Blowing hot air & fanning a controversy: The R.B.I.

The Bullish Bear is back to tell the tale of the Indian central bank a year into the arguably illegal sanctioned demonetization program of the Narendra Modi-led BJP government. Fiscal 2016-17 proved to be a watershed year for the R.B.I., which at a stroke shed its image as a holier-than-thou technocratic governance-based institution (Blocking The Economist and BBC from its pressers) and exposed its vulnerability to a sordid moneyed-political campaign of a bullying government (Reforms of an overzealous Modi) through, at the very least, its poor set of financial disclosures, which will be our focus here in this article.

Part 1: The checksum failure discovery

Back in December 2016, the Bullish Bear had discovered a loophole in the disclosures of R.B.I.’s currency management, which is akin to inventory management of a paper manufacturing (banknote printing) firm. Here’s the problem depicted in figures in the tables below:


In a nutshell, a basic checksum on outstanding currency fails – the number of banknotes supplied and disposed off by the central bank can’t account for the net change in the number of the banknotes. To illustrate: on March 31, 2016, instead of the published 90.266 billion banknotes in total, only 88.406 billion could be accounted for by checksum – a difference of 1860 million banknotes or Rs. 977 bn! (We exclude the latest fiscal FY 2016-17 due to the unusual event of demonetization). On March 31, 2015, instead of the published 83.579 billion banknotes in total, a larger figure, 85.845 billion, could be arrived upon by checksum calculation – a difference of 2.27 billion banknotes or Rs. 119 bn. And the internals would make one’s head spin.  On March 31, 2016, published volumes of the Rs. 100, Rs. 500 and Rs. 1,000 banknotes exceeded calculations by 1.011 billion, 1.088 billion and 362 million, respectively! On March 31, 2015, published volumes of the Rs. 100, Rs. 500 and Rs. 1,000 banknotes exceeded calculations by -30 million, -448 million and 142 million, respectively. Of course, the problem stretches back to prior years as well.

It has to be noted that the problem isn’t that there is merely a checksum failure. After all, there is such a thing as currency in transit – banknotes in limbo – as they make their way from the printing presses to the currency chests. It is the swing in this figure that really matters. And even that is not evidence, in and of itself, of incompetence at the highest levels in the R.B.I. (a) It is the non-disclosure of the significant swings which leads me to believe that something is amiss about these banknotes in transit, which need to be tracked & accounted for fully in real-time, and (b) The way the formula in the table above has been applied, a positive figure indicates oversupply (Akin to ATM unloading) and a negative figure indicates undersupply (Akin to ATMs withholding cash). While either action is entirely permissible in R.B.I.’s currency supply operations (More in the following section), it is the large swings from undersupply to oversupply & vice-versa that don’t square up & need explanation. For instance, in FY 2012-13, the checksum on Rs. 500 transitioned from+2.40 billion to +186 million, a swing in volume to an oversupply of 2.21 billion. But this constitutes as much as 21.6% of the volume of Rs. 500 banknotes at the beginning of FY2012-13. Simply inexplicable that the currency chests can hold & unload over 1/5th of all of the Rs. 500 banknotes in the country in just one year! Also equally discombobulating is the swing in value terms (Right most column). For instance, in FY 2015-16, ID+CC unloaded Rs. 1.10 trillion of cash in to the public circulation!

Part 2: The R.B.I. calls up the Bullish Bear

On the afternoon of Friday, 22nd Sep, 2017, the Bullish Bear received a call from an official from the R.B.I. (Name & designation withheld), who wished to clarify the discrepancy. He was fairly straightforward about it, saying that the discrepancy is merely the cash withheld in the ID (Issue Department) and the CC (Currency chests). To me, this was merely technical arrangement, and I said as much.

