India is counting the cost of its crude oil dependency

Tucked away in the news stream of the past few days has been a developing situation in India. Whilst the headlines have been made by Turkey there have been currency issues in the largest part of the sub-continent as well. Here is DNA India on the subject.

Indian Rupee on Thursday had hit a fresh record low, the Rupee opened at 70.22 versus the US dollar. In wake of the Turkey crisis, the Indian currency started off the session on a weak note. Earlier on Tuesday, after opening at a marginal high of 69.85 against the US Dollar, the Indian rupee touched an all-time low of 70 per US dollar.

The Indian currency touched an all-time low of 70.08 against the US dollar, while marking depreciation of around 10 per cent in 2018.

The fall came majorly due to a drop in Turkish Lira, which helped the US dollar to gained strength on the back of fears that economic crisis in Turkey could spread to other global economies.

In fact it fell to 70.7 this morning versus the US Dollar which is an all time low. Some of the move may have been exacerbated by the issues facing Turkey but over the past couple of days the Turkish Lira has rallied strongly whereas the Rupee has continued to fall. A factor has been the strength of the US Dollar or what is being called King Dollar. This reminds me that themes and memes can change rather quickly in the currency world if we step back in time to the 25th of January.

“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos. The currency’s short term value is “not a concern of ours at all,” he said.

If pressed now I guess the US Treasury Secretary would emphasise this bit.

“Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.

Returning to the Rupee we see that it had started to fall before the turn in the US Dollar as conveniently it began at the turn of the year when it was at 63.3 versus it.

What are the consequences?

The first is simply inflation or as DNA India puts it.

Continuous downfall in Indian Rupee is worrisome for imported goods as the cost of imports will go up.  Currently, India imports around 80 per cent of its crude requirement. The rupee downfall will expand India’s import bill and will eventually be contributing to the inflation.

This will add to the situation below. From The Times of India.

Inflation based on consumer price index (CPI) for the month of July came at 4.17 per cent, government data ..

That was an improvement and as so often in India the swing factor was food prices.

The food inflation came at 1.37 per cent, driven by cooling of pulses, vegetable and sugar rates.

However a boost is on its way and as inflation is above the 4% target things could get especially awkward should food prices swing the other way.

Interest-Rates

One of the economics 101 assumptions is that higher interest-rates boost a currency but as I warned back on the 3rd of May the situation is more complex than that and Argentina reminded us again by raising to 45% earlier this week. As for India we see this.

increase the policy repo rate under the
liquidity adjustment facility (LAF) by 25
basis points to 6.5 per cent. ( Reserve Bank of India August Bulletin)

That was the second rise this year and these have reversed the previous downwards trend. Of course the problem is that the RBI is perhaps only holding station with the US Federal Reserve.

Intervention

India maintains a sizeable foreign currency reserve which was US $406 billion at the last formal update in March. However it will not be that now if this from Reuters on Tuesday is any guide.

Subhash Chandra Garg, secretary at the department of economic affairs…………said the RBI has spent about $23 billion so far to intervene ..

So we see that the fall has come in spite of intervention which sits rather oddly with the claim from Subhash Chandra Garg that the currency fall does not matter. Also it is usually rather unwise to indicate a currency level as he did (80) as events have a way of making a fool of you.
Anyway using reserves can help for a while but care is needed as quickly markets switch to calculating how much you have left and how long they will last at the current rate of depletion. At that point intervening can make things worse.
Trade
Looking at India’s  domestic economy a clear factor in the currency debate is its trade position. The latest numbers were as highlighted above by DNA India heavily affected by the oil price.

 

Oil imports during July 2018 were valued at US $ 12.35 Billion (Rs. 84,828.57 crore) which was 57.41 percent higher in Dollar terms and 67.76 percent higher in Rupee terms compared to US $7.84 Billion (Rs. 50,565.29 crore) in July 2017.

Such a development feeds into the existing Indian trade problem.

Cumulative value of exports for the period April-July 2018-19 was US $ 108.24 Billion (Rs 7,29,823.08 crore)……….Cumulative value of imports for the period April-July 2018-19 was US $ 171.20 Billion (Rs. 11,54,881.70 crore).

Whilst a little care is needed as petroleum exports grew by 30% overall Indian export growth is on a tear at 14%. Many would love that, but the rub is that not only are imports much larger but due to India’s oil dependency they are rising at an annual rate of 17%. So as we stand things are getting worse and according to Business Standard there is trouble ahead.

India’s crude oil import bill is likely to jump by about $26 billion in 2018-19 as rupee dropping to a record low has made buying of oil from overseas costlier, government officials said today…….. If the rupee is to stay around 70 per dollar for the rest of the ongoing fiscal, the oil import bill will be $114 billion, he said.

Comment

The other side of the coin about the Indian economy was highlighted by the IMF only last week.

India’s economy is picking up and growth prospects look bright—partly thanks to the implementation of recent policies, such as the nationwide goods and services tax. As one of the world’s fastest-growing economies—accounting for about 15 percent of global growth—India’s economy has helped to lift millions out of poverty.

Although developments since the writing of the report may have more than a few wondering about this bit.

India can benefit from improving its integration with global markets.

Perhaps it is a case of Blood,Sweat and Tears.

