China trade surplus and other links

In absolute dollar terms, China’s trade surplus with the United States reached USD275bn in 2017. The previous high was USD260bn in 2015. Clearly, the United States matters to China. If the United States monetary policy remains loose in the guise of supporting economic growth and employment, because inflation is not showing up and if financial instability risks are disregarded, clearly it is to China’s benefit. Just saying.

A fascinating and even somewhat frightening report on China’s appetite for commodities. The geopolitical influence that this buys China will be hard, if not impossible, to match.

I read a piece by Mohamed El-Erian in FT. He is permitting himself economic optimism and less discomfort with asset prices. I wonder how he would react to this story about the ‘shocked’ market reaction to the tiny shift in the asset purchases by the Bank of Japan. In other words, how durable is this so-called global recovery?

This page gives details on the asset purchase programme of the European Central Bank. The 10-year Greek bond yield is at 3.75%. There has been no big improvement in its unemployment rate or in its debt ratio. This table gives the youth unemployment rates in European Union countries. Check out the statistics for Greece, Spain, Italy, Portugal and France. This is annual data up to 2016. This table gives you the figures as of August 2017. You can compare the numbers for the above countries and figure out the improvement, if any and decide for yourself whether this is the stuff of a sustainable recovery that justifies Mr. El-Erian’s optimism.

India’s consumer price inflation data for December 2017 was a bit of a worry. JP Morgan finds the momentum in core CPI (headline minus food and fuel) surprising and concerning. Among States, Tamil Nadu and Kerala contribute quite a bit to the inflation rate with their 7% inflation rate and a combined weight of 11%. That means nearly 80 basis points of inflation out of an inflation rate of 5.2%. That is nearly 16% contribution. Inflation in Uttar Pradesh is well behaved. Is hoarding by intermediaries an issue in Tamil Nadu and Kerala? Just asking.

Industrial Production data for November, notwithstanding the outsized contribution by the Pharma sector (and that too, antacids!), was more encouraging than that of the inflation data because motor vehicles, other transportation equipment and basic metals constitute 20% of Industrial Production. They are growing nicely. Pharma with a weight of 5% was growing at an annual rate of 40% and that gives you a contribution of 2% to the annual IP growth rate of 8.4% – almost 25%.

The rather poor growth in textiles and apparels must be worrisome for a country that is looking to light manufacturing to create jobs. It is not that they command a high percentage in the index. In fact, their should increase and they should be productive.  There is a role for policy action here?


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 ( 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