I proceeded to explain my calculations and also gave an additional insight: Around 2013-14, analysts and econometrists were complaining about a perceptible increase in money supply leading to an uptick in inflation. However, at the R.B.I.’s end, at the end of 2013-14, a situation akin to ATM withholding (i.e. ID and CC unable to supply to the public) of banknotes flourishing (2.92 billion deficit in volume from a surplus position of 3.90 billion) coincided with the introduction of the Lead Bank scheme of currency distribution by the R.B.I. (More on this in the following section), which could explain the situation partly.

Similarly, that the Lead Bank scheme was discontinued in FY 2015-16 may explain, at least directionally, the reason that the volume of total banknotes ran into an ATM unloading situation at the end of FY 2015-16 by 4.13 billion notes (4.94% of all banknotes outstanding at the beginning of FY 2015-16) in volume or Rs. 1.10 trillion in value! But there is no tangible data to back up this large swing in banknotes.

I politely conveyed to the official that the institution has to explain the figures and demonstrate with figures that the cash position within the issue department and currency chests account for discrepancy fully. In common parlance, dot one’s I’s and cross one’s T’s. Otherwise we have a square peg in a round hole! The official was courteous, and I thanked him for his call too.

Part 3: Is the non-disclosure of ID+CC data due to the fact that the R.B.I. is technologically challenged?

Looking into the past disclosures, the R.B.I. has not been shy of experimenting with its currency distribution system. This may help explain the wild swings, though only partly. Nonetheless, I do want to point this out as something that has been accounted for while making the headline claims & continuing on the stated big picture theme in this article. Per the R.B.I.’s FY2014-15 annual report, p. 108-109:

“The Lead Bank Scheme for currency management was introduced on a pilot basis in 2013 by identifying one district of each state and assigning the same to a lead bank, which, in turn, is responsible for ensuring that genuine needs of members of the public for clean notes and coins are met through coordination with currency chests and small coin depots situated in that area. The lead bank as a nodal bank for currency management (BCM) attends to issues, such as linkage of non currency chest branches to currency chests, facilitation of supply and issue of banknotes and coins to and from bank branches in the area, prompt routing of diversion requests and redress of public grievances. The nodal BCM undertakes functions relating to spreading awareness/ literacy campaigns on security features of genuine notes and exchange of mutilated notes. After a year of operation, the scheme was reviewed and it was decided to continue it in 2014-15; it is under review for 2015-16.”

The R.B.I.’s FY 2015-16 annual report (p. 90) confirmed that in order to strengthen the distribution of currency by “leveraging technology,” the banknote distribution system was changed to a hub-and-spoke model with mega currency chests (MCCs). Did you read that… “Leveraging technology” at the CCs?

At this point, may I draw the reader’s attention to just show two instance proving that the R.B.I. has been deficient in technology all throughout: (1) Government-owned Security Printing and Minting Corporation of India Ltd (SPMCIL), which supplies ~40% of R.B.I.’s banknotes, admitted in its FY 2014-15 annual report (p. 38) that it first deployed an ERP system (Enterprise Resource Planning) in as late as FY 2014-15! Also that it has “Old machinery & inefficient layouts at some units” on p. 49 of the same report, (2) And in the latest FY 2016-17 annual report itself, on p. 129, the R.B.I. used a “sample” of just 25% of Currency Chests to determine the total number of fake Indian currency notes.

Just to clarify the hypocrisy, at this moment the Indian government and its central bank have been pushing all kinds of demands on the public in the name of digitization and simplification such as the GST, Aadhar, and demonetization. Yet the country’s most respected public organization, the central bank itself, has been dragging its feet on technology & can’t even count properly the banknotes it prints up!


To sum up, it is not just that the swing in the discrepancy ID+CC bucket was large. That it remains undisclosed in the first place and was likely poorly tracked historically – is the nub of the issue

There is plausibly little reason for non-disclosure. Data related to financials of the issue department (ID) (R.B.I.’s accounts for FY 2016-17) is public information and so is the data related to the physical location of the currency chests (CC). And if there are any insecurities about mass looting if the public gets to know how much money there is in which currency chests & that is the reason for non disclosure, it begs the question: how come the banks are so secure with known large deposits of cash at call at all times??

