Negative yields

Dreihaus Capital has tweeted that excluding America, nearly 45% of the global bond market is trading in negative yields.

Michael Lebowitz has a wonderful piece in ‘realinvestmentadvice.com’ and unfortunately or mysteriously or both, it is not available there. It is available via Zerohedge.

This explanation of negative yields, in particular, is brilliant:

It implies that the future is more certain than the present – that the unknown is more certain than the known!

Enjoy reading it as much as I did.

In the meantime, President Trump tweeted exactly the opposite of what Michael Lebowitz is trying to convey:

The Economy is doing really well. The Federal Reserve can easily make it Record Setting! The question is being asked, why are we paying much more in interest than Germany and certain other countries? Be early (for a change), not late. Let America win big, rather than just win! [Link]

and this:

Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home! [Link]

Desperate for re-election, he is forgetting all that he said before getting elected for the first time in 2016. Negative interest rates all along the German bund yield curve is a sign of sickness and not health. European banks are hurting from negative yields.

The European Central Bank, originally modelled after the German Bundesbank, had become absolutely reckless and it believes that it has saved the single currency. Perhaps, it did, temporarily only to make the problem re-appear much later. It is inevitable.

The fact that the German economy is contracting in less than a year after enjoying a weak Euro for years and ultra-low interest rates says a lot about the non-efficacy of ultra-low and negative interest rates.

Through his constant haranguing of the Federal Reserve, he is staking a lot more than his re-election. More on that on another occasion.

Finally, it is impossible not to feel disappointed with the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) for its kid-glove treatment of the Fund on its advice during the post-crisis years with unconventional monetary policy. It was not even a rap on the knuckles. The costs of UMP have far exceeded the short-term benefits and the costs continue to mount. The Fund cheer-led it. IEO has nothing to say on the consequences – political, social and economic – of UMP. Egregious pricing of junk bonds (negative yields!) and tech. unicorns and some of them being able to get away with accounting and other practices weirder than the ones that prevailed in the dotcom mania years of 1996-2000 are also traceable to ultra-cheap money.

IMF warns today about the consequences of real estate bubbles and leveraged loans. But, UMP is directly responsible for both. IMF endorsed and encouraged. It discouraged the Federal Reserve from raising rates even gingerly in 2015 and in 2016. IEO has neither done evaluation nor is it independent.

For a true independent evaluation, read ‘The Rise of Finance’. Available here.

The state (or, the UT) of Kashmir

After writing a blog post here and one in ‘jeevatma.wordpress.com’, I have refrained from commenting on the issue. It was too emotional for many and it remains so for many. On both sides. Mature heads are handling it or so, I hope. The situation calls for sensitivity and restraint and not triumphalism. Chithra Subramaniam’s piece in Mint was a good one.

I had liked TCA Srinivasa Raghavan’s pieces on this topic. See here and here.

His most recent piece is written crisply and rather effectively.

The fundamentalism of the ‘Liberals’ citing the inviolability of the original Constitution is neatly and brutally exposed.

The last line citing Sam Pitroda is the ‘ pièce de résistance  ‘ or ‘coup de grace’. Or, was it the real final blow?

The wonder, as Prime Minister Narendra Modi pointed out during his Independence Day speech, is that this troublesome provision was allowed to germinate and bloom to such an extent that a mere four million Muslims of a small valley — 80 miles by 40 miles — were able to hold not just the remaining 1,300 million Indians but also the superpowers to ransom by cunningly feeding the appetite of the Pakistan military.

Shekhar Gupta’s two recent pieces on the matter too are well worth reading. See them here and here.

[Apologies that these links are from the ‘Business Standard’. They could be behind paywall].

This conclusion of Shekhar Gupta’s article published on 17th August is worth noting:

The Right-Nationalists are missing nuance when they say just 10 districts of the Valley can’t speak for all of the state. Because these represent the state’s majority. The liberal argument is more flawed. If the majority view of Valley Muslims then subsumes the sizeable minorities of the state, what do we do for the view of the rest, about 99.5 per cent of India? Can you have the democratic logic of majority work in one place and not in the other?

Christine Fair wants to avoid being identified as a sympathiser of the BJP Government and strains too much to achieve that. But, her piece is good for it exposes Pakistan’s games rather well for her audience (ht: Puthan Ramesh).

