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Some very relevant observations from Louis Gave of Evergreen GaveKal

Who Will The Emerging Markets Crisis Adjust Against?

In last summer’s emerging market sell-off, India was very much at the center of the storm: the rupee collapsed, bond yields soared and equity markets tanked. The Reserve Bank of India responded by raising rates while the government introduced harsh restrictions on gold imports. Promptly, the Indian current account deficit shrank. So much so that, in the current emerging market (EM) meltdown, India has been spared relative to most other current account deficit emerging markets, whether Turkey, Brazil, South Africa or Argentina. And on this note, the inability of the Turkish lira, South African rand, Brazilian real, etc. to hold on to gains after recent hawkish moves by their central banks is problematic. Markets won’t be calmed until there is clear evidence these countries’ current account deficits can improve. But how can these adjustments happen?

The problem is twofold. First, current accounts are a zero sum game, so future improvements in emerging market trade balances have to come at someone else’s expense. Second, we have had, over the past year, only modest growth in global trade; so if EM balances are to improve markedly, somebody’s will have to deteriorate.

When the 1994-95 “tequila crisis” struck, the US current account deficit widened to allow for Mexico to adjust. The same thing happened in 1997 with the Asian crisis, in 2001 when Argentina blew, and in 2003 when SARS crippled Asia. In 1998, oil prices took the brunt of the adjustment as Russia hit the skids. In 2009-10, it was China’s turn to step up to the plate, with a stimulus-spurred import binge that meaningfully reduced its current account surplus.

Which brings us to today and the question of who will adjust their growth lower (through a deterioration in their trade balances) to make some room for Argentina, Brazil, Turkey, South Africa, Indonesia…? There are really five candidates:

China, again? That seems unlikely. Instead, China’s policymakers continue to do all they can to deleverage, despite the cost of a slowing economic expansion. Moreover, mercantilism still rides high in the corridors of power in Beijing and so the willingness to move to a current account deficit is simply not there.
The US, again? As discussed in our recent book (see Too Different For Comfort), the Federal Reserve’s attitude since the global financial crisis has consistently been one of: “the US dollar is our currency and your problem.” The Fed has been happy to print and devalue the US dollar, leaving other countries to deal with the consequences. The days of the US acting as the backstop in the system are now behind us.
Oil: In the past, collapsing oil prices have come to the rescue during emerging market crises. Of course, this accentuates problems for the EMs dependent on high energy prices for their growth, but is a boon for others (including India, China, Korea, Turkey). Unfortunately, for now, energy prices are not falling, with some more localized markets, like US natural gas, seeing a surge amid record cold snaps.
Japan: Japan, which has been such a non-player for twenty years, is once again finding its feet. However, it is doing so by exporting its deflation through a central bank orchestrated currency devaluation. How this “beggar-thy-neighbor policy” will help the struggling emerging markets is hard to see, except perhaps through a) capital flows from rich Japanese savers into by now higher yielding EM debt, or b) import substitution on the part of threatened emerging markets where the end consumers will perhaps replace high priced US dollar/euro denominated imports of manufactured goods for cheaper yen denominated ones?
Euroland: The currency zone’s slight trade surplus is largely due to Germany. However, Germany’s exports to Turkey, Russia, Brazil, etc., will likely suffer as domestic demand implodes in these countries. In this sense—the euroland will be the likeliest candidate on the other side of the EM current account adjustment. Unfortunately, odds are this will take place through falling European exports rather than rising European imports and/or rising EM exports to the eurozone. This is not a good harbinger for global growth.

In short, either oil collapses very soon, or the US dollar shoots up (with Janet Yellen about to take the helm, is that likely?) or we could soon be facing a contraction in global trade. And unfortunately, contractions in global trade are usually accompanied by global recessions. With this in mind, and as we argued in Eight Questions For 2014, maintaining positions in long-dated OECD government bonds as hedges against the unfolding of a global deflationary spiral (triggered by the weak yen, a slowing China, busting emerging markets and an uninspiring Europe…) makes ample sense.

Rajan Holds India Rate in Surprise on Hazy Inflation Outlook – Bloomberg

December 18, 2013 8:06 am / Leave a comment

Rajan Holds India Rate in Surprise on Hazy Inflation Outlook – Bloomberg.

India’s central bank unexpectedly left the policy interest rate unchanged to support growth while saying it will act if Asia’s fastest consumer-price inflation fails to ease in the nation of 1.2 billion people.

Governor Raghuram Rajan kept the repurchase rate at 7.75 percent, theReserve Bank of India said today, as only five of 31 analysts predicted in a Bloomberg News survey. The rest expected an increase to 8 percent. He had increased the rate by 50 basis points since taking charge of the RBI in September.

