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India Election Like Abe In Japan: 10-Year Bull Market Has Started

29 May


  • India has a stable, single-party government after 25 years; weak governance due to multi-party coalition politics has been the primary cause for India’s growth being significantly below potential.
  • Modi, leader of the new government, has a reputation as being pro-business, with the willingness and ability to quickly push through major changes through the complicated, slow and corrupt bureaucracy.
  • Indian economy has significant tailwinds: demographic dividend, large and growing highly educated and skilled workforce, large and growing middle class.
  • Risk: terrorist strike leads to the right-wing government initiating a military confrontation with its nuclear armed neighbor (Pakistan).
  • Risk: ruling party has been accused of having an anti-minority and fascist ideology. With 13% Muslims and 2.4% Christians, this may lead to negative socio-economic consequences.

Recent political environment and latest election

For the last 25 years (beginning in 1989), regional parties gained significant influence over the national government often causing paralysis of governance due to conflicting demands of coalition parties. The dysfunction of the national government peaked in the last few years with analysts concluding that “India and China are often considered to be the world’s rising economic powers, yet if China’s growth has been led by the state, India’s growth is often impeded by the state.” With crumbling infrastructure, rampant corruption, stalled economic reforms and unacceptably long new-project approval times there are legitimate concerns that India’s government is killing its economic miracle. This led to macroeconomic imbalances, pessimism among investors, corporations and the population at large.

Results of the 16th general election in India were announced on May 16, 2014. After 25 years of messy coalition politics, India will now have a stable, single party government. The Bharatiya Janata Party (BJP) won 282 seats, comfortably above the 272 seats needed for a majority. Further, the BJP-led pre-election alliance (National Democratic Alliance, or NDA) won a historic 336 seats (62% of the seats).

Narendra Modi, leader of the new government, has a reputation as a pro-business aggressive leader with the willingness and ability to quickly push through major changes through the complicated, slow moving and corrupt Indian bureaucracy. He got this reputation while he was the Chief Minister (equivalent of Governor in the US) of the Indian state of Gujarat from 2001 to 2014.

This election in India is akin to the historic election of a Shinzo Abe led government in Japan in 2012. The landslide victory by Abe’s Liberal Democratic Party is enabling Japan to undertake historic and radical economic policies aimed at jolting the economy out of its two decade slumber. The Japanese Nikkei 225 Index (Nikkei) rose 67% in the 5 months after Abe’s election. The Nikkei fell from that high, but is currently still up 53% from the pre-Abe period.

Indian economy – significant economic tailwinds

Economic reforms in India began in earnest in 1991 in reaction to a severe balance of payments crisis. The reform was led by Dr. Manmohan Singh, who at the time was the Minister of Finance in the Congress Party led government. It has continued inconsistently since then. The combination of economic reforms, it’s growing and large highly educated and English-speaking workforce and globalization trends helped India become a major exporter of information technology services, which led to its Gross Domestic Product (GDP) growing by 8.3% per annum from 2003 to 2010. However, this growth slowed to 4.7% in 2012, blamed primary on its crumbling infrastructure and regulatory bottlenecks due to a dysfunctional national government.

A 2011 working paper by the International Monetary Fund concluded that while India has been a latecomer relative to advanced Western nations and East Asian economies, it is in the midst of a major demographic transition. That transition started about 40 years ago and will likely last another 30 years. Large cohorts of young adults are poised to add to the working-age population in combination with falling fertility rates. This leads to working age population growing as a percentage of total population. This demographic dividend could add about 2 percentage points per annum to India’s per capita GDP growth over the next two decades.

As per a JP Morgan report India has the world’s third-largest English-speaking workforce, a sizable part of which is also highly educated. Every year Indian universities produce more than 3.5 million graduates. The Indian Diaspora (people of Indian origin living outside India) has achieved significant success in business and other areas (click here, here and here), indicating that under the right government structure, the population has significant potential for global success.

A recent Ernst and Young report concluded that India’s middle class, currently at around 50 million people or 5% of its 1.3 billion population, is expected to grow steadily over the next decade, reaching 200 million by 2020. This will create a rapidly growing and vibrant consumer base for sustained economic growth.

The election result has led to a historic surge in optimism and confidence among local and global investors, corporations and the population at large (see article 1, article 2). This may create a positive feedback loop in the economy by increased capital investment by corporations and spending by consumers, both supported by major economic reform and reallocation of government resources towards badly needed infrastructure projects.

Domestic and foreign investor flows into Indian equity markets

India’s individual investors still have room to boost stock holdings, which account for less than 6% of their assets. In Japan, which has Asia’s biggest stock market, 8.5% of household assets are invested in equities. That compares with 33% in the US and 16% in the Euro Zone.