What goes up must come down
Spinnin’ wheel got to go ’round

There was of course the domestic issue created by the demonetisation debacle not that long ago but the real achilles heel for India is oil. Something of a perfect storm has hit it where the oil price has risen by 40% over the past year and more recently that has been exacerbated by a stronger US Dollar.

So both the economic and Rupee issues seem as much to do with energy policy as conventional economics. Can India find a way of weaning itself off at least some of its oil dependency?

Me on CoreFinance TV

 

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Are interest-rates on the rise now?

As we find ourselves heading into the second decade of the credit crunch era we find ourselves observing an interest-rate environment that few expected when it began. At the time the interest-rate cuts ( for example circa 4% in the UK) were considered extraordinary but the Ivory Towers would have been confident. After all they had been busy telling us that the lower bound for interest-rates was 0% and many were nearly there. Sadly for the Ivory Towers the walls then came tumbling down as Denmark, the Euro area , Sweden, Switzerland and Japan all entered the world of negative official interest-rates.

Even that was not enough for some and central banks also entered into sovereign and then other bond purchases to basically reduce the other interest-rates or yields they could find. Such QE ( Quantitative Easing) purchases reduced sovereign bond yields and debt costs which made politicians very happy especially when they like some official interest-rates went negative. When that did not work either we saw what became called credit easing where direct efforts went into reducing specific interest-rates, In the UK this was called the Funding for Lending Scheme which was supposed to reduce the cost of business lending but somehow found that  instead in the manner of the Infinite Improbability Drive in the Hitchhikers Guide to the Galaxy  it reduced mortgage interest-rates initially by around 1% when I checked them and later the Bank of England claimed that some fell by 2%.

What next?

Yesterday brought a reminder that not everywhere is like this so let me hand you over to the Reserve Bank of India.

On the basis of an assessment of the current and evolving macroeconomic situation at its
meeting today, the Monetary Policy Committee (MPC) decided to:
• increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis
points to 6.25 per cent.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the
marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.

There are two clear differences with life in Europe and the first is a rise in interest-rates with the second being that interest-rates are at or above 6% in India. It feels like another universe rather than being on the sub-continent but it does cover some 1.3 billion people. Sometimes we over emphasise the importance of Europe. As to why it raised interest-rates the RBI feels that the economy is going well and that inflation expectations are rising as domestic inflation ( official rents) has risen as well as the oil price.

The US

This has moved away from zero interest-rates and now we face this.

to maintain the federal funds rate in a target range of
1½ to 1¾ percent

It seems set to raise interest-rates again next week by another 0.25% which has provoked Reuters to tell us this.

With inflation still tame, policymakers are aiming for a “neutral” rate that neither slows nor speeds economic growth. But estimates of neutral are imprecise, and as interest rates top inflation and enter positive “real” territory, analysts feel the Fed is at higher risk of going too far and actually crimping the recovery.

Personally I think that they do not understand real interest-rates which are forwards looking. So rather than last months print you should look forwards and if you do then there are factors which look likely to drive it higher. The most obvious is the price of crude oil which if we look at the West Texas Intermediate benchmark is at US $65 per barrel around 35% higher than a year ago. But last month housing or what the US callers shelter inflation was strong too so there seems to be upwards pressure that might make you use more like 2.5% as your inflation forecast for real interest-rates. So on that basis there is scope for several more 0.25% rises before real interest-rates become positive.

One point to make clear is that the US has two different measures of inflation you might use. I have used the one that has the widest publicity or CPI Urban ( yep if you live in the country you get ignored…) but the US Federal Reserve uses one based on Personal Consumption Expenditures or PCE. The latter does not have a fixed relationship with the former but it usually around 0.4% lower. Please do not shoot the piano player as Elton John reminded us.

If we move to bond yields the picture is a little different. The ten-year seems to have settled around 3% or so ( 2.99% as I type this) giving us an estimated cap for official interest-rates. Of course the picture is made more complex by the advent of Quantitative Tightening albeit it is so far on a relatively minor scale.

The Euro area

Here we are finding that the official line has changed as we await next week’s ECB meeting. From Reuters.

Money market investors are now pricing in a roughly 90 percent chance that the European Central Bank will raise interest rates in July 2019, following hawkish comments from the bank’s chief economist on Wednesday.

In terms of language markets are responding to this from Peter Praet yesterday.

Signals showing the convergence of inflation towards our aim have been improving, and both the underlying strength in the euro area economy and the fact that such strength is increasingly affecting wage formation supports our confidence that inflation will reach a level of below, but close to, 2% over the medium term.

For newer readers he is saying that in ECB terms nirvana is near and so it will then reduce policy accommodation which is taken to mean ending monthly QE and then after a delay raising interest-rates.

So it could be a present from Mario Draghi to his successor or of course if he fails to find the switch a job he could pass on without ever raising interest-rates in his eight years as President.

Comment

Before I give my opinion let me give you a deeper perspective on what has been in some cases all in others some of our lives.

Since 1980, long-term interest rates have declined by about 860 basis points in the United States, 790 basis points in Germany and more than 1,200 basis points in France. ( Peter Praet yesterday)

On this scale even the interest-rate rises likely in the United States seem rather small potatoes. But to answer the question in my title I am expecting them to reach 2% and probably pass it. Once we move to Europe the picture gets more complex as I note this from the speech of Peter Praet.

the underlying strength in the euro area economy

This is not what it was as we observe the 0.4% quarterly growth rate in Euro area GDP confirmed this morning or the monthly and annual fall in manufacturing orders for Germany in April. Looking ahead we know that narrow money growth has also been weakening. Thus the forecasts for an interest-rate rise next June seem to be a bit like the ones for the UK this May to me.