Stinks to High Heaven: Air India Bailed Out by Life Insurance Corporation (LIC) of India

Against a backdrop of rising concerns over NPAs in the banking system, it was reported that Air India was looking at the possibility of availing a new scheme, the Scheme for Sustainable Structuring of Stressed Assets (S4A), to rejig debt to the tune of a minimum of Rs 100 Bn. Since 2012, the airline has been on a life support with a Rs 300 Bn bailout package from the government, spread over ten years. In fact, this may be one of the biggest sums that LIC has ever loaned out till date: this new loan to Air India of Rs 100 Bn (If that number is correct), will grow its loan book by an enormous 9.26%.

Who reported this? A Secret deal? Was it leaked?

Since, at the time of writing, Air India has made available annual reports only until FY 2013-14, all the financial figures and plans of rejig coming out in the newspapers, if true, are very likely being leaked from Air India/ Civil Aviation Ministry itself, and being dealings in material non-public information, this constitutes a situation of non-uniform dissemination of sensitive information, and possible violation of securities law.


Indeed, the public sector bank index was up by a chunky 1.5% today, being the first day since the story broke, with two of the three stocks mentioned in the story (Bank of India, Bank of Baroda) up over a per cent and the third stock (Punjab National Bank) within 3% of its 52-week high.

Best of socialism at its worst?

There are many facets to this development that stink to high heaven. As Firstpost pointed out – Why the bailout when it was already turning around? It has also been queried before on multiple occasions when LIC was bailing out public sector Companies and investing aggressively in public sector disinvestments, who has the authority to approve this and why isn’t there a public outcry? And all this for a saving of Rs 3 Bn (A 3% saving on Rs 100 Bn), which Air India could save anyway by paying its fuel bills on time, as has been reported here by the Business Standard.

Hypocrisy unlimited

Arun Jaitley: “LIC is not a body which invests only to bailout the government in disinvestment. In issues by private companies, LIC also participates.”

That’s right. The (dis)honorable Finance Minister had agreed, last year, that LIC bails out & bails out repeatedly. And that LIC, with the public’s insurance money, routinely bails out private Companies too!

The government speaks highly of transparency and accountability, yet hijacks the public treasury to bail out desperate banks and monopolies, placing an incremental debt burden on the public.

Here’s another quote from ex- Finance Minister, Yashwant Sinha, a senior leader of the current ruling party, while he was in opposition in March 2012, around the time LIC bailed out ONGC’s disinvestment auction with an unnecessarily high-priced bid:

“LIC is a captive source of funds for the government. They have misused the status of LIC to misappropriate policyholders’ money and brought it to the government’s coffers through the ONGC disinvestment.”

Now that his party is engaged in the same treasonous act, in his own words, a “daylight robbery”, I’m sure he will stand up for the public and do everything in his power to stop this transaction.

Fat chance!

A case of honest kleptocracy

But the Bullish Bear wouldn’t write this if there wasn’t a silver lining to this all. There is an honest side to this, y’kno.

This bailout has proved that the government can openly rob the public of its money, via the LIC, to bail out bankrupt Companies.

Such instances of naked cronyism can at least serve to warn the public that their savings and insurance are at risk. The Life Insurance Corporation of India is not a safe house, nor are any of these banks offering 4-7% return on savings, making loans to extremely indebted Companies while maintaining tier-I ratios of just 10%.

Related reading: Debt-ridden Government makes more claims on LIC (NDTV Profit) >>

This amounts to a rather more transparent & direct socialistic involuntary bailout. Which is bad no doubt, but incrementally better than an indirect socialistic involuntary bailout! As Canadian billionaire and philanthropist Eric Sprott warned, “Whenever you think of the word bank, you should think risk.”

