The American Dream?

I have been wondering about the future of the United States for quite some time now, more so after the election of President Trump. While many see a strong possibility of economic growth in the U.S, I see more than just that. I see potential for growth in the immediate future, however, I also see potential for the long term demise of the U.S, that is, if my expectations of Trump and his advisors are proven correct.

Trump being President provides an obvious conflict of interest as he is now in a position to pursue policies that inflate real estate prices, and may well do so. His advisors too, have rather obvious vested interests, as shown by their net worths and business interests. I fear that Yellen’s attempt to raise rates shall be stopped dead in it’s tracks soon, given the vested interests in favour of lower rates. This, combined with a potential for President Trump to dramatically increase the borrowings of the U.S governments(borrowing seems to be among his only talents, along with a knowledge of bankruptcy law) will worsen the U.S’s debt problems. Coupled with the kind of inflationary expenditure it is expected that Trump will undertake, it seems that there will be growth in the short term, but the U.S’s long term potential will be jeopardised with the potential of a real estate bubble, even higher wealth inequality (given the biases of Trump and his advisors,this seems a reasonable assumption), and an erosion of the creditworthiness of U.S debt. As a result, I feel that in the years to come, the U.S dollar will depreciate heavily, even though the trend in the current time frame is appreciation. Treasury bond yields seem set to spike further in the long run, as U.S’s creditworthiness erodes. It should be noted that this is a long term view, an will take time to pan out.

 

Advertisement

A forecast of the USDINR pair

I had, in my previous post, alluded to the demonstration scheme of the Indian government. However, I did not discuss it’s impact in detail. While the increase in bank deposits caused by this may well improve India’s potential for economic growth in the long run, in the short run we may well see a paralysis in consumption,  especially amongst the many Indians who do not possess bank accounts(around 40 percent of the population). This paralysis in consumption, and a sudden slowdown in cash based businesses implies slower immediate economic growth. Moreover,  this move has also effectively paralysed our agricultural economy, which is predominantly cash based. Given that most agricultural products are necessities for survival,consumption of this is unlikely to reduce significantly. However, given the prior situation, there may well be a contraction of supply. This is likely to nudge domestic inflation rates higher. Combined with a spike in U. S bond yields, and FII outflows, the rupee is likely to depreciate further, especially in anticipation of a rate hike in December and even more so if this anticipation becomes a fact. Thus, there is a case for depreciation of the Indian rupee against the U. S dollar in the near term. However, there is also a case for such a move over a longer period of time,  because India is currently in a interest rate reduction cycle, whereas the U. S is in an interest rate expansion cycle. However,  for the immediate term, I would expect the USDINR pair to inch higher, to touch at least the 67.5, or even the 68 level.

On gold, India, and Mexico

So, I haven’t written anything in a while. In my last post, I had maintained my long position on gold, amongst other things. However, I now feel that gold has run it’s course, and is no longer an attractive investment. The very attraction of gold lay in the economic and political uncertainties this year brought, such as Brexit and the U.S elections. However, that uncertainty is now past, and global economic growth seems to be picking up. More importantly, the U.S Fed is probably going to raise interest rates soon, a predicament that is hardly favourable for the metal. Moreover, demand for physical gold from one of it’s largest markets, India, may well remain muted in the future, as the Indian government’s requirement of PAN identification for purchases above 200000 INR does serve to reduce inflows of unaccounted income into the metal, which significantly reduces it’s demand. However, there is one situation where gold prices may yet rise. That is if the President elect Trump makes any erratic policy decisions that introduce uncertainty into markets. Given all of the above, I would be inclined to book profits on any gold positions, and maybe even put on a short position in anticipation of profit booking.

Additionally, I also have a view on India’s economic growth rates. Given the current policy regarding 500 and 1000 rupee notes, the Indian government may receive an inflow in the region of $45 -50 billion. Given the government’s policy of using govt expenditure to help fuel growth, this would probably result in infrastructure expenditure and higher salaries for public offices. The former will improve India’s potential for long term growth, and the latter will push up growth rates in the immediate term. Both serve to raise India’s profile as an investment destination, and a U.S Fed rate hike provides the perfect opportunity to invest at depressed valuations(caused by FII outflows in the event of the rate hike). It would probably be wise to focus on NBFCs, HFCs, and tyre manufacturers in India’s stock market right now. However, when investing in the first two, a vigilant eye needs to be kept on the NPA figures.

