Sunday, 26 April 2015

Financial Fiction…fi-fi...a new genre

Strange are the ways of the world. The financial world is experiencing weird inconceivable situations which are akin to loss of gravity and matter floating over the surface of the earth. Truly dark holes of space…anti matter…anti gravity…its fi-fi like sci-fi or cli-fi… fiction is the new norm…

1.      Global economy facing secular stagnation with a glut of most commodities like oil,  iron ore, cotton, apart from the classical factors of production like capital, debt and labour which resulting in low economic growth rates, low inflation and low interest rates and yield scenarios. Policy makers in the developed economies, namely, US, Europe and Japan have been struggling to revive the moribund economies and stimulate effective demand.
2.      Several countries being sucked into the whirlpool with high debt/GDP ratios, fiscal deficits, default in debt payments. Total debt comprising government, corporate and consumer debt in US risen to $ 25 bn from $ 17 bn in 2008, ie to 181% of GDP from 167%. Corresponding figures in Europe are 204% from 180% and China 241% from 134%.

3.      Corporate sector too reeling under high debt-equity ratios. More so with currency fluctuations and sovereign debt markets in negative zone, many are further leveraged. Corporate sector resorting to dubious quarterly accounting shenanigans in order to meet the expectations of the ever greedy investors.    

4.      Debt markets are awash with several European economies issuing debt at negative yields or real rates of interest.

5.      Gradual bankruptcies among increasing local government and municipal bodies.

6.      Global banks paying billions of dollars in penalties to regulators and in pay backs to customers till today.

7.      Credit raters also paying hefty penalties for deliberately mis-rating bonds.

8.      Short term objectives of performing well at stock markets driving corporate quarterly earnings and leading to questionable accounting practices.

9.      Derivatives balloon becoming bigger by the day totaling $ 700 bn, which is 10 times the cumulative GDP of the world around $ 70 bn.

10.   Most developed economies growth rates are near 0 or below one in real terms.

11.   Stock markets everywhere touching respective all time highs. More worrisome about 40% of all trading in US taking place away from the regulated public exchanges in high frequency trading dark pools.

12.   Currency wars after Swiss franc delinked from euro and global currency markets a veritable casino.

13.   Property bubbles in world top cities and some emerging markets reaching frightening proportions.

14.   Gold still holding centre stage as the most valuable asset class even tough dollar appears to be most valuable currency and parking ground for funds.

15.   Commodities in excess supply and entering age of uncertainty with decline in appetites of China and few others due to global slowdown leading to lower prices and raising sceptre of deflationary processes.

16.   Agricultural prices stagnant though supplies abundant.

17.   Ironically during period 2000-14, global wealth rose more than 100% from $ 117 trn to $ 266 trn, indicating huge build up of savings and capital resulting in low interest rates which has also blunted the tools of monetary authorities.

18.   This has been accompanies by inordinate increases in supply of workers mainly due to higher automation and robotisation in factories leading to rise in painful unemployment. In many countries this has squeezed the middle class and skewed the income distribution further impacting adversely effective demand which comes from a strong middle class.

19.   Inventories of oil, coal, cotton, iron ore, manufactured products and automobiles are at all time highs.

20.   China’s cooling demand with lowest GDP growth of 7% in 20 years has been one of major contributory factors.

21.   Looks like most of the advanced economies have entered into long tunnels of stagnation and abysmally low rates of growth, interest rates and inflations which Japan entered in early 1990s. Europe is very much in the tunnel and US is fairly in though it’s in a denial mode. China could be about 10-15 years away from it and India probably about 25 years. The ultimate state of all economies is the steady state where growth tapers off into a plateau

Post Covid World

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