Re: Perspectives on the global economic changes
Posted: 04 Sep 2018 17:48
David Stockman: When Next Recession Hits, ‘We’ll Be Borrowing $2 Trillion a Year’
Consortium of Indian Defence Websites
https://forums.bharat-rakshak.com/
Convinced of an existential threat from competitors, America is weaponizing the dollar to preserve its global economic and geopolitical position.
While the U.S. accounts for about 20 percent of the world’s economic output, more than half of all global currency reserves and trade is in dollars. This is the result of the 1944 Bretton Woods agreement, the effect of which was enhanced when the link between the dollar and gold ended in the 1971 Nixon shock, allowing America to control the supply of the currency.
The dollar’s pivotal role — an “exorbitant privilege,” in the term coined by then French Finance Minister Valéry Giscard d'Estaing in 1965 — allows the U.S. easily to finance its trade and budget deficits. The nation is protected against balance-of-payments crises, because it imports and services borrowing in its own currency. American monetary policies, such as quantitative easing, can influence the value of the dollar to gain a competitive advantage.
But the real power of the dollar is its relationship with sanctions programs. Legislation such as the International Emergency Economic Powers Act, the Trading With the Enemy Act and the Patriot Act allow Washington to weaponize payment flows. The proposed Defending Elections From Threats by Establishing Redlines Act and the Defending American Security From Kremlin Aggression Act would extend that armory.
When combined with access it gained to data from Swift, the Society for Worldwide Interbank Financial Telecommunication’s global messaging system, the U.S. exerts unprecedented control over global economic activity.
Sanctions target persons, entities, organizations, a regime or an entire country. Secondary curbs restrict foreign corporations, financial institutions and individuals from doing business with sanctioned entities. Any dollar payment flowing through a U.S. bank or the American payments system provides the necessary nexus for the U.S. to prosecute the offender or act against its American assets.
This gives the nation extraterritorial reach over non-Americans trading with or financing a sanctioned party. The mere threat of prosecution can destabilize finances, trade and currency markets, effectively disrupting the activities of non-Americans.
The risk is real. BNP Paribas SA paid $9 billion in fines and was suspended from dollar clearing for one year for violating sanctions against Iran, Cuba and Sudan. HSBC Holdings Plc, Standard Chartered Plc, Commerzbank AG and Clearstream Banking SA have paid large fines for similar breaches.
Secondary sanctions made it difficult for United Co. Rusal to refinance dollar borrowings when global businesses, banks and exchanges were forced to stop dealing with the Russian company. Its bonds and shares plunged, even though the company sells only 14 percent of its products in the U.S., does not use American banks, and is listed in Moscow and Hong Kong. ZTE Corp., a Chinese electronics company, was hit hard by the inability to buy essential components from suppliers because of sanctions for trading with North Korea and Iran. In these cases, the entity was not in violation of laws where it was domiciled or operated, and the proscribed acts took place outside the U.S.
China, Russia and increasingly Europe want an alternative reserve currency system. The problem is that immediate replacement of the dollar is difficult.
First, the euro, the yen, the yuan and the ruble are not realistic options. The euro’s long-term future and stability isn’t assured, while Japan’s economy remains trapped in two decades of torpor. The Chinese and Russian political and economic systems lack transparency, and the yuan isn’t fully convertible.
Second, the required change in infrastructure is daunting. Foreign-exchange markets where the dollar is the currency of reference would have to be fundamentally restructured. Deep and liquid money markets to support a reserve currency can’t be conjured up overnight.
Third, most candidates are reluctant to take on the role of a global reserve currency because of tensions between national and global economy policy. The economist Robert Triffin pointed out that the country whose medium of exchange is the global reserve currency must meet external demand for foreign exchange. This necessitates running large trade deficits, requiring fundamental changes in the mercantilist policies of Germany, Japan and China.
This means that the U.S. can continue to use the dollar to help further its trade, financial and geopolitical aims, largely outside the strictures of international laws and institutions and without the need for messy, unpredictable military campaigns. As John Connally Jr., Richard Nixon’s Treasury secretary, put it in 1971: The dollar is “our currency, but your problem.”
