Checks and balances in banking practices

• Any administrative system should have strong monitoring by an external body to keep the administration on their feet all the time. Time and again whenever any unfair practices are exposed, people question the concept of checks and balances which is prevalent in our administrative system.
• Recently, when some banks lent the hard-earned money of the depositors without due diligence to powerhouses were unearthed, the efficiency of the big brother is questioned.
• Why can’t the monitoring body get a catch on leniency on due diligence by bankers before they actually happen?
• Why do some bankers resort to unethical practices for some petty material benefits and ruin their careers?
• Is there any nexus between the bankers and checkers?
• Are bankers underpaid?
• The banking system is known to be uncorrupt among all the executive bodies in India, but still why some unethical practices take place.
• Why charted accountants who do audit from grass root to top level in banks were unable to find the lacunas in the banking practices?
• Why do bankers compromise on procedures when it comes to high net worth individuals and being unreasonably rigid on common man?
• Why bankers are not given enough power to take strict action on defaulters?
• Who to blame for the menace?
• With the kind of technology the banking system has incorporated, it is not easy for the bankers to get away with unfair practices. RBI should recognise efficient charted accountants who can monitor advances lent to large business houses frequently. Stringent action to be taken against the bankers involved in unfair practices.Also, enough power to be vested with the bankers to recover the dues from defaulters and other central and state government agencies should cooperative the bankers. And now the time has come to reinvent the prevalent procedures to make sure due diligence is upheld all the time.

why discount broker?

• A discount broker offers us the trade in stock exchange at reduced prices than the full-service broker. The reason being, there won’t be any sort of research team in a discount broker’s firm who are highly paid to give advice on the stocks to the clients as we find them in a full-service broker. This cut shorts the expenditure of the broker and can give the opportunity to trade in exchange at a very lower price to their clients.
•  Fundamental advice to a  trader is not to follow any one’s advice and trade in the markets with their own ideas, not to follow any expert advice, as no one can champion the market pulse which can not be predicted absolutely.
•  Now, the basic need of a trader is a good software tool which is user-friendly and gives us meaningful analysis. Most of the discount broker spends a lot of money to purchase the sophisticated software.This is a valuable addition to the traders who are in much need of.
• Clients of a discount broker will have to make their own research, analyse the markets as sources for getting information is vast in the present times, make their educated call using some of the best software tools, with lower brokerages.
• This concept was developed in some of the developed countries and incorporated in many countries now with a wide customer base.

repercussions of brexit

• Just days after praising the central banks of the world for preventing any notable cash shortfalls, the International Monetary Fund (IMF) has issued a warning that the effects of the United Kingdom’s (UK) decision to sever its relationship with the European Union (EU) will have far-reaching consequences for the world economy.
• A spokesperson for the IMF, Gerry Rice, described Brexit as likely to dampen global economic growth in the near term, and advised that the IMF urge policy makers to take decisive action when addressing the situation.
• “Brexit has created significant uncertainty,” he said, “and we believe this is likely to dampen growth in the near term, particularly in the UK, but with repercussions also for Europe and the global economy.”
• Rice went on to say that policy makers should remain prepared to act to counter financial market turbulence that threatens to create a substantive weakening of the global economic outlook. He punctuated his remarks by saying that “decisive policies will make a difference.”
• “Prolonged periods of uncertainty and associated declines in consumer and business confidence would mean even lower growth and again, policymakers in the UK and the EU have a key role to play in helping to reduce the uncertainty during this period.”
• The IMF feels that the near-term risk resulting from Brexit centers primarily in the UK, and to a lesser extent with the EU. From there, it predicts macroeconomic and financial market impacts that will radiate outward across the globe. This will lead to a rising level of uncertainty, both financial and possibly political.
• “One notable source of this uncertainty concerns the terms of the future relationship between the UK and the EU, and these relate to questions about how long it will take to decide those terms, how the new relationship will impact business, and other actors,” Rice said.
• Although the vote to exit the EU has strained relations between the EU and the UK, the IMF has encouraged both sides to work together with a sense of collaboration in an effort to effect a predictable and smooth transition.
• Later in his comments, Rice again praised the efforts and commitments made by central banks around the world, including the Bank of England, the European Central Bank, the Bank of Japan, the United States Federal Reserve Bank, and many others. Specifically, these banks wisely planned and were able to provide adequate liquidity while preventing excessive market volatility.