Foreign Institutional Investors (FII) have invested more than $17 billion in Indian securities since the BJP announced Narendra Modi as its prime ministerial candidate in September 2013. Now that the uncertainty of the unpredictable election has passed, it is expected that FII money may have another surge.

India has well developed capital markets, with the stock exchange in Mumbaiformed in 1875. Significant capital market reforms beginning with the start of major liberalization in 1991, have increased retail and institutional investor confidence in the integrity and reliability of the capital markets in India.


The broad Indian equity market, as represented by the S&P BSE Sensex Index (SENSEX), is trading at an undemanding 15.4x forward price-to-earnings (PE) ratio. Over the last 10 years, it has traded at an average forward PE of 16.3x, with a high of 23.3x and a low of 9.6x (at the bottom of the 2008-09 crises). Small capitalization stocks, as represented by the S&P BSE Small-Cap Index (BSESMCAP), are trading at an 11.7x forward PE ratio. While the SENSEX is trading at both 5 and 10 year highs, the BSESMCAP is trading at a 22% and 37% discount to its 5 and 10 year highs.

Long-term growth in the price of Indian equities is likely to be driven by both expansion of the PE ratio, which is currently below historical averages, and growth in earnings per share.

Bulls argue that over the next 10 years, India’s GDP could grow to US$5 trillion (from US$1.9 trillion) and the market capitalization of its publicly traded equities could grow to US$4 trillion (from US$1.2 trillion). Such growth would depend on, among other things, (1) the new government focuses on significant structural reforms and its willing and ability to push them through the legislative branch of government and ensuring proper implementation by the bureaucracy, (2) reigning in inflation (3) managing the fiscal deficit, (4) managing the current account deficit, (5) the global economic environment, and (6) productive investment by the corporate sector and strong labor productivity growth.

All else being equal, a potentially strengthening Indian currency (Rupee) in the short term due to inflow of foreign capital and in the long term due to improving macro economic variables, will be a tailwind for investors purchasing US listed ETFs that invest in Indian listed equities.

Relevant securities

The following US listed Exchange Traded Funds (ETFs) provide different ways for investors to get exposure to Indian equities: EGShares India Infrastructure Index Fund (INXX) – focused on companies in the infrastructure sector (during this election, the BJP has stated that a key goal is rapid and large projects to improve infrastructure – roads, railway, ports, power infrastructure), WisdomTree India Earnings Fund (EPI) – skewed towards smaller capitalization companies, Market Vectors India Small-Cap Index (SCIF) – exclusively focused on small capitalization companies, iShares India 50 (INDY) – exclusively focused on large capitalization companies.


If there is a terrorist strike in India like the 2008 Mumbai attacks, the right-wing BJP government may initiate military strikes on Pakistan. A direct military conflict between two nuclear armed countries will be a severe negative shock to the Indian economy.

The BJP was founded as the political wing of the Rashtria Swayamsevak Sangh (RSS), which started life in 1925 as a right-wing nationalist paramilitary organization. The RSS is said to have drawn inspiration from European right-wing fascist groups during World War II and is said to have participated in anti-minority (Muslim and Christian) violence. Most senior BJP leaders have an RSS background and Narendra Modi, who will lead the new government, has been a member of the RSS since the early 1980s. Muslims and Christians account for 13.4% and 2.3% of the Indian population. If the new government directly or indirectly supports organized oppression of the minorities in India, it may lead to negative socio-economic consequences.

Since the anticipation of a potential election victory by a Narendra Modi led BJP, the Indian equity markets (SENSEX) has risen 20% compared to a 4% rise in a basket of emerging market stocks. During the same period, small capitalization stocks in India have risen 40%. As a result, some of the upside has already been priced into the stocks. Further, the stocks are likely to be very volatile going forward.

While the NDA government has complete control of the lower house of parliament (Lok Sabha), India’s federal system means negotiating through the upper house (Rajya Sabha), in which they are a minority, and negotiating with state governments for faster implementation of key policies.

The new government will also have to deal with headwinds from structural economic issues of high inflation, high fiscal deficit and high current account deficit. Further bad monsoon rains can have a severe negative impact on the critical agriculture sector.


Last week’s election results in India, which resulted in the first stable, single-party government after 25 years, may have started a long term (10+ year) bull market. Weak governance due to multi-party coalition politics has been the primary cause for India’s growth being significantly below potential. Narendra Modi, leader of the new government, has a reputation as a pro-business aggressive leader with the willingness and ability to quickly push through major changes through the complicated, slow moving and corrupt Indian bureaucracy. Once unshackled, the Indian economy can capitalize on significant tailwinds: demographic dividend, large and growing highly educated workforce, large and growing middle class. While there are risks (detailed above), the risk-reward is very attractive.

(Source : KL Investment partners)


Optimism In India

29 May

Investors love a good reform story. Last year, major reforms in Japan and Mexico captured investors’ attention. This year, stocks in India and Indonesia have rallied in anticipation that a more business-friendly, reform-minded leader will soon be elected.