Looking at the UK I expect that whilst Mark Carney is Bank of England Governor we will be always expecting rises which turn out to be a mirage. Unless of course something happens to force his hand.

On a longer perspective I do think the winds of change are blowing in favour of higher interest-rates but it will take time as central bankers have really over committed the other way and are terrified of raising and then seeing an economic slow down. That would run the risk of looking like an Emperor or Empress with no clothes.

 

 

 

 

India gives us an update on the war on cash

A feature of these times is what has been called the “war on cash” It’s proponents argue for it on two main grounds. The first is that cash and in particular large denomination banks notes are used by criminals (especially by organised crime) and terrorists and so eliminating such notes would be part of the various wars against them. Others make the case that we may need to cut interest-rates even further when the next recession arrives which means that even more countries will experience negative interest-rates and that they will go even more negative for those that already have them. Cash is a barrier to this because it provides 0%. Who would have thought that 0% would be attractive? It is of course as Prince would say A Sign O’ The Times.

Of course interest-rates were supposed to go up in a recovery but Michael Saunders of the Bank of England has opened more than one can of worms with this in his speech this morning.

It is fully 10 years since the MPC last tightened monetary policy

India

If we go back to early November last year this happened.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

What was called Demonetisation was publicised as an effort to cut corruption. crime and also terrorism and there was a day to consider it as November 9th was a bank holiday. Also as I pointed out on November 11th it was suggested that it would provide an economic boost.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

There were official claims that around 3 lakh crore or 20% of the currency would not come back and therefore a significant cost would be imposed on the criminal and terrorist worlds.Actually I note that the Financial Times is reporting that there were even more inflated claims.

 

At the time, government officials had suggested that as much as one-third of India’s outstanding currency would be purged from the economy — as the wealthy abandoned or destroyed it, rather than admit to their hoardings — reducing central bank liabilities and creating a government windfall.

 

Not everyone was convinced that it would be that easy including The Times of India.

Firstly, gone are the days when people hoarded wealth in gunny bags full of banknotes. In today’s world, there are refined ways of laundering money or stashing it away in benami properties, offshore bank accounts and foreign currency. Only the small fish keep their ill-gotten wealth in currency and the impact on black money will therefore be very limited in this exercise.

What happened next?

As I pointed out on the 26th of November the initial economic effects were negative and some of them were quite strong.

The automobile industry, which accounts for 7.1% of the GDP, is witnessing a fall in stock prices of up to 12% since the demonetisation. Himanshu Sharma, auto analyst at Centrum Broking, said two-wheeler sales can get affected by 40- 45%. The impact on cars is less, since most of them are bought on loan, but it could still be 10-12%……..Things aren’t any better with pharmaceutical companies, as sales of medicines have plunged almost 15%.

If we move to overall economic output we see that it in fact slowed. The annual rate of economic growth fell to 6.1% in the first quarter of this year so we can say that it showed no signs of the economic boost promised. As to how much demonetisation contributed to the fall we can say that there were downward effects but as ever it is hard to be precise.

What happened to the cash?

Yesterday the Reserve Bank of India gave its annual report and here is The Times of India on the subject.

The Reserve Bank of India (RBI) on Wednesday said that Rs 15.28 lakh crore –or 99% of the Rs 15.44 lakh crore demonetised by withdrawal of Rs 500 and Rs 1000 notes on November 8, 2016 –has been deposited with banks.

So the promises and suggestions of a large windfall gain for the government via the central bank have turned out not to be true. Seignorage is usually a theoretical number but in this instance it became reality except as we looked at above it was expected to be much more than this. Also according to the RBI there were costs in doing this.

Expenditure on Security Printing and Distribution
VIII.12 The total expenditure incurred on security printing stood at `79.65 billion for the current year (July 2016 – June 2017) as against `34.2 billion
during 2015-16.

More fake notes were uncovered than usual ( 345% up on the previous year) but considering what was taking place the number remained low especially if the rumours about how many fake bank notes there are in India have any basis in fact. As some of the returned bank notes have not been counted yet could we see the number of notes climb to say 101%?

According to The Times of India the official response is as follows.

The finance ministry said the five main objects of demonetisation were: -Flushing out black money -Eliminating fake currency – Ending financing of terrorism and left-wing extremism – Converting the non-formal economy into a formal economy to expand the tax base and employment — Giving a big boost to digitisation of payments to make India a less cash economy

Well I suppose the last bit is probably true but this bit is pretty woeful if we note the government’s previous rhetoric.

The finance ministry said in a statement that the government had in fact expected the bulk of the cash to be returned to become effectively usable currency.

Although no doubt you can define “bulk” in a variety of ways.

Comment

Let me completely support efforts to reduce organised crime and terrorism with the only caveat being that care is needed how you define that. After all an area pretty much ignored by Demonetisation is that a clear example of what many would consider organised crime in recent times has involved the banks. For obvious reasons it is hard to get accurate estimates but it seems likely that “banking crime” exceeds “cash crime”.

