All that matters for 2018


China bought two years with its 2016 reflation, aborting a global slowdown stemming from its last decision to slow credit growth. This growth cycle has completed and is turning down again.

The fallout from the prior slowdown started showing up after Spring Festival in 2014. From February 23, 2014: China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China.

Regarding the dip in the yuan, I wrote:

If this keeps up, we may soon hear about a dollar shortage in China, which happened last time the yuan spiked. Also, after the 2011 drop, forex reserves fell.

It will only take a small marginal change in the economic trends to create a hurricane force in the financial markets. Once the market moves the other way, the shift will be swift and brutal because everyone is on the other side of the trade. How many people out there have puts on the yuan and expect China’s reserves to start falling?

If history rhymes, there’s going to be some significant negative news out of China in March. If that happens, the clock will start ticking on the next global deflationary wave.

The conventional wisdom about equities, interest rates, inflation and emerging markets is wrong again, just as it was in 2011 and 2014.” [Link]

The emphasis in the first line is mine and I recall what I wrote in MINT in July 2017 querying whether the global economic recovery was statistical or real. It was yet another credit-led growth from China:

China was the main source of that credit growth for the 2016-2017 boomlet. If it is truly over, then global growth will go with it. [Link]

Elsewhere in that blog, the blogger writes this about the yuan:

The yuan is a problem at USDCNY 6.3 and USDCNY 6.9 because China has a massive credit bubble. At one end, the deflationary impact of a rising yuan and at the other, the risk of a major devaluation. In the middle is the Goldilocks exchange rate, not to strong to trigger debt default, not to weak to trigger outflows. USDCNY 6.3 in the current environment is too strong. The PBoC is also pinned in this range. Loosen capital controls to let the yuan weaken, exacerbate the liquidity crunch in the banking system and risk uncontrolled depreciation/capital flight. Let the yuan strengthen and risk a credit crisis. Further reverse yuan internationalization and set the yuan price, but risk an economic response from the United States.

He is quite spot-on. In fact, the paragraph above on the yuan rhymes with what ‘Houses and Holes’ wrote in on Trump’s policies towards China – that they are working.


Weekend snippets

On the other hand, regulation remains a concern for many, with 75 percent of members continuing to feel foreign companies are less welcome in China than they have been in the past. Although down from 55 percent last year, some 46 percent feel foreign companies are treated unfairly compared to local companies and, for the third year running, respondents cited inconsistent regulatory interpretation/unclear laws and enforcement as the top challenge to doing business in China. For the first time, compliance and enforcement made the list of the top challenges companies expect to face in 2018. [Link]

(2) US Non-Farm payroll data for Jan. 2018 [Link]

(a) ​from Jan. 2017, unemployment rate for Whites has declined the most among races.

(b) In terms of education, unemployment rates for

high school or below and

high school but no college have declined the most.

Put (a) and (b) together, ​Trump has delivered for his constituency, I suppose.

(3) This Matthew Klein post in FT Alphaville might be from December 2014 but well worth a read on how Japan is far better placed than most think.

(4) A Chinese company lets go off the option of paying off a perpetual bond and has to raise the coupon by 3 percentage points. [Link]

(5) Dr. Manmohan Singh’s master class in fiscal indiscipline. Indeed! Who is better qualified than him to offer a master class in fiscal indiscipline?

(6) Academic economists close ranks on Janet Yellen as she departs but the last line attributed to Shiller restores a bit of a faith in their judgement [Link]

(7) An important read for financial market participants (aka investors) [Link]

(8) FT records the slump in U.S. stocks on Friday as the worst in the Trump era, leaving not much to the imagination of readers as to what message it wants them to take away.

Curious to know if the FT credited Trump when the stock market kept breaking records on the way up. It takes two to tango – the President would not take the blame for the fall even as he took credit for the ascent (both wrong). Similarly, the media would associate the decline in the stock market with him but not credit him for its ascent for one full year.  Both wrong, again. But, what gives the media folks the right to think that they are morally superior to the man that they love to hate?

(9) Vivek Kaul writes one of the most relevant comments on the Indian budget for 2018-19 [Link]

(10) A good piece on the challenges facing Jerome Powell as he takes office on Monday as the Chairman of the Federal Reserve.