Additionally, the recent Trump victory in the U.S elections has sent the Mexican stock market tumbling. Given the fears of Trump’s policy towards Mexico, this decline may well continue. However, it must be realised that this fear is hardly concrete-it is based on vague, impractical fears, which do not have any concrete underlying logic. Thus, it would be wise to invest into the Mexican stock market, or buy IPC futures as soon as the market slows down it’s slide somewhat.

On China, Italy, gold, and silver

Hey everyone, sorry I haven’t posted anything in a while. I’ve been kind of busy, and didn’t really have that many new predictions to make…I’m starting blogging again from today.

So have you guys been following the USDCNY( Chinese Yuan per US Dollar) recently? The financial community seems to have one trade that is poised on everyone’s lips-short the Chinese yuan now. I honestly feel that this is suicide. While I, too have a bearish view on the Chinese yen, I have also considered China’s gargantuan forex reserves, which, though reduced, are still a very formidable barrier to the sudden depreciation of the CNY, at least right now. My opinion is that anyone looking to short the Chinese Yuan should wait. The reason is rising NPAs(Non performing assets, essentially bad debts) in Chinese banks, especially when considered as a percentage of total loans. This is perhaps the largest threat to the Chinese economy right now, and could very potentially force the Chinese government to recapitalise Chinese banks with many trillions of dollars(obviously in terms of the yuan). This increase in money supply, when it occurs, will definitely cause a massive depreciation of the yuan, and this, I feel, is when the yuan should be shorted. An alternative trade would be waiting for China’s forex reserves to dwindle very significantly, and then short the yuan. The key requisite for both of these strategies is patience. That being said, I feel the the USDCNY pair will rise to around 7 by year end, especially as eve China wants a controlled depreciation of the currency. I also think that shorting other Asian currencies which do not have China’s bountiful reserves would be quite profitable, perhaps more so than the yuan trade.

Though the ECB has long been engaged in an extensive quantitative easing programme, this has not really voided all possibilies of debt crises in the eurozone. I want to bring focus to Italy, which is suffering from an increasing percentage of NPAs to gross loans, which could have the effect of increasing yields on Italian bonds. More importantly, this would slow Italy’s economic growth, and given the interconnected nature of the eurozone, could potentially cause a slowdown in the eurozone.

Additionally, I am also long on both gold and silver(I expect both to appreciate significantly). Thing with gold is, it usually appreciates in periods of high volatility in financial markets, as investors rush to gold in periods of volatility and uncertainty,and the worldwide trend towards lower interest rates only makes gold more attractive. The reason for my bullish tendency on silver is that copper production(silver is a byproduct of copper) has gone down, thus reducing supply of shiver.

Interest rates in the EU, the decline of the Euro, and a long term economic outlook for the EU