Can buy wockhart for long term

• Wockhardt Ltd. with a market capitalization Rs 17,934.77 Crs is one of the leading pharmaceutical company in India. The company has manufacturing units in India, UK, Ireland, France and US, and subsidiaries in US, UK, Ireland and France. More than 50% of the revenues for this company are from Europe.It has wide  market presence in third world nations  such as Russia, Brazil, Mexico, Vietnam, Philippines, Nigeria, Kenya, Ghana, Tanzania, Uganda, Nepal, Myanmar, Sri Lanka, Mauritius, Lebanon and Kuwait.It manufactures formulations, bio pharmaceuticals,  nutrition products, vaccines etc.
• Price of this stock fell steeply in the year 2013 after a warning letter Food and Drug Administration of United States of America for identifying significant violations of current good manufacturing practice for finished pharmaceuticals at the Chikalthana and Wiluj facilities. This had a negative impact on the performance of stock in year 2013 till mid 2014.  From there , a study rise in the price of stock witnessed till date with few dips.
• Sales turnover has increased from Rs 1805.27 Cr year ending March 2014 to Rs 1886.55 Cr year ending March 2015. Sales turnover has never been a issue for this company. Reserves increased from Rs 882.13 Cr year ending March 2014 to Rs 1016.50 Cr year ending March 2015. These fundamentals are impressive. But there is a rise in the debt figure of the company from Rs 181.44 Cr year ending  March 2014 to Rs 833.31 cr year ending March 2015 which one of the obvious concern. Net profit of the firm rose from Rs 198.61 Cr year ending march 2014 to Rs 331.82 Cr year ending march 2015. Consolidated figures of the firm are much healthier than the standalone figures which are of least concern.
• “Company’s UK business backed by effective business development efforts achieved consistent strong quarterly performance and grew by 55% (in £ terms 59%) during the quarter. India business of the company continued to grow significantly at 27% with new product launches and focused sales strategies,”according to Wockhart board.
• The company filed 5 ANDA’s with US FDA during the quarter and received 1 approval, a total 73 ANDA’s are pending for approval till date. UK made 1 new filing during the quarter ended 30th June, 2015, according to Wockhart board.
• Coming to technical parameters of the firm, 52 week low was Rs 802.00 and 52 week high was at Rs 2000. Yesterday the stock appreciated by .87 % closed at Rs 1623.95 with Rs 14.05 rise from the previous close.
• Present level seems to be high for buying this stock, but can enter at this level with a target of Rs 2000. Can stay with this stock for long term , but purchase on dips.