Last week, the Bharatiya Janata Party won a large majority in India’s lower house of parliament, and it is expected that Narendra Modi will be selected to serve as India’s 14th prime minister. Modi is currently the leader of the state of Gujarat, which has recently seen strong growth thanks to Modi’s policies, which fostered a more business-friendly regulatory environment and large investments in infrastructure. Modi’s leadership record and the BJP’s relatively large majority win, which should make it easier to push through difficult reforms, have helped drive a strong market rally. For the year to date, Indian stocks have risen 12% in local-currency terms (as measured by the MSCI India Index), but thanks to a strengthening Indian rupee, the MSCI India Index (in U.S.-dollar terms) has climbed 18%.

At this time, the MSCI India Index is trading at a forward price/earnings ratio of 15 times, which is in line with the index’s 10-year average. While some optimism about India’s future may be justified, corporate India continues to grapple with many challenges in the near term, including above-target inflation, a high cost of capital, weak infrastructure, restrictive and outdated labor laws, and slowing gross domestic product growth. Stronger corporate earnings growth as a result of anticipated reforms may take a few years to materialize.

A Fund for India Exposure
iShares MSCI India (INDA) tracks a cap-weighted index and can be used to achieve exposure to consumer- and investment-driven growth in India. It is appropriate for use as a satellite holding.

It is important to note that the Indian stock market is one of the more volatile among its emerging-markets peers. Indian equities, as measured by the MSCI India Index in U.S. dollars, have had a five-year annualized standard deviation of returns of 30%, which is more than double that of the S&P 500 over the same span. And like most funds that invest in foreign equities, this exchange-traded fund does not hedge its foreign-currency exposure, so its returns reflect both the change in value of the underlying assets as well as the change in the Indian rupee against the U.S. dollar.

There are many factors that drive the volatility of Indian equities. India has a heavy dependence on foreign fund flows for investment and growth. When markets are in a risk-off mode, or when investors become concerned about a potential stall in economic reforms or a deterioration in macroeconomic fundamentals, foreign funds quickly flow out of Indian equities, which tend to have low floats. These factors, combined with India’s current account deficit, drive volatility in the Indian rupee and, therefore, the returns of this fund. India also has a notoriously unfriendly business environment and is plagued by widespread corruption.

Fundamental View
For much of the past two decades, India’s annual economic growth rates were in the mid- to high single digits. Much of this growth was spurred by “big bang” economic liberalization, which began in 1991. These reforms included the opening up of foreign investment and trade, privatization, improved regulation, and capital-market reforms. Even during the 2008 global financial crisis, India was able to continue growing at around 6% because of the economy’s lower exposure to exports (relative to other emerging-markets countries), stimulative fiscal and monetary policies, and stable growth in domestic consumption.

However, relative to China, India’s growth has lagged for a number of reasons, including significantly lower levels of foreign direct investment and very poor infrastructure, in part because of India’s legendary red tape. In the second half of 2012, the Indian government approved of a new law that would allow foreign companies to hold a 51% stake in multibrand retailers. But additional rules, such as local sourcing requirements and large commitments for infrastructure spending, and the potential for an additional layer of state-level regulations resulted in very low interest by global retailers. To date, only U.K.’s Tesco has made a commitment to enter the Indian market.

Many hope the new leadership will usher in another series of major liberalization efforts that will unlock India’s growth potential. But there continues to be many obstacles to India’s growth. Bewildering government bureaucracy, poor infrastructure, widespread poverty, and low literacy rates will weigh on growth. The industrials sector, which accounts for about 20% of India’s economy, is burdened by highly restrictive labor laws, unstable power infrastructure, and complicated tax rules. The agriculture sector, which accounts for about 20% of the economy but employs about 50% of the population, is highly inefficient. Also, India imports about 70% of its domestic oil needs, which the government and the petroleum industry partially subsidize. A significant increase in the price of oil would weigh on India’s public budgets and current account deficit and drive inflation. Finally, job growth continues to be weak, which is a significant economic and social problem, especially given India’s relatively young population.

Portfolio Construction
This fund tracks the MSCI India Index, which is a free float-adjusted market-capitalization-weighted index designed to measure the performance of equity securities of companies whose market capitalization represent the top 85% of companies in the Indian securities market. The fund employs full replication to track its index.

This fund’s expense ratio is 0.67%, making it the cheapest fund for exposure to Indian companies. During the past year, the fund’s net asset value performance has trailed that of its index by 48 basis points per year, which is lower than the expense ratio. This indicates that the fund is tracking its index efficiently.

WisdomTree India Earnings (EPI) is the largest and most liquid U.S.-listed India ETF, perhaps because it is the oldest. It has more mid-cap exposure relative to other India ETFs. This ETF carries an annual expense ratio of 0.83%.

