Archive for the ‘Economics’ Category

Middle class demographics will cause Indian stock market capitalisation to grow by a factor of 20 till 2050

April 4, 2019

The underlying Indian stock market growth is fueled by a burgeoning middle class with a voracious appetite for owning stocks.

The BSE Sensex is India¨s primary stock index. The Bombay Stock Market has been going for some 140 years (formed 1875) but the Sensex Index of 30 shares was established in 1986 and set its reference value of 100 on a base date chosen to be 1st April 1979.  It is now 40 years since the base date and the index stands at over 39,000. For stock investors this represents an annual rate of growth over the 40 years of over 17%.

Rather than a measure of – except indirectly – of the economy or industrialisation, I see the BSE Sensex as primarily a measure of the appetite for investing in stocks. As such, it is a phenomenon of, and by, and for, the “middle class”. Much of the growth of the index is thus due to new owners of stocks entering the market.

It is thought that India has around 25 million owners of stocks. There are many definitions of the “middle-class”. I find defining the middle-class by the number of households with a disposable, annual income of over $10,000 is probably the best indicator of the number of stock investors. By this measure the number of stock investors is about half the number of such households. Currently – 2019 – the number of such households is about 50 million and covers 120 – 150 million of the total population of 1,300 million.

The Indian population will probably reach around 1,500 million and start declining after 2050. It can be expected that the growth of the stock-owning middle-class will keep increasing till then and even for a decade or two after population decline begins. A not-unreasonable projection would be that the underlying growth of the stock index will follow the appetite for owning stocks.

The total number of shares available, the number of investors available and the price of the shares are inextricably linked with the state of the economy. An increasing appetite for a fixed number of available shares will follow the number of investors available. This would increase both share price and market capitalisation. However the number of shares available will, given even a modest growth in the economy, probably track the growth in total population.  However, the underlying growth over the next 30 years is unlikely to reach the heights of the last 40 years. A saturation law applies and my expectation would be a growth in the index of between 2 and 3 times the current value. Since the number of investors would have grown by a factor of 8 this implies that the total capitalisation of Indian companies on the stock market could be closer to 20 times higher than now.


Japan coming out of the doldrums?

November 13, 2017

After 28 years of stagnation, the Japanese economy may be  getting to its feet again.

The Japanese real estate bubble burst at the end of December 1989 and interest rates sank to virtually zero. The Japanese economy struggled against Endaka

Coupled with gigantic savings accumulated over decades from overseas surpluses, and soaring yen, Japan tried a number of measures to weaken its currency. First it began to buy up properties overseas, such as the Rockefeller Center in New York City in 1990, as well as investing in US corporate bonds. After huge property losses, it gave that up. Another was state intervention BOJ in foreign exchange reserves, which it ultimately gave up in 2004 after accumulating nearly a trillion dollars. Japan also invested directly in Fannie Mae and other mortgage bonds, holding close to a trillion dollars in those bonds. Yet another measure was to loan out hoards of money to US and European banks at zero percent rates, which began in earnest in 2004, also known as the massive carry trade (via yen-denominated bank loans to overseas investors). US and European banks then loaned this money out to home owners in America, as well as big property investors in the Middle East. This effectively kept the yen at 120 or weaker levels to the dollar.

Endaka was tipped off again in 2008. The yen moved from the floating near 120 to floating near 90. This is thought to be the first time endaka contributed to a worldwide recession, instead of just a Japanese recession. While the proximate cause of the recession is widely thought to be an increase in credit defaults (largely outside Japan) causing a loss in confidence in the credit markets (a credit crisis), the yen was funding these investments through the carry trade, where loans were made at near zero interest rates in yen to finance the purchase of non-yen debts which had higher interest rates.

From a high of almost 38,000 in December 1989, the Nikkei Index dropped to a low of 9,000 in January 2009. At the end of last week the index had reached over 22,000. Abenomics has not led to any spectacular recoveries, but the mood is lightening.

(I made my first investments in Japanese stocks in 1990 – and Murphy’s Law came roaring into effect!)


Indian Budget today – Economic Survey published

February 1, 2017

The Indian budget will be presented today and the annual Indian Economic Survey (which forms the basis for the budget) is also out. The Economic Survey is the responsibility of the Chief Economic Adviser to the GoI (this year Arvind Subramanian).


