07/31/2026 Market Outlook (Hanging Man)
3 days ago
Saturday, September 20, 2008
Capitalists of the world unite.. you have nothing (else) to lose
http://pensionpulse.blogspot.com/2008/09/capitalists-of-world-unite.html
Thursday, September 18, 2008
ZIRP....
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/18/ccambrose118.xml
Read the headline (and tagline) a couple of times. For the US Treasury Bill to go to Zero that basically means that the demand for US Govt Debt is so high that the US does not have to pay any interest to the investor.
Now look at it this way for the investor to refuse interest it basically means he does not care about Return "on" Investment, in fact the only thing he is concerned about now is Return "of" Investment. So if he thinks that the only safe place that guarantees return of principal is US Govt Debt - then this implies that all other categories of debt is unsafe. This includes the debt of other countries and the debt of large corporations. At the extreme even a company like Shell will thus not be able to finance it's debt.
So what happens when Shell can't re-finance its debt? It has a liquidity crisis. OK so it generates liquidity by liquidating its illiquid assets i.e. property, oil rigs, plant and machinery, exploration rights etc. Now think of it on a global scale what if other corporations also face the same crisis - and all of them at the same time must sell their illiquid assets. There will be a buyer's strike. A global asset deflation of the scale that we have never witnessed before.
Corporations that have the most illiquid balance sheets and have the most amount of leverage will be the first to collapse as things turn bad the deflationary fire will reach up to the more stable, better capitalized corporation.
Read the headline (and tagline) a couple of times. For the US Treasury Bill to go to Zero that basically means that the demand for US Govt Debt is so high that the US does not have to pay any interest to the investor.
Now look at it this way for the investor to refuse interest it basically means he does not care about Return "on" Investment, in fact the only thing he is concerned about now is Return "of" Investment. So if he thinks that the only safe place that guarantees return of principal is US Govt Debt - then this implies that all other categories of debt is unsafe. This includes the debt of other countries and the debt of large corporations. At the extreme even a company like Shell will thus not be able to finance it's debt.
So what happens when Shell can't re-finance its debt? It has a liquidity crisis. OK so it generates liquidity by liquidating its illiquid assets i.e. property, oil rigs, plant and machinery, exploration rights etc. Now think of it on a global scale what if other corporations also face the same crisis - and all of them at the same time must sell their illiquid assets. There will be a buyer's strike. A global asset deflation of the scale that we have never witnessed before.
Corporations that have the most illiquid balance sheets and have the most amount of leverage will be the first to collapse as things turn bad the deflationary fire will reach up to the more stable, better capitalized corporation.
Some questions....
Why is gold "more" protected than other investments, like real estate?
The answer to this is a little complicated and long-winded, you may have to read this a couple of times to "get it". But first we need to go through some basic definitions. Some of these definitions may seem counter-intuitive and contrary to what is generally accepted but as you will see these are the true definitions of these terms.
Inflation: When we think of inflation we think of an increase in the price of good of services. That's not really true, the rise in the general price level of goods and services (most commonly measured through a Consumer Price Index - CPI) is an after-effect of inflation. Inflation is really an increase in the supply of money and credit. Because there is an increase in the supply of money (and credit) there is too much money chasing (relatively) fewer goods, thus the prices of goods as measured by money (the supply of which has increased) rises.
Deflation: The exact inverse of inflation is deflation; when the supply of money and credit contracts then that is called deflation. Because there is a decrease in the supply of money (and credit) there is less money chasing (relatively) more goods, thus the prices of goods as measured by money (the supply of which has decreased) falls.
An important thing to realize is that an increase in the prices of goods and services is the result of past inflations. Consequently when there is deflation it will result in future decreases in the prices of goods and services.
During periods of rising prices and (especially during severe or "hyper"- increases) you do not want to hold cash or cash equivalents. This is because with time can buy less and less of the goods and services you need. Consequently the value of money as measured by the amount of goods and services that can be purchased per unit of said money keeps decreasing. So what do you hold instead? You want to hold assets that can preserve or store value in the face of a general rise in prices. Real Estate, commodities such as Metals, Coal, Crude and Precious Metals i.e. Gold, Silver are such assets - these assets are also called "hard" assets. In fact in extreme increases of prices you want to hold as much debt as possible and use the debt to finance the purchase of these "hard" assets. This is because the rate of interest that you pay on your debt will almost always lag the increase in the value of the asset. Think of it this way: there are two graphs both rising, but the slope of the interest rate is less than the slope of the price increase. As a result Property - which you can easily finance - is a very good asset class to invest during periods of increasing price levels.
