Perspectives on the global economic changes

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Neshant
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Re: Perspectives on the global economic changes

Postby Neshant » 08 Dec 2019 03:46


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Re: Perspectives on the global economic changes

Postby Vamsee » 19 Mar 2020 00:17

Up...

Once in a while a reset button is pressed and the old world order dies and a new world order is born. World War II is a good example. ChinaVirus is probably one of those reset buttons.

Key question is who will rise and who will fall after the reset?

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Re: Perspectives on the global economic changes

Postby panduranghari » 28 Apr 2020 23:16

Image
Probably the most important chart this month.

For the sake of perspective:

Image

Image

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Re: Perspectives on the global economic changes

Postby Ambar » 08 May 2020 19:09

Image

That's a mind boggling amount of money which is being spent to support the economies globally ! For the economic gurus here i have a naive question - how is fed able to generate a whooping 6 trillion dollars in new money and not usher in a devastating collapse of dollar and hyperinflation ? Where as countries like India struggle with chronic inflation and devaluation even without these vodoo economics ?

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Postby Suraj » 08 May 2020 23:39

A very simple, but also simplistic answer: Debt

A government can pay for things different ways:
a) tax revenues
b) loan from banks, repaid with interest using tax revenues
c) debt

Federal tax revenues are $3.5 trillion. Total outstanding US debt is ~$45-50 trillion. The power to issue and sell extensive amounts of debt ensures that the actual transactions that impact inflation on the ground isn't substantial. Most of the QE money isn't sent out as cheques to people. It buys up the existing debt off the books of entities under fiscal pressure, and is simply a balance sheet transfer exercise whose impact is transparent to the public except in the form of interest rates remaining low due to the liquidity.

Given that the situation right now is extremely deflationary (high unemployment, rampant business closure) the impact of inflationary measures will in any case be a counterbalancing one, unlike in India where inflation is a chronic issue due to high cost of money (driven by weak ability of the government to finance activities with debt) even as the economy is growing.

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Re: Perspectives on the global economic changes

Postby Ambar » 09 May 2020 04:01

Thanks for answering but even if fed is mostly (a) monetizing the debt by buying treasury bills and (b) helping balance sheets of entities by buying MBS, junk bonds, munis etc. don't those very action infuse fresh capital into the economy which should result in high inflation and currency devaluation ? I know the current pandemic maybe suppressing spending and there by keeping inflation in check but my question is mostly what happens when this ends ? Also, between 2008 to 2018 the fed balance sheet bloated from 400 billion to around 4.2 trillion before they started tapering in later 2018 but yet kept the inflation in check and instead of dollar weakening it remain very strong..really odd.

This is more of a general question given the times we live in - how is new money created by the governments ? Do you subscribe to credit creation theory or fractional reserve theory or the financial intermediation theory ? I sometimes wonder if there are enough eligible borrowers , then the amount of credit created could be endless..how long can this last in a world of finite resources but infinite money supply ?

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Re: Perspectives on the global economic changes

Postby Suraj » 09 May 2020 04:59

Ambar wrote:Thanks for answering but even if fed is mostly (a) monetizing the debt by buying treasury bills and (b) helping balance sheets of entities by buying MBS, junk bonds, munis etc. don't those very action infuse fresh capital into the economy

They don't quite add new capital and activity. They simply keep alive existing financial structures and linkages. The ability to discharge debt - personal and corporate - fairly easily through bankruptcy proceedings, also helps. There's a significant volume of latent capital that can pick up distressed assets while the central bank simply buys out tranches of debt and expands their own balance sheet using their lender of last resort power.

Can RBI do the same ? Sure, but the Indian debt market lacks the depth and breadth of the US one, or that present in most developed markets in general. Even China has a massively bigger debt market.

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Re: Perspectives on the global economic changes

Postby kumarn » 10 May 2020 03:18

Very interesting suraj ji. Sorry for the noob question. Why doesn't India have a larger debt market? What will enable India to create a larger debt market? Would really appreciate if you could please help in understanding

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Re: Perspectives on the global economic changes

Postby chola » 10 May 2020 05:57

^^^ Debt is created by the ability of a nation to print IOUs until the interest on that IOU is inflated to the point that the publishing country no longer finds it worthwhile to print.

