Efficient market Hypothesis: Zero hedge

Since this chart from the WSJ sums up petty much everything about the "efficient market hypothesis" or whatever it is those wacky Chicago PhD's call their multi-variable, self-similar, Lorenzian "strange attractor" equations that describe human irrationality to the dot, there is little need for commentary : Zero Hedge 

Full article at
http://www.zerohedge.com/news/charting-latest-iteration-moral-hazard

Picture from WSJ attached.

AsianBondsOnline Newsletter (29 August 2011)

To read the full report, data and graphs go to http://www.asianbondsonline.adb.org/newsletters/abowdh20110829.pdf?src=wdh&id=Vd7k9wdkOhnXujvrtQLVzHQl3Ygf9j

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News Highlights - Week of 22 - 26 August 2011

Consumer price inflation in Hong Kong, China quickened to 7.9% year-on-year (y-o-y) in July due to increasing food prices and a low base effect resulting from the timing difference of government's public housing relief measures. Japan's core consumer price index rose slightly in July to 0.1% y-o-y as energy prices increased. Singapore's consumer price inflation accelerated to 5.4% y-o-y in July from 5.2% in June on the back of higher costs for transportation, accommodation, and food. Consumer price inflation in Viet Nam rose to its highest level since December 2008, reaching 23.1% y-o-y in August from 22.2% in July as costs for food surged.

*The Bank of Thailand last week raised its 1-day repurchase rate by another 25 basis points to 3.5%. This was the sixth consecutive rate hike since January. Heightened concerns over inflation outweighed the risks to growth as domestic consumption and investment are expected to remain robust.

*Moody's Investors Service lowered Japan's credit rating to Aa3 from Aa2. The outlook on the ratings is stable. Standard and Poor's affirmed its AAA sovereign credit rating and stable outlook for the Singapore government's long-term debt.

*On 24 August, the Japan Credit Rating Agency (JCR) affirmed Indonesia's ratings for long-term FCY and LCY senior debt at BBB- and BBB, respectively. The outlook for both ratings was stable.

*The People's Bank of China (PBOC) announced the expansion of the existing cross-border trade renminbi settlement program to include the entire country. During the first half of the year, the People's Republic of China's (PRC) total renminbi settlement in cross-border trade increased 13.3 times to reach RMB957.6 billion.

*The Republic of Korea's external debt position rose to USD398.0 billion in June. The country's outstanding household loans grew 8.7% y-o-y in July to reach KRW826 trillion. Finally, the credit default swap (CDS) spread for 5-year FCY-denominated government bonds widened to 149.2 basis points. LCY corporate bond issuance in the Republic of Korea was down 29.5% month-on-month (m-o-m) to KRW8.1 trillion in July. However, the cumulative corporate bond issuance over the January-July period stood at KRW75.1 trillion, which was up 9.3% y-o-y.

*Last week, KT Corporation of the Republic of Korea raised KRW600 billion from a triple-tranche bond sale. In Malaysia, YTL Power International sold MYR2.2 billion worth of 7-year notes with a coupon of 4.35%. In the Philippines, United Coconut Planters Bank issued PHP3.15 billion of LTNCD (long-term negotiable certificates of time deposit), which carry a coupon of 6.0% (payable quarterly) and have a maturity of 5 years and 3 months. Thai property developer Quality Houses raised a total of THB3 billion in bonds. Meanwhile, the State Railway of Thailand issued THB1 billion of 12-year bonds at a coupon of 3.99%.

*Government bond yields fell last week for most tenors in Indonesia, Malaysia, and the Philippines, while yields rose for all tenors in Viet Nam and for most tenors in Hong Kong, China; and Singapore. Yield movements were mixed in the PRC, the Republic of Korea and Thailand. Yield spreads between 2- and 10- year maturities widened in Hong Kong, China; the Republic of Korea; Malaysia; the Philippines; Singapore; and Viet Nam, while spreads narrowed in the rest of emerging East Asian markets.

*WHAT'S NEW: The next edition of the Asia Bond Monitor will be launched on 1 September.

Fw: On Grantham, Weathering the Storm and a Health Tip!

Cheers

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From: <aditya.rana60@gmail.com>

Date: Sun, 28 Aug 2011 20:28:38 +0800

To: <aditya.rana60@gmail.com>

Subject: On Grantham, Weathering the Storm and a Health Tip!

 

Hi!,

 

August  sure has been a tumultuous month,  with the daily changes in the Dow Jones Industrial Average  over one memorable week in early August  (-635,+430,-520,-424 which  amounts to  daily movement of +/-4.5% in the largest and most liquid stock market in the world!) resembling more of a random walk than  rational responses to changes in fundamentals.  Volatile markets are likely to be with us for a while – as long as government policy uncertainty remains with us in the developed world.  With this uncertain backdrop, I summarise below Jeremy Grantham’s latest quarterly which provides ( as usual) deep insights into the current state of markets and his outlook.