For a brief education on bailouts funded with public money, it can’t get any better than this short video segment, in which Peter Schiff, an Austrian economist and a guru & mentor to yours truly, lambasts a pitch for a government sponsored bailout of American car manufacturers by Lansing, Michigan Mayor Virg Bernero on live television! “If you think these Companies are such good investments, you put your own money into it!”

In conclusion

As mentioned previously, the Bullish Bear is an ardent fan of free markets and open competition. Yet, I have sympathy with Air India’s Chairman & Managing Director, Ashwani Lohani. Coming from the head of a public sector enterprise, these are astonishing words, admitting that a public sector entity does not really care about the delivery of its services. Although he does shy away from writing the public sector off completely, the Bullish Bear believes that he is headed in the right direction!

“Often my airline is questioned on its inability to match the private sector on various operating parameters, and this is unfortunately always done without due appreciation of the fundamental reality that there is no level-playing field… A course correction is the need of the hour, for contrary to what many may think, the public sector has still not lost its relevance in entirety… Unless and until we all, and that includes the mighty government machinery, start believing in the supremacy of deliverance over everything else, such dilemmas would always continue.”

Source: The Australian

Review of Under Fire BHP Billiton’s 2016 AGM: Jac Nasser to Leave on a Sorry Note

The Samarco dam disaster in Brazil continued to take its toll on BHP with the pending exit of Chairman Jac Nasser now confirmed. The disaster took place on November 5th, 2015, killing 19 people, and has been well documented here for its initial impact, here where the flooded vicinities are shown, and here documenting how protestors and representatives of victims of BHP Billiton’s mining projects not just in Brazil, but also in Indonesia and Columbia, planned to demonstrate outside the Company’s AGM in London.

The Bullish Bear caught up with the 2016 BHP Billiton AGM, and can confirm that representatives from Brazil and Indonesia were there and questioned the management incisively, to which the management replied with little more than platitudes and steps already put in place.

Some background: Samarco (Brazil) iron ore asset

Source: Company Annual Report FY 2016

The Samarco Mineração S.A., which operates the Samarco iron ore operation in Brazil, is held 50% each by BHP Billiton Brasil and Vale S.A. As a result of the tragic dam failure, operations at Samarco have been suspended, with no indication of reopening soon. Samarco’s main product was iron ore pellets. Prior to the suspension of operations, the extraction and beneficiation of iron ore were conducted at the Germano facilities in the municipalities of Mariana and Ouro Preto. In FY2016, BHP’s share of production was 5.2 MT of pellets (4% of Iron Ore production in revenue terms).

Impact and management steps

As at June 30th, 2016, BHP Billiton’s contingent liabilities registered a relatively small uptick from US$ 3.263 Bn a year ago to US$3.442 Bn, a figure which precludes “A number of matters, for which it is not possible at this time to provide a range of possible outcomes or a reliable estimate of potential future exposures.” Hmmm.. the potential potentialities!

Related reading: Is Deadly Dam Collapse BHP Billiton’s “Deepwater Horizon”? (The Motley Fool) >>

Equally noteworthy is that, despite insurance policies in place with Brazilian and international insurers, no insurance receivable has been recognized by Samarco for recoveries yet. Related to Samarco, BHP Billiton is externally insured for up to $360 MM, a figure which is dwarfed by the claims as below.

As at June 30th, 2016, BHP Billiton Brasil has identified contingent liabilities arising as a consequence of the Samarco dam failure as follows: (1) P&L: impairment charge of US$525 million, (2) Balance Sheet: Losses and provisions totaling US$ 1.2 Bn, (3) Environment and socio-economic remediation: An agreement with various authorities and partners to set up a Foundation, with funds of $ 134 MM initially (4) Legal: Various law suits including a claim brought by the Federal Public Prosecution Office on 3 May 2016, seeking approximately $48 Bn, (5) Commitment: a short-term facility to Samarco of up to $116 MM to carry out remediation and stabilization work.