So what constitute demand for that IOU? Interest of course is one but the ultimate arbiter is the usefulness thous security of that IOU. Because at the end of the day you need to be able to cash that IOU in for something tangible. For Cheen because they produce everything you have your pick of manufactured goods.

For the US, you have the goods and services of not just the US but the whole world since it is the global currency of trade. That is why the US can seemingly print money and debt with abandon. It is basically backed by the goods of the entire globe.

For India to develop a comparable debt market, it needs to 1) make more things for trade and 2) make the rupee more popular as tender for trade.

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Re: Perspectives on the global economic changes

Postby Ambar » 10 May 2020 07:18

Can't GoI just issue debt and have RBI and all the banks buy it ? What stops the Indian govt from playing the same game US and EU play by issuing endless amount of debt and keep the printing press 24x7 ? After all as long as the debt is in rupees, there should be no threat of default , correct ?

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Re: Perspectives on the global economic changes

Postby nandakumar » 10 May 2020 08:05

Ambar wrote:Can't GoI just issue debt and have RBI and all the banks buy it ? What stops the Indian govt from playing the same game US and EU play by issuing endless amount of debt and keep the printing press 24x7 ? After all as long as the debt is in rupees, there should be no threat of default , correct ?

The rich in all parts of the world want to park their surpluses in the US and the EU. The appetite for investing in India is not that high. So India doesn't have that luxury.

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Re: Perspectives on the global economic changes

Postby Neshant » 10 May 2020 13:54

Someone will end up eating a big loss with all the money printing.

As fiat money is all about cheating people out of the fruits of their labour, its just a question of who this loss will be transferred to.

Its a dangerous time to be storing all of one's life's earnings in a pot of govt or corporate IOUs.

That being said, the stock market could still continue its journey up since its disconnected from reality and is now but a simulation.

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Re: Perspectives on the global economic changes

Postby Rahulsidhu » 10 May 2020 14:02

Ambar wrote:Can't GoI just issue debt and have RBI and all the banks buy it ? What stops the Indian govt from playing the same game US and EU play by issuing endless amount of debt and keep the printing press 24x7 ? After all as long as the debt is in rupees, there should be no threat of default , correct ?


Yes, this is correct.

It's a popular and unfortunate misconception that govt bond interest rates are dependent on credit risk as defined by rating agencies. The demand mostly comes from Indian banks (to fulfill SLR quota + park excess cash) and they can always load up on more as it carries no credit risk. The reason they don't do so is because of interest rates risk.

In Industry parlance: Local currency govt bonds are an interest rate product, rather than a credit risk product.

If the RBI wants, it can always drive interest rates lower through buying bonds and it does so often. Another technique is to incentivize banks to do this work by supplying them with funding (with the bonds as collateral).

So, should the gov. issue endless amounts of debt that the RBI buys? My answer: depends on what the govt does with the cash. The RBI buying is not the problematic part.

Consider a situation where govt pays Rs 1lakh to every adult citizen in India. That is a lot of Rupees. What would be the effects of such an operation?

On the plus side, demand for domestically produced goods and services would be through the roof, generating a lot of jobs, investment. this has the potential to turn into a virtuous cycle as more income leads to still more demand and so on.

On the minus side, some (much?) of this demand will be for foreign products. In India's case, a lot of it would be spent on Chinese manufactures and foreign oil. This would mean a depreciating rupee. Furthermore, wages will probably spike too. All this could lead to inflation and further loss of competitiveness.

In fact, as long as India remains a difficult place to do business, the negative effects will outweigh the positive.

If I were advising the govt. on a fiscal strategy therefore, I would suggest a humongous fiscal package, not bothering about the size of debt etc, but ensure that it is targeted so that nearly all of it gets spent locally and boosts productivity. Examples could be infrastructure programs, tax cuts, local defence procurement. IMO India is a large enough and diverse enough economy to be able to do that.
Last edited by Rahulsidhu on 10 May 2020 14:26, edited 1 time in total.

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Re: Perspectives on the global economic changes

Postby Rahulsidhu » 10 May 2020 14:06

Ambar wrote: sometimes wonder if there are enough eligible borrowers , then the amount of credit created could be endless..how long can this last in a world of finite resources but infinite money supply ?


