What a time we are living through

Almost back-to-back shootings in the US – in Texas and in Ohio in the weekend prompts the American President to condemn racism, bigotry and white supremacy. Is it or is it not a tad too late? WSJ article linked in line 1 says that it was the 251st mass-shooting in 2019.

From 2006 to 2016, the number of public mass shootings each year was relatively flat, with about four or a five a year, according to the AP/USA Today/Northeastern University Mass Murder Database. That number has risen in recent years, with seven public mass shootings in 2017 and 10 in 2018.

The Government of India has abrogated Article 370 of the Indian Constitution that conferred special status to the state of Jammu & Kashmir. Useful links to read/listen are here, here and here.

On the face of it, the BJP had done what it promised in its election manifestos both in 2014 and in 2019. Many Indians have questioned the special status for the state of Jammu & Kashmir in the past. After all, the decision integrates the state with the rest of India. Of course, the Government of India has also divided the state into two Union Territories.

The fact is that Article 370 begins as follows:

Temporary provisions with respect to the State of Jammu and Kashmir

Also, Article 370 (1) (3) states the following:

(3) Notwithstanding anything in the foregoing provisions of this article, the President may, by public notification, declare that this article shall cease to be operative or shall be operative only with such exceptions and modifications and from such date as he may specify:
Provided that the recommendation of the Constituent Assembly of the State referred to in clause (2) shall be necessary before the President issues such a notification.[16]

There is no constituent assembly in J&K. The Government of India in the past has substituted it with the words, ‘Legislative Assembly’ and since the Legislative Assembly in J&K has been suspended, the recommendation of the Governor of J&K has been deemed sufficient.

A friend raised the question of whether Article 370 has indeed been abrogated. The Government of India appears to have done it indirectly (?) through amendment to Article 367 of the Constitution of India. But, in the gazette notification published in ‘Economic Times’ should clause 4(c) have come before clause 4(b)? See here.

The Presidential order issued on August 5, 2019 extends the Constitution of India, in its entirety, with all its amendments, to the state of J&K. Thus, it effectively neutralises Article 370. There is no direct reference to Article 370. However, the Presidential order, by superseding the Constitution Order 1954, directly abrogates Article 35A since that Article was inserted as per the Constitution Order of 1954, as per the Wikipedia entry.

It is interesting that the Wikipedia article mentions that the President of India has issued a series of orders since 1950 under clause (1) of Article 370. There have been at least fifty such orders extending the applicability of the Constitution of India to the state of J&K.

But, a few questions will remain for which no clear answer will emerge for a long time: the timing of this decision (why now?), the long-term consequence of this decision in the state of J&K, Pakistani reaction, the impact of incidences of terrorism in the state and in India and the legal admissibility of the decision if someone chooses to challenge it in the Supreme Court.

The Chinese yuan has weakened to over CNY7.00 per US dollar. This is seen as China’s retaliation to the latest round of tariffs levied by the American President. President Trump calls it a major violation.

If China uses the yuan as a lever against the American trade war, two questions arise: will capital not flee China somehow?

Second, has America (acting in concert or not, with the UK?) the Hong Kong lever? See here and here.

In the meantime, late in July, News that Huawei helped build the mobile phone network in North Korea, carried by the Washington Post, was cited by CNN here. A very long article from the Wall Street Journal published in May 2019 on how Huawei grew and the methods it followed is well worth a read.

This Reuters article on the 5G fight also published in May is well worth a read, for how Australia blew the whistle on Huawei. Two points from the article are worth noting:

The United States and its allies were derelict in not developing a 5G supplier, former Australian Prime Minister Malcolm Turnbull said in a speech in London in March. “With the benefit of hindsight it beggars belief that the countries which pioneered wireless technology – the United States, the UK, Germany, Japan and with wifi, Australia have got to the point where none of them are able to present to one of their own telcos a national, or a Five Eyes, champion in 5G,” he said.

What is 5G all about?

5G isn’t only about faster data. The upgrade will see an exponential spike in the number of connections between the billions of devices, from smart fridges to driverless cars, that are expected to run on the 5G network. “It’s not just that there will be more people with multiple devices, but it will be machines talking to machines, devices talking to devices – all enabled by 5G,” said Burgess, the Australian Signals Directorate chief, in his March address.

This configuration of 5G networks means there are many more points of entry for a hostile power or group to conduct cyber warfare against the critical infrastructure of a target nation or community. That threat is magnified if an adversary has supplied equipment in the network, U.S. officials say.

Lastly, Japan and South Korea are bickering more bitterly than they did before.