So if deflation is the exact inverse of inflation - then during periods of decreases in price levels you want to invest in assets that have the opposite characteristics of "hard" assets and you want to stay away from debt. In fact the only asset class that does well during decreases in price levels is money.
Gold is a very funny asset and has some important characteristics that make it special and different from everything else (including other precious metals such as Ag, Pt etc.)
1. All the Gold ever mined in human history approximately 150,000 - 160,000 tons is still with us.
2. The supply of Gold is very stable and is around 2% of the total Gold supply. It takes around 9-10 years for a new Gold mine to come online and then a further 5-7 years for production to hit the market. Thus from exploration to sale Gold takes about 14-17 years. By which time current Gold mines will be in decline. Thus this supply is not very likely to change over time. In fact in recorded human history there has been only one time in which the supply of Gold has increased dramatically, that's when Spain took the Gold of the Mayas and Aztecs in the 1600s and flooded Europe with it. Thus if Gold were to be used as money it would be relatively free from increases in supply i.e. Inflation.
3. Gold has very little industrial usage - its major use is as jewelery. As you are probably aware in India people often buy and gift jewelry not just for consumption but also as security and to use as money when in need. In fact this is true the world over.
4. Gold is almost indestructible (If I remember right you need Aqua Regia to dissolve Gold), relatively portable.
Because of these reasons Gold has and will continue to be regarded as money. In fact in the Foreign Exchange markets Gold trades like any other currency.
So in a deflationary scenario Gold should do well. I expect the world's industrial economies to fall into a deflationary depression thus the only asset class that will do well is money and it's equivalent - Gold falls in that category.
Why do you say that this worldwide depression is impossible to reverse? Haven't we faced crises of more severe magnitude before, and, come out of it before? Why is this depression more severe than (say) the Great Depression of 1929, starting with the crash of US stock market on the infamous "Black Tuesday"?
I'm not saying this is the end of mankind as we know it. We will get through this, it just so happens that we will fall into a deflationary depression and then with time (5 years, 10 years who knows how long...) we will come out of it. It will be more severe than 1929 (which by the way was exactly the same thing) simply because the magnitude of the deflation is much larger. If you think of it as a wave, the amplitude of the wave is greater by several degrees of magnitude consequently the effects of the wave will be that much more severe.
I'm not saying this is the end of mankind as we know it. We will get through this, it just so happens that we will fall into a deflationary depression and then with time (5 years, 10 years who knows how long...) we will come out of it. It will be more severe than 1929 (which by the way was exactly the same thing) simply because the magnitude of the deflation is much larger. If you think of it as a wave, the amplitude of the wave is greater by several degrees of magnitude consequently the effects of the wave will be that much more severe.
You say that "cash and cash equivalents" are the best bets to invest in - in that case, why is US dollar is better mode of saving than, say, Euro or Yen? Isn't this meltdown expected to affect all industrial markets?
The Dollar is the best of a worse lot. The Euro has political issues. No currency without the backing of a stable nation state survives for very long. The European Monetary Union is a grand experiment that will unfortunately fail if it is not accompanied by a political union. Japan's economy is in terminal decline because of demographic issues unless they start allowing massive immigration their economy will slowly reduce to insignificance.
The Dollar is the best of a worse lot. The Euro has political issues. No currency without the backing of a stable nation state survives for very long. The European Monetary Union is a grand experiment that will unfortunately fail if it is not accompanied by a political union. Japan's economy is in terminal decline because of demographic issues unless they start allowing massive immigration their economy will slowly reduce to insignificance.
Wednesday, September 17, 2008
AIG bailout doesn't change a thing
I think they should just merge with LIC.. :-)
Seriously its a $85B loan at 850 bps over Libor - which is around 2.9%? - so that's 11.4%. The Interest expense alone is $2.4B per quarter. The last 3 quarters their loss was $14B the only quarter they made money - they made about $3B. But lets say by some miracle they manage to make the interest payment.