Demonetisation update 38 – pre-dispositions

Prasanna Viswanathan of Swarajya had shared a good article from Economic & Political Weekly (December 30, 2017) on the impact of demonetisation in rural Tamil Nadu. It was a survey based article. What came out well was the fact that people found a way around the cash ban and yet stuck to cash. That came out well. The second thing is that informal networks got strengthened. The authors strangely note that as a failure of the demonetisation exercise. Far from it. The authors of the demonetisation exercise in the government did not wish to disturb social networks in India!

The other thing that came out – the authors mention it twice – is that there was widespread support for demonetisation. That makes us wonder if the inconveniences and difficulties faced by the public are exaggerated by those who were not well disposed towards the government. If it had caused huge hardship to people, the measure could not have remained popular for too long.

The paper is ‘Insights on demonetisation from rural Tamil Nadu’ – understanding social networks and social protection, Economic and Political Weekly, December 30, 2017, Volume 52.

If the authors of the article were not pre-disposed towards judging the demonetisation as a failure, it would have made for a scholarly article. Pre-disposition makes scholars look silly.

You do not have to look far from this FT article by Larry Summers on the American economy for a classic example of pre-disposition or prejudice making for poor scholarship. If my students had written it, they would have scored very low marks indeed. Just one example: for America, a weak currency is not a reflection of its economic weakness at all. Mr. Summers knows it well but mentions it all the same as reflecting economic fragility because he cannot get himself to say something good about the U.S. economy under President Trump.

While on the subject of the U.S. economy, it was amusing to read that President Obama was claiming credit for the improved performance of the economy in 2017. Well, debatable but would he then take the blame for its sluggishness up to 2016 in almost all parameters of the economy?

Coming back to pre-dispositions, we had one on the other side – this time from Surjit Bhalla. He wrote in ‘Indian Express’ that tax buoyancy had picked up in the current financial year 2017-18, despite the demonetisation. Well, he says, it was because of the demonetisation’s impact on black money that tax buoyancy (more like elasticity- % change in tax collection for a % change in GDP) picked up.

This is problematic. GDP growth slowed down in the first three quarters following demonetisation. That does not establish causality but it is reasonable to think that demonetisation had at least a partial impact on economic growth. If, on top of the growth slowdown, there was increased tax collection, then one has to wonder if it was a good or bad thing. Vigorous tax collection in the middle of an economic growth slowdown might have aggravated the slowdown.

So, I am not sure if improved tax buoyancy in the context of an economic growth slowdown that might possibly have been aggravated by demonetisation (if not caused by it) is cause for celebration.

China and globalisation – part 2

Hardly a minute had passed when I received an email from a friend with the following queries with the clarification that they were not rhetorical statements disguised as questions but genuine questions seeking answers:

So… The $ 11 Trillion question is… Why did the US do it?

At what point did they realise they were enabling some bad habits like currency manipulation and debt addiction and IP theft?

And what have they done about it beyond bluster?

And holding the mirror to oneself is not easy! So, I would like to ask…

How has the US gamed the openness of the international trade and finance regimes in order to secure profit for its corporations… And to push its foreign policy agenda?

I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US. But how do I explain this in a calm, logical and data-driven  manner?

Actually, the last question is a genuine question, not rhetorical. Any insights would be appreciated.

My responses:

I understand your questions and I did not think that it was rhetorical.

Indeed, I hold no brief for American behaviour. I was stating it as a matter of fact. Before Americans, European powers, including the UK, have resorted to such selective patronage of nations and policies, garbed in the rhetoric of open markets.

On currency manipulation too, Western nations are not paragons of virtue. Raghuram Rajan is correct that zero or negative rates too are a form of currency manipulation.

Post-1980s United States is all about capital at the expense of labour and therefore, trade deficits and financial openness were instruments in aid of boosting returns to capital. Combination of lazy and predatory capitalism. Have written on numerous occasions on it and a book is coming out later this year, I hope.

That is what emboldens nations like China to cock-a-snook at the international order because its guardians and creators have turned unilateral and unfair exploiters.

>> I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US.. But how do I explain this in a calm, logical and data-driven  manner? 

Fair question. My responses:

(1) The United States did play by international order for at least two decades, that it helped craft after WW II.

(2) The UK lived up to the rules of the Gold Standard before it demanded others countries do so. It tolerated a painful and long period of deflation to restore competitiveness instead of resorting to devaluation (19th century)

(3) Despite a valid and cynical evaluation of U.S trade imbalance, the fact that it has run persistently large (and even increasing, on occasions) trade deficit is a valid testimony to its relative trade openness. Its M&A track record on foreign companies acquiring American companies is far better than that of China.

