(MENAFN- ProactiveInvestors) Roger Bootle: Forget Devaluation it is More Domestic Demand We Need
Here is the opening and also the last paragraph of this interesting column from The Telegraph:
Not only has UK inflation fallen to 0.5pc but it now looks likely that the rate will shortly turn negative. This has given rise to a heated debate about the distinction between “good” and “bad” deflation. I am reminded of when doctors started talking about the difference between good and bad cholesterol. At that point I thought the game was up.
With regard to deflation the good/bad distinction is useful – but only up to a point. If aggregate demand is weak and that forces firms to cut prices and pay then deflation is a sign of the economy’s weakness. That is the bad variety. By contrast if a fall in import prices causes inflation to turn negative this provides a boost to real incomes without implying anything adverse about the state of the domestic economy. This is good deflation.
In practice this distinction can be a bit blurred because it may well be that the fall in import prices is itself due to weak aggregate demand in the world. This is surely partly true today. In that case what may be good deflation for an oil-importing country like the UK is still bad deflation for the world as a whole.
But once you move on from the origins of falling prices to think about the consequences this distinction between good and bad deflation loses all force. The current situation mirrors what happened in the opposite direction in the 1970s. When oil prices first shot up in 1973-74 this implied a reduction in real incomes and living standards for oil-consuming countries.
If people accepted this then there was no reason for the rise in prices to cause continuing inflation. But they didn’t accept it. Workers pushed for higher wages to compensate them for higher prices and firms raised prices faster in order to compensate them for higher wage costs. This became a wage/price spiral. Strikingly the position was utterly different when UK inflation was well above the 2pc target two to five years ago. Wage inflation did not respond.
And:
What the eurozone – and the world – needs is not a burst of competitive devaluations but much faster growth of domestic demand. In Europe that prospect remains as elusive as ever.
David Fuller's view
I maintain that the slump in oil prices is initially due to increased supply thanks to technology. However traditional oil producers also increased production as prices fell in an effort to reduce revenue losses. The net effect for oil importing countries is positive deflation which will help GDP growth over the medium to longer term.
This item continues in the Subscribers’ Area.
Chinese Stocks Plunge Most in Six Years on Lending Curbs
Here is the opening of this informative report from Bloomberg:
Chinese equities plunged the most in six years led by brokerages after regulatory efforts to rein in record margin lending sparked concern that speculative traders will pull back from the world’s best-performing stock market.
The Shanghai Composite Index sank 7.7 percent to 3116.35 at the close its steepest drop since June 2008.Citic Securities Co. (600030) and Haitong Securities Co. the nation’s two biggest listed securities firms fell by the 10 percent daily limit after they were suspended from loaning money to new equity-trading clients and regulators said brokerages shouldn’t lend to investors with assets below 500000 yuan. About nine stocks dropped for each that rose on the Shanghai gauge with more than 100 companies retreating by the maximum allowed.
The penalties have raised concern that policy makers are trying to curb a surge in stock purchases using borrowed money after outstanding margin loans surged to 1.1 trillion yuan ($177 billion) as of Jan. 16 from about 400 billion yuan at the end of June. The Shanghai Composite index (SHCOMP) jumped 67 percent in the past 12 months through last week on record volumes as individual investors piled into the market.
“Regulators are concerned that shares have run too hard too fast” said Hao Hong a strategist at Bocom International Holdings Co. in Hong Kong. “They want a measured increase in the stock market. After all margin financing is one of the reasons for people to be bullish on brokerage stocks and these stocks have run particul
David Fuller's view
This regulatory decision is prompted primarily by the Shanghai A-Share Index (p/e 14.91 yield 2.13% which saw an explosive advance from November 2014 to January 2015. It is a responsible move in my opinion because it should prevent a big bubble from occurring.
This item continues in the Subscribers’ Area.
Narendra Modi: Speaking at the Economic Times Global Business Summit
My thanks to a subscriber for this informative speech by India’s Prime Minister delivered on 16th January. Here is the opening:
I am happy to be here today to address the Global Business Summit. This is a good platform for bringing together economists and industry leaders. I compliment The Economic Times for organising it.
Over the next two days you will debate growth and inflation manufacturing and infrastructure missed chances and unlimited possibilities. You will see India as a country of opportunities unmatched across the world. I assure you that your inputs shall receive my government’s highest attention.
The New Age India has also begun its transition; from a winter of subdued achievement lasting 3 to 4 years to a new spring that beckons.
The country had fallen into deep despair with two back-to-back years of below 4% growth and governance at rock bottom. A series of scams from telecom to coal had paralysed the economy. We deviated from the dream of India as a land of opportunity. No longer can we afford the flight of capital and labour for lack of opportunity.
We have to repair the damage that has happened. Restoring growth momentum will be an uphill task. It will take hard work sustained commitment and strong administrative action. But we can overcome the mood of despair. And we must. It is in this context that all the steps we have taken must be seen.
David Fuller's view
If you wish to understand Narendra Modi and his goals for India I encourage you to read this speech. It is certainly ambitious and we know that Modi is a high achiever. He wants to empower India’s poor modernise the country and turn a $2 trillion economy into a $20 trillion success story.
The world’s biggest democracy is back on track and I would not underestimate its potential. India’s is currently the world’s best performing stock market so far this year with the BSE Sensex Index up 5.26% in US Dollar terms.
(Note: there is also a video of Modi’s presentation at the end of this pamphlet but unless you are Indian I think it is easier to read the speech.)