Matthews India (MINDX) (1.18%) is an actively managed open-end fund that carries a Morningstar Analyst Rating of Silver. This fund has heavy exposure to consumer (30%) and industrial (18%) names but does not own any energy stocks.

Those comfortable with the closed-end fund structure might consider India Fund (IFN) (1.33%) and Morgan Stanley India (IIF) (1.29%), which carry ratings of Bronze and Neutral, respectively. Each fund has a long track record of 20 years.

(Source : Seeking Alpha)

The Debt Ceiling Explained

16 Oct

For most of the past year, the Republican Party has been threatening to refuse to raise the federal debt limit unless Democrats give in to a broad and varying set of demands. To understand just how reckless this brinkmanship is, you have to understand just what the debt limit is and what it means to breach it. So here’s an explanation in 10 short sentences:

1. On May 19, total US debt reached $16.7 trillion, the maximum currently allowed by law.

2. The Treasury Department has been playing various games since then to continue paying all our bills while still technically remaining under the debt limit, but within a few days they’ll run out of tricks and the government will no longer be allowed to spend more money than it takes in.

3. These Treasury tricks are very much not business as usual, and the fact that we’ve been reduced to these kinds of shell games means that normal governance is already dangerously crippled.

4. The Congressional Budget Office estimates that in FY 2014 (which runs from October 2013 through September 2014), total federal income will be $3,042 billion and total spending will be $3,602 billion, a difference of $560 billion.

5. This is the amount of debt we need to issue to pay for everything in the budget, which means that if the debt limit isn’t raised, we need to immediately cut spending by $560 billion, or $46 billion per month.

6. That’s roughly the equivalent of wiping out the entire Defense Department; or wiping out two-thirds of Social Security; or wiping out all of Medicaid + all unemployment insurance + all food assistance + all veterans’ benefits.

7. What’s worse, because the government’s computers are programmed to simply pay bills in the order they’re received, it’s not clear if the Treasury can specify which bills get paid and which don’t.

8. This raises the additional risk that interest on treasury bonds might not get paid—something that would put US debt in default and could be disastrous in a global economy that depends on US bonds being rock solid.

9. So those are our choices if Congress fails to raise the debt limit: Either we suddenly stop paying for critical programs that people depend on, or we default on US treasury bonds—or both.

10. The former would immiserate millions of people and probably produce a second Great Recession, while the latter would likely devastate the global economy.

Not much of a choice, is it? That’s why it’s time for Republicans to stop playing games with the financial equivalent of nuclear weapons and agree to raise the debt limit.

(Source :

Yuan Rises to 20-Year High on Record Fixing, Faster Inflation

15 Oct

China’s yuan strengthened to a 20-year high after the central bank set the currency’s reference rate at a record high and as consumer prices advanced the most in seven months.

The People’s Bank of China raised its daily fixing by 0.08 percent to 6.1406 per dollar, the strongest since a peg to the greenback was lifted in July 2005. Inflation (CNCPIYOY)quickened to 3.1 percent last month, the fastest pace since February, data showed today. The nation’s foreign-exchange reserves, the world’s largest, rose to a record $3.66 trillion as of Sept. 30 from $3.5 trillion at the end of June, according to central bank data released today.

“The global recovery remains patchy and China is looking to shift growth toward domestic consumption,” said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp. “If inflation continues to trend up, we are going to be in a stronger environment for the Chinese currency.”

The yuan gained 0.21 percent, the most since May 8, to close at 6.1079 per dollar in Shanghai, China Foreign Exchange Trade System prices show. It touched 6.1073 earlier, the strongest since the government unified the official and market exchange rates at the end of 1993. The yuan has risen 35 percent against the greenback since the end of its peg, when it traded around 8.2765, according to data compiled by Bloomberg.

There could be changes to the yuan’s trading band after China’s central committee meets in November, according to Sacha Tihanyi, a Hong Kong-based currency strategist at Scotiabank. The likely outcome is for the range to be widened to 1.5 percent or even 2 percent from the current 1 percent, he wrote in a note today.

New Loans

New local-currency loans were 787 billion yuan in September, compared with 623.2 billion yuan a year earlier, official data showed today. Exports (CNFREXPY) dropped 0.3 percent from a year earlier, trailing all 46 estimates in a Bloomberg survey, while imports rose a more-than-forecast 7.4 percent, according to trade data released over the weekend.

In Hong Kong’s offshore market, the yuan appreciated 0.09 percent to a record 6.1010 per dollar, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards rose 0.19 percent to 6.1500, the strongest since Bloomberg began compiling the data in 1998. The contracts were at a 0.7 percent discount to the onshore rate. Hong Kong’s stock market is shut today for a public holiday.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, fell one basis point, or 0.01 percentage point, to 1.24 percent.