(4) After 2008, barring the propping up of SIFI, it did allow its banking sector to restructure. That is why its banking system is arguably more resilient than that of Europe or China’s.

(5) Paul Volcker risked two recessions in two years to control overheating and inflation.

>> ​Why did the US do it? 

I do not think I have answered it. I doubt if John Pomfret too answers it convincingly.

Boils down to several factors:

(1) Japan was becoming too successful for its own good. A counterweight. The U.S. does ensure that its potential rivals balance each other. (Example: Bet on India but make sure that Pakistan is there to keep India checked.)

(2) ‘Capitalising’ China will help neutralise the Soviet Union and also remove the long-term threat of communism

(3) Taiwan was too small to be of benefit to the United States economically – for its financial interests.

(4) Not to leave out a certain naive idealism or hope that getting a potential ‘rogue’ nation into the system will make it a responsible stakeholder and it cannot be a threat to a system (that still largely served Western interests) that it is part of.

Finally, all these are open to debate and different interpretations and weights.

Utterly confused lot

A quick glance through the blog posts in the website of the Economic Policy Institute (EPI) suggests that they are barking at inequality and yet baying for a loose monetary policy.

Loose monetary policy does zilch for good old inflation that they are hankering after. It does a lot for asset price inflation that contributes immensely to the inequality that they are opposed to.

She would, in short, be doing America’s working families a big favor. If she does decide to stay on after losing her chair position, we should all thank her. [Link]

The good folks at the EPI want Yellen to continue as a Governor in the Federal Reserve Board even if she were not the Chairperson! She supposedly tightened interest rates and financial conditions eased considerably, creating asset price inflation that favoured the rich and she had nothing to show for her efforts in generating inflation in goods and services.

EPI is doing a disservice to the workers whose cause it claims to espouse.

Trickle-down hypocrisy

The Keynesian Fed economists who were dismissive of Reagan’s trickle-down theory still don’t appear to see the irony in the fact that they applied trickle-down monetary policy in the hope that by giving a boost to asset prices they would create wealth that would trickle down to the bottom 50% of the US population or to Main Street. It didn’t. [Link]

Well said, John Mauldin. The link is almost two months old. Does not matter. The observation is very relevant even now.

Blase Blasio and other links

New York Mayor decides to sue oil companies for climate change. Seems like a publicity stunt to me.

Stephen Gandel points out that Intel CEO’s share sale – in the context of the problems revealed with computer chips – does not pass the smell test. Quite. Do not miss the chart on Intel CEO’s shareholding before and after the revelation of problems with computer chips.

A Social network company in  China for Truck Drivers decides to slip ‘blockchain’ into the conversation and the stock jumped. Well, it is almost two decades since companies pulled this trick on financial markets. What would poor investors do? They are rational, at one level. They are not buying because they expect this or that company to pull it off. They simply hope to be early buyers so that they stand a very good chance of finding someone else to dump the stock on them, at a higher price, of course. What about the last guys who hold these stocks before they go down? They just happen to suffer from amnesia or they were born after the year 2000. In this context, Roula Khalaf has a good piece on millennials and the crypto-currency craze.

Eastman Kodak said that it would use blockchain to help photographers protect their copyright. The stock jumped 119% during market hours and more after.

Citing precedence from the way that stocks that had dotcom in their names jumped from 1998 until 2000 before the bubble burst, Andy Mukherjee thinks that the collective market value of the stocks of companies using ‘blockchain’, ‘crypto’, etc., may still go up before they go down. But, he does not advocate betting on it. Good for him.

Jamie Dimon says he regrets calling Bitcoin a fraud. May be, JPM wants to facilitate trading in Bitcoins.

Madan Sabnavis has a useful table on how much interest rates had come down in India and yet how little credit growth to industry has revived. But, no amount of evidence would persuade believers that, in the presence of balance sheet constraints, lower interest rates do zilch to revive lending and investing. They may help create asset bubbles and make some richer.

In economics journals, papers written by women authors are more readable. The review process for their papers is longer than it is for male authors. Women authors become more readable as they age. It is not so, for men. Well, damning evidence that male economists-authors are undeservedly privileged. But, will it change things? Unlikely.

MINT has a good Edit on how China is ‘bribing’ its way to superpower status. May be. But, it won’t be the first time nor the last time. There is little outsiders can do about it except to whine. They have to grow their own financial muscles. Is India doing enough on that? I doubt. India, by and large, has retained the control mindset rather than the enabling mindset.