Stimulative measures drive growth, and the U.S. economy and stock market have benefited from quantitative easing, lower rates, less regulation and tax cuts. But Jeffrey Gundlach admonished investors that too much stimulus can backfire.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke via a webcast with investors on September 11. His talk was titled, “Miracle Grow,” and the focus was on his firm’s flagship mutual fund, the DoubleLine Total Return Fund (DBLTX). The slides from his presentation are available here.
Gundlach, an amateur gardener, said that he often uses Miracle Grow fertilizer to help his plants.
“But if you dump Miracle Grow on plants long enough it burns them out,” he said.
The growth of the deficit has been disconcerting. The deficit growth has been at levels that have historically been used to counter recessions, even though we have been in a nine-year-long period of growth.
The U.S. total debt outstanding and the total S&P return have moved up in tandem.
That has been “miracle growth,” he said.
What’s going to happen when the next recession happens? The deficit could “explode,” Gundlach said.
Let’s look at what Gundlach said the future holds for the U.S. economy and stock and bond markets.
A recession ahead?
Tax cuts, deficits and debt have been responsible for the surges in U.S. growth – as are the threats of tariffs, which accelerated growth forward, according to Gundlach. Real GDP growth, he said, is at 2.9% and may be as high as 3.8% for Q3. Nominal GDP has accelerated as a result of higher inflation.
The last time nominal GDP grew at this rate was in 2004, which led to Fed rate hikes.
Is there trouble ahead? The year-over-year leading economic indicators (LEIs) are growing at 6.9%, matching the level at their peak in 2012-2013. “It’s very likely they will turn negatives,” and there is “no sign of a recession,” he said.
Sentiment surveys are “off the charts” and “have never been higher,” he said. This is the result of decreased regulation, according to Gundlach.
The PMI surveys are extremely strong (manufacturing is at 61.3 and at its highest level in 20 years). This, he said, is the result of “extraordinary” dovish central bank policies from the Fed and other central banks.
But the Fed is now in quantitative tightening (QT) mode. “We’ll see what happens as $60 billion/month of debt is retired, starting in October.”
There are also trillions of corporate maturities in the next five years, both in the U.S. and globally, according to Gundlach. Along with QT, that will lead to a lot of “interesting things” as all that debt needs to be re-floated, he said.
As debt has grown, it hasn’t been reinvested smartly, he said. Net government investment hasn’t grown. One of the positive things is that government capital spending has grown faster than consumption when compared to prior years, according to Gundlach.
Among households, student and auto loan debt has grown at alarming rates, he said. Millennials have been trapped into “lifelong debt problems” as aresult of tuition increases, he said, which have been fueled by debt accessibility.
Home prices are up and home affordability is down, he said, so there has been a slump in housing growth. More than two-thirds of sentiment-survey respondents have said that it is not a good time to buy a home.
Countering Trump’s rhetoric
Gundlach generally stays out of politics in his webcasts. But this time he refuted some of President Trump’s claims.
This is not the “greatest jobs economy of all time,” Gundlach said, contrary to Trump’s claims. Wages growth has not kept up with inflation, except briefly in 2017, according to Gundlach. Wage growth is slowing down, according to data from the Atlantic Fed. Real average earnings growth is negative, with the CPI at 2.95%.
“It’s inflation that’s growing,” Gundlach said.
For the first 20 months of the Trump presidency, there have been 190,000 of new jobs per month. But under the last 20 months of Obama’s tenure, there were 211,000. Not only is this not the greatest jobs economy of all time, it is actually slightly worse than Obama’s presidency, and both periods were late-cycle in the economy, Gundlach said.
Since 1939, despite the huge increase in the population, there were “many, many” times when job growth was vastly higher than under Trump’s presidency, Gundlach said. But, Gundlach acknowledged, a lot of that historical growth happened when demographics were much more favorable than it is now.
The response to the next recession will be some form of universal basic income (UBI), he said. Gundlach cited a program like this in Sweden and noted the recent calls for UBI among socialist Democrats.
The miracle growth markets
Miracle Growth has been thrown at the markets, Gundlach said. As global central banks have pursued aggressively dovish policies, foreign stock market returns have responded in a similar way to those in the U.S.
But global stock markets are down this year, with some real “disasters” in the emerging markets, he said, due to the trade war.
“One of the things we will remember most about 2018 is that incredible divergence between the U.S. and global stock market returns,” Gundlach said.
