Weekend reading links – 19.12.2015

This one is almost three weeks too late. I doubt, however, if the links have lost their relevance. Hence, posting them now. Hope to resume regular duties from the weekend of Jan. 9. Wishing you all a happy, healthy and prosperous New Year!

In my previous ‘Weekend reading links’,  I had linked about the decline in Global Planetary GDP. This week, I add to the story. IMF Research Staff dismisses the talk of errors and says that the calculation is in USD which has strengthened and hence, the drop in planetary GDP.

This article has interesting arguments against central banks and negative interest rates.

A tweet with an interesting excerpt from BofA-ML research on the divorce of the US dollar and the Chinese yuan

The head of China’s fourth-largest state bank has stepped down citing personal reasons on December 4. The departure of Agricultural Bank of China Ltd. president Zhang Yun is linked to a separate graft probe on another executive, who headed a regional branch, a source with knowledge of the matter said.

Missing Chinese executives are either being investigated or assisting investigations. That is very comforting. List of top bankers who disappeared or died unnatural deaths this year.

Party workers in China’s rust belt falsified and inflated growth numbers. What about the rest of the country?

China more than triples Macau’s size with new maritime jurisdiction

Andy Mukherjee on stock analysts’ bullishness on mining companies. The more things change, the more….

It is a bubble and someone who has seen it before, says so.

I have a blog post on the Indo-Japan announcement of a new bullet train between Mumbai and Ahmedabad with Japanese assistance.

India’s own ‘Li Keqiang’ index shows that economic growth in the fiscal second quarter (July – Sept.) slowed down and is around 6%. Feels right.

Fascinating philosophical questions that driverless cars throw up.

Very useful link to articles that appeared in FT in 2015 on Finance.

Sri Lanka clears the deck for a controversial port project with China.

Michael Lewis’ ‘Big Short’ is a movie now.

Cathay Pacific experiences YoY slump in cargo traffic, first time in two years.

Lucy Kellaway introduces Guffipedia and many existing Guff entries here. She is the eternal bullshit-buster.

Rudolf Guiliani calls for less finessing in confronting terrorism in the name of Islam

Bloomberg features best books of 2015 from its famous clients.

Wells Fargo warns of stresses in its Energy Portfolio.

Lucidus Capital Partners, a high-yield fund, started by people with some pedigree, has decided to shut. Third high-profile one, in as many days.

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Paris Climate Change Links

How the pact was won with a ‘typo’ tweak. So, it appears that there are no binding targets based on differentiated responsibilities, on the developed world.

On balance, did India really win more than what it had lost in this summit? It was a clear loser in the previous two summits, thanks to Jairam Ramesh. Check out the link. It is interesting to see how India’s ‘Wins’ and ‘Losses’ have been visually presented.

This is not a legally binding treaty, as was the Kyoto Protocol, says this Reuters report.

No legal rights to compensation for vulnerable countries.

Bloomberg report focuses on the shift in fossil fuels.

Audrey Chia in South China Morning Post writes a brief note about India’s chotukool

How ‘Indaba’ – a negotiating and discussion technique – helped achieve breakthrough in climate talks.

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Italy bails out retail creditors after bailing them into the rescue of four banks. Who sold them subordinated bank debt? Good question to ask.

Russia launches its own credit rating agency. What happened to Dagong?

John Kemp’s analysis of the current oil market situation with that of the 1980s is a good read. Well written.

Story in Nikkei Review on Saudi Arabia selling stocks of Japanese companies to raise money.

Euromoney has a good story on HFT in UST. Quite what the message of the story on HFT is, is unclear though.

Dominic Elliott in Reuters has a story on how the Basel Committee on Banking Supervision has rolled back a provision requiring banks not to use credit rating agencies’ assessment to measure the credit riskiness of certain assets. Another case of more they change, the more they remain the same.

Barry Eichengreen adds his own anecdotal tale to the debate on the paradox of missing productivity. The article feels incomplete. Perhaps, that is par for the course.

Attali said the impending risk of a financial crisis contributes to his belief that “we are not far from World War III.”

India’s small companies have lower debt and lower financing costs. They are driving investment. Good to hear that.

Black swans (or base case scenarios) for 2016.

Danes have three-times of their disposable income as gross debt. Central banker is concerned about financial and macro stability. Surprised!

America’s cronyism at the heart of financial markets:

(1) Accounting industry and the SEC hobble America’s audit watchdog. This is part 3 of a series.

(2) How Wall Street captured Washington’s effort to rein in banks. (Part 2)

(3) US banks moved billions of dollars in trades offshore (Part 1)

How to get the Federal Funds rate to rise when there is so much excess reserve in the system? Some technical details here.