In short, my article in Mint published on July 26 appears to have been timed well, by sheer coincidence.

STCMA on August 1, 2019

Pakistan rolls back the increase in cooking gas tariffs for roadside roti/naan outlets. [Link]

Ruchir Sharma’s piece in Times of India on July 31 echoes what I wrote for Mint on July 26:

Japan showed that central banks can print all the money they want, but can’t dictate where it will go.

Authorities in the Chinese capital have ordered halal restaurants and food stalls to remove Arabic script and symbols associated with Islam from their signs, part of an expanding national effort to “Sinicize” its Muslim population. [Link]

OF course, none of these seem to matter for Stephen Roach who sees nothing ‘red’ in China.

His tally of assets at a broader universe of Chinese lenders in “distress” is 9.2 trillion yuan, or about 4% of the commercial banking system and nearly 10% of gross domestic product. [Link]

The UBS analyst, cited above, is being careful, to sound positive (if you read the full story) so that he avoids the fate that befell his economist-colleague

I think what Raghuram Rajan is saying here is that central bankers have become the fall guys because they set themselves up to be supermen and women. It is time for a confession.

Business Today carried an useful article on tech. applications that are considerate to our privacy concerns [Link]

A friend had flagged this. It is indeed nuts. See Ruchir’s piece above too.

The analysis by S&P Global Market Intelligence found unrated entities in China, the U.K. and the technology sector in Asia Pacific are among the most at risk of a sudden spike in defaults. [Link]

Jeffrey Frankel is not sure whether inflation targeting really works because we still do not know, after all these years, how inflation expectations are formed. At least, one interesting link to a paper in his piece. [Link]

Finally, Google gets rid of another employee who is a conservative Republican.

Why 2007-08 was only a curtain-riser

What began as a message to my faculty colleagues at IFMR Graduate School of Business was eventually abandoned and it ended up being a ‘long read’ article published in Mint. They had removed many of the hyper links to keep the piece tractable. Fair enough.

Here is the original version. Perhaps, Mint should have titled the piece, ‘Why it feels like the autumn of 2007?’ The original version, below, has more links.

Wall Street Journal recently issued an oxymoron alert. The oxymoron was that high yield bonds had gone negative. “There are about 14 companies with junk bonds worth more than €3 billion ($3.38 billion) that are trading with negative yields, according to Bank of America Merrill Lynch. They include telecom giant Altice Europe NV and tech-equipment company Nokia Corp.” It would have been unthinkable even a few years ago to have high-yield/speculative/junk bonds being sold for negative yields. They were meant to be high-yielding bonds because they carried with a high probability of default. But, to compensate the borrower to buy them means that the logic of higher expected return for higher risk has been upended. This makes investing impossible.

A pension fund manager in a European country was told by his regulator not to hold too much cash because it is risky and was told to invest them in negative yielding bonds, instead! This cannot and will not end well. It is time for investors to baton down their hatches and settle for safety rather than returns because it is a recipe for the elevation of socialist policies in America to a historically unprecedented level, after the next Presidential elections in 2020.

Globally, about USD 13.0 trillion of debt is trading at negative yields. Two US companies that issued leveraged loans have quickly seen their bonds lose value. Obviously, lenders chasing yields have ignored risks. The companies recycle printer ink cartridges and another one is a beauty company! – Clover Technologies and Anastasia Beverly Hills! See here.

Amidst all this, what is funny or tragic (depending on your lens) is that investors, according to Schroders, have upped their return expectations for 2019 to 10.7% from 9.9%. This is based on a survey of 25,000 people across 32 countries. In other words, the survey respondents plan to make riskier investments (some of which now yield negative returns!) and that they expect central banks to underwrite their risks with ultra-low interest rates or negative rates or nominal GDP targeting into eternity.

Who is responsible for this upside-down world of investing?

Let us start with the Federal Reserve. Its monetary policy committee is meeting on July 30-31. Donald Trump is putting tremendous pressure on the Federal Reserve to ease monetary policy aggressively. Check out his four tweets on the Federal Reserve including and starting from this one. Although the Federal Reserve strenuously denies complying, it is behaving as though it is complying. The Federal Reserve is ready to cut interest rates by 25 basis points at the minimum in its meeting in July. One should not be surprised if the pre-emptive ‘vaccination’ is 50 basis points. The American economy does not need it. William Dunkelberg of the National Federation of Independent Businesses marshalled data to show that no real business – including small ones – is being starved of credit.