Just wanted to point out that your premise here is incorrect. You are right that the amount of credit (money) could be endless, but you are wrong that the "resources" are finite. Most of the wealth today is in the form of intellectual property, and this fraction only keeps going up with progress. And human inventiveness is infinite, just like fiat money :)

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Re: Perspectives on the global economic changes

Postby chola » 10 May 2020 18:03

No, no, no! The idea that an endless supply of money can be had is extremely dangerous. It leads to runaway or hyperinflation. It has destroyed economies before. Think Argentina or Zimbabwe.
Image

And doesn't happen to only third world nations. One of the cases we learn early in economics class on hyperinflation is Weimar Germany. That history is engrained in Germans to this day. This is why they are always fighting extra printing of the Euros even during the worst days of the PIIGS crisis.

It comes down to this: money must be backed by a reasonable amount of goods that the IOU (legal tender) can be exchanged for. Too much IOUs chasing too few good means the funny money you see above. Once confidence is broken then panic will set in with people offering more and more notes just to get something tangible! This is where you see the images of wheelbarrows of notes being exchanged for a loaf of bread (which actually happened in Germany.)

NOTHING can destroy an economy like this thing. Not even Depression comes close.

Again, why the US and EU (and Cheen/Japan to a smaller extent) can do this is the amount of goods that can be traded for in their currency. The US can print the most because goods everywhere even those in China can be exchanged for the dollar.

Right now, no one internationally will take the rupee unless they can exchange it for US dollars from Indian banks. We do not produce enough goods and services that the rest of the world wants.

If our intention is simply to print with abandon for Indians onlee then we risk Argentina or Weimar Germany. A most dangerous game.

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Re: Perspectives on the global economic changes

Postby Ambar » 10 May 2020 19:33

Thanks Suraj, RahulSidhu and Cholaji for this thought provoking discussion ! So the general consensus seems to be even if held in local currency India cannot print money the same way US/EU can because of our inherent structural deficiencies and the fact that rupee does not have enough goods/services to trade upon. However, the Indian government can create new money and use it for infra spending, defense procurement, help MSMEs etc. Will US/EU ever have a day of reckoning when the money they create far exceeds the goods/services that are traded on USD/EUR and it creates a Argentina/Weimar Republic like situation for them ?

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Re: Perspectives on the global economic changes

Postby kit » 10 May 2020 19:51

Rahulsidhu wrote:
Ambar wrote:Can't GoI just issue debt and have RBI and all the banks buy it ? What stops the Indian govt from playing the same game US and EU play by issuing endless amount of debt and keep the printing press 24x7 ? After all as long as the debt is in rupees, there should be no threat of default , correct ?


Yes, this is correct.

It's a popular and unfortunate misconception that govt bond interest rates are dependent on credit risk as defined by rating agencies. The demand mostly comes from Indian banks (to fulfill SLR quota + park excess cash) and they can always load up on more as it carries no credit risk. The reason they don't do so is because of interest rates risk.

In Industry parlance: Local currency govt bonds are an interest rate product, rather than a credit risk product.

If the RBI wants, it can always drive interest rates lower through buying bonds and it does so often. Another technique is to incentivize banks to do this work by supplying them with funding (with the bonds as collateral).

So, should the gov. issue endless amounts of debt that the RBI buys? My answer: depends on what the govt does with the cash. The RBI buying is not the problematic part.

Consider a situation where govt pays Rs 1lakh to every adult citizen in India. That is a lot of Rupees. What would be the effects of such an operation?

On the plus side, demand for domestically produced goods and services would be through the roof, generating a lot of jobs, investment. this has the potential to turn into a virtuous cycle as more income leads to still more demand and so on.

On the minus side, some (much?) of this demand will be for foreign products. In India's case, a lot of it would be spent on Chinese manufactures and foreign oil. This would mean a depreciating rupee. Furthermore, wages will probably spike too. All this could lead to inflation and further loss of competitiveness.

In fact, as long as India remains a difficult place to do business, the negative effects will outweigh the positive.

If I were advising the govt. on a fiscal strategy therefore, I would suggest a humongous fiscal package, not bothering about the size of debt etc, but ensure that it is targeted so that nearly all of it gets spent locally and boosts productivity. Examples could be infrastructure programs, tax cuts, local defence procurement. IMO India is a large enough and diverse enough economy to be able to do that.