Their B/S equity is 78B - so not only are they wiping that out they are effectively making the firm insolvent. I just don't see how this preserves the firm's credit rating, which was the original intent no? Admittedly the equity is book value but in this situation I don't expect a buyer to pay a whole lot more than book.
Which brings me back to my original point.. This doesn't change anything but it does give AIG's counterparties time to unwind their position, and maybe that's all that the Fed wants at this point. But you have to wonder that if it takes $85B (there's no way in hell that the loan is going to be repaid fully) to buy time, what sort of dis-orderly liquidation were we looking at?
Seriously its a $85B loan at 850 bps over Libor - which is around 2.9%? - so that's 11.4%. The Interest expense alone is $2.4B per quarter. The last 3 quarters their loss was $14B the only quarter they made money - they made about $3B. But lets say by some miracle they manage to make the interest payment.
Their B/S equity is 78B - so not only are they wiping that out they are effectively making the firm insolvent. I just don't see how this preserves the firm's credit rating, which was the original intent no? Admittedly the equity is book value but in this situation I don't expect a buyer to pay a whole lot more than book.
Which brings me back to my original point.. This doesn't change anything but it does give AIG's counterparties time to unwind their position, and maybe that's all that the Fed wants at this point. But you have to wonder that if it takes $85B (there's no way in hell that the loan is going to be repaid fully) to buy time, what sort of dis-orderly liquidation were we looking at?
Tuesday, September 16, 2008
Mutually Assured Destruction
We are faced with the total and complete annihilation of modern capitalism as we know it. With Lehman bankrupt and hence it's debt gone to junk status, AIG facing ratings downgrades and WaMu down to junk, here's whats going to happen as the dominoes fall one by one:
1. Lets say that I am financial institution. My balance sheet is probably a couple of hundred billion dollars, but the equity position (i.e. assets less liabilities) is quite possibly in the tens of billions of dollars i.e. at the minimum a 10 to 1 leverage. Lets assume that I have been conservative with my investments and most of my Assets are AAA (the highest investment grade) rated. So I don't have to carry that much Cash because the value of these investments should cover my liabilities.
2. Therefore as and when these investments receive a ratings downgrade I must increase the level of cash that I carry, so that I can cover the loss in value of the erstwhile AAA investments. If I can't raise cash then my own ratings get downgraded.
3. That in itself is not so bad except....everything and everyone else (i.e. other financial institutions) is leveraged and at equilibrium. So if I can't raise cash not only do I get downgraded but anyone else holding investments issued by me is affected and they have to raise capital to cover the loss in values of paper that I have issued or contend with having their rating lowered.
4. Well that's still not fatal in itself .... except much of the investments that I have made and others have made based on paper I have issued are made up of derivatives which are not regulated and are of indeterminate value. Or to be precise whose value can be determined only by a bunch of PhD(s) and a gaggle of lawyers.
5. Now all these investments are interconnected and held by State funds, mutual funds, world funds , sovereign funds and god knows what else then the entire world's markets melt down together because no one knows what the true values of any investment are and therefore no one can be trusted to make good on any liability.
Default thus turns to liquidation... KABOOM!
For the record I am short the US Financial Sector, Short Crude and Natgas, Short Small Cap and Short Basic Materials.
1. Lets say that I am financial institution. My balance sheet is probably a couple of hundred billion dollars, but the equity position (i.e. assets less liabilities) is quite possibly in the tens of billions of dollars i.e. at the minimum a 10 to 1 leverage. Lets assume that I have been conservative with my investments and most of my Assets are AAA (the highest investment grade) rated. So I don't have to carry that much Cash because the value of these investments should cover my liabilities.
2. Therefore as and when these investments receive a ratings downgrade I must increase the level of cash that I carry, so that I can cover the loss in value of the erstwhile AAA investments. If I can't raise cash then my own ratings get downgraded.
3. That in itself is not so bad except....everything and everyone else (i.e. other financial institutions) is leveraged and at equilibrium. So if I can't raise cash not only do I get downgraded but anyone else holding investments issued by me is affected and they have to raise capital to cover the loss in values of paper that I have issued or contend with having their rating lowered.
4. Well that's still not fatal in itself .... except much of the investments that I have made and others have made based on paper I have issued are made up of derivatives which are not regulated and are of indeterminate value. Or to be precise whose value can be determined only by a bunch of PhD(s) and a gaggle of lawyers.