“We won’t react to every spike in inflation that is temporary,” Rajan told reporters in Mumbai after the decision. “It shouldn’t be taken that we are on hold. We are waiting for more data.”

Rajan’s effort to support expansion, which accelerated from a four-year low last quarter, risks exacerbating consumer inflation of more than 11 percent as the cost of everything from onions to clothing climbs. Prime Minister Manmohan Singh has struggled to revive investment while overseeing four straight quarters of economic growth below 5%, hurting his ruling Congress party’s popularity ahead of elections next year.

“The central bank can’t keep raising rates when growth is weak and inflation is driven by food prices,” said Gaurav Kapur, a senior economist at Royal Bank of Scotland Group Plc in Mumbai, who predicted the decision. “Going forward, the rate action will depend on the price situation and the impact of the Fed taper on the rupee.”

Rupee Strengthens

The rupee declined 0.1 percent to 62.105 per dollar at the close in Mumbai and has depreciated about 11.5 percent this year. The S&P BSE Sensex index of shares climbed 1.2 percent. The yield on the 10-year government note maturing November 2023 slid to 8.79 percent from 8.91 percent yesterday.

Indications that vegetable prices may fall combined with a more stable exchange rate and lag effects from the previous rate increases give reason to hold the rate even though inflation is “too high,” the central bank said in a statement. The RBI will act, possibly on off-policy dates, if headline or core inflation does not ease in the next round of data releases, the RBI said.

“We are vigilant for the possibility that food inflation may be more entrenched,” Rajan told reporters. “We are not ignoring food inflation, but we would like to see through the noise. And for that, we want to wait for a month more.”

Risks to pausing include the possibility that the Federal Reserve will disrupt markets by tapering monetary policy, as well as perceptions that the RBI is soft on inflation, according to the statement, which called the move “a close one.”

Fed Decision

Rajan’s decision comes ahead of a U.S. Federal Reserve announcement today on whether to start curtailing $85 billion in monthly bond purchases. Thirty-four percent of economists surveyed by Bloomberg Dec. 6 predicted the Fed will start reducing purchases this month, while 26 percent forecast January and 40 percent said March.

India is better prepared for the Fed to taper stimulus than earlier this year, Rajan said last week. The rupee plunged in August amid an exodus of funds from emerging markets on concern that the purchases would end.

India’s consumer prices rose 11.24 percent in November from a year earlier, the fastest among 17 Asia-Pacific economies tracked by Bloomberg. Wholesale inflation was 7.52 percent, a 14-month high. Gross domestic product grew 4.8 percent in the three months to Sept. 30.

“The RBI has done a smart balance between inflation targeting and incentivizing growth,” India’s Economic Affairs Secretary Arvind Mayaram said in an interview in Seoul today. That will help boost sentiment, he added.

Prices Rise

Companies are facing cost pressures even as demand moderates. Hyundai Motor Co.’s Indian unit said yesterday it would raise prices across all models starting next month.

Rajan, 50, unexpectedly raised the repo rate by a quarter point in his first policy review on Sept. 20 and boosted it again by 25 basis points on Oct. 29. He’s lowered the marginal standing facility rate to 8.75 percent from 10.25 percent, the level reached when his predecessor boosted it 200 basis points on July 15 to curb the supply of rupees.

“We are very uncomfortable with the current level of inflation,” Rajan told reporters on Dec. 12. “Clearly growth is weaker than we would like, inflation is higher than we would like. It would be wonderful if we had the normal situation of extremely high growth and high inflation and extremely low growth and low inflation, in which case policy is very easy.”

Opposition Momentum

Voters punished Singh’s party in recent state elections, with the main opposition Bharatiya Janata Party winning the most seats in four of five polls. Rajan last week called on political parties to ensure that the government that emerges after elections can pass measures necessary to support the economy.

The BJP is set to win the most seats in the national election due by May while falling short of an outright majority, according to a survey by C-voter polling agency, India TV and Times Now television published in October, the most recent available.

Rajan said today the government will have to cut some expenses to meet a deficit target of 4.8 percent of GDP. Tighter spending in the fourth quarter of the fiscal year ending March 31 add to concerns over economic growth, the central bank said in a statement.

India’s credit rating may be cut to junk next year unless the general election leads to a government capable of reviving economic expansion, Standard & Poor’s said last month.

Tesco Investment

Singh received a fillip yesterday for his effort to bolster investment when Tesco Plc, the U.K.’s largest supermarket company, said it plans to become the first global chain to enter India since the government allowed foreign companies to invest in multibrand retail more than a year ago. The company said it will probably invest about $110 million in a joint venture.