A new rate-setting committee

•  A few years ago, when Alan Greenspan was boss of the Federal Reserve, a central banker in Europe remarked how much he disliked it when he saw a headline such as “Greenspan cuts rates”. The Fed’s standing was hurt by such a personalisation of its policymaking, he explained. After all, it is actually all 12 members of the Federal Open Market Committee (FOMC) who decide America’s interest rates, not just its chairman.
• In India the Reserve Bank of India (RBI) and its present governor, Raghuram Rajan, are as closely entwined in the popular mind as the Fed was with Mr Greenspan. Yet on July 23rd the government published an external commission’s draft of a new financial code, which would reduce Mr Rajan’s authority over interest rates. It proposes to set up a new monetary-policy committee (MPC) with seven members: four government appointees, the governor of the RBI and two other representatives of the central bank.
• The proposal was immediately condemned as an assault on the RBI’s independence, but the reality is more nuanced. Unlike the Fed, the RBI is not technically independent. The governor has the authority to set interest rates although, under the RBI Act of 1934, he would be obliged to change them if the government ordered him to. An advisory committee weighs in on his decisions, but it is largely ignored.
• The RBI has credibility because of the standing in financial markets of Mr Rajan, a former chief economist of the IMF. A government hoping for cheap money to boost its popularity would not find him easy to push around. The stockmarket and the rupee would plummet if it ever seemed that anyone was trying.
• By the time Mr Rajan took charge in 2013, no one was terribly sure what guided India’s monetary policy. Was it output growth? The wholesale-price index? The weather? Mr Rajan moved quickly to establish a clear framework. A commission chaired by Urjit Patel, a deputy governor, recommended last year that the RBI should eventually aim for inflation of 4%, with a target range of 2%-6%. A five-strong MPC, comprised of three RBI officials and two outsiders, would be tasked with meeting this goal. In the meantime the RBI should aim to bring inflation below 6%, the commission recommended.
• In March the finance ministry gave its explicit blessing to a 4% inflation target from next year. But it suspended judgment on the MPC. So when the ministry published the draft code on its website, it looked as if the government was seeking to retain (or regain) control over interest rates.
• There is no consensus about the ideal composition of a rate-setting committee. Many, including Britain’s, have external members. Members are also often subject to political vetting of some sort: seven of the 12 voting members of the FOMC, for instance, are appointed by the president and confirmed by the Senate. Even when members from within the central bank command a majority, as at the Bank of England, the boss can still be overruled. That happened several times during the governorship of Mervyn King, for example.
• There is a consensus, however, that a committee is superior to one-man rule. In 2000 Alan Blinder, who served on the FOMC, and John Morgan, a colleague at Princeton University, published a paper based on the results of students playing a simple monetary-policy game. They found that committees made better decisions than individuals. A subsequent Bank of England study along similar lines came to the same conclusion.
• Nonetheless, the furore in India has been so great that finance-ministry bigwigs have hastily declared that the government will not necessarily adopt the draft code in full. Such is the deference that Mr Rajan commands. Agreement on the creation and make-up of India’s committee, it seems, is still far away. Meanwhile a decision on interest rates, which have been lowered in three steps from 8% to 7.25% this year, is scheduled for August 4th. Most economists expect no change. But there is an outside chance that the headlines on the morning of August 5th will declare, “Rajan cuts rates”.

can developed economies sustain the next crisis?