All else being equal, a besieged Federal Reserve would have made the US dollar a sitting duck for speculators and for the world, in general, to fall out of love with the greenback. But, it won’t happen in a hurry because others are far worse off. So, the story of the world finally getting out of the dollar standard has to wait. That is because other central banks are again talking of cutting rates aggressively. European Central Bank is fully prepared to outdo the Federal Reserve. Eurozone countries have selected a ‘tainted’ politician to replace Mario Draghi as the President of the European Central Bank. She will be more populist and ‘bolder’ than him with monetary policy experiments. That will be music to financial markets, hedge funds, PE investors who place bets with a high degree of leverage.

The crisis of 2008 was supposedly due to excessive debt carried by different financial institutions – some visible and some hidden. But, the answer from central banks has been to incentivise even higher gearing of balance sheets. In America, the number of companies with increased risk of becoming financially distressed  – companies that either generated negative EBITDA or have net debt to EBITDA over 3x – has grown noticeably this cycle (53% as 6/30/19) versus last cycle (32% as of 6/30/2007). It gets worse.

Central banks deliberately avoid thinking about why their decade-long policy of ultra-low interest rates have failed to mend economies. In less than a year after proclaiming the return to normalcy, central banks are priming themselves to become even more adventurous with their monetary policies. All that their policies have engendered is reckless risk-taking in financial markets, more leverage, greater inequality and tremendous stress on savers, bank deposit-holders and pensioners. Think of the clients of the pension fund mentioned earlier.

Another important consequence of such remarkable persistence with such ill-advised policies is the diversion of capital for unproductive ends and personal aggrandisement. Loss-making start-ups are carrying on without a concern for profits because cheap money means private equity investors blanket them with funds. ‘Wework’ is a technology unicorn in the office rental space. The company has filed for an IPO but it had the temerity to issue USD 4.0 billion debt before that and its co-founder has cashed out USD 700.0 million in the last year! It is valued at USD 47.0 billion. Softbank wanted to invest USD 16.0 billion in that company with USD 6.0 billion in new money. Its partners protested and the investment was pared back. IWG, the owner of Regus, another office space rental company, is valued at USD 4.0 billion and it is making profits. I had blogged on it here.

We heard of price-eyeball ratio in the dotcom bubble era of the Nineties. Now, ‘Wework’ presents ‘community adjusted’ EBITDA which strips out “not only interest, taxes, depreciation and amortization, but also basic expenses like marketing, general and administrative, and development and design costs.” No one has heard of this EBITDA before because it is effectively gross revenue and without accounting for costs, it turns into profits, of course.

Not only have promoters benefited immensely from loose monetary policies and funds available on liberal terms from capital markets but they have also profited from the tendency of governments to compete away their tax dollars from companies.

The corporate tax rates in developed world have come down steadily from 38% in 1990 down to 22% in 2018. This has forced low-income countries to lower their tax rates as well as, otherwise, companies will shift their tax bases to havens that still remain in high-income countries. Corporate tax rates in low-income countries have come down from 46% to around 28% in the same period. This data comes from the International Monetary Fund which, officially, has been the cheer-leader for unconventional monetary policies that have played a leading role in precipitating the next biggest crisis after 2008. That will not be just an economic crisis but a socio-political one too.

Capitalism does not need enemies or competing ideologies. Capitalists are doing a great job of destroying it with multilateral institutions like the IMF egging on central banks to stick to policies that would ultimately cause capitalism to implode.

There has been much schadenfreude in Asia at the self-destruction of capitalist western societies. But, if only such sentiment were justified. Asia, if anything, is more vulnerable. The crisis of 2008 has damaged their growth models irreparably. Let us start with China. Beijing is presiding over a shaky economy in China as official growth rate is again overstating true economic growth and global manufacturing supply chains are moving out of China, exactly as intended by the American administration, even if they are not returning to the United States.

In the meantime, China’s Minsheng Investment Trust Corp. is defaulting on its dollar debt. Its parent, Minsheng Banking Corporation is China’s largest private sector bank by assets. In 2015, it did warn of ‘systemic, concentrated financial risk happening in China’ but it has become a victim of it, itself. In Hong Kong, protests against the pro-Beijing government are intensifying.

Smaller Asian nations are faring no better. Japan’s exports have had seven straight months of decline up to June 2019. So has the performance of Korea’s exports been except that its export slump appears to be worse than that of Japan. No wonder South Korean auto industry is in a slump. Singapore’s non-oil domestic exports is a bell-weather for international trade and global economy. It is declining  precipitously and Singapore economy itself appears headed for harder times. Singapore’s overall GDP contracted 3.4% in the second quarter (QoQ, annualised). Of course, this is an advance estimate based on two months’ of data. Preliminary estimates based on three months of data will be released in August. Indonesian exports have declined for eight straight months up to June and Malaysia’s exports have fared slightly better than Singapore’s and Indonesia’s.