(Source : Bloomberg)

China Steel Binge Spurs Record Hiring of Ore Carriers

15 Oct

Freight traders are hiring record numbers of iron-ore carriers in the spot market as Chinese steel production expands at the fastest pace in three years, spurring the biggest rally in shipping rates since 2009.

One-time charters to haul the commodity on Capesizes, the largest ore carriers, rose 51 percent to 124 in September from the previous month, according to data compiled by Morgan Stanley. More than 90 percent are bound for China, and the ore they carry would make enough steel to build about 150 Golden Gate Bridges. The surge means more demand for Nippon Yusen K.K. (9101) and Mitsui O.S.K. Lines Ltd., which are based in Tokyo and control the biggest fleets.

The jump in chartering reflects average monthly Chinese steel output that’s been about 10 percent higher in 2013, reducing the nation’s ore stockpiles to the lowest for this time of year since 2007. Imports of the raw material into China rose to a record last month. The demand is diminishing the fleet’s biggest capacity glut in three decades, spurring an almost sevenfold surge in rates since Jan. 2 that means ship owners are making money again for the first time in almost two years.

“Rates have moved quicker than even the most optimistic forecasters had hoped for only a few months back,” said Eirik Haavaldsen, an analyst at Oslo-based Pareto Securities AS, whose recommendations on the shares of shipping companies returned 18 percent in the past six months. “We have really seen a restocking commencing.”

Freight Swaps

Daily rates for Capesizes, each hauling about 160,000 metric tons, jumped to a 34-month high of $42,211 on Sept. 25, according to the Baltic Exchange, which publishes shipping costs for more than 50 marine routes. They were at $31,545 yesterday. Freight swaps, traded by brokers and used to bet on future rates, anticipate a fourth-quarter average of $28,500, the most since 2011. The 1,000-foot carriers need about $14,500 to break even, says RS Platou Markets AS, an investment bank in Oslo.

Shares of Nippon Yusen, with 68 Capesizes in its fleet, rose 62 percent to 326 yen this year and will reach 333.07 yen in 12 months, according to the average of 14 analyst forecasts compiled by Bloomberg. Those of Mitsui O.S.K., which owns 64 of the ships, gained 74 percent to 443 yen and will be at 438.31 yen in a year, the average of 13 estimates shows. The fleet-size data were compiled by Clarkson Plc, the biggest shipbroker.

China may be producing more steel than it needs, according to Morgan Stanley analyst Fotis Giannakoulis in New York. The surge in charters comes as growth in the nation’s $8.36 trillion economy slows. China buys about two-thirds of all seaborne iron ore, the second-biggest commodity cargo after crude oil.

Monetary Fund

The International Monetary Fund cut its 2014 growth forecast for the country on Oct. 8, predicting a pace of 7.3 percent, from a July estimate of 7.7 percent. That would be the slowest expansion since 1990. The World Bank lowered its prediction a day earlier to 7.7 percent from 8 percent.

Owners also are contending with a fleet whose capacity more than doubled since June 2008, when Capesize rates rose to a record $233,988 a day and triggered an unprecedented number of orders for new vessels, according to data from London-based Clarkson. Trade in iron ore climbed 40 percent over the same period, the broker’s data show.

The rally in rates is curbing the biggest ship-demolition program in at least three decades. Owners who previously intended to scrap vessels are now trading them again, Global Marketing Systems Inc., the biggest buyer of obsolete carriers, said Oct. 3. Older Capesizes sailing to China from Brazil, the most important trade route for iron ore, can earn $1.4 million from a single voyage, according to Arctic Securities ASA in Oslo. A 15 year-old ship costs about $17 million.

Fewer Demolitions

Even with fewer demolitions, the largest fleet expansion in history is now easing. Ship yards have orders for new Capesizes equal to 16 percent of current capacity, down from as much as 100 percent five years ago, according to data from IHS Maritime, a Coulsdon, England-based research company. The fleet will expand 5 percent this year, the smallest gain in a decade, according to Clarkson.

The rally in Capesize rates contrasts with declines spanning most other shipping markets. The ClarkSea Index measuring rates across the maritime industry averaged $9,472 a day this year, heading for the lowest annual level on record. The surplus of capacity for oil tankers delivering 2 million-barrel cargoes is the biggest since about 1985, according to Fearnley Consultants A/S, a research company in Oslo.

Nippon Yusen, which also owns crude carriers, container ships and car transporters, will report a 76 percent gain in net income to 33.17 billion yen ($337.8 million) in its fiscal year ending March 31, according to the mean of 16 analyst estimates.

Narrow Losses

Mitsui O.S.K. (9104) will make a profit of 45.63 billion yen, compared with a loss of 178.8 billion yen in the prior year, the average of 16 predictions shows. Seven out of 12 companies in the Bloomberg Dry Ships Index will narrow losses or report a profit in 2013, according to forecasts compiled by Bloomberg.

