US GDP growth 5.7% ?

IS US GDP really growing and has it really grown 5.7%? If indeed so, it must surely rank as one of the fastest growing economies in the world. Or is it something else? Have not had the time to dissect figures recently, so just linking an article i came across. Cannot vouch for the analysis in the article. However, considering the doubts i have on the figures is likely to represent what is wrong.

The link is

http://seekingalpha.com/article/185433-u-s-gdp-when-a-slower-decline-equals-growth?source=feed

Optimism on economy

The stock markets worldwide continue to move up. Yet, nothing much has changed in the fundamentals of economies. Not much of the toxic assets that hit the economies have been written off. Whatever, "improvement" has happened is fueled by liquidity pumped in by governments. Some sense of optimism has returned about the economy. Yet it is this very sense of optimism without any fundamental backing that scares me. Something will give up one day and all the optimism shall soon turn to pessimism.

Have been waiting for the financial markets to fall again like a pack of cards. The wait has become a bit too stretched but i am convinced that markets across the world are likely to see much lower levels than the current levels in the coming months.

I shall continue to wait...

Inflation - A natural outcome of growth?

Economists would have us believe that a mild inflation is desirable for a growing economy? Is it?

As technology improves, the productivity goes up and the cost should come down. Do we not see this in electronic goods? Computers, as an example, are faster and better yet cheaper. Is that not a natural outcome of economic progress? If that is so, why are prices of most other goods continuously rising?

Where did the Electricity go?

I have always found it difficult to understand the IIP nos. Every month, i try to pour into the details of the nos to make sense out of them, yet i find it difficult to do so. One big example is simply the figures for Electricity. Broadly, the IIP is divided into three sectors, Mining, Manufacturing and Electricity. Now consider this..

Comparing August with June this year. Mining in August stood at 181.1 vs 181.3 in June, whereas Manufacturing in August stood at 313 vs 313.1. Both slightly lower as compared to two months earlier. Yet look at Electricity. It stands at 245.1 vs 234.4 in June, a good 4.5% jump. That should be good news but a question is where did this electricity go? If mining and manufacturing both were very slightly down, surely the 4.5% jump in Electricity should have eased the residential shortage. Did you notice fewer power cuts in August?

Now lets compare March with August. The figures for March were; Mining 209.8, Manufacturing 326.9. Both much higher than the figure for August. You bet Electricity must have been much higher than 245.1 in August! Did you bet? If you did, you have lost it. For Electricity in March was 241.3.

Ah! now, this is interesting. If with almost 1.5% less Electricity, we could mine and manufacture much more, it surely means that the much better performance in August on the Electricity front, must have meant much improved household supply (surely we needed less than 241.3 in August for the industrial production). If we did not notice much lower power cuts, then where did Electricity go? Any answers?

India's GDP $ 40 Trillion in year 2020?

Can you believe it? India's GDP will be $ 40 Trillion in the year 2020, that is 40 times what it is today!. You do not believe it? But that is what the stock market tells us.

From the lows of March 2009, Nifty has gone up by about 2500 points in about 6 and a half months (roughly 160 trading days). The rate is about 19 points per day. During the period 2003 to Sept 2007, in a period of four years, Nifty gained only about 3500 points at an average of 3.5 points a day. This was when there was no apparent problem with the economy and the GDP growth rate was touching 9%. Considering the rate at which stock market is growing, i.e. 16 points a day, which is about 4.5 times the rate of the previous bull run, it points to a 40% GDP growth rate. Over eleven years, this should translate into a GDP of $ 40 Trillion. WOW! And what about the market? At this rate of growth we shall see Sensex close to 2,00,000 by the year 2020..

Obviously, the above is most unlikely. This points to an absolutely irrational market today, which should see a correction sooner or later. We need to be patient.

Is it time for Nifty to correct?

Nifty touched new highs last week within touching distance of 4900. While many experts feel that the market upmove shall continue, I think it is time for a correction. Whether the correction shall be a steep one like the year 2008 or it would be a milder one which precedes the next bull run cannot be stated with confidence, but a correction nevertheless is due and should happen within the next few weeks if not the next few days.

The reason why I am so confident is that the markets have run up ahead of the fundamentals. A look at the fundamentals tells the following story.