In Europe, German investor and economic sentiment (ZEW) is going deeper into negative territory. The same ZEW survey also pointed out that “the indicator for the current economic situation in the eurozone fell 6.9 points to a level of minus 10.6 points in July.”

A survey of the global political landscape confirms our worst fears. Leaders are ill-equipped to face the oncoming economic storm. Worse, they are seeding and nourishing it. Japan and South Korea are back to feuding in which the trade disputes playing a small but significant role in it. The wounds are historical and they were re-opened by a Seoul court ruling last October. Malaysian Prime Minister looks all set to walk back on his word to hand over power to Anwar, again! Such political conspiracies and power-grab have rendered ASEAN irrelevant both politically and economically. It was laid low by the crisis of 1998 and it has not recovered since then.

In the United Kingdom, Boris Johnson looks set to become Prime Minister and Brexit – deal or no deal – looks likely. Its consequences will be unpredictable because the country has now fraught relations with the United States, with European Union, with China and with Iran. But, the English team’s Pyrrhic victory in the Cricket World Cup 2019 is a small boost to national sentiment. In continental Europe, Angela Merkel’s physical health is deteriorating. Turkey, the pivotal Eurasian nation at the frontier of the Western alliance against Russia, is no longer a part of it, de facto, if not de jure. This is historic and has enormous implications.

Elsewhere, Iran has seized a British oil tanker and America has shot down an Iranian drone. Of course, the current expectations are that things won’t spiral out of control. But, a President seeking re-election is increasingly focusing on cementing and consolidating his base. Belligerence towards his domestic and international opponents will be consistent with those political goals.

Finally, let us examine if India is anywhere close to being a safe haven from the turbulent world. After all, in the elections held in May, its government won a strong mandate with a better majority Alas, its economy is getting deeper into trouble. The slump in the Indian auto sector mirrors that of South Korea and its overall economy has not stopped slowing. The Reserve Bank of India Governor has taken to chiding public sector banks on their non-transmission of his rate cuts. Just as it is the case in the West, monetary policy has no answers to structural ills. Resolving them starts with admitting to them and then being patient without too much anxiety about short-term growth pains. Window dressing only complicates the problem and delays eventual resolution, recovery and strong growth. The budget was incoherent at best and dangerous at worst, for it privileged financial liberalisation and trade illiberalisation. It socked the rich again and that was needless, both politically and economically.

The government announced that it would go for sovereign foreign currency borrowing at a time when India’s export performance is poor and the global growth environment is becoming worse. Dr. Y.V. Reddy, former Governor of the Reserve Bank of India, wrote that a decision on India’s capital account convertibility must precede the decision to issue sovereign dollar bond. But, this is not the best time to liberalise capital account when India’s fiscal health is not at its best and when export performance is sluggish at best and has deteriorated, at worst.

What appeared to be a cleverly disguised (positive) move to divest government stake in public sector enterprises below 51% has been denied, as well. Monsoon is erratic once again and anecdotal evidence points to India being more vulnerable to global climate change than most other nations. India may be sleepwalking into a major and prolonged economic slowdown. Narayanaswamy Jayakumar may have been prophetic here.

As we head into 2020 – the year of American Presidential elections –present trends in financial markets and economies around the world would coalesce into a major storm, convulsing most of them in the process. The Presidential election campaign in America could yet be the most fractious in history searing the nation apart, at a time when the economy may be pushed into a recession by a crash in the stock market or the other way around. That may set off a dollar crisis. The rest of the world, with political and economic problems of their own, will be unable to fill the leadership vacuum left by a politically fractious and economically floundering America.

Once the storm subsides, a new world economic and political order might emerge. To end on a positive note, the destruction wreaked by the storm might mark a true and a lasting bottom for the world economy on which its durable recovery could be built with more sensible policies than the snake oil that central banks have applied.

Paper over plastics in Japan

When I saw the story that Japan was going to switch to wooden beer bottles and paper straws, I was reminded of this story and this story. I hope it is not a case of ‘from the frying pan to the fire’. The difference is that paper is biodegradable and that trees can be grown. We need to be sensible about these things and not dogmatic or religious. Being religious about many things, including being irreligious, can be harmful.

Is it a Japan tragedy?

Early on Tuesday morning, read this interesting (and sad, to an extent) piece in the Nikkei Asia Review on Japan’s scenic golf courses in rural parts. But, the story is interspersed with narratives of dwindling populations and innovation.

