Assets sales are happening, but at a slow pace. The public sector also wasn’t very forthcoming to pick up the slack created by weak private capex spending.
Hey there!
I have some matter-of-factly stuff to give you about the domestic economy this week. And this comes from my own monthly Charts That Matter (CTM) series. There is piece about how Hanjin bankruptcy have left dozens of sailors at high seas without food and also one that see signs of the Swiss beginning to hoard cash. Will Europe be the trigger point of a bubble burst this time around? IceCap has a theory on that.
Read on… and have a great weekend.
Charts That Matter – September 2016 I publish a monthly Charts That Matter (CTM) series, which carries the most interesting charts from the financial world that I come across during a month. We just published the September edition. There are some very interesting charts and observations in this edition. We have seen a decline in the overall capex in India in recent years with low capacity utilisation and leveraged corporate balance sheets.
Assets sales are happening, but at a slow pace. The public sector also wasn’t very forthcoming to pick up the slack created by weak private capex spending. However, in last two years, we have seen the public sector take up the mandate to kickstart capex – especially in roads, railways and energy. In fact, actual public capex spending in last two years has been almost at par with the budgeted spending – something not seen before.
On a very different note, the Indian consumer is not shy of spending and is becoming aspirational and stepping up discretionary spending. Car buyers are upgrading to the compact car segment (Rs 5-8 lakh) from the erstwhile preferred mini segment (Rs 3-4 lakh). In a related observation, India’s share of global milk consumption has been rising rapidly and India is poised to replace the EU as the higher consumer of milk globally. As per the National Dairy Development Board, Indians now spend one-fifth of their overall food expenditure on milk.
On the other hand, the Indian consumer is not a shy borrower anymore. Credit card outstanding has been growing at more than 25 per cent in the last three years and now stands at Rs 42,000 crore – it has doubled since 2012.
Two global charts here. Caterpillar has been reporting negative machine retail sales in last three years and the July sales de-growth at 18 per cent is the second largest decline in last three years. Caterpillar’s operating performance is a bellwether for global industrial capex; this is not a good sign for industrial recovery.
Finally, in what is seen as a sign of credit tightening, the USD LIBOR (three months) which moves largely in line with the Fed Funds rate has been creeping up even as Fed Funds rates remain unchanged. LIBOR is the most benchmarked interest rate in the world with LIBOR linked transactions valued at more than $450 trillion globally.
Borrowing costs of companies and individuals vary with LIBOR. Could this divergent trend between USD LIBOR and Fed Funds push the Fed to hike rates? READ MORE
Hanjin’s ghost ships seek havens as food South Korea’s cash-strapped Hanjin Shipping, one of the world’s biggest shipping lines is adrift at sea - and in more ways than one. Hanjin, which commands a market share of 3 per cent of global shipping cargo, filed for bankruptcy protection last week in Seoul. That’s created a bizarre situation on the high seas for 85 Hanjin ships that have been effectively marooned offshore as ports in the US, Asia and Europe have turned the company’s ships away. The ports are worried that Hanjin ships won’t be able to pay port fees or their contents might be seized by creditors, which would disrupt port operations.
Hanjin is a giant in global trade and delivers everything from computers and clothing to televisions and toys. The global shipping disruption comes just as companies are shipping merchandise to fill shelves and warehouses for the end- of-year holiday season. On Tuesday, South Korean authorities rushed to piece together a capital injection with a combination of funds injection by the promoters and low-interest loan by the government.
The company, meanwhile, has started providing food, water and daily necessities to crews on six Hanjin ships anchored at ports including Rotterdam and Singapore. About 70 container movers and 15 bulk ships are stranded at 50 ports in 26 countries, according to Hanjin.
One Hanjin captain operating a ship in international waters near Japan said his vessel has been given permission to enter a Japanese port on Wednesday to unload cargo, but will be required to head back out soon after.
A request for food and water was rejected. While Hanjin’s lawyers try to arrange legal cover in 43 countries against ports taking over vessels, some captains are heading for Singapore, Hamburg or Busan in South Korea, where the company hopes the ships won’t be impounded and will be able to unload so that clients can arrange alternative transport. Hanjin container vessels carry as many as 24 crew each and pack enough food, fresh water and other essentials for several weeks.
A journey across the Pacific from Busan to Los Angeles takes up to 10 days, while a trip via the Suez Canal to Rotterdam could take a month. Typically, a vessel that can carry 8,000, 20-foot containers costs about $8,376 to operate per day according to an independent ship consultancy. Samsung Electronics Co. said in court filings it had about $38 million of goods on board two Hanjin vessels off the port of California, waiting to be unloaded.
Hanjin’s woes show the container-shipping industry is in bad health, limping from one exigency to another since the 2008 global financial crisis brought trading to its knees. Helped by cheap loans, container lines have hung on even as freight rates to move sneakers to Barbie dolls from Asia to Europe and the US plunged on sluggish demand.