Returning to the Indian experience there were clear stoppages in the economy and I speculated on the 11th of November last year on who it would hit the most.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

Also let us remind ourselves that India now has more 2000 Rupee notes which surely will only make the stated objectives harder to achieve. The timeline we now know also perhaps provides insight into the resignation of the previous RBI Governor Raghuram Rajan..

On the other side of the balance sheet then if this claim from the Finance Ministry is true maybe there will be a gain going forwards.

Advance collections of personal income tax showed a growth of 41.79% on August 5 over the corresponding year-earlier period. Personal income tax under self-assessment grew 34.25%.

Having mentioned the Indian railways it reminds me of the impact the Monsoon season has on the ( Monsoon Railway if you have not seen it) and that it has been severe this year. My sympathies to those affected.

Me on Core Finance TV

http://www.corelondon.tv/unsecured-credit-boom-j-curve-effect-uk-not-yes-man-economics/

 

 

 

 

The Demonetisation saga in India rolls on and on

As we emerge ( at least in England & Wales) blinking into 2017 then the main economic action is in the East. For example new currency controls for retail investors in China. Such factors are in my opinion what has been behind the subject of my last post of 2017 which was Bitcoin. This broke the 1k barrier in US Dollar terms and is now US $1020.68 according to Coindesk. A factor in this rise must be what is ongoing in India which is what has become called Demonetisation which I first pointed out on the 11th of November last year.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

Something that was immediately troubling was that the official view was along the lines of “please move along, there is nothing to see here”.

There is enough cash available with banks and all arrangements have been made to reach the currency notes all over the country. Bank branches have already started exchanging notes since November 10, 2016.

The initial communique mentioned the 24th of November implying that it would pretty much be over by then and that the Indian economy would boom afterwards.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

How is it going?

Manufacturing

The Markit/Nikkei PMI or business survey had a worrying headline yesterday,

Manufacturing sector dips into contraction amid money crisis

Indeed it went further in the detail.

Panel members widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy reportedly resulted in fewer levels of new orders received. Concurrently, manufacturers lowered output accordingly.

Actually pretty much everything seemed to be going wrong here as input inflation rose and employment fell.

Meanwhile, input costs increased at a quicker rate……Cash shortages and lower workplace activity resulted in job shedding and falling buying levels during December.

So whilst small changes in a PMI tell us little a drop from above 54 in October to 49.6 in December poses a question. This is reinforced by the other PMIs for manufacturing we are seeing that have overall improved (China for example).

Actually the industrial production numbers were weak even before Demonetisation according to dnaindia.

For the April-October period, industrial output declined by 0.3% as against a growth of 4.8% a year ago, as per the data released by Central Statistics Office (CSO) today……..The manufacturing sector, which constitutes over 75% of the IIP index, recorded a contraction 2.4% in October.

All this adds to the problems recorded in the services sector back in early December.

Services activity declines as cash shortages hit the sector

So according to these surveys there was a clear deflationary impact from Demonetisation leading to this.

Nikkei India Composite PMI Output Index dipped from October’s 45-month high of 55.4 to 49.1 in November, thereby pointing to a slight contraction in private sector activity overall.

There were hopes for this to be short-lived back then but for now those seem more to be of the Hopium variety.

A response?

Well if Prime Minister Modi was watching the cricket he may have thought of mimicking England and the UK as he has announced a pumping up of the housing market. From dnaindia.

In a bid to boost rural and urban housing post demonetization, Prime Minister Narendra Modi on Saturday announced interest subsidy of up to 4% on loans taken in the new year under the Pradhan Mantri Awaas Yojana.

Bank of England Governor Mark Carney hasn’t been to India has he? Anyway I do hope that the next bit actually happens unlike in the UK where we seem to announce the Ebbsfleet development every year like it is in a Star Trek style time warp.

Announcing a slew of measures, Modi in his national address on New Year’s eve also said 33% more homes will be built for the poor under this scheme in rural areas.

I wish India better luck than the UK where schemes under the official label of “Help” have in fact contributed to house prices becoming ever more unaffordable for those wishing to get on what is called the housing ladder.

What about other credit?

According to Gadfly of Bloomberg the banks are now awash with cash.

Almost all the 15.44 trillion rupees ($227 billion) of currency outlawed by Prime Minister Narendra Modi has entered banks as deposits, with the biggest, State Bank of India, receiving $24 billion. This “unprecedented” surge in liquidity led SBI to cut lending rates by 90 basis points on Sunday. Other government-run banks followed suit.

But in a familiar trend for the credit crunch era businesses do not seem to be that keen on borrowing more.

The average daily value of new investment proposals announced since the cash ban has slumped by three-fifths, according to the Centre for Monitoring Indian Economy.

In fact a consequence of the economic weakness following Demonetisation is that both companies and individuals in India are less able to borrow.

Supply chains greased by cash payments are broken. From diamond-polishing to shoemaking and construction, layoffs are increasing. As borrowers, both the average Indian worker and his employer are much more subprime today than they were just two months ago. Using this group to pull up credit growth, which has plunged to a 25-year low of 5.8 percent, is both impractical and risky.

Whilst in terms of deposits the Indian banks are in the opposite situation to Monte Paschi of Italy they too have capital issues. This may explain the problem with business lending which invariably ties up more bank capital than other forms of bank lending.