Real Estate

At the peak of the market crash last year, real estate construction had come a virtual grinding halt. There was little or no construction activity in the period Sept. to Nov 2008. Since then construction has indeed picked up. But the activity is nowhere near what it was in the frenzied months of 2007 and the first half of 2008. Any Civil Engineer worth his salt will tell that the pace of construction is very slow and many projects would take much more time than what the builders claim. There are certain projects where not even a single worker can be seen. Yet, new projects are being launched at a frenzy that suggests that the construction activity was in full swing. However, I suspect that it is not so. In many cases, funds raised from the launch of new projects are likely to be diverted towards the completion of older projects. The new projects are most likely to take much longer than what the builders are promising. In some cases builders are promising to pay a small sum per month in case they are unable to complete the projects in time. A CA friend remarked that raising funds by launching new projects would perhaps be a cheaper than borrowing from banks and financial institutions. To say the least real estate remains in trouble as of yet.

Exports

Exports continue to fall year on year. The rate of fall is about 30% give or take a couple of percent. An improvement in the rate of fall by a percent or two here or there cannot be treated as green shoots. By this time, last year, the major world economies had already fallen sharply and imports were falling, which means Indian exports were already falling. A 28% odd reduction from there in exports cannot be said to be better than a 30% odd fall a couple of months earlier on the grounds that the rate of fall has fallen. Since the major economies of the world are still experiencing deflation, revival of exports is a long way off.

Agriculture

A deficient monsoon, especially in North India has already hit the Kharif crop. A 20% odd fall in the sowing of Kharif crops, is definitely going to hit rural economy and income. A late surge in monsoon in the last week of August and first week of September cannot compensate for the fall in sowing of Kharif crops as the sowing time is well past. At best it would help improve the yield of the standing crops and save a potentially disastrous Rabi season. With a fall in rural incomes, demand is bound to fall too.

Inflation

India calculates inflation using WPI. Besides the point that the basket of goods that represent WPI needs revision, a negative WPI only points to a poor demand for wholesale products vis-a-vis a year earlier. The WPI is now inching up back towards zero and prediction of RBI as well as other economists is that it shall reach 5% towards the end of the year or the end of the financial year. But what is of concern is the CPI. The CPI has been going up and is closing on to 12% (look at the chart below). If WPI goes up to 5%, what will happen to CPI? Could it go closer to 15% or 20%? Indeed the inflation faced by consumers is uncomfortably high already. A move to 15-20% could really impact demand. Not only this sooner or later RBI would be forced to tighten the monetary policy by raising interest rates to control the inflation. That would have a direct bearing on the businesses, real estate as well as markets.

CPI-Chart courtesy tradingeconomics.com (Click on chart for a larger view)

Fiscal Deficit

Fiscal deficit for the first four months stands at 1,55,000 cr. At this rate the fiscal deficit target should be comfortably burst. A deficient monsoon is likely to add to the woes. Part of the deficit could be covered by disinvestment, but disinvestment is not a solution towards managing deficits. Disinvestment should be part of liberalization policy only, though it would help cover deficits a bit. As anybody would know, selling fixed assets for the purpose of raising working capital is not a sign of a vibrant company, similarly selling assets (PSUs) for the purpose of covering deficits does not indicate a vibrant govt. financial condition. If indeed fiscal deficit breaches the target of about 4 Lakh crore for this fiscal, expect trouble. Rating agencies may downgrade India, govt. may have to raise taxes and of course markets may react negatively.

The graph below shows the rise in fiscal deficit in absolute terms. Economists argue that fiscal deficit should be seen as a ratio of the GDP to see whether it is a cause for alarm or not. As a percentage of GDP fiscal deficit is targeted at 6.8% for the year, which is likely to be breached. But this figure is only for the central govt. If state govt. deficits and off balance sheet items are added we are looking at around 11% of the GDP, which is high. The graph below shows the deficit in absolute terms. What needs to be noted is the sharp rise to about 4 times as earlier in the last year and a half after having been stable for about 6 years before that.In my view the absolute amount of fiscal deficit is equally important as it shows how much needs to be financed.

(Click on the chart for a larger view)

The above are some of the issues that seem to me as obvious reasons why markets should not go up from here. We seem overheated. It is time for a correction.

Fiscal Deficit - April-July 2009

The Period of April-July 2009 saw a fiscal deficit of Rs. 1.55 Lakh crores. This is about 39.5% of the target for the full year. At this rate we will comfortably burst the full year target. Considering the monsoon failure, it is more than likely we will indeed go past the target. However, there is a silver lining, though one should not react to one data point very quickly. The addition to fiscal deficit in July was about 0.31 Lakh crores. This does show that the deficit was controlled better in July. Why was it so? We need more data to be able to see how this happened and whether this is sustainable. The detailed data is yet to be released by the govt.

More details on release of detailed data