U.S banks have lowered their underwriting standards, warns OCC

Piecing together the oil puzzle

Good friend Srinivas Thiruvadanthai sent me this link last night. That set me thinking as to whether Saudi Arabia has bitten off more than it could chew and whether it would set off some other chain reaction since the ‘gambit’ has gone badly for them, or so I think. Things have changed quickly. Until about May this year, Saudi Arabia was confident that it would weather the oil price swoon and that others, including US shale oil producers, would be hurt the most. Following is, more or less, a reverse chronology of articles in the last year or so.

This news of Saudi Arabia delaying payments to contractors must be quite embarrassing, if not downright humiliating.

There was a big feature article in Bloomberg Markets earlier this year centred on Mr. Ali al-Naimi as to how Saudi Arabia (and he, by extension) was the master string-puller of oil prices. This reinforced the message from the Reuters article below.

A Bloomberg piece in January 2015 also predicted that Saudi Arabia would last it out, compared to US shale oil producers.

According to some analysts, Saudi Arabia had initially wanted lower oil prices to extend the life of oil as the source of fuel and energy for the world. To perpetuate and extend the dependence on hydrocarbons. To snuff out marginal producers and hydrocarbon substitutes too. To put off the development of renewable energy sources:

Some OPEC members including Venezuela are clamoring for production cuts to push oil prices back up above $100 a barrel.  But Saudi officials have given a different message in meetings with investors and analysts: the kingdom, OPEC’s largest producer, will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

This Reuters article from November 2014 actually mentions that the Saudi oil minister had tied the decision not to cut production to taming competition from US shale oil producers:

Saudi Arabia’s oil minister told fellow OPEC members they must combat the U.S. shale oil boom, arguing against cutting crude output in order to depress prices and undermine the profitability of North American producers.

Ali al-Naimi won the argument at Thursday’s meeting, against the wishes of ministers from OPEC’s poorer members such as Venezuela, Iran and Algeria which had wanted to cut production to reverse a rapid fall in oil prices.

See this story in FT too towards the end of 2014. See the observations on Saudi Arabia:

Saudi Arabia

Fiscal buffers are in place to offset the impact of any potential domestic deficit but Saudi Arabia — the world’s largest exporter — will still be among the Gulf nations most affected by lower oil prices. At $60 a barrel the kingdom, whose oil receipts accounted for 85 per cent of exports and 90 per cent of fiscal revenue in 2013, would experience a fiscal deficit equivalent to 14 per cent of GDP in 2015, according to Moody’s. Its vast foreign exchange reserves, estimated at close to $740bn, will offset some of the negative effects of much lower oil prices, but such a stressed scenario is still likely to mean a pull-back in spending on social programmes which had increased substantially following unrest related to the Arab uprising. Even so, Riyadh has used its leading position in OPEC to resist calls for a production cut.

The above FT article had a link to an earlier article published in the same paper, a week earlier:

According to a well-placed Arab figure, a senior Saudi official told John Kerry, US secretary of state, while he was talking to Sunni Arab leaders this summer about a coalition against the jihadis: “Isis is our [Sunni] response to your support for the Da’wa” – the Tehran-aligned Shia Islamist ruling party of Iraq.

But, a sentence earlier was somewhat contradictory:

Iran, of course, is aligned if not allied with the US and its European and Arab partners, including Saudi Arabia, in the fight against the Islamic State of Iraq and the Levant.

In truth, Saudi Arabia might have decided to take credit for ‘masterminding’ a price decline that it might not have had any control over. That is the substance of the piece by Nick Butler in FT on December 15, 2014.

If it did not have any control over the price movement in 2014 that has continued into 2015 with dire consequences, what would be its response now? To try and squeeze the price higher? How? Any geopolitical ‘accident’ would help? Or, would it still last it out for a year or two and see off other marginal producers in the U.S. and elsewhere? Certainly, Iran would love to have higher oil price too, as it wants to ramp up production after the lifting of sanctions. So, would that discourage Saudi Arabia from trying to engineer a higher price? Alternatively, does it have the financial resources and tolerance for pain to go through another year or two of lower or even declining oil price?

Amidst all this focus on producers, demand does look set to remain weak with global growth heading lower? Probability of a U.S. recession in 2016 is non-trivial. Doubt if further demand collapse is in the oil price yet.

I am Mostly Fuzzy

This week is the week when the International Monetary Fund releases its World Economic Outlook for April 2015. Newspapers are filling space with IMF analyses. Martin Sadnbu at FT (‘Free lunch’) cited a blog post by Francesco Saraceno (FS) as to how the IMF now appears willing to correct its own previously held views. The blog post is interesting. We need to read it to keep ourselves updated that there is no Washington Consensus, at least in Washington, as FS writes. May be, it is just the US Treasury consensus only, now. Intellectual openness at the Fund is to be welcomed.