Sample this:

The town of Nemuro lost its only obstetrician last year since its birthrate had fallen so low. Its fishing industry may be strong — global tennis star Naomi Osaka’s grandfather once served as chairman of the cooperative — but nobody new is moving there.

The lament is not particularly constructive but I doubt if any reconstruction is possible:

Somehow Japan has lost its will to innovate, to develop new technologies and to compete with the rest of the world. A pervasive conservatism has infected much of working and social life, leaving regional Japan a museum-like landscape of rural beauty and Asian culture. Buddhist temples of astonishing grace, Shinto shrines of perfect simplicity, small fields of rice or vegetables, and orchards of flawless fruit decorate the countryside. Yet behind it all are dying towns, shuttered shops, and unending road projects or concrete barriers piled up along island shores to protect against typhoons.

Abenomics works to preserve the tranquil beauty of rural Japan and sustain its culture. but what is going to save rural Japan from the hollowing out that you can see, hear and feel? The digital economy is barely discernible here, stunted by too many large corporations whose overweening presence in national policymaking makes the startup sector a minor sideshow instead of a pathway to the future.

Demographics are long-term and slow-moving trends in motion. They have impact on innovation and investments, etc.

Somehow, I feel that Buddhist Japan will and is handling its aging better than the Christian West would do or is doing. The swing towards relative and growing intolerance of strangers amidst dwindling economic prospects could be traced not just to a financial crisis but also due to demographic transition towards a greying population in the West.

The crisis pulled the economic rug from under the feet of millennials. More debt in America and youth unemployment in Europe. The older generation is reacting to the economic loss (networth wiped out by the decline in asset prices and having to work into old age) and the social aspects of globalisation.

Each and everyone of us who have crossed 50 can reflect on how their own attitudes towards many things have shifted and are shifting with age, slowly, imperceptibly but surely.

At a policy level, to counter this with even more forced immigration is a policy disaster which is what ‘liberals’ would want governments to do. One has to accept the costs of the economic crisis and demographic trends and work with them rather than seek to overturn the consequences forcefully. That ends up feeding the resentment.

Cannot learn, won’t learn

Robin Harding of FT wrote an article on why Japan should not withdraw its monetary policy stimulus and listed instances in which the Japanese economy went into recession when the stimulus was withdrawn ‘prematurely’. May be, true. But, if it is always the case that one has to increase the intensity of the treatment, when would one consider the possibility that the treatment was wrong, in the first place?

Is it possible to keep an economy on life support all the time? What are the costs of doing so? A reader had sent a good set of comments on the Harding column:

Japan’s central bank now owns bonds and shares equivalent to a full year of national economic output. Real interest rates have been negative for years, something not seen in 5,000 years of recorded debt history. The long-term effects of such monetary policies are quite simply unknown, but the asset bubble created by QE has been nothing short of obscene.

The results on Japan’s domestic economy have been, at best, unimpressive, and at worst, an absolute disaster for the country’s competitiveness. Why bother to adhere to good corporate governance principles if the government is going to prop up your stock price anyway? Or why bother to make money if you can borrow to pay back interests? Mr. Harding is actually calling for more of this madness. What has the world come to? The end of capitalism is in sight.

This comment correctly focus on many unintended consequences of policy decisions and actions.

Today’s news links

The re-election problems of PM Modi [Link]

Suzuki commits to ‘Make in India’ with electric vehicles [Link]

Suzuki will test run its first electric cars in India in October! This news is from September. I do not know if it happened [Link]. If it did not, then we know how to read the previous link, though.

Japan is still struggling to come to terms with its relaxed foreign worker visa policies. The resolution passed but after a lot of doubts and scepticism were expressed [Link]

Philippines compromises (or, attempts to) with China on South China Sea [Link]

Two well-known Chinese economists-critics of China’s economic growth model actually blame China for the trade dispute with the United States. [Link]

A story in FT on how Mauritius still makes its revenues through assisting tax evasion although the African state confirms that it is compliant with all tax-evasion international laws and treaties. Indeed! India has scrapped its double-taxation treaty with Mauritius. Full capital gains tax will apply on capital gains earned by Mauritius-registered entities from 1st April 2019. Let us see.

China allows share buybacks to boost stock market – when in doubt, ape the West and yet claim superiority to Western model of economics and finance!

American college undergraduate students are now ambivalent on capitalism. Wall Street Journal is alarmed! While most of the points made by James Freeman are valid, he would have been more correct had he also exhorted capitalists to introspect on why things have come to such a pass.