These heady, heavy numbers aside, the management did take many steps, however. For example, (1) it took part in over 500 community meetings over the last year, (2) 41 programs were set up involving Samarco, BHP, Vale S. A. and the  Brazilian government, to focus on and rehabilitate social, economic and environmental impact of the accident, (3) A governance review of non-operating minerals joint ventures has been undertaken, (4) An expert panel’s investigative findings were released in August ’16 and also shared with other resource Companies, and (5) A global centralized dam management function was set up, with global tailings standards for design construction, maintenance of tailings and more frequent usage of independent safety reviews.

Another change was made after the December 2015 results: shareholder dividends were set at a minimum of 50% of underlying attributable profit, against a progressive dividend policy that sought to increase steadily or at least maintain half yearly dividends.

As for the earnings of CEO Andrew Mackenzie, they fell to half as he did not receive any performance-related pay in FY2016 – short-term and long-term  incentives were both zero. This was notably lauded by a keen attendee at the AGM, I noticed.


The failure of the tailings dam was blamed on construction defects in the base drain, while numerous warnings went unheeded

A Fundão Tailings Dam Review Panel was constituted by Cleary Gottlieb Steen & Hamilton LLP, which was retained jointly by Samarco Mineração S.A. and its shareholders, BHP Billiton Brasil Ltd. and Vale S.A., to conduct an investigation to determine the immediate cause of the November 5, 2015 Fundão tailings dam failure.

As I read the disclaimer on the website page here it clearly indicated that this was going to be less a fault-finding mission and more a technical, causation-investigative mission.

[A side note on tailings dam: A tailings dam in a cost effective structure to hold back the water from the mining area, contain the ground-rock tailings from the ore-milling and separation process and recycle the water to be reused in processing.]

It was originally planned to deposit sands behind a compacted earthfill Starter Dam, then raise it by the upstream method to increase progressively its capacity. To preserve the freedraining characteristics of the sands, a 200 m beach width was required to prevent water-borne slimes from being deposited near the dam crest where they would impede drainage.

An incident in 2009, shortly after the Starter Dam was completed, damaged the dam so badly that the original concept could no longer be implemented. This was “due to construction defects in the base drain.” A revised design followed in which more widespread saturation was allowed and accepted, increasing the extent of saturation introduced, which increased the potential for sand liquefaction. Sand liquefaction is a process whereby the material loses nearly all of its strength and flows as a fluid, which is what happened on the fateful afternoon of Thursday, November 5th, 2015, following the likely triggering event of three minor earthquakes in the region.

The foundation was laid, but the summary findings went on to highlight multiple indications and warning signs: (1) In 2011-12, “The 200 m beach width criterion was often not met,” (2) “In late 2012 when a large concrete conduit beneath… was found to be structurally deficient,” (3) During 2013, “Surface seepage began to appear on the left abutment setback at various elevations and times,” (4) By August 2014, “The replacement blanket drain intended to control this saturation reached its maximum capacity”, the saturated mass of tailings having grown meanwhile.

Related reading: A chronology of major tailings dam failures worldwide (WISE Uranium Project) >>

Alas, this narrative points to a pattern of operational negligence, which is what is making the victims, regulators and other stakeholders take action.

Returning to the goings on at the AGM, something else also caught my attention. BHP added this to its Charter (A one page leaflet with a few punchy dictums):

“We are successful when… Our teams are inclusive and diverse.”

Tacit admission of deficient decision-making?

By including the clause of inclusion and diversity in the Company’s Charter, we have a window into the minds of the management, into how they view a possible resolution to the mistakes made in this episode.

It is well-known from many studies [Kellogg, Essec, Houston Journal of Leadership, Skema Business School in France], that diversity boosts decision-making capabilities of a group.

“Our Charter… is the basis of our decision-making.” BHP Billiton Annual Report FY 2016, p. 39.

Reviewing the panel’s findings, it is apparent that despite many warnings, the management of Samarco S.A. continued its operations. Is the new mantra being introduced to improve this facet, and therefore, given the timing of this, is it a tacit admission that poor decision-making while reviewing key incidents through five years of the operation of the tailings dam at Fundão, was the most important cause of its failure?