5. Now all these investments are interconnected and held by State funds, mutual funds, world funds , sovereign funds and god knows what else then the entire world's markets melt down together because no one knows what the true values of any investment are and therefore no one can be trusted to make good on any liability.
Default thus turns to liquidation... KABOOM!
For the record I am short the US Financial Sector, Short Crude and Natgas, Short Small Cap and Short Basic Materials.
Friday, September 12, 2008
Senators Ask Fannie, Freddie to Freeze Foreclosures
Bloomberg says:
U.S. Senate Banking Committee members urged Fannie Mae and Freddie Mac, the mortgage companies placed under federal control this week, to freeze foreclosures on loans in their portfolios for at least 90 days.
There's another quote:
"This action would provide immediate relief to many homeowners'' and let the companies "turn these non-performing loans into performing assets to minimize losses,'' Senators Charles Schumer, Robert Menendez and other panel Democrats said today in a letter to the companies and the Federal Housing Finance Agency, which is overseeing them under the government conservatorship.
Umm.. No. If not collecting the EMI on a loan makes the loan into a "performing asset and minimizes losses" we would have to rewrite the history of banking, in fact while we're at it why don't you change the definition of all loans and just start calling it gifts - because thats what these supreme intellects propose.
I guess politicians all over the world are the same, and here was I thinking that only our Desi politicians had a monopoly on economic illiteracy.
U.S. Senate Banking Committee members urged Fannie Mae and Freddie Mac, the mortgage companies placed under federal control this week, to freeze foreclosures on loans in their portfolios for at least 90 days.
There's another quote:
"This action would provide immediate relief to many homeowners'' and let the companies "turn these non-performing loans into performing assets to minimize losses,'' Senators Charles Schumer, Robert Menendez and other panel Democrats said today in a letter to the companies and the Federal Housing Finance Agency, which is overseeing them under the government conservatorship.
Umm.. No. If not collecting the EMI on a loan makes the loan into a "performing asset and minimizes losses" we would have to rewrite the history of banking, in fact while we're at it why don't you change the definition of all loans and just start calling it gifts - because thats what these supreme intellects propose.
I guess politicians all over the world are the same, and here was I thinking that only our Desi politicians had a monopoly on economic illiteracy.
Tuesday, September 02, 2008
So much for Gustav
Well so much for Gustav - turned out to be quite literally a tempest in a teacup. Looks like my bet on NATGAS turned out wrong and NATGAS, Crude and Gold all collapsed through early trading on Tuesday AM. Crude is at $110, NATGAS at $7.50 and Gold at $819.
I am currently down about 7% from my position and am seriously considering throwing in the towel. It looks demand destruction is going to trump all other themes. I full expect Crude to go down to $75.
I am currently down about 7% from my position and am seriously considering throwing in the towel. It looks demand destruction is going to trump all other themes. I full expect Crude to go down to $75.
Sunday, August 31, 2008
Gustav takes aim at N'awlins, oil prices
I think the story is in NATGAS rather than crude. If Gustav is anywhere near what Katrina was, the effect should be more pronounced in Natgas.
What with the Russian imbroglio and Natgas already heavily oversold, I expect gas to go upto 10.5. For the record I am long UNG at 38.5.
What with the Russian imbroglio and Natgas already heavily oversold, I expect gas to go upto 10.5. For the record I am long UNG at 38.5.
Friday, August 29, 2008
Chindia
An interesting paper by W. Michael Cox and Richard Alm of the Dallas Fed (link above) posits India is poised to benefit more in the long run from its services driven approach towards development over China - which has taken a more conventional manufacturing/export driven route towards development.
A couple of things stood out: In 1980 China's per capita income was $556 in 2007 it was $4766, India's on the other hand was $917 and $2534. Compounded annually China's per-capita income growth rate in the last 27 years has been about 8%. India's on the other hand was 4%. Note these are NOMINAL figures in US $. Given that the CPI denominated in US $ has probably been around 6% in this period (http://www.economagic.com/em-cgi/data.exe/feddal/cpimsa). India's REAL per-capita growth in 27 years has been -2% and China's +2%.