Inflation has been picking up in the U.S. and internationally. Across the globe, 80% of countries have had rising inflation during the last three months. “We can clearly see that inflation has bottomed out and is heading higher,” Gundlach said. Both goods and services prices have been rising over that period.
We are not having problems getting inflation to the 2% level, according to Gundlach. There is good reason to believe the core CPI will go higher, according to DoubleLine’s proprietary models, the New York Fed’s Underlying Inflation Gauge (UIG) and the ISM PMI (which also is a leading indicator of inflation). Money growth (M2) supply also suggests a move above 3% for inflation, according to Gundlach.
A suicide mission
“It’s bad enough that deficits are increasing this late in the cycle, but we are increasing taxes and raising interest rates,” Gundlach lamented. It is a “suicide mission,” as Gundlach had called it in a previous webcast. If rates are hundred basis points higher, with $7 trillion of debt, there will be $140 billion of additional interest costs, according to Gundlach.
“This will put further pressure on the deficit and create a self-reinforcing cycle of higher debt and higher rates,” he said.
The Treasury could get overwhelmed by a “supply fear” that could lead to much higher inflation, with a tough economy and rising rates, Gundlach warned. “That would be the gateway to universal basic income. Americans would think they were getting something, but it would really be a devaluation of the dollar.”
The dollar’s next big move will be down and it will be lower than it is now by year end, he said. It has recently weakened versus the euro. That will help non-U.S. stock markets. But the dollar has strengthened relative to emerging markets, which has hurt those stock markets.
“The market is telling us the trade war is very bad for emerging markets, especially those with dollar-denominated debt,” Gundlach said.
But, he said, President Trump wants the dollar to be weaker and wants the Fed’s help to make this happen.
U.S. valuations, according to the CAPE ratio, are near 1929-levels. Emerging markets are at half the levels of the U.S., based on the CAPE ratio. It’s really hard to believe that equity markets will hold up. If it gets worse in the emerging markets, then it “has to be a global situation.”
That will happen if the dollar weakens.
Advice to investors
Since May, global markets are down 10% and the U.S. is up 7%. Emerging markets are down 20% over that period, which “looks like a bear market,” Gundlach said. But he does not expect this divergence to continue.
Commodities are at historically cheap levels, but are not going lower, according to Gundlach. “They are a late-cycle play and highly volatile” and they should “stay in the portfolio,” he said.
Gold, at approximately $1,200 per ounce, will increase in price as the dollar weakens. It is a “really good buy” at its current price and has “exhausted its downside,” Gundlach said.
The U.S. 10-year yield (at 2.97%) has been remarkably stable over the last several months. But if nominal GDP growth or the German 10-year yield moves higher – the two have historically been closely tied to U.S. 10-year rates – then it would lead to higher rates. But Gundlach said he does not have high conviction about the future direction of rates.
There is an extremely large speculative position against the Treasury market. Gundlach said that if rates head down, even a little, it could lead to a “stampede” and possibly to a 10-year rate as low as 2.25%. He called this scenario “conjectural” but not impossible.
The 30-year yield (at 3.12%) is nearing the 3.22% level, which Gundlach has previously cited as a threshold that would lead to higher rates, provided there are two consecutive closes above that rate.
Across sectors of the bond market, Gundlach said he is not a big fan of corporate bonds, which are two standard deviations rich, according to the DoubleLine models. Junk bonds are “very highly valued,” he said, but not in imminent danger. Corporate-debt-to-GDP is “horrifically” high, he said, and is inconsistent with tight option-adjusted spreads. Corporate bond yields are also suffering from historically high levels of supply.
With convertible bonds, investors are “basically owning stocks” he said. They are more of an equity investment.
Non-agency mortgage-backed (MBS) securities and floating rate bonds are his favored bond sectors.
Don’t buy Chinese stocks, he said. The financial problems there are “scary” and investors are better off in other Asian markets.
The S&P 500 will end the year modestly lower, he said.
“You want to be globally diversified,” Gundlach said. The U.S. market is sensitive to “just a few stocks.” If you want to increase beta, invest outside the U.S.
“I would not invest in e-commerce stocks,” Gundlach said.
“I would rather sleep at night.”
Nigeria is making little progress in eliminating poverty.