The ECB is essentially creating $60bn each month to use in it’s bond buying programme, and in fact, plans to expand this programme.This has two obvious effects in the long run- a depreciation of the euro in comparison with major currencies such as the USD, and a maintenance of low interest rates in the EU, with a possibility of yet lower interest rates. This, combined with an impending rate hike in the U.S., should mean that the EURUSD pair is constantly moving downward. The EURUSD pair has, in fact, hit a two month low a day ago, yet it seems there is much more downside potential. In the long run(as Elliot wave analysis seems to indicate) it seems that EURUSD trading at 1 would not be extremely unlikely. This is not based just on the ongoing QE programme in the EU, but also on the economic slowdown that the EU may be facing. When speaking of the EU’s economic health, I am referring to the economic conditions of France and Germany respectively. Germany’s model of grow is based upon exporting to developing countries, mainly China- in the near future this is likely to result in stymied growth due to lower demand from China, and a weak banking sector. Moreover, China’s stock market crash is having a contagion effect over global markets, including European indices such as the German DAX. The stymied growth prospects of China are unlikely to get better- in fact in the near future, they may only get worse. This is due to China’s use of the “one child policy” which has had the effect of reducing China’s workforce. Moreover, aggressive government intervention in the Chinese stock indices has ensured that Chinese banks have excessive exposure to the Chinese stock market, the disastrous condition of which would only help destabilise an already fragile banking sector. Lastly, the influx of immigrants into Germany, while acceptable on humanitarian grounds, will have more costs than benefits for Germany- Germany is spending 9 percent of it’s GDP on refugees  and its GDP is expected by Goldman Sachs to increase only by 0.3 percent due to these refugees. France’s economic growth has already been experiencing a slowdown, which seems to show no signs of abating. Finally, it should be noted that if and when the interest rates in the U.S. are increased, bond yields in the EU, especially in Germany, should increase. In fact, the raising of interest rates in the U.S. could cause a worldwide increase in bond yields worldwide. Thus, there are two possible scenarios if and when the U.S. raises the Federal Reserve rate. Either, the ECB further expands it’s programme of quantitative easing, which will send the EURUSD pair spiralling downward due to the combined effects of demand for U.S. dollars causing dollar appreciation, and inflating of money supply in the Eurozone causing euro depreciation; or the ECB could keep it’s quantitative easing policy unchanged, which would not only cause  the EURUSD pair to depreciate, but could also cause liquidity crises in Europe and widespread cases of defaults on debt.Given that U.S. interest rates will eventually be raised- the EU is faced with one of two situations- a weak currency and economic slowdown, or a weak currency, economic slowdown, liquidity crises, and an increased probability of debt defaults.There does not seem to be any version of the story that bodes well for the Eurozone, or provides for a strengthening of the Euro. Finally, let us look at the political consequences of this. The welfare of citizens in the Eurozone is likely to be adversely hit due to it’s economic circumstances. Though this may be slightly speculative, it seems to me that as a result of it’s economic outlook, Europe is likely to embrace an even more socialist political structure, and may even tend toward communism if this poor economic outlook serves to galvanise wealth inequality.

An outlook on oil

The drastic fall in the price of oil that occurred in the recent past can be thought of as a simple increase in oils supply, mostly from OPEC countries, which has resulted in high cost projects being forced to shut down.This is somewhat similar to a price war in an oligopoly, in that the price of oil is essentially being slashed to push out higher cost producers of oil out of the international oil market. Thus, the oligopoly that is the oil market is becoming smaller and smaller. Given that even within OPEC the costs of oil extraction vary significantly, this could lead to members of OPEC such as Saudi trying to up production at the cost of other OPEC members.Thus, any tension within the OPEC is of prime importance. A basic game theory analysis would show that price undercutting would be the dominant strategy for low cost oil producers such as Saudi Arabia. This, with the long term outlook that oil may be replaced by more efficient alternatives, would lead to my stating that a short bet on oil in the long run, at least for now, is a good idea. However, is price competition results in something closer to a monopoly market being established, it would be wise to be long on oil

The one thing that can usually be stated is this- the central bank of a country knows it’s economy, and it’s markets inside out. Thus, if one can read between the lines of their policies, one can understand what they feels the future holds, and this mostly serves as a relatively accurate forecast. Now, how has the Chinese government and the PBOC reacted to the ongoing meltdown in the Chinese stock markets? The answer is that they have used measures such as threatening to arrest short sellers, which reeks of desperation. Now when a government is this obviously desperate, it implies that there is more, much more potential downside. In fact, economists have been predicting Chinese meltdowns for decades, but have been proven wrong. Why? Because China, if one thinks about it, was, to an extent, an inflated bubbles, and when exposed to external influences, bubbles eventually pop. The reason this did not initially happen was that China was essentially state run. Given China’s recent liberalisation, though, it seems that the bubble that is China may pop.If the Chinese markets continue to crash, they will cause a contagion in Asian markets.

The Eurozone and a global bond yield spiral

In my earlier post I mentioned the implications of the current crisis in Greece and of a possible Grexit. Now, we see the imposition of capital controls in Greece. Given the anti-austerity stance of the current Greek government, and the reluctance to acquiesce to creditors’ demands, this can be seen as a signal of further troubles. A result of this situation is a jump in borrowing costs of heavily indebted members of the Eurozone such as Greece and Spain. In current conditions, yields on their government bonds will rise sharply, so shorting them is a good bet. In fact, due to this, it may further be extrapolated that most bond issues in heavily indebted Eurozone countries will be selling at a discount, and it might currently be a good idea to short the stock indices of Spain and Italy. The question is this- where is the money that wil flow out from I these places go to? The U.S.? Perhaps, if a significant rate hike happens… But we do not know for sure.