• During the financial crisis, when the global economy faced its gravest threat since the 1930s, policymakers sprang into action. To stimulate the economy, central banks slashed interest rates and politicians spent lavishly. As a result, the recession, though bad, was far less severe than the Depression.
• Unfortunately, however, that quick response nearly exhausted governments’ economic arsenals. Seven years later they remain depleted. Central banks’ benchmark interest rates hover above zero; government debt and deficits have ballooned. Should recession strike again, as inevitably it will, rich countries in particular will be ill-equipped to fend it off.
• Just how much wriggle room do they have? For comparison, The Economist has devised a composite measure of debt, deficits and interest rates—the weapons policymakers typically wield to dispel threatening conditions. Though crude, the analysis yields a clear and troubling conclusion. A few economies could mount a robust defence against a new shock, but most are sitting ducks.
• For interest rates, we assign a value of 100—meaning maximum wriggle room—to rates of 10% or higher. The Federal Reserve’s main policy rate was just above 9% (or 90, in our measure) before the recession of the early 1990s, and just over 6% (60) before the downturn of 2001. It is now down to 0.125% (a mere 1 point). At the beginning of 2007 the average central-bank policy rate in the countries in our ranking was just under 4%—low by historical standards. The average for rich countries now is 0.3%.
• Though a few central banks in Europe are experimenting with negative rates, none has dared to go far into negative territory. In other words, a rate of 0% (0 points in our ranking) leaves central banks with little or no wriggle room in monetary policy. Yet they will probably remain close to that level for some time to come. Futures prices suggest that the Fed’s main rate will be around 2% in early 2018. Traders expect the Bank of England’s to be about 1.5%, and those in Europe and Japan to remain stuck near zero.
• Central banks will not be alone in fighting off the next shock. Governments will try to help by increasing spending on things like unemployment benefits and infrastructure, as they did during the financial crisis. But countries cannot simply borrow as much as they would like. Ireland was spurned by private creditors when the rescue of its failing banks pushed its deficit to more than 32% of GDP in 2010, leading it to seek a bail-out from the European Union. Ireland excepted, no other rich country ran a deficit of more than 16% of GDP at any point in the crisis.
• In our wriggle-room ranking, therefore, we give countries a score of 100 if they run a budget surplus of 5% or more, and 0 for deficits of 15% or greater. Most have seen a large improvement on this measure since the darkest days of the crisis, thanks both to a return to growth and to austerity. The average budget deficit this year is forecast to fall to 2% of GDP, down from nearly 6% in 2010. Before the crisis, however, the countries in our analysis, on average, boasted a small budget surplus.
• The mountain of public debt accumulated since 2007 adds a further constraint. Debt as a share of GDP is, on average, 50% higher than it was before the crisis.  Economists at the IMF provide fresh estimates of the “fiscal space” available to governments, taking account of their past behavior. We assign a score of 100 to countries that, in the IMF’s view, could borrow a further 250% of GDP or more and 0 to those, including Greece, Italy and Japan, that it judges to be testing markets’ faith. Almost all countries have much less room for manoeuvre than in 2007.
• Combining the three measures yields a worrying picture. Norway, South Korea and Australia come top: all have kept their interest rates clear of zero and have very low debt loads. On average, the rich world’s wriggle room has fallen by about a third since 2007. The leeway of hard-pressed countries such as Italy and Spain has shrunk by nearly half.
• These estimates, though instructive, do not settle the question of which countries have run out of economic firepower. Take Japan, the most constrained of the countries in our ranking. The IMF thought Japan had no fiscal space in 2007, when its debt-to-GDP ratio stood at 183%, yet it has continued to borrow heavily since. Italy allegedly ran out of fiscal space during the crisis. Yet its borrowing costs, which rose to alarming levels in 2011, actually began falling in 2012, after investors became convinced that the European Central Bank would buy Italian debt if necessary. Debt limits seem not to bind when economies have a strong external financial position—or when a central bank can be counted on to buy up debt in a pinch. The ECB’s reluctance to lend its printing presses to euro-area governments may explain why debt burdens have been more burdensome within the single-currency area.
• Yet even the ECB is now testing the boundaries of fiscal space. After policy rates fell close to zero early in the crisis, central banks printed money to buy bonds in an effort to provide additional stimulus—a policy known as quantitative easing (QE). The lower long-term interest rates and higher asset prices that resulted, they reckoned, would boost investment. With policy rates expected to stay low indefinitely, QE may become a measure of first resort.
• Central banks’ capacity to conduct QE is theoretically limitless: they can buy as many bonds as governments issue. Such outright monetisation of debt should eventually lead to soaring inflation. Yet the experience of Japan, where the central bank now owns almost 30% of the public debt, suggests markets will tolerate much more QE than economists had thought. Wriggle room seems to expand with central banks’ readiness to print money.