The Bullish Bear tends to indeed think so.

Unlike The Guardian, BBC, the Financial Times, and many others, all of who suggest that the diversity program is for the sake of it or to improve performance: there is more to it than that. It is for a far more precise, strategic reason – to improve decision-making in high-pressure, high-stakes business scenarios.

Latest update: Brazil lays homicide charges over Samarco dam collapse, BHP Billiton rejects the charges outright (The Australian) >>

3 Reasons Why Urjit Patel Is a Dove Trapped in Hawk’s Clothing

The Bullish Bear is back with a few delectable insights into yesterday’s rate cut by the Reserve Bank of India, a relatively unexpected one, albeit a sixth cut in just under 2 years. A basic survey of newspapers after yesterday’s events will reveal that many analysts seem convinced that Government has now sidelined its CPI target in coming years of 4%. Two quick deductions: (1) Interest rates are decidedly headed in one direction only: and that’s down. For now. And (2) Monetary Policy Committee (MPC) or not, Urjit Patel is there to command the ship as per the directions of the BJP-led government. I present my case here in support of such a growing belief that Urjit Patel is a dove trapped in hawk’s clothing under the previous governor’s regime.

#1 Recent data releases were mixed and technically, did not merit a reaction

Consumer sentiment was robust and ahead of forecasts (A: 113, F: 110, P: 112), likewise the August PMI manufacturing forecasts (A: 54.7, F: 52.3, P: 51.9). July’s industrial production index (IIP) missed wildly (A: -2.4%, F: 4.0%, P: 2.0%), though these are known to be volatile, but August’s inflation (A: 5.1%, F: 5.8%, P: 6.1%) and current account deficit in Q2 remained under control (A: -$0.3 B, F: $0.4 B, P: -$0.3 B). [All statistics sourced from]


A cut in interest rates seems to be the obvious course of action from the statistic of Bank Credit growth FYTD of 0.8% significantly lagging Bank Deposits growth of 5.0%. However, sound economics will deduce, infact, a necessity to raise interest rates based on this data point! More money growth in the system is a warning sign of excess money creation, and a cut in interest rates will only add fuel to the fire. In any case, even if we were to analyze the conventional view of cutting interest rates, rate hike transmission was the key intermediate step to resolve: Over the last 150 bp of rate cuts, only 70bp have been passed on.


Comparing India’s positioning to BRICS nations, for the large part, India has favorable growth statistic (9th highest in the world), but is at risk from rising prices. Upside risks to CPI include (1) rising crude prices, (2) upcoming strong quarter for Gold, which may strain deficits & the Rupee and (3) government largess in wages and compensation fueling consumption demand. And although RBI’s release cited moderating food prices as a relief, it should be noted that the food price inflation index is first of all, volatile, and second of all, at a level of 8.23% in July, still very high!


#2 Ex-ante polls were markedly more dovish under the new governor

Since Urjit Patel’s appointment as governor on August 20th, analyst polls on rate cut swung significantly to a more dovish stance (From under 12% expecting a rate cut in deposed governor Raghuram Rajan’s last meeting on August 9th to over 40% ahead of October 4th meeting chaired for the first time by Mr Patel). Reuters on 30th September stated that “Several analysts in the poll said they expect him and the newly-formed Reserve Bank of India Monetary Policy Committee to follow a more dovish path than his predecessor.” If analysts are to be considered “informed,” then this large movement in the informed consensus on what’s coming held valuable information for the market.


#3 Urjit Patel was installed by a government crying out for lower interest rates

Numerous instances have been reported documenting politicians criticizing Raghuram Rajan’s monetary policies. Dovish Government stalwarts such as Rajya Sabha MP Subramianian Swamy openly backed the instalment of Urjit Patel, who thought it was “idiotic” to believe that Patel will be as hawkish as deposed RBI Governor Raghuram Rajan. Mr Patel may have some wrongful history as well: it was reported that Patel was involved at the highest levels with scamster Jignesh Shah, according to a report by India Samvad.

