China and the Minsky moment

The Chief Strategist at Alpine Macro thumps the table to argue that a Minsky moment is impossible in China. He makes far too many conceptual mistakes.

It is not only the scale of debt but also the speed of debt accumulation that matters. Second, higher savings and higher debt/GDP ratios go together because higher savings mean lower interest rates, according to the author.  But, there is also the concept of risk premium which should be demanded by creditors at higher levels of debt. That is missing. Of course, not just in China. In China, that is partly because of financial repression. Savers are thus deprived and, in the context of China, have far too few choices to register their protest.

Debt brings growth forward. It cannot go on for ever. That is the point that Mervyn King makes in his book, ‘The End of Alchemy’. That applies to China.  Further, too much debt means much of the future growth goes to debt servicing and not productive investments. There is an opportunity loss here.

Too much debt will have created too much excess, idle and wasteful capacity.  It is evident in China. That is why the incremental GDP/debt ratio keeps falling.  Assets can and do drop in value especially if too much of them have been created whereas debt obligations are legal and fixed. Hence, to talk of the concept of Net Debt is not exactly relevant.

Finally, Japan has a net positive international investment position and that is not due to the size of its foreign exchange reserves. China’s net positive IIP turns negative once foreign exchange reserves are taken out of the equation.  In such a situation, the size of the domestic debt raises the risk of a substantial exchange rate depreciation down the road, if capital flees.

The Minsky moment arose in the Western world in 2008 after twenty five years of debt-financed growth. Given its financial repression and other controls, it is possible that the Minsky moment is some time away in China.  But, delay is not the same as denial.


Productivity and fragmentation

My friend Gulzar Natarajan drew my attention to the article on improving productivity in Indian dairy farming. These lines were interesting for me:

The potential of using software and genomics is immense in India’s fragmented milk farming sector, where some 120 million farming families are engaged in cow and buffalo rearing, according to the Indian Agricultural Census. [Link]

Fragmentation is the feature of India’s production landscape in general. Fragmentation is anti-productivity because the costs-benefits calculations are hard to make and may appear miniscule. More than that, there is the difficulty of aggregation of information. A new productivity-enhancing technique will have to be disseminated to 120 million farmers or at least half of them to have an impact in the national level statistics.

On the other hand, scale based companies in the West (‘industrial’ farming or dairy) generate output that are sometimes deemed harmful and carcinogenic. Hence, the fad or organic products. Forget about genetic modification but even the feed that is given to the cows is deemed unhealthy for humans.

Rock and hard place.

Schumpeter and creative destruction

As we approach the end of the year, one is tiring of many things. Blogging is one of them. My friend Gulzar Natarajan alerted me to a couple of sentences in the article by Ricardo Hausmann on R&D in large corporations:

Joseph Schumpeter stumbled on to these two approaches at different points in his life. When he published The Theory Of Economic Development in 1911 at age 28, he emphasized that innovation came from the spirit of entrepreneurs in a process of creative destruction. By 1942, when a 59-year-old Schumpeter published the book Capitalism, Socialism, And Democracy, he realized that a lot of the innovation was coming from very large corporations that faced rather limited competition. [Link]

Public policy must be relentlessly focused on enabling firms to start reasonably ‘big’ and to be able to grow bigger. Subsistence entrepreneurship is romantic but will not move the economic growth needle much at all. It is disguised unemployment.

A distracted post

I saw the link to the story in FT Alphaville about smart phones and their impact on productivity.  We should not be surprised at all. The evidence is in front of our eyes, as we walk on the road, as we drive, etc. Almost everyone is distracted, to the detriment of not just productivity but of safety. The FT Alphaville story is here. The original blog post is here. The original post is worth reading for it teases out other dimensions of what it means to be part of the distracted generation.

Izabella Kaminska had written in 2014 about supermarkets, big data and manipulation of human preferences. That link appeared in the post above. I quickly glanced through it. Helps us to focus on how powerless we are and how little influence and control we have over our own lives and choices. It is as much a spiritual realisation as it is a consequence of modern technology! Humans have unleashed a Frankenstein monster on fellow humans. Quite likely they did not intend it that way since they are not in control themselves! So, who really drives this? Perhaps, no one. Once we set down on a path of ‘conquering’ everything that we viewed as obstacles, this ought to be a logical conclusion?

In case you are too distracted to read ‘Thinking Fast and Slow’, please do watch Dan Ariely’s TED talk. I had posted that several times. But, worth reiterating.