Trade in seaborne iron ore will expand 6 percent to 1.17 billion tons this year, with China taking 66 percent of the total, Clarkson says. Shipments of dry-bulk commodities that also include coal and grains will rise 5 percent to 4.3 billion tons, according to the shipbroker.

Spot iron-ore fixtures provide the best indicator of changing demand because they exclude cargoes moved under long-term contracts, according to Erik Nikolai Stavseth, an analyst at Oslo-based investment bank Arctic Securities. The ships booked in September will mostly unload this month and next.

Services Industry

China’s steel mills now account for 50 percent of global output. Manufacturing (CPMINDX) in the country is expanding at the fastest pace in 17 months, while growth in the services industry is the strongest since March, government figures show.

The nation imported 74.58 million tons of the ore last month, 15 percent more than a year earlier, customs data show. Its steel output averaged 65.1 million tons a month this year, 10 percent more than in 2012, according to data from the Brussels-based World Steel Association. Stockpiles of iron ore at China’s ports now come to 70 million tons, 24 percent less than this time last year.

“China needs a much bigger restock in iron ore than last year,” said Aneek Haq, a metals analyst at Exane BNP Paribas in London. “The recent increase in fixtures is a confirmation of this.”

(Source : Bloomberg)

Marc Faber Warns “There Is No Safe Haven”

15 Oct

There is no safe haven, Marc Faber tells Bloomberg TV’s Tom Keene, “The best you can hope for is that you have a diversified portfolio of different assets and that they don’t all collapse at the same time.” Bank deposits are no longer safe; money and treasury bills are not 100% safe; and equities in the US are relatively expensive by any valuation metric. However, at around $1250, gold is a buy, Faber adds on the basis of the ongoing monetization of debt globally. The debt ceiling debacle will lead to the Fed stepping up to directly fund the government (something it already implicitly does but mainstream media prefer not to consider). Faber clarifies the idiocy of the discussions, “both parties want to spend, it’s just on different things,” with “the idiocies of government” having grown way too large, wasting money everywhere… the Democrats are “buying votes” and the Republicans funding the military complex. The debt-ceiling is merely a symptom of the problem, Faber concludes, that “government has grown disproportionately large and that retards economic growth.”

Faber on gold:

“We have a strong rally form the lows at 1180 to over 1400 and now we are backing off. I think between around 1200 and 1250 it is getting into buying range. The sentiment about gold is very negative, but if you look at everything considered – the monetization of debt, the debt ceiling, which sooner or later will be increased because both Republicans and Democrats are big spenders and the government’s debt has expanded from $1 trillion in 1980 to $5 trillion in 1999, now we are at $16 trillion. Both Democrats and Republicans have been big, big spenders because a lot of money flows through the government.”

On how he sees the debt ceiling debate playing out:

“If they don’t agree by the 17th, I think what can happen is that the Fed will actually finance the Treasury independently so the interest payments are being met. If the interest payments are not being met, I think it will cause quite a bit disruption to the financial market. I am not that concerned about that. I think this larger issue is like the euro issue a year ago where people were very negative and it was debated and so forth. In the end it is a political decision. I think both parties want to spend. It’s just on different items that they want to spend money.”

On whether what’s going on across equities, bonds currencies and commodities, along with the events in US, can be compared to other idiocies by governments in previous decades:

“Yes, idiocies by governments. That is exactly the word. It’s basically a dysfunctional government that we have that is far too large that is essentially wasting money left, right and center. The Republicans are wasting money on the military complex and the Democrats are basically buying votes with transfer payments, with entitlement programs, it goes on. It is a huge waste. The problem is that I don’t see a solution. I think the current debate about the debt ceiling and the budget is more a symptom of a problem than a problem itself. The problem is really that the government, not just in the US but other countries as well, has grown disproportionally large and that retards economic growth.”

On whether there’s a safe haven left:

“There is no safe haven. Bank deposits are not safe, which used to be safe. Money in treasury bills is not 100% safe because there is inflation in the system and you hardly get any interest. Bonds are not very safe anymore because eventually interest rates will go up. Equities in the US are relatively expensive by any valuation metrics you might use. I don’t see anything particularly safe. The best you can hope for is that you have a diversified portfolio of different assets and that they don’t all collapse at the same time.”

Families hoard cash 5 years after crisis

10 Oct

They speak different languages, live in countries rich and poor, face horrible job markets and healthy ones. When it comes to money, though, they act as one: They’re holding tight to their cash, driven more by a fear of losing what they have than a desire to add to it.

Five years after U.S. investment bank Lehman Brothers collapsed, triggering a global financial crisis and shattering confidence worldwide, families in countries as varied as the United States, Japan, the United Kingdom and Germany remain hunkered down, too spooked and distrustful to take chances with their money.