oil prices may fall further

• The price of oil has steadied in recent days after making new lows .  The March WTI futures contract approached its 20-day moving average earlier (~$52.30) for the first time since late November.  This was a new selling opportunity as it has reversed lower.  We are looking for lower prices and it would not surprise us to see the price of WTI fall to the late-2008/early-2009 lows in the $32-33 area. 
• The EIA continues to project higher production, even as the price has fall.  The World Bank cut is world growth forecasts for this year and next earlier this week.  
• US oil production rose by about 60k barrels a day last week to 9.19 mln barrels a day.  This is the highest in at least 32 years.  EIA estimates US oil output will average 9.31 mln barrels a day, up from 8.67 mln a day average last year.  Output next year expects to average 9.53 mln barrels a day.
• This forecast seems to be at some risk of a revision lower.  However, there is an important lag here.  Some new wells are only now being exploited.  Shale production, which accounts for about a third of US output typically have short lives than conventional production.  Capital budgets are being cut, and this will impact futures exploration and development.
• The other point that we made before and worth repeating in this context is that US oil production is not just a function of OPEC trying to maintain too high a price in the past, which gave rise to competition and alternatives, but also access to cheap credit.  Capital is not as cheap as it was. However, the debt acts like a fixed cost.  Producing at a loss is an incentive to businesses with high fixed costs.  We expect the squeezing of debtors in this space and the fragmented industry to rationalize through failures and mergers.  Regionally, Texas and North Dakota are particularly vulnerable.
• The increase in production has come despite the decline in the number of oilrigs.  The number of operating oil rigs in the fell by 61 last week to 1421, which is the lowest in a year.  The oilrig count peaked early last October at 1609.  In past dramatic bear markets for oil, the US has lost between a third and half of its rigs.  A comparable decline now should not be surprising.  It may take a couple of quarters. Due to technological advances that boost efficiency, like horizontal drilling, the correlation between rig count and production is looser.
• Output is still exceeding demand.  This translates into higher inventories.  Crude inventories rose by 5.39 mln barrels, which in the US is about a little more than half a day of production.  According to EIA figures, US crude inventories stand at 387.8 mln barrels. 
• US refineries continue to operate at more than 90% capacity.  Gasoline inventories rose 3.17 mln barrels to 240.3 mln.  Distillates (e.g. heating oil) inventories rose 2.93 mln barrels to 139.9 mln.   The average price of retail gasoline has fallen to $2.10, the lowest in nearly six years.  The decline in gasoline prices expects to boost household discretionary consumption.  US December retail sales, especially the core rate, which excludes gasoline, autos, and building materials, was disappointing,  but generally US household consumption fairly strong.  Moreover, US consumption is taking place without the use of revolving debt.  We caution against reading too much into the disappointment with any one high frequency data point, if a trend were to develop, that would be a different story.
• There are dozens of oil benchmarks.  Brent and WTI are simply the most important.  The West Canada Select benchmark fell to about $33.30 recently.  The combination of new pipelines (not the Keystone yet…) and new rail capacity has boosted Canada’s shipments to the US.  In early January, Canada was shipping 3.2 mln barrels a day to the US.  This is displacing others, including Saudi Arabian oil, and is challenging Mexico.  The premium for Canada Select over Mexico’s Maya has fallen to four-year lows.  In early January, the US imported about 533k barrels a day of Mexican oil.
• Another important development has been the convergence between WTI and Brent.  There are several factors at work.  Some participants expect the US output to slow faster than the rest of the world’s production.  OPEC wants Brent to fall below WTI.  Over time, this will encourage US refineries to process Brent over domestic output, squeezing US producers more.  At the same time, there appears to be growing speculation that the US will lift, or at least modify, its ban on crude exports.  This is relatively supportive for WTI over Brent.
• Participants are also watching storage capacity.  Europe has less unused storage capacity than the US.  Extra storage capacity may help underpin prices in the face of insufficient demand (relative to supply).  Storing oil on ships is expensive. Estimates put it around $1.20 a month per barrel.  Storage at Cushing, where delivery of WTI futures takes place, costs about a third as much.

Will falling oil prices curb America’s shale boom?