Salvator Mundi and stock market bubbles

Before Leonardo da Vinci’s painting, ‘Salvator Mundi’ went up for sale, this is what the New York Times wrote:

This is your chance to buy a genuine Leonardo da Vinci painting. The last da Vinci painting in private hands, “Salvator Mundi” (Saviour of the World), is expected to fetch $100m at a Christies’ auction in New York. Sotheby’s sold the painting, unaware of its true provenance, in 1958 for £45. In 2011, the work was confirmed as a genuine Leonardo and unveiled publicly — the first discovery of a painting by the artist since 1909.  [Link]

Eventually, an unknown buyer paid USD450 million for it. This comes days after Christie’s sold some impressionist art works for USD479 million. [Link]

In the meantime, Greenlight’s David Einhorn thinks that most of the problems that caused or were raised by the crisis of 2008 have not been resolved. He is right.

Conor Sen, writes for Bloomberg that the big five technology companies could destroy the tech. ecosystem. He too is likely right.

On Monday evening, Venezuela missed a deadline to make an interest payment on its bonds and thus officially defaulted.

India’s Reliance Communications missed an interest payment to China Development Bank and thus has ended up in default. RCom’s Anil Ambani has managed to do what the Indian governments in the past could not do:  hurt China’s interests! Aircel may have defaulted too.

Ajit Ranade’s piece on coal shortages in power companies confirms that India is leader nonpareil in sub-optimal functioning and turning simplicity into complexity.

India’s DMart is more expensively valued than Walmart. Indian IPOs in general are too richly praised to be sustainably rewarding to investors. [Link]

Rakesh Jhunjhunwala says that there is lot of froth in Indian IPO market. He thinks that the Indian stock market may experience a sharp, swift correction and seems to be bearish on the rupee to boot, for 2018 although he presents it differently. [Link]

Andy Mukherjee has a lovely piece on how (Mukesh) Ambani is taking on Amazon in India. A great line:

The e-commerce industry, including online food delivery, is just $15 billion a year, or 40 percent less than Alibaba Group Holding Ltd.’s Singles’ Day sales in China. [Link]

Will be an invaluable case study for B-School students.

Tired, old and unhelpful

Read this Edit in ‘Business Standard’ on how India should be cautious about not ‘irking’ or ‘annoying’ China by joining the Quad – U.S, Australia and Japan with India included.

An unfortunate edit especially the finishing note. What has India got to show for its ‘non-alignment’ with respect to China and for being mindful of its sensitivities? Even as this Edit was being written, China was harping on the lack of consensus in the U.N. Security Council on the lack of consensus in the Security Council on declaring Masood Azhar a ‘Global Terrorist’.

When will we be ready or what would it take – over and beyond what has happened over the years – for us to shed old shibboleths and repeat the tired, old advice that have nothing to show for them in terms of results on enhancing India’s security or standing?

Read Richard McGregor here and here as to what and who is driving China’s (what it sees as its inevitable) quest for dominance. These Edits are pointless.

DIY assignment: Off-balance sheet assets in China’s banking system

China’s Financial Stability Report for 2016 published in 2017 is now available in English. You can download it from here. It does not show up under the tab, ‘Financial Stability’. Under that tab, you can download the 2016 report which covers the year 2015.

In the 2017 report, go to the Chapter on Banking Sector (page 48 as per their page number; not as per the PDF file. As per the PDF, the page number is 64) and understand the figures of assets on and off-balance sheet in the China Banking Sector.

Do the same thing with the 2016 report. Go to page 53 of the document. That is page 69 of the PDF document. Find out the off-balance sheet asset size.

The on-balance sheet asset size comes at the beginning of the Chapter in each of the reports.

You can also get the nominal GDP of China from one of the earlier sections.

Now you are ready to do your math on China’s banking system assets and their ratio to GDP, etc. (on and off-balance sheet).

You will know why we have a ‘recovery’ in 2016.

This is what I was alluding to (without proof but with some intuition) in my MINT column which wondered whether the global recovery was statistical or real. Well, I should have asked if it was financial or real.

A report by Macquarie Research (not available in the public domain) released few days ago is cynical but also correct. It backs the perennial doomsday machine to continue because, without that, financial assets worth some USD400trn will be exposed for their hollowness as they are backed by real assets worth far less or nothing.

It is liquidity and leverage or nothing.