The Real Economy

If we move to actual experiences we see signs of trouble, trouble,trouble as India Spend reports.

Now, the government’s decision to withdraw Rs 14 lakh crore–86% in value of India’s currency in circulation–has dealt a hard blow to 80,000 workers, whose economy was defined by cash. Before notebandi, despite a growing downturn, the town soldiered on.

This is the town of Malegaon which has an economy based on the power-loom industry which has gone on a 3 day week.

In the weeks following demonetisation, power looms, known to work 16-18 hours in a day for six days a week, were working only three days a week–Saturday, Sunday and Monday–halving the wages of thousands of workers.

 

Why? Well here it is.

Most of the transactions in the power-loom sector are in cash–power loom owners buy raw material in cash, disburse wages in cash, and  sell in cash.

Thus we see how the problem feeds through the economic chain in what is a clear government driven credit crunch which hits weak industries like this one the hardest. Even more sadly the same is true of people. From @bexsaldanha.

“Business is down so we work on the farm more,” Megha Patil, Hivali village, Bhiwandi Taluka

Goods supplier Santosh Jadhav: From Wada to Vikramgad, supply chain to 203 Kiranas has broken down. Nobody has money.

Comment

There are obvious issues with the unofficial economy in India and attempts to reduce it are welcome. Except in any move you need to look at the likely side-effects and these were always going to be large from removing over 80% of the cash money in circulation. I warned about the problems back on November 11th.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Actually the gold trade has not been boosted and as The Times of India points out there is more than a little irony in the reason why.

“The business was down by more than 70% in December, primarily because of the cash crunch and weakened purchasing power of consumers and investors. Many don’t still invest in gold except for by cash transactions. Besides, the liquidity crunch is also impacting trade,” said Shanti Patel, president, Gems and Jewellery Trade Council.

So whilst very little is easy in a country where changes are even harder than turning an oil supertanker but so far the message is not good.

Number Crunching

We learn from the table below that Helicopter Money would be much easier for the Swiss Air Force than the Indian one.

https://twitter.com/BTabrum/status/816208447846907904

 

 

 

 

The impact of Bitcoin and negative bond yields

As we approach the end of 2016 the natural tendency is to look ahead to 2017. We will soon find ourselves afflicted by a litany of forecasts for the year ahead. I say afflicted because this has been an “annus horribilis” for establishment forecasters but those that I am in touch with seem to have learned little if anything at all. Accordingly the theme “same as it ever was” seems set to turn into a “road to nowhere” for them. However we will take a different tack as the holiday break has thrown up a couple of disturbing signals in the world monetary system.

Bitcoin surges

When I signed off before Christmas I ended with this.

The average price of Bitcoin across all exchanges is 910.16 USD

As you can take the boy out of the city but it is much harder to take the city out of the boy I had noted that it had been further on the move this week and now I note this.

Bid: $972.27 Ask: $972.28

So there has been a push higher and of course we are reminded of two things. The first is simply a factor of the way that we count in base ten meaning that the threshold of US $1000 is on the near horizon and the second is the Bitcoin surge of a bit more than a couple of years ago.

Actually for some I note that threshold city has already arrived. From BTC Manager.

Bitcoin has surpassed its all-time high in two major currencies, the Euro and the British Pound……With the largest weekly volume in almost 12 months, bitcoin looks to continue to soar against the Euro. With a break of the all-time high at €872.90, there are no previous fractal levels to gauge where the market will take us next. However, the best bet is through the use of simple psychology. Buyers will look to cash out once the price has hit a psychological resistance, a big, round number where profits will be locked in and buying interest starts to fade.

So it is interesting to note first that standard analysis ” it might go up or it might go down” applies as much to newer markets as it does to older ones! As ever the possibility it might stay the same is ignored though. But those of you who use the Euro as a currency have seen a considerable devaluation against Bitcoin in recent times which means those of us who use the UK Pound £ have had a particularly poor 2016 against it.

On the Coinfloor exchange, BTC-GBP was at £479.00 week ending June 26, 2016, following our open letter to Britons. Fast forward to the close of 2016, BTC-GBP is looking to break above the £800 mark and is taking aim at the psychological £1000 level. With a break above the all-time high, there is no precedent and £1000 could be a conservative estimate for the long-term, but we will see some exhaustion from bulls at this level.

Looking at the chart a past colleague of mine would be very upset if I did not point out that it looks very much like what he called a “bowl” formation. This means that it needs to continue to accelerate or otherwise it will then be like one of those cartoon characters which run over a cliff edge by mistake. Or to bring things up to date like the Toshiba share price this week as it has now eroded nearly all the gains of 2016.

There is another perspective we can find and StockTwits helps us out with this.

 Some care is needed with the word never as Botcoin was invented on the 31st of October 2008 and is thus a child of the credit crunch era. But the current situation does give us food for thought as the immediate knee-jerk response that it is replacing gold in some fashion does have issues. Let me point out the one which occurs to me which is that discoveries on other planets and moons apart the supply of gold is fixed whereas Bitcoin and especially cryptocurrencies in general is not. ( Just to add that the latter remains true but @BambouClub has pointed out that Bitcoin is limited to 21 million units).