In the final analysis, that the move by the NDA government is an international and geopolitical coup is beyond question. Pakistan’s hyperventilation is incontrovertible proof of that. But, whether it turns out to be an internal success in terms of achieving internal integration and economic progress will be the litmus test of the success of the daring and necessary political manoeuvre. Read Admiral Arjun Subramanian channelising Lt.Gen. Nanavatty here. (ht: Rohit Rajendran). For me, the important comment in that article is this:

Nanavatty and his team submitted the strategy document to Army headquarters, and later sent copies of it to many senior government functionaries like then-Home Minister L.K. Advani, Home Secretary N.N. Vohra, and Foreign Minister Jaswant Singh. Except for Jaswant Singh, who took time off to discuss the strategy document with Nanavatty, there was little interest in other quarters. 

But, even that would and could be complicated by the external environment – the moves and actions of nations across the border on the Northeast and Northwest of India.

Syed Akbaruddin’s interview to the media after the ‘closed door’ meeting of the United Nations Security Council is good to watch. The short report in Mint is useful to know about the stance of Britain. One country that remains deluded big time?

Should S&P bring back ‘core earnings’?

This chart shows how S&P 500 Companies’ Operating Earnings has now reached a high share of the overall National Income measure of corporate profits. The last time it did so was in 1999-2000!

Source: https://twitter.com/GauravSaroliya/status/1156536674517753857

I remember that, in 1999-2000, Standard & Poor’s had introduced a concept called ‘core earnings’ because companies had begun to state whatever they wished under ‘Operating Earnings’. Perhaps, it is time to bring it back.

In another sign of market craziness, the 5-year Greek bond yield (1.27%) is lower than the 5-year US Government bond yield (1.5%). Does the prospect of Euro appreciation over US dollar dominate the credit risk of Greece (in comparison to the USA) or is it that the market is very confident of the European Central Bank and the European Commission rescuing Greece in the light of any default risk? Both stretch credulity, in my view. (ht: tweet by David Rosenberg).

Financial fault lines in America

The headline for this story says it all: “Families go deep in debt to stay in the middle class.” The article appeared in Wall Street Journal. It features individual stories even as it presents macro statistics. It makes for heavy reading. One chart captures the failure of the monetary policy followed in America since 1990 and particularly since 2001 and since 2008.

Debt for top 10 and bottom 90

Unadjusted for inflation, home prices rose 188% from 1987 to 2017, average tuition at public four-year colleges rose 549% and health-care expenditures rose 276% from 1990 to 2017. Meanwhile, household income from 1987 to 2017, not adjusted for inflation, rose 135%. [Link]

What about household wealth?

The U.S. economy roughly doubled in size from 1989 through 2016, data from the U.S. Bureau of Economic Analysis show. Counted together, everyone got wealthier. But gains in assets owned were heavily skewed toward the highest earners, according to a Journal analysis of the Fed’s Survey of Consumer Finances.

The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016, the latest available data. For households in the top 20%, median net worth more than doubled to $811,860. And for the top 1%, the increase was 178% to $11,206,000.

Put differently, the value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A third of the gain—$19 trillion—went to the wealthiest 1%, according to a Journal analysis of Fed data. [Link]

While such an article appeared in WSJ, the NYT published a rather strange article which lauded the Federal Rate’s interest rate cut as being sensitive to the poor, the marginalised and ethnic minorities! Stumped.

If anything, the chart shown here exposes the vacuity of such an article.

Similar in spirit to the article in Wall Street Journal featured here is an article in Financial Times on the rising bankruptcy among the retired folks in America.

The article is summed up in these words:

Baby boomers aged 65 and older are racking up far higher levels of debt than their parents, who were raised during the Great Depression, and a growing minority are finding themselves tipping over from desperate financial trouble into bankruptcy.

The culprits are vanishing pensions, soaring health-care costs and tens of thousands of dollars in unpaid student loans for themselves, their children and even their grandchildren. [Link]

This blogger knows when the American model of capitalism began to break.

It is not just American monetary policy that remains the source of the problem. Wall Street Journal has another well-researched piece on the problems with rating agencies. Issues that do not deserve their high rating still get them. What is funny or tragic, depending on your point of view, is this:

Moody’s, S&P and Fitch responded to increased competition by issuing higher ratings, according to two academics’ study of 2,488 securities rated between 2009 and 2014. One author, Colorado State University Finance Professor Sean Flynn, says “competition among credit-rating firms has, if anything, reduced the quality of credit ratings. [Link]

Inflated bond ratings are back, according to the header of the article. If competition does not lead to realistic bond ratings, then what is the way out? It is a challenge for researchers.

