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Wed, 22nd February 2017

Anirudh Sethi Report

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Archives of “economics” Tag

Satyajit Das Warns Financial Engineering “Has Masked The Global Economy’s Precarious Health”

Too much of economic growth and the accompanying bull market in stocks is the result of financial engineering. Increasingly, companies seek to improve earnings or increase their share price by means that are not necessarily directly linked to their actual business.

Companies have increased the use of lower-cost debt financing, taking advantage of the tax deductibility of interest. In private equity transactions, the level of debt is especially high. Complex securities have been used to arbitrage ratings and tax rules to lower the cost of capital.

Mergers and acquisitions as well as various types of corporate restructurings (such as spin-offs and carve-outs) have been used to create “value.” Given the indifferent results of many such transactions, the major benefits appear to have accrued financially to corporate insiders, bankers, and consultants.

Share buybacks and capital returns, sometimes funded by debt, have been used to support share prices. In January 2008, prior to the global financial crisis, U.S. companies were using almost 40% of their cashflow to repurchase their own shares. Ominously, that position is similar today.

Not just execution, note ban idea itself was wrong :Rajiv Bajaj

With the adverse impact of note ban continuing to hamper two-wheeler sales, Bajaj Auto Managing Director Rajiv Bajaj on Thursday said the idea of demonetisation was itself “wrong” and it is incorrect to blame only the execution side of it.

“If the solution or the idea is right, it will go like a hot knife through butter…If the idea is not working, for example demonetisation, don’t blame execution. I think your idea itself is wrong,” Bajaj said at the annual Nasscom leadership forum here.

Prime Minister Narendra Modi had on November 8 last year scrapped all the Rs 500 and Rs 1,000 notes, with a view to check the black money.

Massive cash rationing was introduced as the new replacement notes were in short supply. The ban on 86 per cent of the total currency worth Rs 15.55 trillion in circulation impacted economic activity across sectors with the consumption-driven ones being the most affected.

Notably, the two-wheeler sales are yet to recover from the impact of demonetisation and industry data releases over the last two months have been showing a slump. The industry was looking forward to better sales on the back of good monsoon and an acceleration in rural economic growth, which drives consumption.

China Just Created A Record $540 Billion In Debt In One Month

One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”

DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “ 

India’s GDP growth to slow to 5.7% in Q4: Nomura

India’s economic growth is likely to remain muted in the first quarter of this calender year with the GDP likely to grow at 5.7% in the January-March period amid subdued activity, says a report.

According to the global financial services major Nomura, following subdued growth in the first quarter, a V-shaped recovery is on the cards due to remonetisation, wealth redistribution and the lagged effects of lower lending rates.

“We expect growth to remain subdued in the first quarter of 2017 as the activity level remains below its recent peak,” Sonal Varma chief India economist at Nomura said in a research note. Nomura expects economic growth to remain in a downtrend.

As per the report, from 7.3% GDP growth in the July-September 2016, the October-December 2016 quarter GDP growth is likely to slow to 6% and further to 5.7% in the first quarter of 2017 (January-March).

“We expect GDP growth to slow from 7.3% in Q3 2016 to 6.0 % in Q4 and 5.7% in Q1 2017,” it said.

How’s that oil demand picture looking OPEC? – India’s demand at the lowest for 13 years

One part of the OPEC production deal isn’t going according to plan

The main reason for the OPEC deal was to freeze production so that demand eats into the glut of supplies. That’s all well and good until the glaring floor in the plan comes home to roost, i.e demand doesn’t grow or worse, it drops.

So when one of the fastest growing countries sees oil demand fall the most in 13 years, there should be alarm bells ringing at OPEC.

Bloomberg has noted the drop which has seen India’s use of diesel drop 7.8% in Jan. Diesel accounts for around 40% of total fuel use. India also imports around 80% of it’s oil and the IEA said it will be the fastest user of oil through to 2040.

The drop is being tied in with the recent policy crackdown on high value bank notes, which is expected to shrink economic growth. One analyst expects that this is a one off and demand will pick back up in Feb. We’ll see whether he’s right no doubt. If he’s not then this could be a bigger issue for OPEC who will start to think about what to do with the current deal in a couple of months or so.

For me, the demand part of the OPEC puzzle was always the weak link and if demand doesn’t match expectations in relation to this deal, there’s going to be strong calls to expend it.

Fed’s Kashkari Says “Stock Prices Appear Somewhat Elevated”, Explains “What Might Be Wrong”

This morning, Minneapolis Fed Chairman Neel Kashkari penned an essay “Why I Voted to Keep Rates Steady” in which the former Goldmanite says that while core inflation “seems to be moving up somewhat, it is doing so slowly, if at all.”  He adds that “financial markets are guessing about what fiscal and regulatory actions the new Congress and the Trump administration will enact. We don’t know what those will be, so I don’t think we should put too much weight on these recent market moves yet.”

Repeating a on often heard lament about the lack of rising wages, Kashkari points out that “the cost of labor isn’t showing signs of building inflationary pressures that are ready to take off and push inflation above the Fed’s target” and adds that “it seems unlikely that the United States will experience a surge of inflation while the rest of the developed world suffers from low inflation.”