The budget itself is expected to be mildly expansionist (especially after the jolting brake applied to the economy by the demonetisation circus of the last few months). Certainly some black money was removed from the system but this may be a one-off affair. Certainly, from the anecdotes I hear, the generation of “new” black money has not been slow to start. Maybe demonetisation will have to become an annual affair – or a regular occurrence every so often. But, no doubt, India has made a step-change in the level of electronic transactions being used. It has also brought a huge number of people into the banking system. One of the main concerns for the government is that the cash economy has allowed so many to remain invisible and completely outside the tax base. Considering that only 7 of every hundred voters is even registered for tax, it was imperative for the government to reduce the huge number of the tax-invisible. This they probably have done.

The Economic Survey itself highlights “8 interesting facts”:

  1. Indians on The Move – New estimates based on railway passenger traffic data reveal annual work-related migration of about 9 million people, almost double what the 2011 Census suggests.
  2. Biases in Perception – China’s credit rating was upgraded from A+ to AA- in December 2010 while India’s has remained unchanged at BBB-. From 2009 to 2015, China’s credit-to-GDP soared from about 142 percent to 205 percent and its growth decelerated. The contrast with India’s indicators is striking.
  3. New Evidence on Weak Targeting of Social Programs – Welfare spending in India suffers from misallocation: as the pair of charts show, the districts with the most poor (in red on the left) are the ones that suffer from the greatest shortfall of funds (in red on the right) in social programs. The districts accounting for the poorest 40% receive 29% of the total funding.
  4. Political Democracy but Fiscal Democracy? – India has 7 taxpayers for every 100 voters ranking us 13th amongst 18 of our democratic G-20 peers.
  5. India’s Distinctive Demographic Dividend – India’s share of working age to non-working age population will peak later and at a lower level than that for other countries but last longer. The peak of the growth boost due to the demographic dividend is fast approaching, with peninsular states peaking soon and the hinterland states peaking much later.
  6. India Trades More Than China and a Lot Within Itself – As of 2011, India’s openness – measured as the ratio of trade in goods and services to GDP has far overtaken China’s, a country famed for using trade as an engine of growth. India’s internal trade to GDP is also comparable to that of other large countries and very different from the caricature of a barrier-riddled economy.
  7. Divergence within India, Big Time – Spatial dispersion in income is still rising in India in the last decade (2004-14), unlike the rest of the world and even China. That is, despite more porous borders within India than between countries internationally, the forces of “convergence” have been elusive.
  8. Property Tax Potential Unexploited – Evidence from satellite data indicates that Bengaluru and Jaipur collect only between 5% to 20% of their potential property taxes.
Trade IES 2016-17

Trade IES 2016-17


Fake economics at the Bank of England

January 6, 2017

Not just fake news. There is also quite a lot of fake science around and there always has been fake economics. Ancient alchemists had more rigour and integrity than many economists today. What characterises fake science and fake economics is that they start with a “politically correct” result and then “generate” the science (by cherry picking, ignoring inconvenient data and even fakery) as proof.

I have long thought that economics is  a “black art” and if anything a social study and a long way from being a science. Much of the status economics enjoys as a discipline is due to the existence of a Nobel prize (which was not wanted or instituted by Alfred Nobel himself). It was something dreamed up by the Swedish Central Bank to elevate the status of their own charlatans. Economists are usually very good at making hindcasts and developing theories about what has just happened but are remarkably useless in making forecasts. There is no economic theory that does not contain a large measure of political or religious advocacy.

The Bank of England economists who made dire predictions about the consequences of Brexit are now desperately trying to justify why they made such utter fools of themselves. But it has been the same with IMF and World Bank, EU and UN economists. Excellent at hindcasts and useless at forecasts.

The Telegraph: 

The Bank of England has admitted its dire warnings of a downturn in the wake of the Brexit vote were a “Michael Fish” moment and said that the economics profession was now in “crisis”.

Andy Haldane, the Bank of England’s chief economist, said there was a “disconnect” between political warnings about Brexit and the “remarkably placid” state of the markets, adding that the worst predictions may turn out to be “just scare stories”.

He made the concession as new figures suggested Britain was the fastest growing of all advanced economies last year after the services sector defied gloomy forecasts to hit a 17-month high. 

The FTSE 100, the index of Britain’s biggest companies, closed on a record high for the sixth time in a row on Thursday – the longest run for 20 years.

At an event at the Institute for Government in London, Mr Haldane said that criticism of economists was a “fair cop” after they failed to predict the financial crisis and were wrong about the impact of the Brexit vote.