Also those of you who like me watched the BBC 4 documentary on Fleetwood Mac last night which of course featured the “Gold Dust Woman” Stevie Nicks will wonder about any impact on music and this is before the backing vocals she did for John Stewart?

There’s people out there turning music into gold

Somehow I don’t see “Bitcoin Dust Woman” quite cutting it do you?

Why is this happening?

If you follow the advice of go west young (wo)man then you have a long journey as the real pressure is to be found in the East. Let us first take a stop over in India where the Demonetisation debacle continues.  From LiveMint.

Mumbai: Demonetisation has boosted the digital platforms for payment, which has helped the National Payments Corporation’s (NPC) RuPay card usage at merchant terminals soar seven times since 8 November, taking the daily volumes to over 2.1 million.

As we look at the ongoing issue it is not hard to see the motivation for people wanting to escape the Indian monetary system entirely and thus moving towards currencies like Bitcoin. As I pointed out on November 11th.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Although of course many were left out.

It has made it harder to buy vegetables and rice, and hire rickshaws. And, for hundreds of millions of Indians who work in the informal economy, it has brought commerce to a halt. If there is a well-laid plan to mitigate the impact of this surprise crackdown on “black money”, it has yet to reach rural parts, where few Indians have bank accounts or credit cards.

Here is a link to the details of Demonetisation.

https://notayesmanseconomics.wordpress.com/2016/11/11/the-war-on-cash-continues/

China

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops! If we move to this morning there are other signals to be found. From the Wall Street Journal.

The yuan dropped 7% against the dollar this year…….

Unlike other emerging markets that have mostly free-floating currencies such as Russia and Brazil, China hasn’t had a chance to find its bottom. Chinese investors, therefore, act as if more depreciation is coming, sending money overseas.

The People’s Bank of China is increasingly replacing deposits and indeed finance in the banking system in a move that has not gone so well for us western capitalist imperialists. But the fundamental point here is that with such a large flow of funds ongoing we see two clear effects. The first is the rise in the Bitcoin price as it would take only a minor proportion of the move to put it in a boom and the second is that the world financial system looks unstable one more time.

Negative Interest-Rates in the UK

One of the forecasts for 2017 will no doubt be for higher bond yields. After all it has to be right one year! But more seriously if we just look at the UK something else is in play and it covers a few areas. It started with this before Christmas. From Bloomberg on December 16th.

The U.K. Treasury sold one-month bills at an average negative yield for the first time ever on Friday, with investors bidding for more than seven times the amount on offer,

That got worse just before Christmas and today a former respondent on here Shireblogger who now contacts me on Twitter pointed out this.

UK gilts just hit a record low 2 year yield at 3.3 bps. ( @bondvigilantes )

What we find ourselves observing is a safe haven problem of sorts as @NelderMead points out.

a year end desperation for collateral. QE creates the priv deposits & takes away the collateral to back ’em

Another “side effect” of the “Sledgehammer” of Andy Haldane and Mark Carney. Are they available for comment and I do not mean a diversion onto green issues?

Comment

So there you have it. After all the central planning and “reform” what we see are yet more signs of stress in the financial system. So much for certainty about 2017 as we expect inflation yet again in the use of the words “unexpected” and “surprise”.

Share Radio

I will be on after the 1 o’clock news today with quite a bit to discuss I think.

How is the demonetisation of India going?

A feature of these times is what I have labelled as the war on cash . In essence this war involves the establishment blaming it for financial crime and tax evasion. The High Priest of such thoughts Kenneth Rogoff is giving a talk this evening on this very subject at the London School of Economics.

Tomorrow at LSE: Leading economist on why we should get rid of most paper money

I did reply to enquire if they meant leading as in leading everyone off a cliff? Unfortunately I cannot be there as I will be on Share Radio but I do hope that someone will ask why if all the interest-rate cuts have not worked going further into negative territory will?

India and Demonetisation

This is an area where it is hard not to think of our Ken and his pet theories. Back on the 11th of this month I explained what had taken place.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

They were taking advantage of a public holiday to facilitate the move.

All ATMs and other cash machines will remain shut on November 9, 2016 to facilitate recalibration

After that there were going to be limits on what cash could be withdrawn.

cash withdrawal from a bank account over the counter shall be restricted to ₹ 10,000/- per day subject to an overall limit of ₹ 20,000/- a week from the date of the notification until the end of business hours on 24th November, 2016, after which these limits shall be reviewed.

So we are pretty much there especially if we allow for the time difference so how has it gone? The Hindustan Times gives us some insights.

“Consumers have not had the cash to complete purchases, and there have been reports of supply chains being disrupted…The time spent queuing in banks is also likely to have affected general productivity… ,” said Fitch, one of the world’s three big rating agencies alongside Moody’s and Standard & Poor’s.

It gave specific examples of industries which have been affected.

The automobile industry, which accounts for 7.1% of the GDP, is witnessing a fall in stock prices of up to 12% since the demonetisation. Himanshu Sharma, auto analyst at Centrum Broking, said two-wheeler sales can get affected by 40- 45%. The impact on cars is less, since most of them are bought on loan, but it could still be 10-12%……..Things aren’t any better with pharmaceutical companies, as sales of medicines have plunged almost 15%.

Why has the pharmaceutical industry been affected? Well something of a shambles seems to have been at play here.