 

-“Can-kicking” to postponing the day of reckoning  is an art form perfected by countries around the world – from Britain’s peace  agreement with Hitler in 1938 to modern day examples of Japan’s lost  decades , Europe over the last 10 years (by failing to rein in the growing uncompetitiveness of the peripheral countries) and finally to the US’s refusal to deal with the housing bubble  earlier.

 

-His prediction in early 2009 of “seven lean years” for the US economy  was somewhat optimistic -   while  some factors have shown modest improvement  other  key factors have failed to keep up with what were pessimistic  expectations. GDP  would have to grow by  4% a year for the next 3.5 years (unrealistic) to close the gap with the 2% projected trend line growth rate of the economy.

 

-The plus side of the “seven  lean years” have been:  the resilience of emerging economies, particularly China and India; the sizes of the Chinese trade surplus and US trade deficit have declined; the US savings rate has increased from 1% to 5%, and,   corporate profits have risen.

 

-The negative side of the “seven lean years” is a long list:  disillusionment with institutions and capitalism has increased,  dampening animal spirits; resources prices are even higher than expected;   fiscal  deficits are higher ; housing prices are lower and could overshoot more  on the downside; personal income growth has been very meagre with gains accruing to corporations and the very rich making the US one of the least egalitarian developed societies;  while private debt is declining modestly  through write-downs and pay-downs of debt, there is no new debt being created to boost consumption which remains anaemic;  economic policy remains caught between half-hearted Keynesian stimulus  and ill-timed “Austrian” cutbacks; if unchecked the  “seven lean years” could rapidly  result in  a dramatic loss of the US’s leadership position, which has been a show piece to the world of entrepreneurial drive, effective government, social leadership and international justice and assistance.

 

-Corporate profits are at their highest levels, while  wage  growth is flat and 16-18%of workforce is either out of a job (9%) , discouraged to look for  a job (4%) or working part-time (5%).  Normally these conditions  would have led to lower revenue growth, but the surge in government debt has allowed corporations to maintain top line growth while reducing costs and thereby increasing profits. This likely to change as government debt falls or its growth decelerates.

 

-In the current environment which is fraught with uncertainty , as he advised last quarter, its best to be cautious and remain cautious for the foreseeable future. Quality stocks have continued to outperform low quality stocks and points towards a classic late bull market rally.

 

-He continues to favour the following asset classes:

-Well-managed forestry and farmland.

-Natural resources, energy, metals and fertilizers over the next 10 years though near term they could be experience sharp declines.

-Quality stocks are priced to provide 4.5-5% real return.

-Emerging market stocks are also likely to provide 4-5%  real return.

-Japanese stocks have the potential to provide double digit real  returns for the next 7 years.

-Other global equity markets range from unattractive to very unattractive. With the S&P fair value being 950.

-Cash will provide the dry powder to take advantage of possibilities.

-Stop press: with the sharp market declines in early August, they became modest buyers for the first time since mid-2009 and own US high quality stocks, emerging markets, Japan, Italy and European growth stocks,  with this portfolio  likely to  return about 6.5% real over the next 7 years.

 

-The main long-term risk continues to be that, after two massive bubbles and reflation programmes, the Fed may be out of ammunition if a serious global double-dip ensues.

 

-This would imply that instead of a sharp recovery in markets, they could  become cheap and stay below long-term averages for a long while as has been the norm historically (pre-Greenspan).  This would wash away a whole generation’s  false expectations, high animal spirits and excessive risk taking. It would also mean high long-term returns from investing at cheap levels – i.e. long-term gain from short-term pain!

 

A brilliant piece which succinctly lays out the risks  as well as the opportunities which the  markets face today. A core equity funds portfolio in US quality stocks, global energy and natural resources, select emerging markets (China, India, Brazil, Russia), Japan, Korea, Singapore  combined with a core bond funds  portfolio (EM and select developed world govt& high grade credits denominated in local currencies, US private mortgages and credits) and a  core portion in cash diversified across several currencies, and finally, gold, should be able to weather the storm ahead and provide decent returns over a 3 -5 year period. The key is to be disciplined in terms of not giving way to temptation to  time the market, or be swayed by market movements,  which inevitably is a recipe for buying high and selling low over time.