• This year’s Christmas parade in Lindsay, in the heart of Oklahoma’s oil country, featured the Stars and Stripes every ten yards, 11 horses with riders in Santa hats and a rifle salute by veterans. But the highlight was a thundering, bright red oil tanker covered in fairy lights and owned by Hamm & Phillips, an oil-services firm with local roots that has ridden the shale boom in the state and across America.
• That energy revolution is the envy of the business world. Abundant oil and gas have been extracted from underground rocks by blasting them with a mixture of water, chemicals and sand—“fracking”, in the jargon. As well as festive spirit, the firms responsible embody an all-American formula of maverick engineers, bold entrepreneurs and risk-hungry capital markets that no country can match.
• Yet now that oil prices have fallen by almost 40% in six months, these firms’ mettle is being tested. Across America shale-shocked executives will spend Christmas overhauling their strategies to cope with life at $70 per barrel, even as investors dump their firms’ shares and bonds. Executives at Lukoil, a big Russian firm, now sniff that shale is like the dotcom bubble—a mania that is being cruelly exposed.
• Oil-price slumps usually lead to cuts in energy firms’ investments. Production eventually falls, helping prices to stabilise. In 1999, after the Asian crisis, global investment in oil and gas production dropped by 20%. A decade later, after the financial crisis, investment fell by 10%, then recovered.
• This time some of the pain will be taken by the big integrated energy firms, such as Exxon Mobil and Shell. After a decade of throwing shareholders’ cash at prospects in the Arctic and deep tropical waters to little effect, they began cutting budgets in 2013. Long-term projects equivalent to about 3% of global output have been deferred or cancelled, says Oswald Clint of Sanford C. Bernstein, a research firm. Most “majors” assume an oil price of $80 when making plans, so deeper cuts are likely.
• But much of the burden of adjustment will fall on America’s shale industry. It has been a big swing factor in supply, with output rising from 0.5% of the global total in 2008 to 3.7% today. That has required hefty spending: shale accounted for at least 20% of global investment in oil production last year. Saudi Arabia, the leading member of OPEC, has made clear it will tolerate lower prices in order to do to shale firms’ finances what fracking does to rocks.
• Even the gods of shale disagree about the industry’s resilience. The boss of Continental Resources, Harold Hamm (whose fortune has dropped by $11 billion since July), has said he can cope as long as the oil price is above $50. Stephen Chazen, who runs Occidental Petroleum, has said the industry is “not healthy” below $70. The uncertainty reflects the diversity of activity. Wells produce different mixes of oil and gas (which sells for less). Transport costs vary: it is cheap to pipe oil from the Eagle Ford play, in Texas, but expensive to shift it by train out of the Bakken formation, in North Dakota. Firms use different engineering techniques to pare costs.
• Two generalisations can still be made. First, in the very near term, the industry’s economics are good at almost any price. Wells that are producing oil or gas are extraordinarily profitable, because most of the costs are sunk. Taking a sample of eight big independent firms, average operating costs in 2013 were $10-20 per barrel of oil (or equivalent unit of gas) produced—so no shale firm will curtail current production. But the output of shale wells declines rapidly, by 60-70% in their first year, so within a couple of years this oil will stop flowing.
• Second, it is far less clear if, at $70 a barrel, the industry can profitably invest in new wells to maintain or boost production. Wood Mackenzie, a research consultancy, estimates that the “break-even price” of American projects is clustered around $65-70, suggesting many are vulnerable (these calculations exclude some sunk costs, such as building roads). If the oil price stays at $70, it estimates investment will be cut by 20% and production growth for America could slow to 10% a year. At $60, investment could drop by as much as half and production growth grind to a halt.
• The industry’s weak balance sheet is also a vulnerability, says Michael Cohen of Barclays, a bank. Most firms invest more cash than they earn, making up the difference by issuing bonds. Total debt for listed American exploration and production firms has almost doubled since 2009 to $260 billion (see chart), according to Bloomberg; it now makes up 17% of all America’s high-yield (junk) bonds. If debt markets dry up and profits fall owing to cheaper oil, the funding gap could be up to $70 billion a year. Were firms to plug this by cutting their investment budgets, investment would drop by 50%. In 2013 more than a quarter of all shale investment was done by firms with dodgy balance sheets (defined as debt of more than three times gross operating profits). Quite a few may go bust. Bonds in some smaller firms trade at less than 70 cents on the dollar.
• All this suggests looming investment cuts that within a year will slow growth in American shale production to a crawl and perhaps even lead to slight declines. A few firms have trimmed their budgets already. More are expected to announce cuts in January. “Frontier” projects—on the fringes of existing basins or in places where little commercial production has taken place—are vulnerable, including Oklahoma. Most firms will hunker down in the Bakken, the Eagle Ford and the Permian Basin, where they have scale and infrastructure. Even in the Bakken, applications for drilling permits fell by almost 40% in November.
• OPEC’s wishes may seem to be coming true over the next year. But adversity will eventually make shale stronger. It will prompt a new round of innovation, from cutting drilling costs through standardisation to new fracking techniques that increase output. Dan Eberhart, the boss of Canary, a Denver-based oil-services firm, says the industry has already “pressed fast forward” on saving costs.
• And if and when prices recover, new wells can be brought on stream in weeks, not years. America’s capital markets will roar back into life, forgiving all previous sins. “There is always a new set of investors,” says the boss of a one of the world’s biggest natural-resources firms. He predicts a shale crash—and a rapid rebound.