Greece : Nine out of 10 firms are not creditworthy

Almost two in every three Greek companies (63 percent) are deemed to have a high credit risk, compared to just 6 percent in 2009, according to data compiled by ICAP, as the Greek production base is collapsing rapidly.

Most Greek firms now have serious or very serious problems in covering their obligations, along with weak financial results and particularly low competitiveness. This is a combination which generates major doubts about their sustainability.

Another 27 percent of enterprises are on the verge of entering the above category too, with an increased risk, as they show vulnerability to adverse financial conditions, low economic performance and low competitiveness.

In other words, 90 percent of enterprises in Greece find themselves in the zone of high or increased credit risk and according to bank rules should not be entitled to bank financing. Therefore the credit system is up against a huge problem, as in order to help the revitalization of the economy it will have to increase credit levels, but the companies that are actually creditworthy and fulfill the banks’ criteria are very few indeed.

Overnight US Market :Dow closes back above 20,000, Nasdaq hits record

Banks and other financial companies led stocks higher on Wall Street Friday as President Trump prepares to scale back financial industry regulations. Buyers were also encouraged by a pickup in hiring in January. Small-company stocks, which stand to benefit more than others from stronger economic growth, make sharp gains.

The Dow Jones industrial average jumped back above the 20,000 level as the blue-chip index rose 186.55 points, or 0.9%, to close at 20,071.46. The Standard & Poor’s 500 index gained 16.57, or 0.7%, to 2297.43, moving within one point of its record closing high of 2298.37. The Nasdaq composite index added 30.57, or 0.5%, to set a new record closing high of 5666.77.

The Russell 2000 index of smaller-company stocks climbed 1.5% to 1,377.84. Smaller, domestically-focused companies may have more to gain than their larger peers from faster growth in the U.S. The Russell made large gains at the end of 2016 based on those hopes.

The stock market rally kicked off early after the government reported that U.S. employers added 227,000 jobs in January, higher than last year’s average monthly gain of 187,000 and a sign that President Donald Trump has inherited a robust job market. The unemployment rate ticked up to a low 4.8% from 4.7% in December, but for a good reason: More people started looking for work. The percentage of adults working or looking for jobs increased to its highest level since September.

Financial firms rose after President Donald Trump took his first steps aimed at scaling back regulations on the industry. He signed an order that directs the Treasury Secretary to look for potential changes to the Dodd-Frank law, which reshaped financial regulations after the 2008-09 financial crisis and created the Consumer Financial Protection Bureau.

The order doesn’t have any immediate impact, but suggests Trump is intent on reducing regulations, which could boost profits for financial companies and banks.

Dow components Visa (V) and Goldman Sachs (GS) jumped 4.6%, JPMorgan Chase (JPM) added 3.1% and American Express (AXP) gained 2%. Smaller banks, which could find it easier to lend money if regulations are cut, also traded higher.

BOJ Dec. meeting minutes published now – main points

Minutes from the Bank of Japan December 19 & 20 meeting

  • Most members shared view momentum for Japan’s inflation to reach 2 pct inflation was being maintained
  • Some members said factors that would support rise in prices going forward had been increasing
  • One member said recent yen depreciation might push up prices in short run but would not raise underlying trend in inflation
  • Many members said yield curve control had been functioning as intended, JGB yield curve had been formed smoothly despite global yield rises
  • Many members said BOJ must pursue powerful monetary easing as still long way to go to hit 2 pct inflation target
  • A few members pointed to market views that BOJ wants to guide 10-yr JGB yield at range of -0.1 to 0.1 pct, said it was inappropriate to set such “uniform standards”
  • One member said it was uncertain whether amount of JGB purchases would decrease going forward under yield curve control
  • One member said BOJ should set amount of its JGB purchases as operating target and make sure to reduce it incrementally
  • One member said BOJ should allow for natural rise in long-term rates if they reflect prospects for improvement in Japan’s economy, prices
Headlines via Reuters

Overnight US Market :Dow closed -6 points.

Stocks closed mixed Thursday as investors shied away from riskier assets amid renewed concerns over U.S. President Donald Trump’s policies and didn’t find much to get excited about in the latest batch of earnings reports from U.S. companies.

The Dow Jones industrial average fell 6.03, or less than 0.1%, to 19,884.91. The Standard & Poor’s 500 index rose 1.30, or 0.1%, to 2280.85 and the Nasdaq composite index fell 6.45 points , or 0.1% to 5636.20.

Investors were rattled by the latest news from the Trump administration, including a phone call in which he warned Mexico’s president he might send in troops and another about a tense exchange with Australia’s leader over refugees. Following the Trump rally in the wake of his election victory last November, stock gains appear to be petering out with investors getting jittery in light of Trump’s dramatic policy announcements since taking office.

Investors are also looking to Friday’s closely watched jobs report, the first that will be under the tenure of President Trump. Economists expect employers created 175,000 jobs in January, and the unemployment rate remained at 4.7%.