The Markets Now
Monday 23rd February at the East India Club 16 St. James Square London SW1Y 4LH
David Fuller's view
I enjoy meeting subscribers because international investors are often interesting and imaginative people. That was an important reason why I travelled around the world for several decades with TCS and on other speaking tours before handing that privilege over to Eoin Treacy a few years ago. Now with a daily service I meet subscribers mainly at our Markets Now seminars which I launched last year with Iain Little who has been a subscriber for several decades. If you live near London and attend our next seminar on 23rd February you will meet another subscriber David Brown who has attended Markets Now and will return next month as our guest speaker. He is a fascinating visionary and accomplished individual whose subject will be The Third Industrial Revolution.
You will find David Brown’s short bio in the latest brochure. Delegates will be limited to 35 so I would not delay if you are interested in this event. At approximately 8:30pm following the presentations speakers and many delegates adjourn to the East India Club’s American Bar for refreshments and further conversation. I hope you can stay on and join us if you have the time.
Draghi Big Push Seen Delivering $640 Billion With QE
This article by Alessandro Speciale and Andre Tartar for Bloomberg may be of interest to subscribers. Here is a section:
Mario Draghi is likely to announce a 550 billion-euro ($640 billion) bond-purchase program this week and won’t skimp too much on the details economists say.
The European Central Bank president will make his biggest push yet to steer the euro area away from deflation by announcing quantitative easing on Jan. 22 according to 93 percent of respondents in a Bloomberg News survey. The median estimate of the size of the package tops the 500 billion euros in models presented to officials this month.
Draghi’s goal at a press conference after the Governing Council gathers will be to convince investors he has a strategy big and bold enough to reinvigorate the moribund economy.
Speculation over his plans has already sent the euro to an 11- year low with the fund flows probably contributing to the Swiss National Bank’s shock decision to end a cap on the franc.
“Market expectations now are stellar” said Attilio Bertini head of research at Credito Valtellinese SC in Sondrio Italy. There must be “no disappointment” and “the ECB’s next move should be pervasive risk-transferring and long-lasting” he said.
The proportion of economists predicting QE at this week’s meeting has risen from 37 percent in a survey carried out after the last monetary-policy meeting on Dec. 4. This month’s survey polled 60 economists and was conducted from Jan. 9 to Jan. 16.
Eoin Treacy's view
It’s been a long time coming but the prospects of a full blown quantitative easing program for the Eurozone have improved considerably in the last few weeks following the ECJ’s decision on the legality of the 2012 LTRO program brinksmanship by Greek politicians and continued deflationary and disinflationary pressures. The equity market is already pricing in a significant move and the announcement will need to be in the region of the €600 billion mark if the recent run-up in Eurozone equities is to be sustained.
The Euro Stoxx Index has rallied over the last week to test the upper side of its six-month range as optimism about the impact on asset prices of quantitative easing overwhelms negative perceptions of the Eurozone’s growth potential. In the absence of a clear downward dynamic potential for additional upside can be given the benefit of the doubt.
I clicked through the constituents of the Euro Stoxx Index for clues to commonality among its outperformers.
Email of the day on total ETF holdings of gold
I remember seeing a chart in a comment of the day of total gold holdings in GLD (or maybe it was all physical Gold ETFs combined)
Eoin Treacy's view
Thank you for this question. Considering how much of an influence ETFs have on the gold market it is reasonable to monitor their holdings as a barometer of investment demand. You can find the chart for the Total Known ETF Holdings of hold in the Chart Library by using a keyword in the search such as “holdings” or with the ticker ETFGTOTL. It can also be found in Commodity Indices section
Gold has now posted a failed downside break from its $1200 - $1400 trading range and is currently rallying towards the upper boundary. ETF holdings increased last week but more will be needed to signal renewed investment demand beyond the short term.
Citic Securities Sees No Change to $4.6 Billion Share Sale Plan
This article from Bloomberg news may be of interest to subscribers. Here is a section:
Citic Securities Co. China’s biggest brokerage by market value said it will push ahead with a plan to sell about $4.6 billion of stock even after curbs on margin lending triggered a record plunge in its shares.
The broker’s plan to sell as many as 1.5 billion new H shares remains unchanged a Hong Kong-based press officer said in an e-mailed response to questions today. Citic Securities said in December it would sell the shares valued at $4.6 billion based on today’s price to develop capital-intensive operations including margin financing and securities lending.
Chinese brokerages’ shares plunged today after the securities regulator banned three of the biggest firms from adding new margin-finance accounts for three months. Citic Haitong Securities Co. and Guotai Junan Securities Co. let customers delay repaying financing for longer than permissible the China Securities Regulatory Commission said Jan. 16.
The business and operations of Beijing-based Citic Securities remain unchanged it said in today’s statement. Citic Securities shares fell by the 10 percent daily limit in Shanghai and dropped 16 percent the most on record at the close in Hong Kong.
Haitong hasn’t changed its share sale plan said a person with knowledge of the matter who asked not to be identified discussing private information. It said in December it plans to raise about $3.9 billion from a sale of 1.92 billion new shares.
Eoin Treacy's view
Today’s announcement clipped the wings of highflying mainland brokers with the three main companies falling the daily limit of 10%. Brokerages have outperformed by a wide margin over last three months with Citic Securities returned to test its 2008 peak. Consolidation of that accelerated move is now underway.