The paper says that the typical Indian services worker generates about $25000 per year in productivity. Based on personal experience I think that's too high. It should be in the $15000 (About 6,00,000 INR) per year region: We have 35 employees our revenue is about 200,00,000 INR - which makes the per employee revenue to be about 5,70,000 INR. Admittedly my sample is very skewed and I am only considering one imperfect firm. But I believe my company is the typical small-sized services firm that will make up the bulk of future growth in services exports. That would put the services worker's productivity squarely in the same range as China.
For all practical purposes China is a middle-income country (or will be shortly), India on the other hand has languished in the emerging column for the last 3 decades and looks to continue doing so for my lifetime. I think India's time as a counter-weight (economically and geo-politically) to China is past.
A couple of things stood out: In 1980 China's per capita income was $556 in 2007 it was $4766, India's on the other hand was $917 and $2534. Compounded annually China's per-capita income growth rate in the last 27 years has been about 8%. India's on the other hand was 4%. Note these are NOMINAL figures in US $. Given that the CPI denominated in US $ has probably been around 6% in this period (http://www.economagic.com/em-cgi/data.exe/feddal/cpimsa). India's REAL per-capita growth in 27 years has been -2% and China's +2%.
The paper says that the typical Indian services worker generates about $25000 per year in productivity. Based on personal experience I think that's too high. It should be in the $15000 (About 6,00,000 INR) per year region: We have 35 employees our revenue is about 200,00,000 INR - which makes the per employee revenue to be about 5,70,000 INR. Admittedly my sample is very skewed and I am only considering one imperfect firm. But I believe my company is the typical small-sized services firm that will make up the bulk of future growth in services exports. That would put the services worker's productivity squarely in the same range as China.
For all practical purposes China is a middle-income country (or will be shortly), India on the other hand has languished in the emerging column for the last 3 decades and looks to continue doing so for my lifetime. I think India's time as a counter-weight (economically and geo-politically) to China is past.
Thursday, August 28, 2008
Pakistan Outlaws Falling Prices
Securities can trade within their daily limit of 5 percent "but not below the
floor-price level'' of yesterday's close.
I had to re-read this a couple of times. So they are outlawing the fall of stocks prices below the last closing price. While they're at it why don't they outlaw gravity, or perhaps one can't fall below however much one has risen.....
This is the original post on the Karachi Stock Exchange: http://www.kse.com.pk/kse4/notices2/shownotice.php?id=004177
Tuesday, August 26, 2008
A Savings glut
There's a theory out there (can't remember who came up with it) - the problem with the world is not too much debt but rather too much savings. Because of the Chinese one-child policy, China's Seniors have saved like crazy. (The thinking goes since you won't have enough children to take care of you - you need to save). All these savings need to find a home, hence the financial engineering to create new products to capture these savings.
Which of course means that with ample supply of debt - consumers, corporations and investors go on a buying binge. Guess what happens when the binge ends? I doubt the saver is going to be immune from the after-effects.
Which of course means that with ample supply of debt - consumers, corporations and investors go on a buying binge. Guess what happens when the binge ends? I doubt the saver is going to be immune from the after-effects.
Friday, July 04, 2008
Reserves and Deficits
The RBI released a report on Balance of Payments over Q4 2007-2008. I stumbled upon this on my weekly browse to the RBI site (yeah I know.. I have no life) - link on the title of the post.
It's a very entertaining and revealing document, a couple of things caught my eye.
There seems to be two main contributors: Short-Term Trade Credits and FDI, that allowed the reserves to grow. If you look back at the data for 2006 and 2007, in each of these years the Current account surpluses of 4.49 Billion and 4.25 Billion don't justify the reserve increases of 13 Billion and 20 Billion respectively.
Kind of obvious when you think about it. If we're not earning enough money (through trade) then the only way our bank balance (as represented by our Reserve) can increase is if we borrow the money.
In a declining Dollar - appreciating rupee regime this seems to make all the sense borrow in Dollar invest in Rupees, earn profits and then repay with less rupees than you started out with. But what happens when this reverses - the Bernanke Fed has the cojones to hike rates (in fact they maybe compelled to sooner rather than later) and the Dollar finally catches a bid.