New reports by global development institutions show that human capital spending in Nigeria—the poverty capital of the world after recently overtaking India—is among the worst in the world.
Local politicians would have got their due shares obviously.Neshant wrote:Seriously how dumb must a country be to entrust Goldman Sachs with their national funds?
From Libya to Malaysia, all funds handed over to Goldman Sachs for investment have ended up being stolen - billions literally turning into $0.
Rent seeking & con artistry 101.
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Malaysian Prime Minister Fumes "Obviously We Have Been Cheated By Goldman Sachs"
https://www.zerohedge.com/news/2018-11- ... dman-sachs
Nice interview , Hope the Stock Market do fail 70 or 80 % in next crash when ever that happens , Keeping fingers crossedNeshant wrote:
We'll all be out of a job when that happens bro.Austin wrote:
Nice interview , Hope the Stock Market do fail 70 or 80 % in next crash when ever that happens , Keeping fingers crossed
I think a better approach is to anticipate what is to come and prepare for it rather than worry of loosing what we have specially lucky us who understand these things a little more than those who dont , Look for alternative career better safer investment options for stormy times ahead.Neshant wrote:We'll all be out of a job when that happens bro.
Something drastic has to happen so that people dont get cheated time and again , dot com crash , sub-prime crash , QE etc this can only end if something drastic happens and happens soon. 80 % fall in stock market should be one of those things of many.My view is the money printing, inflating and bad loans transferred from banks onto the public ledger that has been going on since 2008 is nothing more than a preparation by banks for a resumption of the 2008 crash. Once that pause button is unclicked and play resumes, the crash will occur.
Setting aside, what sort of personality is ideal for an RBI governor, fact remains his record in office was a fairly good one. He served out the entirety of his tenure and that isn't lessened by the absence of an extension.Suraj wrote:Viv S: do you realize you’re simply reinforcing my argument that Rajan was a poor hire in his role as RBI governor ? The governors role is not one suited to a publicity focused ‘intellectual’ . The role demands minimal public utterances AND has very little oppprtunity to generate first hand intellectual input, and puts a premium on smooth interaction with the government - something he did poorly at .
Getting an extension past 3 years is the norm . That he didn’t is an effective firing because his appointment is at the governments pleasure and the RBI gov is a public servant . For all the claimed ‘independence’, the MPC effectively places govt at the RBIs rate policymaking table .
What primary credit have any of the previous RBI governors received for major policy initiatives during their tenure? The RBI works as an institution, the governor's chair isn't meant be a solo act.My problem with Rajan is that his most high profile role is completely unsuited to what he is - a bookish academic . He could have focused his energies on a Nobel as the next Indian laureate but he’s nowhere in that picture either. He’s no Friedman or Nash.
His tenure at RBI was marked by open acrimony, no individual policymaking credit at all, and an early exit . To be quoted as ‘former RBI governor’, the best candidates are those with long tenures, a record of sticking through difficult periods, and ideally primary credit for major policy initiatives . It’s a pity that this fellow gets so much publicity when those with far greater accomplishments as RBI gov do not .
If one dislikes Rajan, at a personal level, because he's a media celebrity, not seeing it as being appropriate for a former RBI governor, that's fair enough. Trouble is, that doesn't make his opinions, both as an ex-RBI governor and as an economist, any less valid. And it would be rather ironic for the Parliament to be asking the man for advice while his commentary is non grata on the BRF Indian Economy thread.Rajan is liked because he’s a media celebrity like some Bollywood star, and not because he had long fruitful tenure to speak about. As such he is not suitable for this thread - his videos etc will be moved to the discussions of global economy thread where all the general prognosticators go .
Scrutinising the issue of increasing non-performing assets (NPAs) a parliamentary committee on estimates headed by senior BJP leader Murli Manohar Joshi has asked former RBI governor Raghuram Rajan to appear before it.
A member of the committee told India Today that Joshi wrote a letter to Rajan on August 7 asking him to depose before the panel for a briefing on mounting NPAs.
While the NDA government had not considered offering an extension to Rajan, whose term ended in September of 2016, the committee chairman in his letter has said that the "committee admires his experience and knowledge and if he is unable to testify to the summons in person, the committee would like a written testimony of his expert view on the NPA crisis, how it has been created and how India should tackle it."