He compared their performance to Mr Fish’s infamous weather forecast in October 1987, in which he dismissed warnings that a hurricane was “on the way” but noted there could be high winds in Spain. 

Mr Haldane said: “Let’s go back to a different crisis, the crisis not in economic forecasting but weather forecasting. Michael Fish getting up: ‘Someone’s called me, there’s no hurricane coming but it will be windy in Spain.’

“It is very similar to the sort of reports central banks issued pre-crisis, that there is no hurricane coming but it might be very windy in sub-prime.”

When it was put to him that the Bank of England had forecast a “hurricane” after the Brexit vote which had not materialised, Mr Haldane replied: “It’s true, and again fair cop.” …… He said: “Right now there is a very interesting disconnect between what we read in the papers about the degree of political and policy uncertainty, which by any historical metric is at high levels, and what we have seen from the economy and financial markets, which have actually been remarkably placid. That disconnect cannot last forever. There will need to be a reconciliation between the two … Maybe some of the scarier stories politically will be seen to be just that – scare stories. ”

Economists have claimed to be “experts” but have failed to be of real use more often than not:

Economics Has Failed America

There are “positive” questions in economics that have mathematical answers — things that simply must be true — and then there are “normative” questions that amount to value judgments on points of policy. In economics classes, we teach the former and usually stop short when faced with the latter. This leaves a hole in any discussion of economic policy; students acquire first principles but rarely consider real-world applications, because to do so would presuppose a social or political point of view.

In the case of free trade and globalization, this omission has been disastrous. All first-year students of economics learn the theory of comparative advantage and gains from trade. They see a mathematical proof showing that when two countries trade goods or services, the benefits to the winners outweigh the costs to the losers. They are assured, correctly, that this result allows everyone to be made better off — or at least no worse off — by trade.

Yet the redistribution required to generate this broad improvement in living standards is hardly addressed, or sometimes even mentioned.

I can’t quite remember what set me off then, but I posted this rant some 3 years ago:

Economists are – by and large – religious or political advocates

A recent article …. got me to wondering why “Economists” and “Economics” – in spite of their gross and sometimes spectacular failures – have the high status they do. I come to the conclusion that “Economists” are – by and large – just religious or political advocates and “Economics” is no more than a study of social behaviour. …..

The practice of the black-magic that is considered economics – for it is certainly no science in the Popper sense – gets much of its cloak of respectability from the fact that the Nobel Prize exists (more correctly the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel).  

The Nobel prize in Economics should never have been created. In fact Nobel never wanted one and he is probably spinning in his grave as prize winners, one after another, prove – at best – to be mere historians and – at worst – religious or political zealots.  The prize adds more stature to the discipline of economics than it deserves. Almost every economic theorist has developed wonderful hindcasts but few – if any – have produced theories which can consistently make correct forecasts. …..

The political advocacy which is inherent in the theses promoted by Nobel Economics laureates have led to spectacular failures. Milton Friedman and his rabid monetarism gave rise to many of the crises today, Muhammad Yunus and the Grameen bank with their concept and practice of microcredit have exacerbated the risks of the debt trap into which so many small farmers have fallen. Krugman’s politics are essentially of the left and usually encourage profligacy. His analyses are more destructive than constructive and he has fault to find with almost every other theorist cutting across all political boundaries. He himself has yet to advocate any consistently successful theories. Amartya Sen focuses on analysing the “economics of poverty” but has nothing real to offer for its alleviation beyond platitudes representing his own political values from his ivory tower.

The world’s economies lurch from one crisis to the next but rarely are the crises foreseen. The only constant that can be observed is that growth – when it happens – leads to the improvement of the human condition but no “economic theory” has been able to deliver sustained growth. Growth – when it happens – achieves more for poverty alleviation than any social welfare program. Real wealth creation achieves more in achieving full employment or achieving social equality than merely redistributing a static pot of wealth.

graphic from Study Blue

graphic from Study Blue

Emerging markets outlook for 2017

November 25, 2016

Focus Economics has published its emerging markets prediction for 2017.