I'm pretty sure that all these increases in the Capital Account (FDI, FII Portfolio flows, ECB, Short Term Credits) will start going the other way. All these folks buying into the India story will start selling their rupees. In this scenario any decrease in Crude prices is likely to be nullified by a Rupee depreciation. Furthermore if the RBI suddenly decides to try to buy Rupees in an attempt to stabilize the currency this could mean a curency attack.
Add political uncertainity to the mix and things don't look so good now. Perhaps that's whats got the SENSEX spooked.
It's a very entertaining and revealing document, a couple of things caught my eye.
- Import payments increased by 37.2 % - reflecting an increase in the basket of international crude that we buy from $56.4 to $93.9.
- Oil Imports increased by 88.9%
- Given that the price rise was 66% - it basically means we are consuming more even at increased prices.
- The trade deficit was 23.8 Billion US$ - a YoY increase of 85%, again reflecting the increase in oil imports.
- Invisible receipts grew by 26.2% and the invisible surplus was 22.8 Billion US$ - a YoY increase of 33%. Invisibles of course means software, ITeS, travel and remittances from the diaspora.
- Which meant that the net deficit was 1 Billion US$.
Inspite of this deficit the Reserves grew by about 25 Billion US$
There seems to be two main contributors: Short-Term Trade Credits and FDI, that allowed the reserves to grow. If you look back at the data for 2006 and 2007, in each of these years the Current account surpluses of 4.49 Billion and 4.25 Billion don't justify the reserve increases of 13 Billion and 20 Billion respectively.
Kind of obvious when you think about it. If we're not earning enough money (through trade) then the only way our bank balance (as represented by our Reserve) can increase is if we borrow the money.
In a declining Dollar - appreciating rupee regime this seems to make all the sense borrow in Dollar invest in Rupees, earn profits and then repay with less rupees than you started out with. But what happens when this reverses - the Bernanke Fed has the cojones to hike rates (in fact they maybe compelled to sooner rather than later) and the Dollar finally catches a bid.
I'm pretty sure that all these increases in the Capital Account (FDI, FII Portfolio flows, ECB, Short Term Credits) will start going the other way. All these folks buying into the India story will start selling their rupees. In this scenario any decrease in Crude prices is likely to be nullified by a Rupee depreciation. Furthermore if the RBI suddenly decides to try to buy Rupees in an attempt to stabilize the currency this could mean a curency attack.
Add political uncertainity to the mix and things don't look so good now. Perhaps that's whats got the SENSEX spooked.
Wednesday, June 25, 2008
The return of the Bond Vigilante?
Hmmm... Interesting that the yield on the 10 year has bottomed and moved steadily up since the middle of march.
Here's what I posit - this is the dreaded inflation expectation. The Bond Market believes that rates are headed higher in the medium term, because the Fed (and other Central Banks) must start to pay heed to inflation.
Here's the 1 Month
Notice how this has started moving up at about the same time. If the Bernanke Fed were to raise rates at this juncture it would mean a total implosion of the US (and quite possibly global) Banking System. But if they don't ... the Bond Market is going to force their hand.
In the 1980s and early 1990s the fixed income investor was notorious for selling (and driving up yields) at the slightest whiff of inflation - these so-called bond vigilantes had promised never-again to believe the Central Banks. Since then they've gone the way of Chandler, Ross, Monica, Joey, Phoebe and the blonde chick who married Brad Pitt - yes to retirement....
But like the Ronin in Yojimbo is the bond vigilante back?
The 4 phases of inflation
The RBI raised the Repo (to 8.5%) and CRR (to 8.75%) rates by 50 bps. Hopefully it's not too little too late - given that actual CPI is probably going to come in higher than 12%. Bank Deposit rates should crest 10% easily in the next couple of weeks.
In light of this I read an interesting interview on Financial Sense (linked to the title of this post). But one excerpt caught my eye:
Ominous stuff...
In light of this I read an interesting interview on Financial Sense (linked to the title of this post). But one excerpt caught my eye:
So we've gone from phase one where money supply is growing but the currency is not losing value because people trust it. We are now in phase two where the currency is in trouble, it is falling, money velocity is increasing and expectations for inflation are going up, and we are heading into phase three where velocity really starts to ramp up, prices are rising much faster than the supply, the currency is being ditched, which is what is occurring right now overseas by those that are accumulating dollars. And eventually you get to phase four where the currency collapsed and that's the final phase, which is the hyperinflationary phase.