The narrowing of the trade deficit since June through November should bring down the current-account deficit to a more sustainable level for the year, the RBI said. Inflows into a swaps window opened by the RBI from August to November provided stability to the foreign-exchange market and helped build resilience to external shocks, the central bank said.

The rupee has climbed about 11 percent versus the dollar since reaching a record low in August after Rajan offered concessional swaps to banks to encourage them to raise dollars. The facility, now closed, attracted $34 billion.

India’s current-account deficit narrowed to $5.2 billion in July through September, the lowest level since 2010, compared with $21.8 billion for the prior quarter.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net

Indian Inflation: Out of Control? | ToTheTick™ToTheTick™

November 3, 2013 12:28 pm / Leave a comment

Indian Inflation: Out of Control? | ToTheTick™ToTheTick™. (source)

While some harp on about the growing dangers of yet another housing bubble in the western world, there are other more important things perhaps that are going on in other countries in the world. But, they are of little interest since we are not directly concerned by them. How is it that we only care about what’s actually happening in the back yard while someone round the block might be doing something or on the receiving end of something pretty bad and yet we don’t give a damn about what happens to them? While we are concerned with our bubbles, there are people in India that are suffering from the rise in prices that is drastically changing the way they live.

Over the past year inflation has been driven up by food prices. In September alone food prices were at their highest level for the past seven months and it seems that India is now going through the worst financial crisis that it has ever experienced since 1991.

The Indian wholesale price index (WPI) rose by 6.46% in September.
This was largely due to the fact that food prices have increased beyond control.
Since the start of this year onions have increased by 322%, for example.
Food prices have increased by an annual rate of 18.4% so far according to data released by the Indian government on Monday this week.

Food prices have been increasing due to supply shortages in India which were brought about to climatic conditions and rain. Today the price of a kilogram of onions amounts to 75 rupees today (or $1.22). One third of the Indian population still earns less than $1.25 per day in the country and that means that buying basic foodstuffs is pretty much out of their price range today. Food prices have hit the political agenda as a result and have been made a key issue in the run-up to the general elections that are going to take place within the next 7-month period.

Traders and shop owners are reaping the rewards of a rapid rise in prices today. But, the shopkeepers will not be able to keep hiking prices to recoup on the price increases as the people will run out of money. The real people are at the short end of the stick and suffering from the consequences of the hike that is almost daily now.

India is not the only one suffering from high inflation today in the world. Other emerging countries have also recently seen highs in their own rates. China had a consumer-inflation rate that hit 3.1%in September. That was also the highest it had been for the past seven months. Food prices in China have increased by 6.1% so far this year. However, in comparison with Indian data, that seems as if it is insignificant.

India is having immense difficulty increasing economic growth in the country and it has a 5%-growth rate that hasn’t been seen for the past decade.
The rupee has already hit lows that have rarely been seen before (it has lost 10% since the start of the year against the dollar) and inflation looks as if it will be fuelled by the interest rates that have been increased by theReserve Bank of India.
There has been a general outflow of capital from India since the start of this year due to the slow-down in the economy.
Inflation stood at 2.1% in September for India and it’s that which is the most worrying element perhaps today (at least for the population).

While India has problems with its economy and price stability, it’s the people that will be suffering the most. When food prices increase and they get out of control, it’s the third of the population that is living with just over a dollar a day that will have trouble making ends meet more than they already did in the past.

Is India becoming an inflation nation? (bbc.co.uk)
Why inflation will remain HIGH in India (rediff.com)
Onions, diesel push up inflation to 8-month high; another bank rate hike soon? (profit.ndtv.com)
Indian Food Prices Are Still Out Of Control (businessinsider.com)
India Central Bank Hikes Rate to Fight Inflation (abcnews.go.com)

Indian Temples Fight Back Against Government Gold Grabbing Plot | A Lightning War for Liberty

October 1, 2013 2:55 pm / Leave a comment

Indian Temples Fight Back Against Government Gold Grabbing Plot | A Lightning War for Liberty.

The following article from Reuters is a follow up to a topic I have explored on various occasions in the past. Namely, how an inept Indian government is attempting to use the age old tactic of scapegoating in order to deflect attention away from its widespread policy failures. In the case of India, the target is gold. It’s a logical target for any crony Indian bureaucrat or Central Banker to go after. Wealth confiscation is a tried and true method historically used by corrupt elites to stay in power, and there is plenty of gold floating around the subcontinent. Easy pickings…or so they thought.

It appears some of the temples are now drawing a line in the sand, and are in fact refusing to provide details about their holdings. Other temples are a bit more compliant. From Reuters:

The central bank, which has already taken steps that have slowed to a trickle the incoming supplies that have exacerbated India’s current account deficit, has sent letters to some of the country’s richest temples asking for details of their gold…