  1. Latin America | External shocks to undermine potential growth in the region
  2. Asia | Growth will benefit from rising global demand and resilient domestic dynamics
  3. MENA | Higher oil prices promise to boost growth in 2017
  4. Eastern Europe | Economic conditions set to improve in 2017
  5. Sub-Saharan Africa | Weak growth urges policy action
Focus Economics: Emerging Markets outlook 2017

Focus Economics: Emerging Markets outlook 2017

It is in Asia and a recovering Russia that there may be some drive:

Asia | Growth will benefit from rising global demand and resilient domestic dynamics

  • China’s still resilient economic growth and the ongoing reform momentum in India will prompt the East and South Asia (ESA) region to expand a strong 6.0% in 2017, which will represent a slight deceleration from the expected 6.1% increase in 2016. Meanwhile, in the Association of Southeast Asian Nations (ASEAN), an improvement in the region’s external sector should support quicker growth along with resilient household spending. ASEAN will expand 4.8% in 2017, up from 2016’s 4.6% increase.
  • Inflationary pressures are expected to strengthen across Asia next year as a result of a low base effect, the gradual increase in commodity prices and scheduled subsidy cuts and tax hikes in some economies. While inflation in ESA will increase mildly from 2.4% in 2016 to 2.5% next year, the pick-up in ASEAN will be more pronounced and inflation is expected to rise from 2.3% in 2016 to 3.2% in 2017.
  • While economic growth in the region will benefit from a mild improvement in global demand and resilient domestic dynamics, some clouds are gathering on the horizon. Donald Trump’s victory in the U.S. presidential elections could disrupt the global economy if he implements his proposed protectionist policies. This has the potential to hit growth in the region, given the importance of the external sector for most Asian economies. Also, a more aggressive monetary policy normalization by the U.S. Federal Reserve could heighten volatility in the financial and exchange rate markets in the region.


Eastern Europe | Economic conditions set to improve in 2017

  • The stabilization of commodities prices and the economic recovery in Russia, the region’s largest economy, should support a return to growth in the Commonwealth of Independent States (CIS) region next year. GDP is seen growing 1.5%, after falling 0.3% in 2016. However, geopolitical risks and monetary tightening in the U.S. are casting a shadow on the outlook.
  • In Central & Eastern Europe (CEE), steady domestic demand should fuel a healthy 3.0% growth this year and next. Meanwhile, dynamics in South-Eastern Europe (SEE) will be dominated by escalating political uncertainty and security concerns in Turkey and the ongoing debt saga in Greece. GDP in SEE is seen expanding 2.8% in 2017, slightly above the 2.7% projected for this year.
  • Price pressures in the CIS region should fall steadily throughout 2017, supported by a tightening bias by most central banks in the region, and our panel sees inflation at 5.6% in 2017. For CEE, inflation is expected to rise in 2017 as the effect of low oil prices wanes, with our analysts projecting average inflation of 1.5%. Meanwhile, SEE will see a slight increase in price pressures on the back of rising inflation in Greece and Romania.
  • External risks to the Eastern European economy are high heading into 2017. The surprise outcome of the U.S. presidential election along with tense Brexit negotiations will increase volatility in the financial markets and weigh on currencies and assets across the region. In addition, an expected increase in U.S. interest rates has the potential to tighten global liquidity and spark capital outflows. For Russia, however, Trump’s election is seen as positive and some analysts speculate that he could end sanctions against Russia due to his close ties with the country. 

Maybe the financial crisis which started in 2008 is finally coming to an end. Eight years is long enough.

I blame the EU and the lack of drive from Barack Obama, not for the start of the crisis, but for prolonging the length of time it has lasted. But one reaction for the political cowardice of the last 8 years (some would say 20 years) is the disenchantment with liberal/social democratic, politically correct, elite and  “establishment” politics.

The disenchantment is showing itself to be a global phenomenon.


The Italian Dilemma: Weak banks and faltering domestic demand

September 22, 2016

Reblogged with permission from Focus Economics

The sudden panic about a potentially imminent Italian banking sector collapse back in July has somewhat subsided for now, but sooner or later the issue will inevitably rear its ugly head again. Two months after Italian bank stocks collapsed even further in the aftermath of the Brexit vote, fears of an imminent need for a bail-in have receded as the Italian government works on plans to shore up its weakest bank, Monte dei Paschi di Siena (MPS). This will be achieved via an alternative but rather ambitious method culminating—if all goes according to plan—in a new capital injection. However, MPS, which came up short in July’s ECB stress tests, has already received capital injections in the past. Such plans to patch up banks have tended to involve kicking the can down the road rather than providing a more definitive solution to the 360 EUR billion of non-performing loans (NPLs) weighing down Italy’s banking sector, equivalent to one fifth of its GDP. If a sustainable solution is not found to clean up Italian bank balance sheets in the near future, they will inevitably constrain domestic demand and thereby weigh on the country’s already feeble growth even further.