That said, the extensive simulations done by the Fund economists based, presumably, on their DSGE models make eyes glaze over. An example is this. There is no way in hell of knowing how much would a Euro weakness help or hurt growth anywhere in the world, including in the Eurozone, especially now, when the band of uncertainty about what is happening to economic growth, global trade and energy demand, etc. is far wider than before. At worse, such analyses may help trigger ‘beggar thy neighbour’ reactions at the most inopportune time.

Look at another WSJ blog post on the rise in Eurozone household savings rate. At the same time the ECB is printing money, European households are saving more. Makes sense, from their point of view. After all, when returns to savings are lower, the targeted savings levels take longer to reach and hence households increase the quantum of savings. So much for policies such as low interest rates that boost spending. In other words, polilcymakers have to keep in mind the impact of policies on expectations. The latter are changed by the very policies that seek to achieve economic impact premised on unchanged expectations. This is the essence of Lucas’ critique and Lucas Critique, in plain English, is that Ceteris is not paribus. Other things simply do not remain the same. That is why economic theories are only useful starting points at best. The most egregious rejection of Lucas’ Critique is to be found in the QE policies of major central banks.

Most of the models are not equipped to deal with structural shifts and changes that economists and policymakers neither anticipated nor know how to handle. Consider this statement in the FT article on global trade growth slowing down:

With Tuesday’s forecasts the WTO seems to be joining a camp of economists who argue that the slowdown in trade growth is not only cyclical but has also been due to structural factors. [Link]

In the middle of the prominence given to the WEF released by the IMF, the WTO report on global trade outlook has been somewhat sidelined.

The opening lines of this story in FT on the world energy outlook confirm the same issue confronting all of us – we are flying blind:

The rebalancing of the global oil market may still be in its early stage with the outlook “only getting murkier”, according to the International Energy Agency, as uncertainties remain about demand and supply responses to the steep drop in prices. [Link]

There is no visibility for any one and, in such a situation, to make precise forecasts of how Euro weakness (or strength) would affect growth in the US and in China up to 2018 is a largely meaningless exercise.

Bizarre logic

I must admit being stumped for a response to this statement in a Bloomberg Op.-Ed:

Economists at Oxford Economics Ltd., a U.K.-based research group, say policy makers may be damping hopes that last year’s near-halving of crude prices would spark worldwide demand. “With rates this low, even good news has a sting in the tail,” John Bulford and Gabriel Sterne, economists at Oxford, said in a report to clients last week. “The expansionary impact of the oil-price shock is dampened to some extent because of the limited capacity of central banks to loosen monetary policy.” [Link].

Central banks are unable to cut rates because they have already cut rates to zero! Is that not stimulus enough? The fact that a plunge in crude oil to the extent of 50% has not left most countries in the world feeling cheerful should tell something about the state of underlying economic vigour. But, thinking has been so clouded by debt that very few are seeing clearly.

They are being bogged down by all the debt that they accumulated in the gung-ho years. In fact, th gung-ho years felt gung-ho because of debt creation. Debt and economi growth reinforced each other. Far from deleveraging, central banks and policymakers are encouraging more borrowing. Debt-induced spending cannot conjure up economic growth for ever. It has done already. Existing debt burdens have to be extinguished considerably before the next wave of economic growth can commence.

What the world has done in the last six years is to take on more debt, in response to the debt-induced crisis of 2008. They have to wait a very long time for the next growth wave to arrive. Cheap oil is unlikely to spark a growth revival. It is a symptom of the low economic growth, induced by the dead-weight of debt.

Pizza on Lexus and other readings

The fact that only 20% of the 9.7 million vehicles sold this year have been small cars and the average sales price of new cars sold is now $31,000 proves Americans are still living in a delusional fantasyland of cheap gas and monthly payments for eternity.

As gas prices surpass $4 per gallon across the country, somehow 4.7 million of the 9.7 million vehicles sold in 2012 have been pickups, vans, crossovers or SUVs. Three of the top eight selling vehicles are pickups. Luxury vehicle sales are booming, with Mercedes, BMW, Porsche, Land Rover and Audi showing double digit percentage sales gains over 2011. We’ve entered a recession, gas prices are approaching all-time highs, job growth is pitiful, and Americans continue to buy luxury gas guzzlers on credit. This will surely end well.

Offers of 7 year financing at 0% interest and monthly lease offers of $150 to $200 for brand new cars now are understandable. The newer model BMWs, Cadillac Escalades, Volvos, and Jaguars I see parked in front of the low income luxury gated townhome community in West Philadelphia now makes sense. A pizza delivery guy driving a new Lexus is now explainable.

Full article (‘Subprime auto nation’) here.