capital markets subdued

• The capital markets are subdued. European markets have been thinned by the Assumption Day holiday.  The US dollar is a bit softer against most of the major currencies, except the Japanese yen.  Equity and bond markets are mostly firmer as well.
• The news stream has been light.  Investorsare still digesting the poor euro zone GDP figures.  The contraction of the German economy was the shocker, but thecontinued stagnation of the French economy and the contraction of the Italian economy also weighs on sentiment.
• The US economy contracted in Q1.  That was a fluke. Growth rebounded in Q2, though recent data has made investors question how strong of momentum the economy really enjoys at the start of Q3.  The Japanese economy contracted in Q2, pressured by the retail sales tax.  Policy makers may have been surprised by the magnitude of the contraction, but expect the economy to rebound.  The German economic contraction in Q2 is also a bit of a fluke.  Growth is expected to return here in Q3.
• However, the French and Italian economies are a different story.  France has not strung together two consecutive quarters of growth since Q4 11/Q1 12.    Italy has recorded positive growth in one quarter since mid-2011.  Some observers are trying to count dips as if that is the meaningfulissue here.  It is not.  The key is whether growth is on a sustainable path.  It is not.
• There are no agreed upon definitions of recession.  The word itself was made up todistinguish between the end of businesscycles and the Great Depression.  The US itself does not define a recession as two consecutive quarters of negative growth.      While some pundits talk about a triple dip recession in Italy, for example, it does not really help further our understanding.  Neither it not France arguably had a sufficient expansion from which it could dip from.
• It is also remarkable that some of the same observers who questioned the merits of QE in the US and elsewhere now insist that it is the only thing that will lift the euro zone economy.  It is not so obvious.  With the German bund yield flirting with 1%, and peripheral yields near record lows, high interest rates do not appear to be the major obstacle to growth.   While Nero is said to have fiddled while Rome burned, Renzi is expending political capital on reforming the Senate, while structural economic reforms are awaited.
• Some observers want to blame the CURRENCY union itself for Europe’s economic problems, but even before EMU, some countries, like Italy and Portugal struggled with stagnation. France was already unable to keep up with Germany’s economic prowess.  EMU may have helped give particular shape to the crisis, but the challenges pre-date it.
• Today is the anniversary of Nixon’s decision to severe the final link between the dollar and GOLD in 1971. This marked the end of Bretton Woods.  Hopesof a new Bretton Woods are misplaced.  Bretton Woods required, as hegemonicstability theory suggests, one country to have sufficient power and will to establish and enforce “rules of engagement”.  The asymmetries of power at the end of WWII allowed for this.  Such conditions do not exist now, even if we are not a G-Zero world as some political scientists suggest.
• It is also instructive to recall that the demand for such quantities of gold that posed a quandary for US policy makers, did not arise from the rivals, like the Soviet Union, but from US allies, like France, Germany and Great Britain.  It was the rebuilding of Europe, and their desire to hold more GOLD rather than Treasuries (were they really called paper gold?) that strained Bretton Woods to the breaking point.  Inter-capitalist rivalries were more important than the Cold War in bringing the international monetary order to its knees.
• Today’s news is more mundane.  The main news item is the affirmation of UK’s Q2 GDP of 0.8%.  The year-over-year rate was revised to 3.2% from 3.1%.  This is the strongest year-over-year pace since Q4 07.  However, it could very well mark the cyclical high water point.
• Sterling has been confined to about a quarter of a cent below $1.6700.  It held the 200-day moving average (~$1.6667) and this appears to have spurred a light bout of short-covering.  For its part, the euro is TRADING inside yesterday’s ranges, which was inside Wednesday’s range.  While the euro has carved out a shelf in the $1.3335-45 area, the upside has been terribly limited.  It has notTRADED above its 20-day moving average since the middle of July.  It is found near $1.3410 today.  Only a close above it on a weekly basis, would help lift the tone into next week.
• The German 10-year yield at 1% (and the poor GDP data) has fanned talk of the “Japanification” of Europe, and the US 10-year yield posted its lowest close in more than a year.  Japan’s 10-year yield has slipped below 50 bp to a 16-month low.
• Today’s North American session features US industrial production and PPI.  Little light will be shed on the key issue for investors about the momentum of the US economy.  Wholesale price pressures may have eased a little, suggesting that what is thought of as pipeline pressures remain modest.  The TIC June TIC data will also be reported.  The behavior of the China and Russia are likely to be the focus.  Recall that central banks, including the PBOC, like private sector participants, appear to have increased their duration. Extending maturities ahead of the end of tapering and the rate hike that is expected next year seems largely defensive in nature.
• Canada restates its July employment data.  A 20k increase in the headline employment is forecast, but the breakdown between full and part-time work may be key.  The report that the BOC recalled showed a 60k loss of full time jobs.  The US dollar appears to be rolling over against the Canadian dollar, and is slipping through the CAD1.09 level.  The immediate target is CAD1.0850-70.