Domestic demand, the longstanding mainstay of the Italian economy, is already under intense pressure. In the second quarter, GDP failed to grow in quarter-on-quarter terms, primarily on the back of a broad-based deterioration in all components of domestic demand (private consumption, government consumption and fixed investment), which could not be offset by the unusually-positive contribution of the external sector to growth. The difficult climate for domestic demand in Italy is nothing new, since the austerity policies implemented in recent years have taken their toll and Italian governments have centered their efforts on trying to boost external demand instead in order to reverse the current account deficit Italy had until 2012 and keep it positive going forward. And yet private consumption has remained the main driver of Italy’s feeble economic recovery. Analysts foresee that the poorer-than-expected performance of domestic demand (especially private consumption) in the second quarter this year will be temporary, but its growth rate will nevertheless decelerate in 2017.

Our latest September Consensus Forecast for Italy, obtained by polling 37 local and international analysts, sees GDP growing a meagre 0.9% both this year and next, a figure which has in both cases been gradually revised down in recent months from the 1.2% forecasts for both years back in January. The panel are basing their growth projections primarily on modest improvements in consumer spending, albeit at a slower rate than initially expected, on the back of gradual gains in household disposable income fueled mainly by improving employment and low inflation. Domestic demand is forecast to contribute 1.1 percentage points to total growth this year (which will be dragged down slightly by a 0.2% contraction in the external sector), of which 0.7 percentage points will come from the strongest component, private consumption. In 2017, domestic demand is expected to decelerate and contribute 0.8 percentage points to growth while the external sector will pick up slightly. Of the domestic demand components, private consumption is seen remaining the main cornerstone of the tentative recovery next year, decelerating from 2016 but still contributing 0.5 percentage points to growth.

A failure to swiftly clean up bank balance sheets means domestic demand will inevitably suffer as bank credit supply constraints continue to prevent the recovery of investment. Loan-loss provisioning reduces the credit banks have available for lending, especially to small and medium-sized enterprises (SMEs) and consumers, which are perceived as risky. Arguably, analysts assessing the Italian banking sector are now most worried about the risk of chronically constrained growth rather than another systemic shock, as banks are trapped in a vicious circle whereby poor economic growth means bad loans keep growing, which in turn weigh on growth even further. The latest ECB stress tests showed that most Italian banks do have loss-absorbing capacity to withstand a theoretical three-year economic shock, but strong concerns remain about their profitability as NPLs reduce their lending ability and deter investors.

Moreover, this scenario of sustained weakness prolongs the risk of banks eventually being forced to resort to a bail-in. A recapitalization of the banking sector involving substantial losses for retail investors would strongly hit consumer confidence and spending, the backbone of Italy‘s economy, which analysts we surveyed foresee as remaining essential to its fragile recovery. For a country whose already weak economic growth is heavily dependent on domestic demand, this would therefore bode disaster, and not only for the individual citizens with affected bond holdings.

Italy’s banking sector woes

The Italian government is desperate to avoid any need for a bail-in, especially after the politically disastrous bail-ins of a handful of small regional banks last year. In this context, it has sought to reassure the markets that individual critical cases of weakness are contained and new capital can be raised without the need for individual investors to take a hit. But exactly how the overwhelming quantity of NPLs in the Italian banking sector will be dealt with is still far from clear. Italian banks have only made provisions to cover just under half of the 360 EUR billion NPLs weighing down their bank balance sheets, of which 201 EUR billion are already estimated by the IMF to be bad loans that will be irrecoverable. Plans such as that affecting MPS, where NPLs are to be offloaded into a securitization vehicle in an attempt to sell them to investors, would seem to be in line with the IMF’s recommendation that Italy build a robust market in NPLs. And yet many analysts consider such ambitions rather wishful thinking, especially since most of the bad loans on Italian bank balance sheets are uncollateralized loans to small businesses and consumers (in contrast to the mortgage NPLs that dominated Spanish and Irish bank balance sheets during their time of stress), and specialist NPL buyers tend to be more attracted to loans with easily recoverable, tangible collateral.

Moreover, if Italy is to create a functioning NPL market, banks will need to accept significant write-downs on their loans compared to their current book value. There is a sizeable discrepancy between banks’ valuations of the NPLs and the price they would get for them if they attempted to sell off the loans to specialist distressed debt players, which will create yet more of a gaping hole on bank balance sheets. The small private Atlante fund and its successor Atlante 2, set up by the Italian government to help participate in distressed banks’ recapitalization and also to buy NPLs from banks, are unlikely to be anywhere near large enough to resolve these problems.