Even though chemists are allowed to take old currency notes, distributors are not.

It goes onto point out that in the words of Taylor Swift there was always going to be “trouble,trouble,trouble” if you withdrew 86% by value of bank notes in the country described below.

This was only to be expected in a country which has 20% of its $1.8 trillion GDP and 80% of employment in the unorganised sector. Nearly half the population still does not have a bank account. Less than 300 million use the internet, and therefore the overwhelming majority cannot make electronic payments.

Ch-ch-changes

The initial statement implied that ATMs would be up and rolling after the bank holiday yet if we look at the Reserve Bank of India today we are told this.

17. Can I withdraw from ATM?

The ATMs are progressively getting recalibrated. As and when they are recalibrated, the cash limit of such ATMs will stand enhanced to ₹ 2500/- per withdrawal.

There has been a specific change today which tries to cover the Indian habit of paying for weddings in cash.

With a view to enable members of the public to perform and celebrate weddings of their wards it has been decided to allow a cash withdrawal of maximum ₹ 250000/- from their bank deposit accounts till December 30, 2016 to meet wedding related expenses.

A fundamental point through all this is the assumption implied below.

7. ₹2000 cash is insufficient for my need. What to do?

You can use balances in bank accounts to pay for other requirements by cheque or through electronic means of payments such as Internet banking, mobile wallets, IMPS, credit/debit cards etc.

This is all very well for those applying the move who no doubt have these but India’s many poor? They do not.

What about the economic effect?

Back on the 11th I reported on the official view.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

How is that going? From Bloomberg.

The most pessimistic of these estimates comes from Ambit Capital which says GDP (gross domestic product) growth could crash to 3.5 percent. Others like HDFC Bank and HSBC are paring down GDP growth estimates by 0.5 – 1 percentage point.

Down seems to be the new up yet again. There are also concerns about rising prices due to shortages as industries wonder why weddings get relief but they do not?

What does Kenneth Rogoff think?

You might think he would be cheering and high-kicking but no.

The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

Indeed for a man whose plans for ever more negative interest-rates require an elimination of cash this is not far-off breathtaking.

First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time.

Mind you what is “less convenient”?! Our Ken is trying to have his cake and eat it here. Also I have a few £10 notes and a £20 note in my jacket pocket and will give them a serious telling off later.

the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts.

Sweden

This comes to mind as it is a type of polar opposite to India in that so much of its money is already electronic. So I noted this from Cecilia Skingsley of the Riksbank on the 16th.

Will we have e-krona in an e-wallet in the future, as naturally as we now have a wallet with cash in it? The less those of us living in Sweden use banknotes and coins, the clearer it becomes that the Riksbank needs to investigate whether we should issue electronic money as a complement to the money we have today.

Is complement the new euphemism for replace? Convenient should you ever find yourself looking to take the official interest-rate lower than -0.5%. Indeed one of the accompanying slides poses this question.

Should we accept that the use of cash comes to an end?

Comment

This was always going to be a very difficult thing to do in India. The stated reasons are on their own good ones as India plainly has severe problems with corruption and the underground economy. The issue can be expressed Bob the Builder style ” Can you fix it?” I note some pointing out that in India corruption is regularly to be found at the top of the system. Also according to Live Mint Credit Suisse has reported this.

In the last two years, the share of the top 1% has increased at a cracking pace, from 49% in 2014 to 58.4% in 2016.

if you were looking for corruption where would you start after seeing that? it makes our 1% in the UK seem lightweights doesn’t it? It reminds us also of the point that a lot of crime takes place in electronic finance as the recent issues at Tesco bank illustrated in the UK. The ordinary Indian can still be affected by this although of course it is indirect for many. Maybe someone tonight will ask our Ken about online financial crime?

There are differences to the western war in cash in that India for example has interest-rates of around 6% as opposed to the -0.5% of Sweden. But there are also similarities.

As to language let me translate a speech given today by Kristin Forbes of the Bank of England. Here is the entry in my financial lexicon for these times.

Uncertainty: This means we were wrong, “This is well above the consensus expectation by economic forecasters, as well as the MPC forecast. ” But as we are so intelligent and nobody else we meet at dinner parties thought anything else that’s fine…

Sad really as she is perhaps the brightest member of the Bank of England

Share Radio

I will be on the Simon Rose show after the 7 pm news tonight and already there is much to discuss.

If the economic outlook is so good why are there so many interest-rate cuts?

Yesterday saw something rather familiar for 2015 take place as we saw this announced by the Reserve Bank of India.

reduce the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect;

If we just look at India we see that this has become a regular event in 2015 as the RBI confirms.

the 75 basis points of the policy rate reduction during January-June.

I will return to the Indian situation in a moment but we are in the 60s in terms of interest-rate cuts this year. Odd in what was supposed to be a year of economic recovery is it not? What are they worried about? Here is the list kindly provided by @moved_average.

One can to and fro over individual instances as I would argue that the ECB move in January was a quantity easing via QE rather than an interest-rate cut although of course it had quite an impact on longer-term interest-rates via bond yields.

What about India?

This is an interesting (sorry!) case as of course we are reviewing what is supposed to be one of the fastest growing areas of the world economy. So let us remind ourselves of what the RBI expects to see.