double standards of west

• Recently, China’s yuan has depreciated, and there is some evidence that Chinese officials got the ball rolling and may be continuing to guide the currency lower. This has been the cause of great consternation for G7 policy makers. Yet while the U.S. and Europe often issue statements against Chinese currency intervention, little is done when European officials purposely talk the euro lower.
• Many observers and policy makers expressed frustration with Japanese officials in late 2012 and early 2013 for seemingly making the exchange rate an objective of policy and explicitly talking the yen down. European and US officials insisted in February 2013 that Japan pledge to use monetary policy for domestic purposes and not target foreign exchange rates.
• More recently China’s yuan has depreciated, and there is some evidence that Chinese officials got the ball rolling and may be continuing to guide the currency lower. From the middle of January through the end of April, the yuan depreciated by 3.5 percent.
• This has been the cause of great consternation for G7 policy makers. Some suspect that China is sanctioning currency depreciation to boost its flagging exports. High frequency data is often noisy and using a moving average helps smooth it out. The three-month moving average of year-over-year export performance was negative in April (-7.9 percent) for the third consecutive month. It is the first such contraction since 2009. The 12-month average stands at 1.6 percent, its lowest level since 2010.
• We have argued against such an interpretation. China’s exports are import intensive. That is to say that China’s inputs for its exports are often invoiced and paid in US dollars and yuan denominated inputs are relatively small. Another way of saying this is the value-added generated in China is modest, meaning that it likely takes a substantial depreciation of the yuan to boost the price competitiveness of its exports.
• We find it more persuasive that Chinese officials helped engineer the reversal of the yuan as part of an attempt to manage the deflation of some financial excesses that had built up under the gradual multi-year yuan appreciation campaign. During this recent period, the PBOC widened the band the yuan can move against the dollar to 2 percent (from the officially set reference rate or “fix”). PBOC officials have not deigned to explore the entire range, but it has accepted somewhat more price movement, and this is reflected in the more than doubling of the (three-month) historic volatility.
• In any event, the US and Europe have pushed back against Japan and Chinese efforts that weakened their respective currencies. Now, however, European officials have been purposely talking the euro lower. In fact, much of the discussion about the ECB’s policy options relate to combating the strength of the euro. It is not just French officials, like Economic Minister Montebourg, who are entering the fray, trying to talk the euro lower. It was the ECB’s Draghi who first crossed the Rubicon and other ECB officials have followed suit, though quick to add that the central bank has no target (except apparently lower).
• Consider that the latest polls show the center-right with a slight lead over the center-left in this week’s EU Parliament elections. The presidential candidate for the center-right EPP) is the former Prime Minister of Luxembourg and Eurogroup head Jean-Claude Juncker. He indicated that the treaties allow the EC to suggestion the general orientation to European finance ministers who then could instruct the ECB. Juncker was clear he wanted to give the ECB instructions on the exchange rate (though he refused to comment about instructions on interest rates).
• In its semi-annual report on the foreign exchange market and international economic policy, the US Treasury was critical of Germany’s large trade and current account surpluses. The report noted this is in contravenes to the G7/G20 agreement to reduce global imbalances. Previously, the German surplus offset the deficits in most of the remainder of the euro area. However, now a combination of demand compression in the periphery and an adjustment in relative prices means that the deficits in the periphery are been reduced, or completely disappeared.
• We have argued that if the problem is one of lackluster growth and the ECB wants to ease monetary policy more than it can due to the zero-bound that it could take a page from the Swiss National Bank and buy foreign rather than domestic (i.e., euro area bonds). This would have the appearance of selling euros and buying US Treasuries. Euro area officials, however, haranguing about the currency has tainted this approach, as much as the some of the officials in the Abe government who had tried to talk the yen down.
• Some observers seem confused. They want to equate currency manipulation with interest rate manipulation. Manipulation is manipulation, they say, defending some sort of free market purism. However, this is not the issue. The crux is that manipulating foreign exchange prices simply borrows (steals, if you are so inclined) demand from elsewhere. It is a zero-sum exercise. Interest rate manipulation can increase aggregate demand. It is a non-zero-sum exercise.