 

For those who doubt the positive impact of QE programmes on the markets and the economy i attached a graph which rather vividly demonstrates the relationship between the  commencement and ending of the QE1&2 programmes and the waxing and waning of economic output. Yes, the effect is only temporary (and is not claimed to be otherwise) and can have unintended consequences (higher commodity prices) but it  does work – as the economist  Irving Fisher noted long ago in his classic study of deflations and  depressions in the 19^th and early 20^th centuries.  So if the economy continues to sputter along, or goes into another dip, we are likely to get another dose of QE (later this year?) and further fiscal stimulus (early next year?) as well which will  limit the downside and provide potential for upside.

 

 

 

 

A health tip:

 

I came across a particularly interesting story on how daily mild exercise  can  add to your life expectancy:

 

Exercising for 15 minutes a day adds three years to a person’s life expectancy, according to the first study to show there’s a health benefit from even low levels of physical activity.  In a study involving more than 400,000 people, those who exercised for 90 minutes a week were also 14 percent less likely to have died after eight years than those who were inactive, researchers at Taiwan’s National Health Research Institutes wrote in The Lancet medical journal. Every extra 15 minutes of exercise reduced the risk by a further 4 percent., up to 100 minutes a day, after which there was no additional benefit.

 

So get on with the daily walk/swim/yoga – it’s not that complicated!

 

I will be travelling (again!) over next weekend so the next newsletter will be sent on  September 10.

 

Regards,

 

Aditya

 

 

 

 

 

 

 

Indian Interest Rates Have Overshot - Atyant Capital

via Atyant Capital by rahul on 8/25/11

Reserve Bank of India (RBI) governor Subbarao's decision to hike short term interest rates by 50 basis points on July 26th was a mistake.  Monetary policy operates with a lag.  Many of the earlier interest rate hikes are yet to filter through to economy.

The RBI is trying to fight inflation by raising rates and squeezing out demand.  In the absence of fiscal policy action, the burden of inflation management falls on the RBI.  The RBI is, however, fighting a lost battle.  Interest rate increases are unlikely to be effective in controlling inflation and may in fact exacerbate the situation by choking investment and supply.

India is not one but multiple economies within one.  The starkest difference is between two segments at opposite ends of the spectrum.  One is the credit based urban India and the other is the mostly cash based rural India.

Urban India is choking, crying and gasping for help, but the RBI remains unrelenting in its crusade against inflation.  The numbers have finally started catching up.  Housing sales have plummeted and the real estate sector is in intensive care.  Automobile sales have started declining.  Power and infrastructure investment has come to a standstill.  Loan delinquencies among small and medium businesses are rising at an alarming rate.

Rural India on the other hand is booming.  Food prices have risen and remained high across three full crop cycles for the first time in decades.  The rural employment guarantee scheme has ignited a fire under rural wages.  The monsoon rains have been excellent and India is on track for a record agricultural harvest.  Telecom connectivity has had a transformational effect on rural India.  The demographic boom in rural India has created a positive consumption cycle that has been unprecedented.  This explains why sales of motorcycles and tractors are booming while sales of passenger cars are declining.

For further validation of this trend, look at the ongoing anti-corruption movement being championed by social activist Anna Hazare.  It is exclusively an urban Indian middle-class driven movement.  Rural India is conspicuous by its complete absence and disinterest in the movement.  Urban middle-class India is stuck and frustrated, while rural India has never had it better (albeit from a very low base).  In times past, protests and agitations were primarily rural centric while urban inhabitants went about their lives.

Food is becoming expensive in Indian cities because a lot less is making it to them.  A lot more food is being consumed in villages where it is being produced.  For food availability to improve a lot of investment needs to take place in farming as well as in the distribution supply chain.  High interest rates and policy inaction are not helping the cause.

How India measures inflation is completely flawed.  India's headline wholesale price index is primarily a commodity index.  In a zero interest rate world where all currencies are debasing, commodity price increases are an international phenomenon.

Indians are putting a record amount of their savings into fixed income instruments and bank deposits.  They clearly don't see fixed income instruments giving them negative real yields.  I don't believe that this phenomenon can be explained by money illusion alone.  The fact of the matter is that we are in a world where relative prices shift suddenly and intensively.  Most people recognize this and (rightly so) don't think of it as inflation or erosion in purchasing power.  In India there is no homogenous consumption basket and everyone's effective rate of inflation is different.

I believe that, inflation, the way the Indian government measures it, will remain high and may even accelerate from here as debasement in the developed world kicks off in earnest.  Raising interest rates to rein in this inflation will prove completely ineffective.

GDP growth in India in April-June will print below 8% and it is very likely that by the Oct-Dec quarter GDP growth will fall below 7%.  The RBI needs to stop its interest rate increase cycle and start preparing for reducing interest rates lest it wreck the economy.