Viktor Shvets, Head of Asian Strategy at Macquarie Securities recently published a report on who could be the next fall guy amidst the current trade and monetary disputes in the world, and also provides a long-term solution.
We recently published our Indian Macroeconomic dashboard for April 2018. Find out below for more details.
The rupee appears to signal once more unwelcome “rising dollar” tendencies, despite whatever very real advantages the Indian economy demonstrates. The real question is what this all means, but the biggest clue will be in escalating warnings like this.
Nike, as one of the most successful companies to ever exist. “Shoe Dog” tells the story of the companys origins, told by none other than Phil “Buck” Knight, its founder. This is worth a read that has lessons especially if you are an entrepreneur or aspire to be one.
I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week…
Trade deals need a fall guy. Who will it be?
(Source: Macquarie Securities)
Any major trade deal requires a “fall guy”, prepared to “bite the bullet”. In the 1985 Plaza Accord, that fall guy was Japan, which accepted a 50% higher forex rate to accommodate the conflicting interests of other parties. In 1990s/2000s, it was the US that aggressively promoted a global agenda.
While trade and globalisation are not zero-sum games, the distribution of gains and losses is not uniform. This is the big problem, amplified by our system of delineated nation-states. The key contention here is that there are no obvious new fall guys.
The biggest challenge is that two major sources of US dollar (US monetary base and current account deficits) are no longer growing but global economy cannot expand unless the dollar is relatively weak. As the Donald Trump administration insists on smaller deficits, the liquidity is further constrained.
The most natural candidate is China; however, it is unlikely to be willing or able to carry the burden of rapid renminbi appreciation. It is highly unlikely that China would accept Plaza Accord II while euro zone needs global reflation to keep its deeply flawed monetary system afloat and Japan continues to export capital not demand while its long-term positioning is unclear. Hence, the US must generate rising deficits to lubricate the system. Alas, it also seems to be coming to the end of the road.
The world is caught between Rodriks Political Trilemma whereby globalization and nation-states, with independent local policies are simply incompatible, Impossible Trinity whereby no nation can simultaneously control exchange rates, monetary policy and capital flows and The Triffin Paradox which essentially states that a country issuing a global reserve currency must run ever-increasing deficits or find alternative ways of somehow injecting sufficient liquidity to fund and lubricate global trade and interactions.
There exists a long-term solution, which involves replacement of the dollar with new non-country specific global currency and close policy coordination. No one wants it for now, until some day they might have no other choice.
Macroeconomic Dashboard- India
(Source: Macroeconomic Dashboard)
Valuewalk recently published Macroeconomic dashboard for April.
• Inflation accelerated at faster pace with core CPI inflation at 5.9%. This may have a pass through effect on retail prices and push RBI to raise interest rates in next two policy reviews.
• The 10-year G-Sec reversed its movement in early April falling to levels of 7.13% from 7.4% in March 2018, but increased again to 7.8%. As seen in other EMs, the countries with weak macro variables and high FPI exposure to local debt have seen sell off in their currency and bond markets. It had an effect on Indian bond markets as well, bond yields continue to be under pressure due to weakening macro variables (oil, inflation, CAD, INR) and foreigners remaining net sellers of Indian debt.
• Bank non-food credit growth increased 12.8% YoY for the fortnight ended April 27, the highest in the last 12 months to Rs 84.8 lakh crore. The credit flow from mutual funds and other non-banking institutional lenders has reduced due to lack of liquidity with them. Hence credit demand is flowing back to the bank which is reflected in higher credit growth rate.
• Deposits grew 8.2% YoY to Rs 114.3 lakh crore for the fortnight ended April 27, 2018, rebounding from the slow growth rate since Nov 2017, which is attributable to the high base due to demonetisation less attractive interest rates offered by the banks. Indian banks are raising deposit rates like other banks in different parts of the world but mainly to corporate/institutional segment. Also the RBI will continue to do OMO and inject liquidity in order to meet liquidity demand.
• On the consumer side, motor vehicle sales increased 17.4% y-o-y in April 2018, driven by strong growth in commercial vehicles that rose 76% YoY, two-wheeler sales, which grew 16.9% and passenger vehicles that registered a healthy growth of 7.4%. The high frequency indicators suggest sustained growth in consumption sector aided by recovery in rural sector. All this bodes well with aggregate growth recovery.
• The Nikkei Manufacturing Purchasing Managers Index (PMI), compiled by IHS Markit, rose to 51.6 in April 2018 from 51 in March and above the 50-point mark that separates growth from contraction for the ninth straight month. The pick-up in growth was buoyed by stronger demand conditions supported by faster expansions in output and new orders.
Shoe Dog: How Nike was Built
(Source: Old Dog, New Tricks?)
“Shoe Dog” by Phil Knight is a remarkable book. Its extremely well-written, brutally honest, authentic, and emotionally raw. You must read this book, especially if you are an entrepreneur or aspire to be one.
His remarkable story begins with his “Crazy Idea” that he dreamed up during a graduate seminar at Stanfords School of Business. There he wrote a case study about building a shoe company by breaking into the track and field shoe industry!
When his first shipment of 12 shoes arrived, he sent a pair to his former track coach, who would become a co-founder of his company. From 12 shoes to billions in revenue. From such humble beginnings to such an amazing success. The whole period from 1980 to now, from a split-adjusted offering price of $0.18 per share to todays $69.50. Thats a return of 19.4% per year with dividends reinvested, for a total return of 75,620%.
Phil Knight loved the act of creation. He remembered the early resource-starved days of struggling together with his team to solve problems of ever increasing complexity to bring into being something which had never existed before. He describes amazing highs, soul-searching lows, and everything in between as the team of misfits and iconoclasts that he had assembled battled its way through one problem after another.
Your only tools to combat these problems, and to create the solutions that make companies successful, is to have the right people on your team. Phil Knight got this. He named the streets at Nikes global campus headquarters after members of his early team. Others have buildings named after them.
So, this is what reading “Shoe Dog” helped to crystalize: the importance of the right people on the team.
An India Canary?
(Source: Rupee a good indicator for dollar condition)
For much of the Great "Moderation”, India's currency was pretty stable. During the 2000s, up until the Great Financial (dollar) Crisis, there was practically no volatility in it at all. During the panic, the rupee fell like so many others – ending the "devaluation" in March 2009.
Recovering quickly, it wasn't until the 2011 crisis that the rupee and India's inflation problems really began. In that way, the rupee has been a pretty good indicator for global "dollar" conditions, and especially this post-2011 sort of permanence to it all.
The emerging market crisis in 2013 or "rising dollar" would move on to other places, mostly China and the other two BRICs. Many credited, and still do, the Reserve Bank of India's late 2013 policy actions for that relative tranquility. Whatever the cause, the rupee fell again during the main of the "rising dollar" episode, finally hitting bottom in later February 2016.
The currency appears to signal once more unwelcome "rising dollar" tendencies, despite whatever very real advantages the Indian economy demonstrates over its rivals.
It is the timing, and more so the intensity, of this latest move that draws our focus. Reflation via appreciating rupee proceeded pretty solidly until first clearly interrupted in early September 2017. The big move began in late January 2018, in the days leading up to the global liquidations. The unit has since that time just about crashed; it hasn't behaved like this since 2013.
Indian currency should reflect some greater measure of stability by its own fundamental prospects. There are too many major moves all lining up together and in the wrong direction. It started with the US, and that part is confirmed. The real question is what this all means, up to and including whether it marks the start of whatever the next phase of Eurodollar decay might be. We obviously won't know anything like that for some time, but the biggest clue will be in escalating warnings like this.