Curtail and reduce Chinese imports, spend and spend internally , defence capital expenditure, infrastructure expenditure MUST be indian. All PSU s must mandate indian make and manufacture. Release funds to medium and small scale industries to capture global markets, now is the time.

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Re: Perspectives on the global economic changes

Postby chola » 10 May 2020 21:02

Ambar wrote:Thanks Suraj, RahulSidhu and Cholaji for this thought provoking discussion ! So the general consensus seems to be even if held in local currency India cannot print money the same way US/EU can because of our inherent structural deficiencies and the fact that rupee does not have enough goods/services to trade upon. However, the Indian government can create new money and use it for infra spending, defense procurement, help MSMEs etc. Will US/EU ever have a day of reckoning when the money they create far exceeds the goods/services that are traded on USD/EUR and it creates a Argentina/Weimar Republic like situation for them ?


The EU/US day of reckoning comes when trade begins to be done in significance percentage in other currencies. For example, if Argentina can buy goods directly in China with the Peso instead of the US dollar then suddenly a currency that was worthless a few years ago becomes a powerful IOU because importers everywhere in the world can hoard it for their operations. And the US dollar becomes just a little bit weaker because people can hold something else to get what they want. Now imagine, energy producers like OPEC accepting the Pesos too.

Cheen and Russia are working for that day. They don't want to use US dollars that puts them under US control, under US laws and threats of embargo.

kit wrote:Curtail and reduce Chinese imports, spend and spend internally , defence capital expenditure, infrastructure expenditure MUST be indian. All PSU s must mandate indian make and manufacture. Release funds to medium and small scale industries to capture global markets, now is the time.


Actually as I described earlier with the peso, if we deal with the chinis and we can buy directly from Cheen with the rupee then the Indian currency would suddenly be backed by the industrial might of China. It would become a powerful forex overnight. This is something that would have been unthinkable two years ago because the chinis hoarded dollars like everyone else. The trade war has changed that perhaps permanently.

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Re: Perspectives on the global economic changes

Postby suryag » 10 May 2020 21:29

I like the idea of 1Lakh to every citizen towards boosting consumption of Indian made goods. Suppose blockchain is implemented in an effective manner, the citizen can be provided with a credit card which when swiped at a counter or online purchase tells you how much of this money can be redeemed based on the products that they are buying. For ex: I buy various items for 6000 on Amazon and then swipe this PM credit card and the website based on blockchain technology tells me that items worth 2300 which are produced in India(the GoI can fix the %age of value add done by Indian companies/suppliers) can be redeemed from the card and for the rest the person can use his personal credit card. This would boost up consumption considerably in all sectors. For instance, I can buy cement for my home to be constructed and redeem almost all the cost using this card.

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Re: Perspectives on the global economic changes

Postby kit » 10 May 2020 22:07

suryag wrote:I like the idea of 1Lakh to every citizen towards boosting consumption of Indian made goods. Suppose blockchain is implemented in an effective manner, the citizen can be provided with a credit card which when swiped at a counter or online purchase tells you how much of this money can be redeemed based on the products that they are buying. For ex: I buy various items for 6000 on Amazon and then swipe this PM credit card and the website based on blockchain technology tells me that items worth 2300 which are produced in India(the GoI can fix the %age of value add done by Indian companies/suppliers) can be redeemed from the card and for the rest the person can use his personal credit card. This would boost up consumption considerably in all sectors. For instance, I can buy cement for my home to be constructed and redeem almost all the cost using this card.



That could be a precursor for a "universal income scheme" , but who will pay for this state or central Govt ?.. there are still gaps in id registrations in some states., i would say 50 percent by central govt and 50 by state govt who are willing to chip in .. would reduce chances of fictitious accounts and skim off by states as duplicitous as Kerala or w Bengal as far as "schemes" are concerned.

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Re: Perspectives on the global economic changes

Postby Neshant » 11 May 2020 07:34

India should also expand its maritime claims so far as the UN's Law of the Sea permits.

Hope the babuz are not asleep on the issue before the 20201 deadline passes.

There are literally thousands of islands within the Union Territory that have low lying continental shelves which should have either strategic and/or mineral/metal wealth of some kind.

