Why Wall Street Is Worried About the End of Rajan Reign
Date
6/21/2016 6:55:48 AM
(MENAFN- ProactiveInvestors - UK) Fuller Treacy Money, 07:53
Why Wall Street Is Worried About the End of Rajan Reign
Here is the opening of Bloomberg''s article, including comments from a number of economists:
The Indian rupee slumped as investors reacted to the news that Reserve Bank of India Governor Raghuram Rajan will return to academia in early September.
At India''s central bank, the former International Monetary Fund chief economist not only oversaw a revolution in the conduct of monetary policy but also pushed for structural reforms and commented on fiscal policy, often drawing the ire of lawmakers in the process.
Rajan, along with Bank of England''s Mark Carney, is one of the two ''rock star'' central bankers of this generation. At the Jackson Hole symposium in 2005, he famously warned of excessive and growing imbalances in the financial system that manifested in the crisis of 2008.
A government official highlighted five possible successors for Rajan, but for now, analysts are scrambling to get a handle on what the governor''s departure means and how markets are likely to be affected.
David Fuller''s view
Governance is everything has long been a mantra at this service. Confidence in the governance of countries and corporations leads to relative outperformance by attracting more investors whose interest and participation increases valuations. For evidence, just look at Asia''s two giants.
There are too many questions over governance in China, following the excessive monetary bubble just over a year ago. Now China''s stock market languish despite comparatively low valuations for the Shanghai Stock Exchange Composite Index (SHCOMP) (p/e 15.92 and yield 2.12%), compared to the S & P BSE Sensex Index (SENSEX) (p/e 20.29 and yield 1.48).
Clive Hale: The View from the Bridge
My thanks to the author for his interesting report on Brexit and the EU''s seven sins. Here is a brief sample:
Deadly Sin 1: Currency Manipulation:
''For a small, open economy like Cyprus, euro adoption provides protection from international financial turmoil.'' A quote from Jean-Claude Trichet, then President of the European Central Bank, in January 2008. After the provision of a number of emergency loans to Cyprus throughout 2012/13, on the 25th March 2013 a 10bn ECB bailout of the entire Cypriot banking system was undertaken. To fund part of the bail out savers deposits (above 100,000) were seized and used to bail out the bankrupt banks. To this day, capital controls, restricting the amount of money that can be taken out of Cyprus, are still in place. Contrary to Mr Trichet''s comments, adoption of the euro has simply been an economic disaster for Cyprus. And the worst part of this story; it was all entirely predictable. Why? All rational economic justification for the EU went out of the window the minute that the single currency became a fact of life. Currencies act as the pressure valve for an economy. They weaken when economies are weak, thus encouraging increased capital inflows and inwards investment, therefore cushioning the economic fall, and eventually promoting recovery. The opposite is also true for booming economies, where currencies appreciate and ultimately dampen the euphoria, before the boom ''overheats'' and becomes too destructive. The minute you block that pressure valve, by artificially fixing the value of currencies, as the advent of the euro has done in Europe, internal pressures begin to build. History is littered with examples of financial crises where official currency manipulation is a major symptom. Arguably, there has never been a totally successful currency union anywhere in the world, as the internal pressures always result in unbearable economic and/or social distortions. The euro is clearly no different; today social discontent and expanding economic disparities are plain to see and they are getting worse. When will the pressure become too great? And when will that valve blow?
David Fuller''s view
Today, the world''s financial markets are telling us that Brexit will not occur. Global stock markets are soaring; government bond yields are mostly rising; and British Sterling has rallied sharply. Most of this, I believe, is short covering because for most of last week the opposite was occurring as polls showed that support for Brexit had gained momentum. The pendulum has now swung in favour of Remain.
I will be voting for Brexit on Thursday, because to quote from Abraham Lincoln''s Gettysburg Address on November 19th 1863, I favour ''government of the people, by the people and for the people''. Instead, we British citizens will increasingly be ruled by an unelected, unaccountable bureaucracy from the EU. That is neither good for democracy, responsibility, or economic growth and prosperity, in my opinion.
However, I think this will continue to be less bad for Britain than for our European neighbours, mainly because the UK has not suffered from the Euro straightjacket. Moreover, it is increasingly recognised within the EU that it is a grandiose, oligarchical scheme heading for the rocks. Bureaucrats in Brussels and Strasbourg may be the last to accept this but the political unrest and uprisings tell another story. Economic underperformance for the entire EU region, plus the tragedy of scandalous unemployment levels in Southern European countries, will force root and branch changes over the next ten years, in my opinion.
OPEC Chasm of Doom
Here is the opening of this informative article from Bloomberg:
OPEC''s members are divided by many things: language; size; politics; sometimes outright war.
And money. Don''t forget money.
If you want to understand why OPEC has responded to its current crisis with all the cohesion of cat herding, some numbers in the Energy Information Administration''s "OPEC Revenue Fact Sheet," published on Tuesday, provide some important clues. First up, estimated revenue, adjusted for inflation:
Tight Oil
OPEC''s real net oil export revenue is expected to be the lowest since 2003
The estimate for this year, $337 billion in real terms, is barely a third of 2012''s peak -- and, uncannily, exactly the same as the consensus forecast for the combined revenue of Exxon Mobil and Chevron in 2016. Of course, those two only have to pay their employees, creditors and shareholders. OPEC''s members have about 700 million people to answer to, roughly double the amount in 1980. So, on a per capita basis, those numbers look worse:
Email of the day on Brexit and a federal Europe
Thank you for posting the link to Jacob Rees-Mogg''s referendum speech. I thought it was calm, clear and thorough. In particular, it homed in on the central question - do we want to live in a democracy? If I may, I''d like to draw your attention to a shorter video that I believe covers an oddly overlooked part of the debate - the history of the EU: The initial two minutes of graphics and information are followed by five minutes summing up that history. I can see it''s drawn heavily from the well-researched Booker and North book mentioned at the end. My feeling is that it should be compulsory viewing for anyone intending to vote so that they know what they''re voting for. I thought they handled such a dry topic extremely well. I''ve found that that video leads very well into Jacob Rees-Mogg''s, and have included both links in emails to interested friends. My very best wishes and thanks to you all.