And lest we forget the basics of how the central bank operates in India. Per the Reserve Bank of India Act, 1934 (Updated January, 2013): (1) Its governors are appointed or nominated by the central government, (2) the Government of India also dictates the appointment/ nomination of all directors to RBI’s board of directors, (3) the RBI was nationalized on 1 January, 1949, and is fully owned by the Government of India.

And best of all: the RBI does not even get audited!

Independence.. what independence?!

It’s Deplorable! The Federal Reserve’s Regulatory Pneumonia Out in the Open

The Fed used 3 stooges to test market opinion & adopt a dovish stance

In a week well-marked by Madam Secretary, Hillary Clinton’s pneumonic seizures catching the political world’s attention, the Fed’s tarzans swung from tree-to-tree, roiling the capital markets. What’s lesser known, however, is that just as Hillary Clinton’s unease was really not pneumonia, the Fed’s swinging stance on raising interest rates was really part of a hoax. Make no mistake – the Federal Reserve is masquerading as a hawk deep inside dove territory, as it tries to carefully crawl its way out into the open without being preyed upon.


The Fed seemed to test the waters before muddying them – a predetermined move – very similar to the events preceding the rate hike in December 2015. Peter Schiff calls it “sending out a trial balloon” of rate hike talk before finalizing what to do. “Quantitative talking,” “Open mouth operations,” just to borrow a couple more phrases from the real Dr Doom!

Is it all just a show?

The representatives of the Federal Reserve – either from the member banks or from the Federal Open Market Committee (FOMC) – are rolled out to talk to the media, they take a strong position in front of the market (Of hiking rates in this instance) and then they gauge the feedback. Based upon the reaction on (Which was extremely negative on Friday, 9th September), the Fed can position its speakers to go whichever way it desired – raise interest rates, maintain them or cut them (Maintain them, in this case).


To start off, in the week prior, San Francisco Fed President John Williams, a known centrist, gave a rather hawkish speech, which was in the face of some fairly bearish data in August just 12 hours earlier (Aug Fed Labor Market Conditions Index (A: -0.7, P: 1.0, F: 1.5), Aug ISM Non-Manufacturing PMI (A: 51.4, P: 55.5, E: 55.0)). The markets declined somewhat: over the following two days, the S&P lost 0.2%, and the US Dollar gained the same amount. And then, as if to compound the error, Boston Fed President, Eric Rosengren, a known dove, came in and gave an even more hawkish speech on Friday morning. By the end of Friday, despite the best efforts of Daniel Tarullo to insert a dovish narrative, Crude Oil lost 3.2%, the Dollar index climbed 0.3% and the S&P 500 lost 2.5%!

The adverse reaction forced the Fed’s hand on Monday, being the last day before a blackout period on public comments related to monetary policy ahead of the FOMC meeting next week, and dovish speeches spewed forth from all directions.

Source: The Federal Reserve official website, Bloomberg, Thomson Reuters

Accordingly, the 3 main speakers on Monday, 12th September, were (1) A centrist – Atlanta Fed President & CEO, Dennis Lockhart, (2) A dove, Fed Governor Lael Brainard and (3) Lesser known, but evidently a hawk, Minnesota President Neel Kashkari. And they all dove for cover, desperate to stay the course of easing.

Particularly surprising was Minnesota President Neel Kashkari’s ultra-dovish interview on CNBC. Also, albeit that the centrist Atlanta Fed President & CEO, Dennis Lockhart’s speech was only mildly dovish, he excused himself from offering an opinion on what will likely be done in future Fed meetings, citing the fact that “Financial markets seem to be very sensitive to remarks of Fed speakers.” He conveniently proceeded to proffer a number of forecasts and estimates in his speech of nearly 1,900 words, offering a wide range of opinions.

