strikes a cautious tone.


Mohammed Taki in Pakistan’s Friday Times reviews ‘Purifying the Land of the pure’ by Farahnaz Ispahani. (Jan. 29, 2016)

Carlotta Gall’s piece on Pakistan’s role in aiding and abetting global Islamic terror networks in NYT is not news for its content but for the fact of it being carried by NYT.

‘Pakistan And The Emergence Of Islamic Militancy In Afghanistan’ – a book to bookmark to buy later. Too expensive now.


A ‘lest we forget’ quote for posterity from Prof. Christine C. Fair: “It is difficult to imagine the existence of al-Qaeda had the United States supported the insurgency in Afghanistan on ethnic rather than jihadist terms.” – from an article in ‘War on the Rocks’ on Jan. 31, 2014

I really doubt if I can pretend that I understand this.

Russian Prime Minister, Medvedev, says that the world is in a new cold war.

Worst drought on record in South Africa sends corn prices soaring. Rainfall below 60% of the average.


German spy agency says IS spending terrorists disguised as refugees. How much longer will Merkel stay in office?

Monetary Policy

The unintended consequence of negative rates in Japan. One hopes that Martin Sandbu had read it.