Map the full extent of the continental shelf by sonar and start filing claims or risk losing all those rights.

----------------------------------------------

Portugal plans to double its territory


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Re: Perspectives on the global economic changes

Postby panduranghari » 13 May 2020 23:01

Ambar wrote:Can't GoI just issue debt and have RBI and all the banks buy it ? What stops the Indian govt from playing the same game US and EU play by issuing endless amount of debt and keep the printing press 24x7 ? After all as long as the debt is in rupees, there should be no threat of default , correct ?


No one can play the same game like the US because the US accidentally discovered the game and then decided to run with it.

While US was on the gold standard, there was actual shipping of gold from everywhere to everywhere. That ended when Bretton Woods gold exchange standard came into being. Gold was linked directly to the dollar and was exchangeable only in dollar. Sterling was given a special place by the US permitting all other currencies to be exchangeable into dollar or sterling. When the world was on the gold exchange standard, things were not working as well which allowed foreign commercial banks to hold dollars as a liquid float. It was unofficially called eurodollars. And these eurodollars were what the commercial banks in US and the west discovered as a easy way to bypass the need of the liquidity injections of the central banks. The 2008 crisis was a banking crisis because the eurodollar supply almost stopped. To overcome this US central bank set up swap lines with banks in Europe and Japan. Since 2008 the world is on PhD standard and the eurodollars are still a problem so late last year (September 2019 precisely), when the overnight US repo rate went to 10% from 0.1% the US central bank set up swap lines with all the G20 central banks. This is to provide emergency dollar liquidity.

China cant do this nor can Europe. Remember many central banks already hold euros and even then its not possible for EU to do something like USA. Forget about RBI. Besides why would you want India to do this? Did you know until 1973, gold purchases within US were illegal.

The last statement of yours - 'After all as long as the debt is in rupees, there should be no threat of default ' is what is called modern monetary theory(MMT). It was heavily promoted by people like Kelton, Steve Keen et al who all supported Bernie Sanders in 2016 and recently. It is already happening right now. How do you think the governments around the world are able to support these huge bills for COVID19.

Don't be fooled by Modern Monetary Theory- its neither modern nor new. Adding word theory to it does not give it any real scientific value. In real terms its a modern counterfeiting scandal.

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Re: Perspectives on the global economic changes

Postby vera_k » 22 May 2020 21:21

The quality of Chinese financial markets looks to be where India's was in the 90's. Also shows the extent to which US regulators were in bed with the Chinese. This has the potential to let the air out of the bubble created in Chinese listings since 2008.

Chinese Companies Could Be Forced to Give Up U.S. Listings Under Senate Bill

At the heart of the dispute is China’s unwillingness to grant routine access to audit records sought by American regulators. Companies that sell shares publicly in the U.S. are legally required to be audited by firms that are inspected by the Public Company Accounting Oversight Board, an audit watchdog.

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Re: Perspectives on the global economic changes

Postby Ambar » 27 May 2020 03:24

This should have been done soon after the 2008 crisis. So many fly by night Chinese company owners and promoters became overnight multi millionaires and billionaires by creating fictional 10Qs and 10Ks and then vanished. So many investors including myself lost a lot of money "investing" on chinese solar and agricultural companies that turned out to be complete duds later.

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Re: Perspectives on the global economic changes

Postby vera_k » 02 Jun 2020 06:12

Harvard making progress to matching JNU's illustrious standards -

Delisting Chinese companies plays straight into their hands

The proposed trading ban could make things even worse for shareholders. Assuming Beijing continues to bar inspections, the SEC will announce a ban, causing a rout in a barred company’s stock as investors dump shares before they become non-tradeable. The Chinese controller can then use a take-private to cash out investors at rock-bottom, while blaming the delisting on the US government. The trading ban will play straight into the controller’s hands.

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Re: Perspectives on the global economic changes

Postby Ambar » 04 Jun 2020 19:26

Any thoughts on the incredible stock market rally since March 18th ? S&P 500 has had the best 50 days in history, this is while the world in general and US in particular continue to suffer from a global pandemic and its fallout, 43 million unemployed in the US, protests and riots across US, major retailers filing for bankruptcy. Even in the heights of 2005-06 asset bubble, i don't think i've seen markets so disconnected from the mainstreet.