The Fed’s political maneuvering is not in good faith

The Fed’s behavior has been as deplorable as Hillary Clinton’s pneumonic cover up of her health issues, which could disqualify her from running for the highest office. No discerning student of capital markets should take the Fed seriously. The Fed was never seriously contemplating raising interest rates with the integrity of a rigorous regulator, else interest rates would not be as low as they are in the first place.



It’s that time of the year again: The NRF spin (It’s good despite it being bad)

Oddly enough, the National Retail Federation (NRF) did not choose to build on its 2014 ruse that Thanksgiving sales, which were down 11%, were disappointing because there is an “evolutionary change” of online shopping. If anything, this theme would have found stronger support in the media this year, with Amazon sales growing by 23% in Q3 and a MasterCard research citing holiday season online sales growth of 20%. Never mind the fact that online sales only account for a tiny portion of total retail sales.

NRF-holiday salesHowever, better sense prevailed. The NRF did admit, to a large degree, that the U.S. Retail sector has been weak. And don’t be fooled: despite U.S. holiday sales (sales in November and December excluding autos, gas and restaurants) growing by 4.1% in 2014 and an estimated 3.7% in 2015, the consumer is under pressure.

The NRF, in fact, went on to highlight in this article that although general retail prices were 2.9% lower in October than a year earlier, as per the U.S. BEA, rent, healthcare costs and even the amount spent on communications like smartphones, tablets and broadband Internet service had all increased. Much of the extra money freed up by lower gasoline prices would have plausibly gone to such higher costs and travel and restaurants rather than retail merchandise. In other words, the consumer is feeling the pain pretty much everywhere, leaving little room for discretionary expenditures to grow.

“All of this has combined to create a very deflationary atmosphere the past year or more, meaning retailers have needed to be competitive and drop prices to keep products moving off the shelves.”


Retail Sales in the U.S. increased 1.40% in November of 2015 over the same month in the previous year. The figures have been on a downward trajectory of late and missing forecasts significantly and consistently (Source:

US Retail Sales YoYUS Retail Sales Recent

From the NRF’s perspective, Retail sales for November — excluding automobiles, gasoline and restaurants — were up 3% from a year ago, also below its expectations.


Furthermore, a crucial indicator of corporate over-optimism, firms’ inventories to sales ratio, is rising rapidly.

Inv to Sales
Readers may be astonished to know the strength of this weakness – the October U.S. Census Retail Inventory to Sales ratio was at the highest point since 2008 at 1.57. This means that the retail industry, on an aggregate, was overstocked by an astounding 57% in the month of December.  Even more distressing is that the ratio is well spread throughout sectors – Clothing & Departmental Stores have inventory worth close to 3x the revenue they are generating. Motor vehicles, home appliances, building materials and general merchandise have on an average 1.86x the inventory than sales. Also, looking at historical trends, this ratio usually drops sharply m-o-m in December, but then picks back up again in January to beyond levels seen in October.

The pain, thus, is likely to intensify for corporations in a soft growth environment, in the March-2016 quarter.


U.S. corporate profits decreased by 1.7% to USD 1508.90 Billion in the third quarter of 2015 from USD 1533.90 Billion in the second quarter of 2015. Moreover, comparing retails sales y-o-y growth of 1.7% to CPI rise of 0.20% y-o-y and wage growth rate of 4.3% y-o-y in October 2015, corporations are clearly troubled. (Salaries as a percentage of operating expense varies from 18% in retail/wholesale trade to 52% in health care services. Source: Society for Human Resource Management). If one were to consider Shadow Government Statistics’ 1990-based CPI figure of close to 4%, coupled with the wage growth of also in the region of 4%, one can see that the retail sales did not rise enough to offset the increase in costs for the corporations.


Yet, our Christmas isn’t complete without that little twist in the headline by the NRF: “Consumers Win as Retailers Cut Holiday Prices”! It’s alright, because despite bad news for retailers (the very group that NRF represents) who are having to slash prices, it is good news for the customers “in the long term”. Gotcha!