An Associated Press analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation.

“It doesn’t take very much to destroy confidence, but it takes an awful lot to build it back,” says Ian Bright, senior economist at ING, a global bank based in Amsterdam. “The attitude toward risk is permanently reset.”

A flight to safety on such a global scale is unprecedented since the end of World War II.

The implications are huge: Shunning debt and spending less can be good for one family’s finances. When hundreds of millions do it together, it can starve the global economy.

Some of the retrenchment is not surprising: High unemployment in many countries means fewer people with paychecks to spend. But even people with good jobs and little fear of losing them remain cautious.

“Lehman changed everything,” says Arne Holzhausen, a senior economist at global insurer Allianz, based in Munich. “It’s safety, safety, safety.”

The AP analyzed data showing what consumers did with their money in the five years before the Great Recession began in December 2007 and in the five years that followed, through the end of 2012. The focus was on the world’s 10 biggest economies – the U.S., China, Japan, Germany, France, the U.K., Brazil, Russia, Italy and India – which have half the world’s population and 65 percent of global gross domestic product.

Key findings:

– RETREAT FROM STOCKS: A desire for safety drove people to dump stocks, even as prices rocketed from crisis lows in early 2009. Investors in the top 10 countries pulled $1.1 trillion from stock mutual funds in the five years after the crisis, or 10 percent of their holdings at the start of that period, according to Lipper Inc., which tracks funds.

They put more even money into bond mutual funds – $1.3 trillion – even as interest payments on bonds plunged to record lows.

– SHUNNING DEBT: In the five years before the crisis, household debt in the 10 countries jumped 34 percent, according to Credit Suisse. Then the financial crisis hit, and people slammed the brakes on borrowing. Debt per adult in the 10 countries fell 1 percent in the 4 1/2 years after 2007. Economists say debt hasn’t fallen in sync like that since the end of World War II.

People chose to shed debt even as lenders slashed rates on loans to record lows. In normal times, that would have triggered an avalanche of borrowing.

– HOARDING CASH: Looking for safety for their money, households in the six biggest developed economies added $3.3 trillion, or 15 percent, to their cash holdings in the five years after the crisis, slightly more than they did in the five years before, according to the Organization for Economic Cooperation and Development.

The growth of cash is remarkable because millions more were unemployed, wages grew slowly and people diverted billions to pay down their debts.

– SPENDING SLUMP: To cut debt and save more, people have reined in their spending. Adjusting for inflation, global consumer spending rose 1.6 percent a year during the five years after the crisis, according to PricewaterhouseCoopers, an accounting and consulting firm. That was about half the growth rate before the crisis and only slightly more than the annual growth in population during those years.

Consumer spending is critically important because it accounts for more than 60 percent of GDP.

– DEVELOPING WORLD NOT HELPING ENOUGH: When the financial crisis hit, the major developed countries looked to the developing world to take over in powering global growth. The four big developing countries – Brazil, Russia, India and China – recovered quickly from the crisis. But the potential of the BRIC countries, as they are known, was overrated. Although they have 80 percent of the people, they accounted for only 22 percent of consumer spending in the 10 biggest countries last year, according to Haver Analytics, a research firm. This year, their economies are stumbling.

Consumers around the world will eventually shake their fears, of course, and loosen the hold on their money. But few economists expect them to snap back to their old ways.

One reason is that the boom years that preceded the financial crisis were fueled by families taking on enormous debt, experts now realize, not by healthy wage gains. No one expects a repeat of those excesses.

More importantly, economists cite psychological “scarring,” a fear of losing money that grips people during a period of collapsing jobs, incomes and wealth, then doesn’t let go, even when better times return. Think of Americans who suffered through the Great Depression and stayed frugal for decades.

Although not on a level with the Depression, some economists think the psychological blow of the financial crisis was severe enough that households won’t increase their borrowing and spending to what would be considered normal levels for another five years or longer.

To better understand why people remain so cautious five years after the crisis, AP interviewed consumers around the world. A look at what they’re thinking – and doing – with their money:

Rick Stonecipher of Muncie, Ind., doesn’t like stocks anymore, for the same reason that millions of investors have turned against them – the stock market crash that began in October 2008 and didn’t end until the following March.

“My brokers said they were really safe, but they weren’t,” says Stonecipher, 59, a substitute school teacher.

Americans sold the most in the five years after the crisis – $521 billion, or 9 percent of their mutual fund holdings, according to Lipper. But investors in other countries sold a larger share of their holdings: Germans dumped 13 percent; Italians and French, more than 16 percent each.

The French are “not very oriented to risk,” says Cyril Blesson, an economist at Pair Conseil, an investment consultancy in Paris. “Now, it’s even worse.”

It’s gotten worse in China, Russia and the U.K., too.

