Lewis on Thaler and other links

Been on the road since last Friday. Too much of travel and hence less time to think but made time to read, though.

Thanks to Tracy Alloway’s Twitter handle, saw this Michael Lewis piece on Richard Thlaer, written first in May 2015, republished early in October.

Google/Alphabet’s urban cities project is fascinating, mind-boggling or scary or something to be welcomed? I have no idea.

HSBC might have helped Guptas in South Africa to launder money.  Could be behind a paywall.

A comprehensive interview with CEO of UBS. Parts of it have a wider relevance than only to financial types.

Countries around Asia are banning sale of sand and Singapore’s land expansion is threatened.

Americans are ‘freaking out’ but, as consumers, they are feeling confident more than ever in the last seventeen years.

The scariest chart is the last one – Halloween special.

This – a similar set of scary charts – is from the bond market perspective. The information below boggles the mind:

ECB QE is currently 7 times bigger than net issuance. So is it any wonder why yields have fallen, and what happens when the ECB tries to turn off the easy money tap?


Germany, Austria and Catalonia and other links

For the last few weeks, my posts have tended to concentrate on India. But, the world does not wait for me to blog about it!

The elections in Austria, coming on top of the rather weak mandate in Germany for mainstream parties and the mood and momentum for secession in Catalonia in Spain have dealt big blows to the facade of European stability and leadership in the world.

Noah Smith has a piece on the ‘inevitable’ takeover of global leadership by China. I demur but that requires a lengthier post. Do not miss the link to a useful and interesting recent paper inside his post.

This article in the Wall Street Journal explains why the clamour for Russian connections to the American Presidential elections appears to have slowly faded away.

Google did not let me circulate the following two articles to my mailing list:

The rise of road fatalities in the US and the use of smartphones [Link]

A new game by ‘Tencents’ to applaud the Chinese President [Link]

A new poll shows that Abe’s political party would win a super-majority in Japan’s polls. Hope it turns out to be correct.

(FT and Nikkei Asia Review links might be behind paywalls. Apologies)

A bubble pops

Hectic traveling continues. Traveled to a village called Dattwada in Madhya Pradesh, about 150 kms from Indore. The route goes via Tikri, Anjad (Anjad-Bharwani Road) and then to Dattwada. The heat was sweltering in end-September. No internet connectivity.  Back to the base in Singapore on Sunday.

Too many things happen for us to keep pace. We cannot. We cannot keep pace. We can try and keep peace with ourselves and the world. That is what we can and should try. The European economic and political stability bubble was pricked with the German election result. Christian Democratic Union of Merkel turned in its worst performance since WW II and the Social Democratic Party (SDP) turned in its worst performance from even earlier. The Alternative for Germany (Alternativ für Deutschland – AfD for short), deemed far-Right by the commentariat turned in its best performance and won some 94 seats, I think. AfD picked up votes in Bavaria State (where Munich is located) and in the capital Berlin too. As for what AfD stands, it is only thing to emphasise nationalism and security and seek tigher curbs on immigration and it is another to deny the holocaust. See here. The WSJ article has some useful charts.

Even before the elections in Germany, I had been sceptical of the romance of the so-called global ‘elites’ with Europe. They saw in Merkel an alternative to the isolationism of Trump. But, Merkel was disregarding the popular feelings towards immigration. Daily Shot, a nice collection of pictorial global economic snapshot from the Wall Street Journal carreid this chart on 6th September:

Pressing issue in Germany_Sept.2017

While I was searching for the chart above, I saw this one too.

Germany divided over Merkel policy_Aug.2016

Other charts carried in this article in August 2016 are equally interesting. The warning signs were there. Again, the elites and the biased media ignored them.

European economic convergence had not happened. Post-Euro introduction, it has been a story of divergence between Eurozone original 12. Further, IMF Article IV consultation report for the Eurozone stated bluntly that the Southern European nations had not used the windfall from low interest rates to put their fiscal house in order. They are vulnerable when rates rise. I had written about it in a MINT column recently.  It is a different story that IMF still advised European Central Bank not to raise rates, despite low rates encouraging complacency!

Over the weekend, there was a stabbing incident in Marseille (France) outside the train station. Two women were killed in a ‘terrorist’ incident. Such attacks are meant to create panic and hardening of attitudes among the locals. Alienation is what terrorists seek and such attacks succeed in breeding alienation as they strike very near ‘home’ for many. However, analysts and intellectuals would blame the locals for not wanting immigrants in their midst. It is silly to question the innate human need for security. Charity comes after security.

In Spain, Catalonia held an ‘illegal’ referendum. 42% showed up to vote and of them, 90% voted in favour of independence from Spain.

It is a difficult world. Europe is no exception. Indeed, Europe is arguably the epicentre of it. It was delusional to think otherwise.

ECB, Euro and more stimulus

ECB headlines_08092017

The above is a screen shot from the website of Credit Bubble Bulletin (http://creditbubblebulletin.blogspot.sg/) this morning. Ignore the first headline. Look at the next three. If a central bank raised its GDP growth forecast, it cannot be talking of more stimulus. It is inconsistent. If GDP growth were being revised higher, it is time to remove and not add stimulus. Then, why is the ECB doing it? They are not stupid.