Now to address the elephant in the room. Yield on German debt has been increasing for a while, and rates in the Eurozone as a whole are relatively quite low. A jump in Spanish and Italian debt yields may well spark into a jump in yields all over the Eurozone. If this causes yield on German debt to shoot up rapidly, the consequence of this could be a global jump in yields. The reason is this-German sovereign debt has an AAA ranking, one not even the U.S. enjoys. If the yield associated with triple A debt suddenly spikes, then supposedly “inferior” debt would also have to yield more, thus causing a spike in yields worldwide. Now, large moves usually occur during liquid times, and lucky for us, different markets are liquid at different times. Therefore, if, as I feel, Spanish and Italian govt debt yields jump, and German sovereign debt starts following suit, and rises along with high volume, then SHORT US govt debt(T-bills) etc immediately. Short any and all govt debt if this scenario arises( as long as price action does not indicate anything else). There will probably be a large spike in debt yields GLOBALLY. For all we know, we could be seeing mean reversion of yields.

Views on the euro and the EU

https://www.tradingview.com/chart/oEz2unZC/

Above is a link of the EURUSD weekly chart. Please take a look at it. It seems that the EURUSD is in the fourth wave( a corrective one) in an upward motive five wave structure( a motive structure, in Elliot terms). However, this particular corrective wave has fallen below the start of the third wave, implying a failure of the upward five wave structure, and a long term bearish outlook. Moreover, the chart will show that the EURUSD is currently in a downward trading channel.

Besides the chart, let us look at the situation right now. Currently, the situation in Greece may not be resolved, as it seems unlikely that creditors and the Greek government will reach any understanding. Any Grexit, which is now a very real and looming possibility, would cause serious downward pressure on the Euro. Moreover, a key factor that is for the long term demise of the Euro, and perhaps a break up of the eurozone is the fact that it limits the monetary tools available to central governments, a s it would find it quite difficult to directly manipulate money supply in the economy.

Now let us look at the three month Euribor chart, which, after a long time, has finally fallen below it’s support line, implying an overall rise in interest rates payable on European bonds. A rise  as  interest rates may seem helpful initially, however it has to be noted that a number of economies in the Eurozone have simply stagnated, most importantly France and Italy. Increased costs of borrowing could prove quite problematic, especially for France and Italy, whose Net International Investment Positions are -15.6 and-30.7 percent respectively( in USD).These economies are already stagnated,and higher rates being payable on government debt would further slow down growth, perhaps stimulate serious deflation due to a liquidity trap. Deflation really is the Achilles heel of the EU, it seems, as stymied economic growth and deflation in France and Italy would certainly rub off on the EU as a whole. So, there is a very real possibility that the EU will once again slip into deflation, along with a fall in the euro. The one epicentre of rising rates in the EU though, would be Germany. As Bill Gross had said a while back, shorting German government debt is the trade of a lifetime. The debt situation for France and Italy does not currently seem too dangerous, but it will be if the EURUSD pair declines very significantly and interest rates on G secs rise, which is a very real  possibility in the not so distant future.

Additionally, if the Fed makes a decisive rate hike this year, all hell will probably break loose, as EU government debt would face the ripple effects of the rate hike in the form of spikes in yields. If this leads to the ECB making a rate hike, well, the EU would be pretty much doomed to deflation, and anaemic growth. If the ECB does not do this, then money flows out of the EU and into US debt.Given such a long term outlook, the Euro would decline significantly against most currencies, especially the USD.  The EURUSD pair would decline most significantly, and interest rate differentials between equivalent European government ans US bonds must be observed. Any sharp movement, either way, will pose threats to the EU.

So, pretty much all my posts have been on point. If anyone is interested in detailed reports on something, contact me at 919007086213 post 8th June. P.S-If you haven’t seen it yet,  look at 10 year US T-bill yields…long US dollar against INR, against most currencies in fact…another tip- there is probably going to be a serious increase in volatility in crude, my personal opinion is that crude may slide downward somewhat, what is obvious is an increase in volatility