Fu Lili, 31, a psychologist in Fu Xin, a city in northeastern China, says she made 20,000 yuan ($3,267) buying and selling stocks before the crisis, more than 10 times her monthly salary then. But she won’t touch them now, because she’s too scared.

In Moscow, Yuri Shcherbanin, 32, a manager for an oil company, says the crash proved stocks were dangerous and he should content himself with money in the bank.

In London, Pavlina Samson, 39, owner of a jewelry and clothes shop, says stocks are too “risky.” What’s also driving her away may be something that runs deeper: “People feel like they’re being ripped off everywhere,” she says.

Holzhausen, the Allianz economist, says the crisis taught people not to trust others with their money. “People want to get as much distance as possible from the financial system,” he says.

The crisis also taught them about the dangers of debt.

After the crisis hit, Jerry and Madeleine Bosco of Tujunga, Calif., found themselves facing $30,000 in credit card bills with no easy way to pay the debt off. So they sold stocks, threw most of their cards in the trash, and stopped eating out and taking vacations.

Today, most of the debt is gone, but the lusher life of the boom years is a distant memory. “We had credit cards and we didn’t worry about a thing,” says Madeleine, 55.

In the U.S., debt per adult soared 54 percent in the five years before the crisis. Then it plunged, down 12 percent in 4 1/2 years, although most of that resulted from people defaulting on loans. In the U.K., debt per adult fell a modest 2 percent, but it had jumped 59 percent before the crisis.

Even Japanese and Germans, who weren’t big borrowers in the years before the crisis, cut debt – 4 percent and 1 percent, respectively.

“We don’t want to take out a loan,” says Maria Schoenberg, 45, of Frankfurt, Germany, explaining why she and her husband, a rheumatologist, decided to rent after a recent move instead of borrowing to buy. “We’re terrified of doing that.”

Such attitudes are rife when it has rarely been cheaper to borrow around the world.

“A whole new generation of adults has come of age in a time of diminished expectations,” says Mark Vitner, a senior economist at Wells Fargo, the fourth-largest U.S. bank. “They’re not likely to take on debt like those before them.”

Or spend as much.

After adjusting for inflation, Americans increased their spending in the five years after the crisis at one-quarter the rate before the crisis, according to PricewaterhouseCoopers. French spending barely budged. In the U.K., spending dropped. The British spent 3 percent less last year than they did five years earlier, in 2007.

High unemployment has played a role. But economists say the financial crisis, and the government debt crisis that started in Europe a year later, has spooked even people who can afford to splurge to cut back.

Arnaud Reze, 36, owns a home in Nantes, France, has piled up money in savings accounts and stocks, and has a government job that guarantees 75 percent of his pay in retirement. But he fears the pension guarantee won’t be kept. So he’s stopped buying coffee at cafes and cut back on lunches with colleagues and saved in numerous other ways. “Little stupid things that I would buy left and right … I don’t buy anymore,” he says.

Even the rich are spending cautiously.

Five years ago, Mike Cockrell, chief financial officer at Sanderson Farms, a large U.S. poultry producer in Laurel, Miss., had just paid off a mortgage and was looking forward to the extra spending money. Then Lehman collapsed, and he decided to save it instead.

“I watched the news of the stock market going down 100, 200 points a day, and I was glad I had cash,” he says, recalling the steep drops in the Dow Jones industrial average then. “That strategy will not change.”

The wealthiest 1 percent of U.S. households are saving 30 percent of their take-home pay, triple what they were saving in 2008, according to a July report from American Express Publishing and Harrison Group, a research firm.

After years of saving more and shedding debt, the good news is that many people have repaired their personal finances.

Americans have slashed their credit card debt to 2002 levels. In the U.K., personal bank loans, not including mortgages, are no larger than they were in 1999. In addition, home prices in some countries are rising.

So more people have the capacity to borrow, spend and invest more. But will they?

Sahoko Tanabe of Tokyo, 63, lost money in Japan’s stock market crash more than two decades ago, but she’s buying again. “Abenomics,” a mix of fiscal and monetary stimulus named for Japan’s new prime minister, has ignited Japanese stocks, and she doesn’t want to miss out. “You’re bound to fail if you have a pessimistic attitude,” she says.

But for every Tanabe, there seem to be more people like Madeleine Bosco, the Californian who ditched many of her credit cards. “All of a sudden you look at all these things you’re buying that you don’t need,” she says.

Attitudes like Bosco’s will make for a better economy eventually – safer and more stable – but won’t trigger the jobs and wage gains that are needed to make economies healthy now.

“The further you get away from the carnage in `08-’09, the memories fade,” says Stephen Roach, former chief economist at investment bank Morgan Stanley, who now teaches at Yale. “But does it return to the leverage and consumer demand we had in the past and make things hunky dory? The answer is no.”

(Source : GARP)