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Fri, 24th February 2017

Anirudh Sethi Report

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Archives of “money supply” 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.

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. “ 

China Jan consumer inflation quickens to 2.5 percent, beating forecasts

China’s consumer inflation rate quickened to 2.5 percent in January from a year earlier, the highest since May 2014 and beating market expectations.

Analysts polled by Reuters had predicted the consumer price index (CPI) would rise 2.4 percent, the biggest gain in nearly three years, versus a 2.1 percent gain in December.

 The producer price inflation rate accelerated to 6.9 percent, the National Bureau of Statistics said on Tuesday, compared with the previous month’s rise of 5.5 percent.

The producer price index (PPI) rose the fastest since August 2011.

The market had expected producer prices to rise 6.3 percent on an annual basis.

Le Pen Victory Would Lead To “Massive Sovereign Default”, Global Financial Chaos, Economists Warn

With two months left until the French election, analysts and political experts find themselves in a quandary: on one hand, political polls show that while National Front’s Marine Le Pen will likely win the first round, she is virtually assured a loss in the runoff round against either Fillon, or more recently Macron, having between 20 and 30% of the vote; on the other, all those same analysts and political experts were dead wrong with their forecasts about both Brexit and Trump, and are desperate to avoid a trifecta as being wrong 3 out of 3 just may be result in losing one’s job.

Meanwhile, markets are taking Le Pen’s rise in the polls in stride, and French spreads over Germany are moving in lockstep with Le Pen’s rising odds. In fact, as noted earlier in the week, French debt is now the riskiest it has been relative to German in four years.

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.”

Frexit would ‘impoverish’ France warns ECB’s Cœuré

Image result for frexitMarine Le Pen’s plans to take France out of the euro would consign the country to impoverishment, one of the European Central Bank’s most senior French officials has warned.

Benoît Cœuré, executive board member at the ECB, called the notion of a ‘Frexit’, a choice for “impoverishment” that would “threaten the jobs and savings of the French people”.

Ms Le Pen, leader of the far-right National Front, is vowing to hold a referendum to take France out of the eurozone and redenominate the country’s €2tn of outstanding debt into a new franc after 18 years of membership should she become the country’s new president in May.

Should a Frexit occur, “debts incurred by French businesses and households would increase”, warned Mr Cœuré.

“Inflation, which would no longer be restrained by the ECB, would eat into savings, the fixed incomes of households and small pensions”, he added.

Despite Ms Le Pen’s assurances of an “orderly” exit, the French central banker said “leaving the euro would mean taking risks which have unpredictable consequences”.

The prospect of surging popularity for Ms Le Pen and the apparent demise of one of her main rivals for the job, the right-wing Francois Fillon, has sent the country’s 10-year bond yields to an 18-month at the start of the week.

Investors have dumped French debt, demanding the highest premium in four years to hold its benchmark bonds over Germany’s, as the likes of S&P Global Ratings have warned a Frexit would result in a likely downgrade of France’s sovereign borrower status.

With less than three months since the start of the first round presidential vote, Mr Cœuré said he could “not contemplate” a French vote in favour of leaving the euro, with the latest polling showing around 68 per cent of French people still back membership of the single currency area.

Amid promises by Ms Le Pen to restore monetary sovereignty to France and reverse the forces of globalisation, Mr Cœuré defended the euro, arguing it had proven to have had “greater benefits for the disadvantaged and the vulnerable”.

Rangarajan says bank cannot control NPAs

Former Reserve Bank of India Governor C Rangarajan today said banks cannot escape from the responsibility of controlling Non-Performing Assets (NPA) in their balance sheets.

At a panel discussion on ‘Union Budget-2017’, Rangarajan also said that though the adverse impact of demonetisation will wear off as the currency availability improves, some affects will not go away even as sectors like real estate will have to rethink their business models.

“The banking system is undoubtedly under stress. How to resolve that particular problem is only through capitalisation. Please remember even in good old Basil-I, the capital is 8 per cent of the risk weighted assets.

So Rs 10,000 crore (capital infusion to banks in 2017-18 as mentioned in the budget) should not be compared with Rs 1 lakh crore or Rs 2 lakh crore,” he said. “I think that the general scene is that the capital provided is not adequate…I think this cannot let the banks

escape the responsibility for the non-performing assets that they have in their asset portfolio.

ECB sees seeds of next crisis in Trump deregulation plan

The European Central Bank rejected U.S. accusations of currency manipulation on Monday and warned that deregulating the banking industry, now being openly discussed in Washington, could sow the seeds of the next financial crisis.

Arguing that lax regulation had been a key cause of the global financial crisis a decade ago, ECB President Mario Draghi said the idea of easing bank rules was not just worrying but potentially dangerous, threatening the relative stability that has supported the slow but steady recovery.

 Draghi’s words are among the strongest reactions yet from Europe since U.S. President Donald Trump ordered a review of banking rules with the implicit aim of loosening them. That raises the prospect of the United States pulling out of some international cooperation efforts.

“The last thing we need at this point in time is the relaxation of regulation,” Draghi told the European Parliament’s committee on economic affairs in Brussels. “The idea of repeating the conditions that were in place before the crisis is something that is very worrisome.”

The ECB supervises the euro zone’s biggest lenders.

“Big mistake”

Andreas Dombret, a member of the board of Germany’s powerful central bank, the Bundesbank, said that reversing or weakening regulations all at once would be a “big mistake”, because it would increase the chance of another financial crisis.

“That is why I see a possible lowering of regulatory requirements in the U.S., which is under discussion, critically,” said Dombret, who is also a member of the Basel committee drafting new global banking rules.

Schauble Agrees With Trump That Euro Is “Too Low” For Germany, Blames Mario Draghi

In surprising comments that may rekindle a verbal currency war between president Trump and Europe, German finance minister Wolfgang Schäuble told German newspaper Tagesspiegel that in his opinion the Euro is “too low” for Germany, echoing criticism from Trump’s trade advisor Peter Navarro, who last week told the FT that Germany was exploiting its US and EU partners by using a “grossly undervalued” euro to create a vast trade surplus. The comment placed Germany, alongside China and Japan, in a category of countries that the Trump administration has accused of currency manipulation for competitive advantage.

As the FT reports on Sunday morning, Schauble acknowledged that the ECB had to set monetary policy for the eurozone as a whole, but said: “It is too loose for Germany.” A recent chart from Morgan Stanley confirms that on a PPP basis, the EUR is over 40% undervalued for exporting and current surplus powerhouse Germany on a standalone basis, however for many of Europe’s peripheral countries it still remains expensive.

What was more curious about Schauble statement is that the German finance minister blamed the European Central Bank for the low exchange rate.

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