Sat, 22nd July 2017

Anirudh Sethi Report


Archives of “July 8, 2017” Day

China Central Bank Advisor: “Bitcoin As A Currency Could Collapse Entire Economies”

An advisor to China’s central bank, Sheng Songcheng, said that virtual currencies like bitcoin are assets but do not have the fundamental attributes needed to be a currency that could meet modern economic development needs. Speaking in an interview with financial magazine Yicai, the PBOC advisors said that the adoption of Bitcoin as a national currency by a country “could lead to its economic collapse.”

Sheng Songcheng, a counselor at the PBoC, dismissed digital currencies like bitcoin as assets that lack the value basis of a legitimate currency. “Bitcoin does not have the fundamental attributes needed to be a currency as it is a string of code generated by complex algorithms, and does not have inherent value… But I do not deny that virtual currencies have technical value and are a type of asset,” he said cited by Reuters. Apparently he is unaware that paper currencies – the type preferred by central bankers – is made of either strings of linen and paper or strings of 1s and 0s, and – while also having no inherent value – can be infinitely created out of thin air.

Sheng, who was the director-general of the Department of Statistics and Research at the People’s Bank of China, holds a PhD in economics from the Shanghai University of Finance and Economics in the 90s. He is currently the professor of economics and finance at a business school in Shanghai.

 Sheng warned that the deflationary nature of digital currencies – unlike fiat money there is a hard limit on how much can be reated – would mean that they would not function well as a currency or medium of exchange in modern economies. Expanding on his criticism, Reuters quoted Sheng as stated that “Bitcoin would reach its ceiling of 21 million in 2140. If it is accepted as standard money, that will inevitably lead to deflation and constrain economic growth.” Of course, that same feature would assure that consumers’ purchasing power does not vaporize every time central bankers make a mistake and unleash hyperinflation.

Think of it as the old fiat vs gold-backed currency debate, only in this case it’s bitcoin-based.

His objection is to be expected: after all no central bank wants to be constrained in how much “money” it can print to stimulate inflation in a world where debt/GDP is 327%; and where China’s credit creation dwarfs every other central bank. Recall that in the aftermath of the financial crisis, it was China that served as the dynamo of global “growth” as it doubled its total debt over the past decade, something it would be unable to do if there was a hard ceiling on the amount of currency in circulation.


Emerging Markets: What has Changed

  • The US confirmed North Korea’s claims that it tested an intercontinental ballistic missile.
  • The Pakistani rupee was devalued, prompting a new central bank governor to be named.
  • Vietnam’s central bank cut interest rates for the first time since March 2014.
  • Egypt’s central bank surprised markets with a 200 bp hike to 18.75%.
  • South Africa’s ruling ANC reportedly proposed that SARB be state-owned.
  • Petrobras announced two separate cuts to fuel prices.

In the EM equity space as measured by MSCI, Chile (+1.9%), Hungary (+1.8%), and India (+1.7%) have outperformed this week, while Qatar (-1.4%), Hong Kong (-1.3%), and Russia (-1.1%) have underperformed.  To put this in better context, MSCI EM fell -0.8% this week while MSCI DM fell -0.4%.

In the EM local currency bond space, Argentina (10-year yield -6 bp), India (-3 bp), and Taiwan (-3 bp) have outperformed this week, while Turkey (10-year yield +27 bp), Colombia (+25 bp), and Indonesia (+21 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 8 bp to 2.39%.

In the EM FX space, EGP (+1.4% vs. USD), BRL (+0.5% vs. USD), and HUF (up 0.2% vs. EUR) have outperformed this week, while TRY (-2.9% vs. USD), RUB (-2.8% vs. USD), and ZAR (-2.6% vs. USD) have underperformed.

The US confirmed North Korea’s claims that it tested an intercontinental ballistic missile.  The US and South Korea almost immediately announced a new joint military exercise.  Although the US has indicated that all options are on the table, there does not appear to be support for military options by South Korea, Japan, Russia, or China.  

Global Stock Markets Monthly Comovements

Interesting data table we put together on how the global stock indices move together on a monthly basis.  They’re ranked according to their monthly movement with S&P500.   That is the monthly return on each index has the same sign – positive or negative – as the S&P500.

The data show, for example,  Australia’s stock index tracks, by sign, the S&P500 on monthly basis 80.8 percent of the time.  Germany, 79.6 percent;  Canada, 78.1 percent.   China is the least correlated at  57.5 percent.

Note, we have also caclucated France’s comovement with Germany at 81.8 percent and Hong Kong with China at 62.9 percent, which is surprising but probably higher with a shorter-term more recent data series.

Also interesting to note that almost all stock market indices return a postive number on a monthly basis (first column) around 60 percent of the time.

The upshot?   Better get the direction on S&P500 right if you expect to make a positve return in foreign stock markets.   That is all things risk  are a beta play on the S&P500.

Stock Market Comovement_July7

US Indices close with solid gains on the day

Nasdaq leads the way with a gain of 1.04%

The US major indices rose with the Nasdaq index leading the charge:
  • The Nasdaq index increased by 1.04% or 63.614 points to 6153.078. The high reached 6164.93. The low 6111.215.
  • The S&P index rose by 15.43 points or 0.64% to 2425.18. The high reache 2426.92. The low 2413.52.
  • The Dow is ending up 94.30 points or 0.44% to 21414.34. The high reached 21425.82. The low 21350.72.
For the week:
  • The Dow rose 0.60% on the week
  • The S&P added 0.23% on the week
  • The Nasdaq squeaked out a gain or 0.14% on the week.
Year to date gains?
  • Dow up 8.36%
  • S&P up 8.32%
  • Nasdaq up 14.3%