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Re: Perspectives on the global economic changes

Postby yensoy » 04 Jun 2020 20:04

vera_k wrote:Harvard making progress to matching JNU's illustrious standards -

Delisting Chinese companies plays straight into their hands

China has deeply infiltrated America, and this has been going on over the past 30 years, probably even since Nixon's famous trip. American universities run on Chinese money these days. They have strong linkages with Chinese universities for summer programs, language immersion programs, executive MBA type courses and some even have full-fledged branches in China. There is a lot of money involved here, prestige and even the survival of the brand name.

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Re: Perspectives on the global economic changes

Postby chanakyaa » 05 Jun 2020 07:38

Ambar wrote:Any thoughts on the incredible stock market rally since March 18th ? S&P 500 has had the best 50 days in history, this is while the world in general and US in particular continue to suffer from a global pandemic and its fallout, 43 million unemployed in the US, protests and riots across US, major retailers filing for bankruptcy. Even in the heights of 2005-06 asset bubble, i don't think i've seen markets so disconnected from the mainstreet.

Three things -- (1) Potentially over-correction led by shutdown, (2) Hope from Lockdown Relaxation, and (3) $4-$6 trillion of new digital debt money

Values can drop significantly because stock prices are derived by earnings multiple. If little or no earnings, means value can be as much a guessing game as wind direction. In such market, large institutional traders will bring the value way way down to leave room for earnings surprise. Relaxation of lockdown means earnings are back and the recovery of price multiples. One big factor that drove the confidence was the Fed stabilizing the credit markets. Once the credit market stabilizes, the equity will come back. 40+ million are unemployed but govt is paying them (in some cases more than they made in job) to stay home. As soon as the payments end (June), market will go in the other direction (unless more digital money is printed/created). For now markets definitely appear disconnected from real economy. Soon, all the newly created digital money will end up in the stock market and run up in the market is pretty much telling the same thing. It will change soon as the payments to unemployed stop. Until then enjoy the ride. Eventually it will go up much higher.

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Re: Perspectives on the global economic changes

Postby vimal » 05 Jun 2020 13:01

^^ Most of the folks who did not lose their jobs dumped their stimulus checks in stocks, plus institutional investors also pushing the markets. But there will be an end to this rally and correction.

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Re: Perspectives on the global economic changes

Postby disha » 05 Jun 2020 22:30

^wrong conclusions.

1. Going into shutdown, the average American household was far more stable (better quality debt) than previous cycle. For example, debt of the average US household was in personal loans, car loans, home mortgage, education loan and medical loans (partly financed by personal loans)

2. The stimulus checks by 98% of the households were used to 'run the house' (groceries), cut costs, and actually paying down the debt! It was not used for aspirational purchases like TV or vacations or on weddings.

3. Most of the job loss was in the economic segment where the median income of the avg. household was $40k. Even though this might have been 20% of the US workforce (or whatever significant number), this segment did not matter in the overall scheme of things. That is the ugly truth. This population is not going to go out and buy Tesla's or enjoy vacation in Florida keys.

4. The labor market was very tight going into shutdown. Extremely tight.

5. It is difficult now for businesses to justify sourcing goods and services from China. Businesses are looking at replacing some (if not all) of their supply chain outside of China and they are getting good deals and outcomes. For example look at Vietnam and India (here India is emerging as one of the largest producers of PPE in the world!)

As the economy opened up even slightly, people got back to work. It shows in the job numbers. Current oil prices are ultra-low. Inflation-adjusted, the oil prices seem to be below $20 per barrel!

Add in the massive influx of capital. And voila you have just fertilized the ground for a booming economy. Now here is the kick, next year in 2021 spring US stock market has to hit a wall.

On deflation, think food, clothing & shelter. Water, electricity, and transport. Other then clothing and shelter, all are more correlated to energy, and energy prices are low. Other than shelter, there is no inflation in any of the other items. Even the inflation in shelter is iffy and concentrated in large metropolis areas.

So where is inflation? Yes, there is inflation if you want to buy jimmy choos shoes. The price of a Jimmy Choo on sale handbag is now around $350. Yes, just 10 years back it was around $275. The inflation even after sale is high in the luxury segment!


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