Eoin Treacy''s view
Thank you for this instructive piece. The democratic issues raised by the Brexit campaign and the history of the European Federalist agenda are important considerations. However it is looking increasingly unlikely that the vote in a few days will result in the UK leaving the EU and markets are responding accordingly.
Eoin''s personal portfolio: profits taken on stock market shorts
Eoin Treacy''s view
Details of this trade are posted in the Subscriber''s Area.
U.S. Gasoline Demand Is Likely to Slide
This article by Lynn Cook for the Wall Street Journal may be of interest to subscribers. Here is a section:
Even the low end of the forecast by Wood Mackenzie, which provides in-depth analysis for a wide range of clients including large oil companies, utilities and banks, is a more bullish outlook for electric-car adoption than many oil-and-gas companies have espoused.
Spencer Dale, the chief economist of energy company BP PLC, said last week in Houston that while he expects electric cars to start gaining traction, the internal-combustion engine still has significant advantages over electric alternatives and widespread adoption won''t happen in the next two decades.
''It will still take some time,'' Mr. Dale said. ''Electric vehicles will happen. It is a sort of when, not if, story.''
The electrification of the automobile has evolved more slowly than some expected, in part thanks to low fuel prices and limited battery life that meant drivers had to recharge every 100 miles. But more capable cars are coming to market as tightening air-pollution regulations in places such as Europe and China force auto makers to engineer better electric vehicles.
The U.S. market today remains tiny, with pure electric cars amounting to less than 1% of total sales so far this year. But Tesla''s decision to build cars with sizable batteries that can run for more than 200 miles before recharging has led a number of competitors to double down on their own electric-car designs.
Eoin Treacy''s view
Tesla remains the standard bearer for electric cars because, more than any other company, it has succeeded in marketing a car people aspire to own. However it is not the only, or even the biggest company manufacturing electric vehicles. In fact Tesla''s success ensures it will deal with a lot more competition as incumbent manufacturers release their own models.
IEX Sees Winning Enough Volume to Muscle Into Top Exchange Ranks
This article by Annie Massa for Bloomberg may be of interest to subscribers. Here is a section:
Now that IEX Group Inc. has the same coveted regulatory status as the New York Stock Exchange, Nasdaq Inc. and Bats Global Markets Inc., the company''s chief executive officer plans to steal a significant chunk of business from them.
As a dark pool, IEX handles less than 2 percent of U.S. stock trading; NYSE, Bats and Nasdaq each process roughly 20 percent. But the Securities and Exchange Commission on Friday gave IEX a regulatory upgrade, clearing the way for it to open a new stock market, called the Investors Exchange, in August.
''There are limits to how big dark pools can grow, and we no longer have a limit to how large we can grow,'' IEX Chief Executive Officer Brad Katsuyama said Monday in a Bloomberg Television interview. ''It will take some time, but we are confident that we can become one of the largest markets.''
IEX pitches its platform''s 350-microsecond speed bump on orders as an antidote to speed-driven trading strategies it views as predatory. It''ll be the only U.S. stock exchange with an intentional delay.
The company may attempt to bring its business model to other asset classes and countries, though for now it''s focused on U.S. stocks, Katsuyama said during the interview. He declined to identify those other areas. ''There''s a void of trust in different markets,'' he said.
Eoin Treacy''s view
IEX is not publicly traded, yet, but it represents a major challenge to the profitability of established exchanges. Leasing space in data centres has been big business for exchanges who have been courting high frequency trading groups. However it has been a challenge for funds and pensions who have seen liquidity improve but slippage costs have increased as computer programs pre-empted trades. The imposition of a speed bump is very attractive for the buy side which has led to the growth of IEX''s venue and could represent a continued growth model.
Rajan Defends Inflation Fight, Says India Should Stay Course
This article by Sandrine Rastello and Unni Krishnan for Bloomberg may be of interest to subscribers. Here is a section:
''We had gotten used to decades of moderate to high inflation, with industrialists and governments paying negative real interest rates and the burden of the hidden inflation tax falling on the middle class saver and the poor. What is happening today is truly revolutionary we are abandoning the ways of the past that benefited the few at the expense of the many."
''Indeed, the fact that inflation is fairly close to the upper bound of our target zone today suggests we have not been overly hawkish, and were wise to disregard advice in the past to cut more deeply."
''If a critic believes interest rates are excessively high, he either has to argue the government-set inflation target should be higher than it is today, or that the RBI is excessively pessimistic about the path of future inflation. He cannot have it both ways, want lower inflation as well as lower policy rates."
''At the same time, the RBI does not focus on inflation to the exclusion of growth."
''The bottom line is that in controlling inflation, monetary policy makers effectively end up balancing the interests of both investors and savers over the business cycle."
''Decades of studying macroeconomic policy tells me to be very wary of economists who say you can have it all if only you try something out of the box. Argentina, Brazil, and Venezuela tried unorthodox policies with depressingly orthodox consequences."
Eoin Treacy''s view
Rajan has done an admirable job as Governor of the RBI so the big question for investors will be to what extent policy continuity can be achieved when his successor will be a political appointee. The decision will be a fresh test of Modi''s commitment to reform and long-term growth rather than short-term solutions.
Fuller Treacy Money