USD above 7 CNY

This morning, as I type this, the USDCNY exchange rate is 7.0445. Bloomberg sends out a daily newsletter called ‘Bloomberg Opinion Today’. The remarkable convergence of the views stated therein tells me that reading all of them is a waste of time. For everything that happens, Donald Trump is to be blamed. Period. There are no shades of grey nor nuances. Whether Trump is being shrewd or smart or miscalculating or bumbling from one step to another or that he throws his rivals off-balance, these can be debated ad nauseam. We will not know until a good deal of time has passed. But, to provide no scope for alternative points of view speaks poorly of the platform.

America has labelled China a currency manipulator. Treasury department makes the call and it leads to some punitive actions. It is one of those unilateral measures that America takes, in many areas. Back in the early-2000s and even after 2008, Fed monetary policy stance could have been termed currency manipulation. In any case, China technically does not meet the criteria America has set out for currency manipulation and yet it was tagged. But, the punitive actions that have to follow have no sting because China does not have any US government contracts nor does it receive development funding. See this well-written news-story in Bloomberg.

George Magnus has a piece on it in Bloomberg. It says a lot but says nothing much that is new. The path of yuan from hereon will determine global currency arrangements. Possible. Methinks that the elections next year, the Federal Reserve policies and a possible bitter fight between an incumbent President fighting for re-election and the central bank in America will play a big role in the global confidence on the US dollar.

But, unfortunately for others and fortunately for America, there are many other factors that would play a big role in influencing the trajectory of the continued global role of the US dollar. All those factors underpin dollar’s strength because they undermine the claims of other currencies and countries to dethrone the US dollar.

For example, sample this comment from Magnus’ article:

A major Chinese investment bank recently suggested the industrial sector has lost about 5 million jobs in the last year, almost half of which are attributable to the trade war.  [Link]

Vladimir Putin who is widely hated by the mainstream English media has suddenly become quotable for them because Russia is coming good on its threat to diversify out of US dollar. Mildly interesting news but nothing more, for now.

Trump’s fights with the Federal Reserve on American monetary policy stance are more critical, as far as I am concerned, to the path and fate of the US dollar.

John Authers wrote, after the Federal Reserve Board Open Market Committee Meeting last week in which they cut the Federal Funds rate by 25 basis points, that Trump escalates the stakes in the trade war with China to force the hand of the Federal Reserve. I find the logic weird.

A far more reasonable proposition is that he wants monetary policy to help cushion the shock coming from his long-standing and long-running trade battle with China. He is anxious and he knows that market sentiment would sour as he escalates the fight with China. He wants the Federal Reserve on his side to cushion the impact on market sentiment.

Be that as it may, he is risking a big setback to global comfort with and confidence on the US dollar by haranguing the Chairperson of the Federal Reserve. Fed policy is already a slave to stock market gyrations. Trump’s tweets and angry comments are compounding the blows to the Fed’s already-battered credibility. That is the big threat to the US dollar. Not the path of China’s yuan.

If anything, China’s currency war games are a double-edged sword.

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.

The failed gambit on China

Professor Aaron Friedberg flags this brilliant post on the failed China gambit by America. T. Greer who authored this post has written rather eloquently.

But, that has not stopped some so-called China experts from writing an open letter in ‘Washington Post’ blaming Donald Trump. John Pomfret cites the open letter in his piece in which he takes exception to their thesis.

Read this particular point from the John Pomfret article:

Campbell also had another observation that was unusual for a former official in a Democratic administration: “President Trump has basically received and gotten more Chinese leverage,” he said, “… by this brutal approach than we got by treating China as a partner and with deep respect.”

He concludes on this note:

But the Trump administration is the first one in decades to tell China that the status quo is broken. What China watchers should be doing is building on that insight, and not returning to promises of a kinder, gentler policy that wouldn’t have worked in the 1940s and won’t work today.

Pomfret’s article in Washington Post has many links to all the promises that China had walked back on.

Check out this story in sciencemag.org on how the National Institute of Health found out about research scholars in America (of Asian origin, mostly) hiding their collaboration with institutions in China.