The answer is in the last headline. I think they are concerned about the strength of the EURO. To me, it is surprising. I thought that a strong Euro suits Germany. Germany does not want to stimulate the economy to deflect criticism of its large external surplus. A strong Euro would suit the country fine. If you remember, that is the argument that Mervyn King (former Governor, BoE) made in a speech in May. The Eurozone exchange rate is dysfunctional.

But, notwithstanding the German situation that favours a strong Euro, if the ECB were to resist Euro strength – and that is why they are still talking of continuing with stimulus – then it shows the fragility of the so-called recovery of the peripheral countries – Greece, Italy, Spain, Portugal and France too.

My two cents worth.

ECB Meeting Minutes

The Minutes of the European Central Bank (ECB) meeting held in the first week of August were released on August 17. Members had expressed concern over the strength of the Euro, overshooting further.[1] That was a surprise. One thought that Germany would tolerate a stronger Euro in return for less pressure on its high current account surplus. Further, even for other countries (the Southern European or peripheral countries), the real effective exchange rate is not overvalued. The Eurozone enjoys a current account surplus, even if modest. Not just Germany.

Instead, the ECB Governing Council was worried that the strength of the Euro would undermine its progress towards a 2% inflation rate, from below.

In fact, the Minutes reiterated the need for continued monetary policy accommodation more than once. It stressed that interest rates could remain at the present levels well past the end of the asset purchase programme:

The Governing Council decided to keep the interest rates on the Eurosystem’s main refinancing operations, the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and ‑0.40% respectively. The Governing Council expected the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. [Link]

Vague concerns were expressed about the low volatility in financial markets. Other than that, the ECB Governing Council had nothing to say about its monetary policy distorting global asset prices. Not just the Euro, but the ECB monetary policy is another bubble that needs to burst for the world to return to normalcy.

They should read what Howard Marks had written about the low volatility in his recent newsletter. [Page 5 – Link]

Bad writing

A bad FT article on the monetary policy of the European Central Bank and the impact on savers in the Eurozone. One small problem: the article deliberately conflates impact on savers vs. interest cost savings for sovereigns.

As many commentators caught on, it was either a financially illiterate but bona fide article. Or, it is a mala fide article. Very bad conflation of issues and very misleading headline. Does no credit to FT at all.

Household savers may have even increased the amount they had saved over the years. But, the truth is that low interest rates have forced them to earn little on their savings. That is a fact.

A Bank of England discussion paper acknowledged this in the context of the UK. That was in 2012 or in 2013. Last year, OECD published as part of its mid-year economic outlook, that retirees’ incomes from their savings had dropped 40% from 2000. Check out page 13 of the link.

Nothing of what has been written in this FT article is consistent with this.

In the meantime, from the resourceful Twitter handle of Jeroen Blokland (many thanks to him for some wonderful charts) comes this table of what ECB had wrought. I am unimpressed. 40 bp. drop in the unemployment rate per year for all the money printing and negative rates? Inflation is lower. The EURUSD should be a lot weaker than this. But, that would be too hot for Germany.

ECB score card

No more crisis in our life times

Well, that is not what I believe. But, that is what Ms. Janet Yellen, chairperson of the Federal Reserve believes. When I read it in a blog post by Gavyn Davies, I could not believe my eyes. Why would anyone say that? It is bad risk management. If it did not happen, no one would remember the prediction. If it happened, her predictions would be played over and over again. Ask Chuck Prince. Perhaps, he has stopped dancing now.

According to a Reuters story, this is what she said:

Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be. [Link]

I was glad to find John Mauldin come out with a strong reaction to her remarks:

I disagree with almost every word in those two sentences, but my belief is less important than Chair Yellen’s. If she really believes this, then she is oblivious to major instabilities that still riddle the financial system. That’s not good. [Link]

His entire post, ‘Prepare for turbulence’ is worth reading.

With amazing consistency, the International Monetary Fund wrote in its Article IV assessment of the Eurozone that the European Central Bank should maintain its current easy money policy and that it should not hasten into a tightening. In the same breath, it added that debt-heavy countries in Europe have not utilised the space afforded by the easy money policy to undertake fiscal consolidation and improvement. See this:

Most high-debt countries have so far not saved the windfall interest reductions from monetary accommodation (text figure). It is important to make decisive progress on fiscal adjustment before monetary accommodation is reduced. Otherwise, countries could face dangerous debt dynamics as interest rates rise—running the risk that self-fulfilling expectations could emerge if markets begin to doubt fiscal sustainability. [page 21-22 – link]

Why would they? When we make bad habits less costly for people, they do not stop them. They persist with them. That is what governments are doing. Central banks are not making it easy for governments to shed debt addiction. They are making it easy to stay addicted. Low interest rates remove pressure to reform. No pain; no gain. No pain; no reform.

I enjoyed writing my MINT column for August 1. I said it was time for the queen to ask intellectuals as to why they were failing to stop another crisis coming. By the time she asks the question again, assuming she does, it might well be too late.