Swaminathan Aiyar’s piece on ‘Better Economics’ makes interesting reading. But, there is no better economics that is out there. This is all there is to economics. All we can ask for is for humbler economists.

Two + trillion US dollars of asset purchases by the Federal Reserve has not really helped. They are going to try more. Will they? We will know shortly. The full census bureau report is here. I am yet to go through it.

You can be optimistic or pessimistic about the outcomes, but you can’t speak of the China or, by implication Asia, miracle nowadays, without considering the chances of successful political and institutional reforms. More to the point, perhaps, what would the consequences be for China if, for existential reasons, the CPC wasn’t willing or able to go down this path?

Very well put by George Magnus of UBS in his new report, ‘Asia: is the miracle over?’. A brief blog post on that is here. I think the answer to the question is YES. According to work by Angus Maddison, China and India dominated the global GDP league tables up to around 1820. The baton has been passed on. I doubt if it would return to Asia soon.

A non-executive director at ICBC (China) writes on the end of good times for China banks. Couple of interesting statistics.

A Caixin edit (I think) asks governments in China – local and federal – to learn to live with and in hard times.

If Ben Bernanke did not read Ruchir Sharma, it is even less possible that he read Rajeev Mantri and Harsh Gupta in MINT. Now, we know that he did not read any of them nor, of course, Baretalk.

We have now learnt that the Federal Reserve would buy more mortgage backed securities (40 billion dollars per month), has determined that accommodative monetary policy would be warranted well after economic recovery strengthens and that zero to 0.25% interest rates would be maintained well into 2015. Markets would have been happier with 60 billion dollars per month of asset purchases but they would take this.

More pizza delivery on Lexus now!

In an action packed Thursday night, the Government of India announced an increase in the price of diesel by 5.0 Rupees per litre and limited subsidised cooking gas to six cylinders per customer per year. These are good decisions – overdue but incomplete. Under-recovery from diesel will still remain big. We have to wait and see if Congress’ ‘allies’ will let the measures go through.

Printing orgy on its way

Blogging has been a bit erratic lately because of some unexpected travel to Mumbai (Aambi valley) last week and because I was leaving my employer after 5 years and nine days. Yes, I have left Bank Julius Baer as of July 19th, 2011. I am not joining another financial market or capital market institution. I think I won’t for a while. But, never say never. Given my personal expectation of turbulent times in financial markets in the next two years, I thought it would be better to be a ringside observer than a participant. It was not a surprise to read about the myopia of the banking industry here.

It was a pleasant surprise to find TGS mentioned in the directory of best Indian blogs. My fellow bloggers at the INI have been there before and done that. It was a good motivation to begin and complete this blog post.

Today being the first ‘off-day’, I decided to resume blogging since I had not posted any comment after the US employment data. On getting up, was surprised to read that US stocks have rallied 200 points (DJIA). The ostensible reason is that the US Congress and the government seem to be reaching an agreement on deficit reduction and a rise in debt ceiling. Good news for the US. But, with the US Treasury bond yields never budging from their lows recently, I wonder if the market was already pricing in a bad outcome. It was not, in my view. But, silly me. Since when stock investors have needed rational arguments to ramp up asset prices?

By the same token, I am not sure why housing starts rising in the US should be good news when there is so much inventory of unsold homes left. Just as the rise in the Chicago PMI in June was due to auto producers producing more cars for inventory (ht: Vasan Sridharan).

With the UK economy in doldrums and with political support for David Cameron peaking and coming off, it is a matter of time before the Bank of England pursues another round of quantitative easing. The European Central Bank – if it wished to preserve the single currency project – must, somehow, engineer a weaker Euro. That would squeeze the Switzerlands, the Singapores, the Brazils and the Japans of the world real hard. Their currencies – rising inexorably already – would soar. They have to join the quantitative easing party.

The big daddy of ’em all – the United States – will not be sitting quiet and watching. After all, it has got a free pass so far on dollar debasement. If the room gets crowded, it has to find new tricks to keep the dollar from rising against the rest.Gold dropping 20 dollars overnight sounds like a terrific summer sale opportunity! (Caveat emptor, of course)

No surprises therefore that the price of crude oil (Brent crude) is not too far below recent highs. Check out this news on the rise in Saudi oil consumption. Stock investors know how to ignore inconvenient news until it is too late to ignore them, that is. My latest MINT column talks about frogs basking in the warm glow of boiling water.

Niranjan has a very succinct reminder of the inflation risks here:

The current mess means that Western central banks have an incentive to maintain loose monetary policies and keep interest rates low, even if these policies impose huge costs on economies in our part of the world through inflows of speculative capital and high commodity prices.

I must concede that Niranjan’s column this morning in MINT makes this blog post redundant.