Ominous stuff...
Saturday, June 21, 2008
11% and counting
The headline inflation number came in at 11%. This is just the projected number when the actual numbers come in - I full expect it to be above 12%.
Taylor rule says that for every 1% increase in the inflation rate the nominal interest rate should go up by more than 1%. Which means that the RBI is going crank up the rates like no tomorrow. I fully expect the rates to go up to 13-14%. Which would mean that the Rupee should rise relative to the US$.
Now is the time to go into Cash. Take $ debts and wipe out all Rupee debts.
Taylor rule says that for every 1% increase in the inflation rate the nominal interest rate should go up by more than 1%. Which means that the RBI is going crank up the rates like no tomorrow. I fully expect the rates to go up to 13-14%. Which would mean that the Rupee should rise relative to the US$.
Now is the time to go into Cash. Take $ debts and wipe out all Rupee debts.
Friday, June 13, 2008
Between a Rock and a Hard Place
Don't look now but the yields on the short-end (2 and 5 year) US $ Treasury Bills have been ratcheting upwards. Take a look at :
Note the upward shift at the short-end of the curve.
Treasuries are pricing in an increase in the Fed Funds Rate (FFR). I don't buy the Recovery in 2008 argument so what that means is that the Fed needs to raise rates to fight inflation (or more correctly inflation expectations). Most likely the ECB and the Japs let Bernanke have it - "listen you old so and so... if you don't raise rates now the dollar is f*&^%$#"
Note the upward shift at the short-end of the curve.
Treasuries are pricing in an increase in the Fed Funds Rate (FFR). I don't buy the Recovery in 2008 argument so what that means is that the Fed needs to raise rates to fight inflation (or more correctly inflation expectations). Most likely the ECB and the Japs let Bernanke have it - "listen you old so and so... if you don't raise rates now the dollar is f*&^%$#"
Wednesday, June 11, 2008
Central Bankers hostage to the Past
Over the past week Bernanke (and Paulson) have been jawboning the Dollar higher. It struck me that these guys seem to be hostage to their past.
All Central Banks profess to have a twin mandate: 1) Price Stability and 2) Economic Growth. But when the cycle turns (the current situation would qualify) price stability and economic growth are bipolar requirements. In these situations Central Banks must choose one of the following:
1) Raise interest rates and thus control inflation, which would dampen Growth.
OR
2) Keep the Monetary Spigot flowing thus supporting growth but fueling the inflationary pyre.
Depending on the Central Bank's read of their economic history they seem to chose one or the other. Witness Trichet and the ECB being much more hawkish on inflation. I daresay their worldview is colored by the Austrian and Weimar hyper-inflationary episodes.
On the other hand Greenspan and Bernanke seem to me more concerned about potential deflationary episodes - a'la the Great Depression. Thus their policy reaction is always to ratchet down monetary rates. (Volcker though would seem to defy this explanation.)
In India we have been lucky never to have seen hyper-inflationary episodes. In fact when inflation hits double digits governments usually fall. The RBI seems to have had a pro-active stance on inflation and keeping monetary policy generally tight. Economists here seem to have based their world-view on the Austrian model.
All Central Banks profess to have a twin mandate: 1) Price Stability and 2) Economic Growth. But when the cycle turns (the current situation would qualify) price stability and economic growth are bipolar requirements. In these situations Central Banks must choose one of the following:
1) Raise interest rates and thus control inflation, which would dampen Growth.
OR
2) Keep the Monetary Spigot flowing thus supporting growth but fueling the inflationary pyre.
Depending on the Central Bank's read of their economic history they seem to chose one or the other. Witness Trichet and the ECB being much more hawkish on inflation. I daresay their worldview is colored by the Austrian and Weimar hyper-inflationary episodes.
On the other hand Greenspan and Bernanke seem to me more concerned about potential deflationary episodes - a'la the Great Depression. Thus their policy reaction is always to ratchet down monetary rates. (Volcker though would seem to defy this explanation.)
In India we have been lucky never to have seen hyper-inflationary episodes. In fact when inflation hits double digits governments usually fall. The RBI seems to have had a pro-active stance on inflation and keeping monetary policy generally tight. Economists here seem to have based their world-view on the Austrian model.
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