The global shipping industry has been operating at a loss since the end of 2015, and it’s set to lose about $5 billion this year amid an oversupply of vessels, according Drewry Maritime Research. The financial woes have made terminal operators and marine service suppliers wary of working with Hanjin’s vessels. Seems like Hanjin will remain adrift in sea for a long time. READ MORE
The Swiss begin to hoard cash It’s a sign the world is getting used to negative interest rates when what once seemed bizarre starts looking like the norm. Consider Switzerland, where more and more companies are taking out insurance policies to protect their cash hoards from theft or damage. It started in Japan where in February hardware stores reported that consumers were hoarding cash, as confirmed by the spike in demand for safes, "a place where the interest rate on cash is always zero, no matter what the central bank does”.
German safe manufacturers have reported record sales and are operating at their limits. In a negative interest rate dominated Europe and Japan, where the Swiss differ from many other nations is that numerous local banks have already passed on negative rates to their wealthiest customers. Many lenders including UBS Group AG and Credit Suisse Group AG have passed on at least some of the burden, to cash-rich clients like asset managers and big companies.
Interestingly, a fascinating arbitrage has emerged between negative rates and insurance costs: A large underwriter said it charges about 1,000 francs ($1,020) a year to insure 1 million francs, a fraction of the 7,500 francs a company would pay to park the same amount in a bank for a year, assuming the lender passes on the full charge.
But the best news for Swiss residents is that unlike in Europe where the ECB recently banned the €500 banknote, in Switzerland it is relatively easy to store substantial amounts of cash in relatively modest spaces courtesy of the CHF1000 bill, the highest denomination banknote in circulation in Europe.
As per Bloomberg, 1 million francs worth of 1,000-franc bills can fit in a small box. Furthermore, unless Switzerland bans the 1000 Swiss Frank note, it may soon trade at a premium as demand for the "paper" rises. The reason is that more banks have warned that they may one day have to charge ordinary savers - not just big customers - for liquidity.
For now, there is no need to panic: Consumers are shielded from the negative interest rates so far as per an economist with a big Swiss Bank. Large institutional investors have had to pay, but in the overall context it’s not dramatic. However, sensing what is coming, some lenders that are below the Swiss National Bank’s (SNB’s) threshold are taking on other banks’ cash for a fee. As a result, a “market for liquidity” has developed between the banks as a result of negative rates, the Swiss Banking Association said last week in its annual report on the industry.
Cash hoarding is a problem for monetary policy. It’s a question of efficiency: the more corporates hoard cash, the smaller the impact of negative rates. For now, the SNB says it hasn’t seen evidence of widespread cash hoarding in Switzerland which is precisely what the Swiss people would want it to see. Meanwhile, the stealth hoarding continues. READ MORE
Chaos or Harmony? IceCap global outlook IceCap is expecting a crisis in the government bond market and says it will have ripple effects around the world. They are advising to shift to stocks (ex-financials) from bonds and are bullish on USD and gold. They believe that Europe will be the trigger point for bursting the bond bubble.
Seemingly everywhere today, countries have been thrown into complete chaos due to the rise of “extreme” political parties. Yes, it’s happening, this cannot be denied. This was clear in the BREXIT voting - the majority who voted to stay live in the London-area and Scotland. The London area has benefited tremendously from being a part of the EU. As soon as you moved beyond affluent London you meet an entirely different group of people.
Low income earners, little if any bonuses, no stock dividends and worse still, the constant threat of losing their jobs to foreigners. And to top it off, this group had no big businesses, no big media and no big government supporting them. In the end, the vote to leave wasn’t a vote about trade deals, or more expensive holiday’s in Spain and Portugal, instead it was really a vote against the political establishment.
The 2008-09 crisis was caused by the private sector. The bubble has now shifted from private to government sector and this will be reflected in the govt. bond market. Long term interest rates have reached their bottom and its only a matter of time before they start moving up.
Long-term rates move down slowly but can ratchet up sharply – if this happens it will be chaotic for investors. As a result of being always advised by financial advisors and banks that bonds are safe, the most conservative investors in the word remain heavily invested in the bond market and are therefore smack dab in the middle of the riskiest investment they’ll ever see.
IceCap advises investors to move to safety in the form of the US dollar, gold and stocks (ex-financials) from govt./HY/EM bonds, financial stocks. Stock markets will remain volatile although. Bond market bubble will burst and IceCap sees Europe as the trigger point for the bubble burst. IceCap advises against holding long-dated bonds. Currency - USD will surprise by surging against other currencies. Gold rally has faded since Brexit but IceCap remains patient on gold. READ MORE
(Ritesh Jain is the CIO of Tata Asset Management. Views expressed in this weekly column are personal in nature and do not represent those of Tata AMC or ETMarkets.com. It should not be construed as an investment advice. Any action taken by the reader or recipient on the basis of the information contained herein is reader's/recipient's responsibility alone.)