The letter to Rajan was fired by the chairman of the committee after the last chief economic advisor or CEA Arvind Subramaniam, who decided to quit before the end of his term, made a presentation before the committee.
Subramaniam is said to have briefed the members of the committee last month that it should go to Rajan's credit for identifying exactly what the causes for the mounting NPAs were and launching serious efforts to resolve the issue.
Absolutely. I agree 100%Viv S wrote: Setting aside, what sort of personality is ideal for an RBI governor, fact remains his record in office was a fairly good one. He served out the entirety of his tenure and that isn't lessened by the absence of an extension.
As for the MPC, while many others (including Rajan) pushed for the creation of such a body, he's the one who delivered on it while in office. And its not a loss of independence for the RBI - the RBI members still have controlling numbers with the governor empowered to cast a deciding vote - its an expansion of accountability and an increase in transparency.
He is better than Friedman. Nash was a genius and I doubt there is anyone on any central banking committee who will come close to Nash. I also agree he gets too much publicity. Perhaps mainly because Modi fired him (or did not extend his tenure.) I doubt he really cares or is bitter about it. He always said he will go back to academia and he did. Unlike Amartya Sen who is truly a 'dhobi ka kutta- na ghar ka na ghat ka.Suraj wrote:My problem with Rajan is that his most high profile role is completely unsuited to what he is - a bookish academic . He could have focused his energies on a Nobel as the next Indian laureate but he’s nowhere in that picture either. He’s no Friedman or Nash.
His tenure at RBI was marked by open acrimony, no individual policymaking credit at all, and an early exit . To be quoted as ‘former RBI governor’, the best candidates are those with long tenures, a record of sticking through difficult periods, and ideally primary credit for major policy initiatives . It’s a pity that this fellow gets so much publicity when those with far greater accomplishments as RBI gov do not .
Arvind Subramanium from Peterson Institute, whose head office is based in the Capitol Hill in Washington DC, aspired to be the one to take over from Rajan, specially paratrooped by Soros and his ilk into India. Thankfully he was booted. He was vile and treacherous fellow. Laid too many land mines.IndiaToday wrote:The letter to Rajan was fired by the chairman of the committee after the last chief economic advisor or CEA Arvind Subramaniam, who decided to quit before the end of his term, made a presentation before the committee.
Subramaniam is said to have briefed the members of the committee last month that it should go to Rajan's credit for identifying exactly what the causes for the mounting NPAs were and launching serious efforts to resolve the issue.
Right on.Singha wrote:a brf member was saying the new mainland china fabs are hiring people from fabs in taiwan, south korea and japan @ upto 5x of regular salary.
taiwan has become a nice manchurian candidate for them - all noise and no bite - cheen is using them as a conduit to suck up restricted western tech. if taiwan were to be peacefully reabsorbed, that flow would cease - so they want them out there making periodic anti-peking noises and keeping the pipe open
China does not much ship in Indian ocean , 6-7 of all types includng tanker out of which half is on anti-piracy mission escorting Civilian ship as per IN chieframana wrote:Neshant, India lures PLAN to Indian Ocean and frees the Sea of Japan. This helps the Japanese.
In return they invest in long term infrastructure projects in India at marginal interest rates.
Its pro quid quo.
rightly said. we need new thinking and reset of how cities infra is managed.Singha wrote:a study by oxford research. http://resources.oxfordeconomics.com/global-cities-2035
while I would call it +ve news. if we do not tone up our municipal bodies and local governance asap, we will have all the worlds most unmanegeable slummy cities.
2s5 has inverted. 2s10 not yet. 2s10 probably more important.Austin wrote:'Bond king' Jeff Gundlach says yield curve inversion means 'economy is poised to weaken'
https://www.cnbc.com/2018/12/04/bond-ki ... onomy.html
Jeff Gundlach in interview to CNBCpanduranghari wrote:2s5 has inverted. 2s10 not yet. 2s10 probably more important.Austin wrote:'Bond king' Jeff Gundlach says yield curve inversion means 'economy is poised to weaken'
https://www.cnbc.com/2018/12/04/bond-ki ... onomy.html
https://www.zerohedge.com/news/2018-12- ... -does-full
"China is basically trying to steal the future of Japan, the U.S. and Europe, by going after our technology," Navarro said, virtually assuring that no deal will be achieved in the allotted timeframe.