Growth in real GVA (Gross Value Added)  at basic prices is expected to be around 7.0 per cent in Q3 of 2015-16 before firming up to around 7.6 percent in Q4 with risks evenly balanced around this projection . Real GVA growth is expected to pick up gradually in 2016-17 on a shallow cyclical upturn, driven by an expected normal monsoon and some improvement in external demand,

The first thing we need to do is recalibrate our settings as the current 7% growth rate is considered a disappointment in India. But I note that a pick-up is expected so the RBI could have slapped itself on the back for its past policy moves and done nothing. However the RBI in fact decided to do this.

Therefore, the Reserve Bank has front-loaded policy action by a reduction in the policy rate by 50 basis points.

A pre-emptive cut returns us to the theme of what are they afraid of? It also makes me wonder if their forecasts are subject to some rose-tinting like so many other official forecasts. The obvious thought is that they are preparing themselves for any disruption caused by the interest-rate rises promised by the US Federal Reserve and to a lesser extent the Bank of England. Awkward if they do not actually arrive as we know that they have been delayed suffering from leaves on the line for quite a while now.

What about the world outlook?

The RBI suggests that there are plenty of problems here.

Since the third bi-monthly statement of August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased.

It does not take long for blame to be apportioned.

Since the Chinese devaluation, equity prices, commodities and currencies have fallen sharply.

Also the RBI focuses on something which does not get reported widely.

In the United States, industrial production slowed as capital spending in the energy sector was cut back and exports contracted, weighed down by the strength of the US dollar.

US industrial production ended 2014 at 107.5 where 2012 = 100 and was 107.1 in August. Now whilst there has obviously been a downwards drag from mining (especially shale oil and gas) manufacturing has only edged forwards from 104.9 to 105.3 so it is more complicated than that. Also readers may recall the downwards revisions to US industrial production which took place not so long ago but again were swept under the carpet in news terms. From the US Federal Reserve.

However, the gains in 2012 and 2013 are each 1 percentage point weaker than previously stated, putting the trajectory of the recovery on a lower path.

At one point in its review the RBI has us reaching for a pack of economic anti-depressants!

EMEs are caught in a vortex of slowing global trade volumes, depressed commodity prices, weakening currencies and capital outflows, which is accentuating country-specific domestic constraints.

I think that “depressed commodity prices” is something of a misnomer. After all whilst they have fallen many are still at relatively high levels also for many countries they will provide a boost. For example India is a very large importer of oil and has used the price of it as an excuse/reason for its persistent trade deficit. However the August trade figures showed that the lower oil price had reduced the value of India’s oil imports by 39%. If we move to coal and coke ( the carbon version here….) the value of imports has fallen by 18% and iron and steel by 12%. Now for the latter the experience of Redcar SSI in the UK shows us that there have also been volume contractions but the oil change is one of prices and is a large gain for India.

Is it the banks?

It would appear that a familiar theme is playing out as banks do not pass on interest-rate cuts in some areas.

The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction.

But do so with great enthusiasm in others.

Bank deposit rates have, however, been reduced significantly,

It is a shame that they do not specify the “significantly”…

A familiar theme

At a time like this it is particularly important to be sure of your data. That message does not appear to have reached the official statisticians.

Concurrent indicators also suggest that the new GDP series shows higher growth than would the old series,

There were changes too for the inflation numbers as the water gets ever muddier. All of that is before we get to the issue of corruption and the black market in India which even its best friends would quietly admit is rife.

Inflation

If we move to the Euro area we get another insight into the machinations of the inflation and interest-rate debate. From Eurostat this morning.

Euro area annual inflation is expected to be -0.1% in September 2015,

That will resonate at the ECB because some of its forwards looking indicators are dipping too. Now some care is needed because services inflation is running at 1.3% as we observe goods disinflation mostly driven by oil prices but nonetheless the headline is what it is.

China

Not an interest-rate cut but yet another extraordinary monetary measure. From Bloomberg.

China cut the minimum down payment requirement for first-time homebuyers, stepping up support for the property market amid an economic slowdown.

The reduction to 25 percent (from 30%).

I guess if all else fails there is always the housing market.

Comment

One factor in the actions of emerging markets interest-rate cuts has been fear of an interest-rate rise in the US something the IMF seems to be mounting a particular scaremongering campaign about.

Emerging markets must prepare for the adverse domestic stability implications of global financial tightening.

Oh and its discussion of the problems of lack of market liquidity can mostly be explained by all the QE policies which have driven liquidity lower. At this point the IMF may start displaying some of the characteristics of HAL-9000.

Meanwhile let us touch base with one of those who keeps promising to raise interest-rates and be part of the “global monetary tightening” Bank of England Governor Mark Carney.

There is a growing international consensus that climate change is unequivocal…..Evidence is mounting of man’s role in climate change. Human drivers are judged extremely likely to have been the dominant cause of global warming since the mid-20th century

Forward Guidance for the weather and climate Mark? I note that he has later left himself a get out clause with “temporary fluctuations” used. After all we know that temporary can cover as long a period as they like!

Also we have two issues. One is of a man who asked for his term to be shortened from 7 to 5 years telling us about the ultra-long-term. The other is the reliability of the Bank of England as yet another scandal emerges, Still I suppose he cannot be proven wrong during his term! Unlike on interest-rates….