To complicate matters further, holdings of bank bonds by retail investors are exceptionally high due to the longstanding practice in the country of selling (or rather mis-selling) bank bonds to ordinary citizens. An IMF report published back in July calculated that retail investors own about one third of around 600 EUR billion of senior bank bonds and nearly half of an estimated 60 EUR billion of subordinated bonds on the balance sheets of Italy’s 15 largest banks. Under the bail-in requirement of the EU’s Bank Recovery and Resolution Directive (BRRD) in force since the start of this year, at least 8% of a failing bank’s total liabilities must be written off before state aid can be requested, if the EU enforces strict adherence to the rules (the Italian government has been investigating every possible loophole in case). In Italy, the IMF estimates that this requirement would hit the majority of subordinated bond holdings by retail investors in the fifteen largest banks and that it would also hit some of their senior debt holdings in two thirds of those cases.

After the experiences of massive publically-funded bank bailouts in countries such as the UK, Ireland and Spain during the height of the financial crisis, the whole idea behind the BRRD was to break the link between banking and sovereign risk and to stop putting taxpayers on the hook for private banking sector failures, making bank bondholders pay instead. But this assumes that the bondholders are institutional investors, and fails to take account of the specific circumstances of countries such as Italy where retail investors risk having their holdings wiped out too. In Italy’s case, many of the bank bondholders at risk are ordinary citizens and taxpayers, who were mis-sold bank debt as if it were as safe as placing their money in a savings account but with the added benefit of a much higher interest rate. In fact, retail investors are likely to be disproportionately affected compared to institutional investors, since individual citizens are usually sold more risky subordinated debt rather than its safer senior counterpart.

Reviving the risk of recession?

Unless concrete plans for how to create a functioning NPL market are devised, it is unclear how banks that need to recapitalize will be able to do so without ultimately ending up hurting at least some of their equity and subordinated debt holders. For a country where consumer spending is the cornerstone of an already weak recovery, imposing losses on retail investors, if they are not somehow exempted, would risk dampening consumer confidence to the extent that this could in itself push the country back into recession. This is before the wider downside risk implications of a struggling banking sector are even taken into consideration. Even if a bail-in remains avoidable, if banks are forced to use their own precious reserves to increase loan-loss provisions and capital buffers in the absence of any substantial state aid injection, this risks prolonging the Catch-22 of poor growth leading to a weak banking sector and vice versa.   

Author: Caroline Gray, Senior Economics Editor

Date: September 19, 2016


Burning ivory only increases poaching

May 3, 2016

Some 105 tons of contraband ivory was burned by Kenyan authorities last week in their effort to curb illegal poaching. I find their logic flawed. All the ivory that was destroyed was what had been recovered from poachers or traders who had been caught. The ivory came from elephants already killed. But I don’t see how destroying this ivory will save a single elephant from being targeted by poachers.

BBCKenyan President Uhuru Kenyatta has set fire to a huge stockpile of ivory in an effort to show his country’s commitment to saving Africa’s elephants.

More than 100 tonnes of ivory was stacked up in pyres in Nairobi National Park where it is expected to burn for several days. The ivory represents nearly the entire stock confiscated by Kenya, amounting to the tusks of about 6,700 elephants.

Some disagree with Kenya’s approach, saying it can encourage poaching.

ivory burning

Suppose even that some – say 10% – of this contraband ivory – if it hadn’t been destroyed – would have found its way back to the illegal market. To that extent the price of ivory would have been held down. Now the price will have increased in  response to the shortfall in supply. And any increase in the black market price will only increase the incentive for the poachers. That part of the ivory destroyed – which would have found its way to the black market – will now have to be replaced by additional poaching.

The ivory comes mainly from African elephants for markets in Asia. The producer countries are primarily Kenya, Tanzania and Uganda and the consumption is in China, Malaysia, the Philippines, Thailand and Vietnam.

Elephant poaching is driven by the demand for ivory and the price the consumer is prepared to pay. Around 20,000 elephants are killed by poachers every year (from a population of about 500,000). That is driven by the demand for about 1,000 – 1,500 tons of raw ivory every year. Currently the price of raw ivory – I am told – is about $2,500 per kg (from around $1,500 for small tusks to over $3,000 for large tusks). In 2010 this was less than $1,000 per kg. Most of this price increase reflects an increase of demand and not a scarcity of supply. As long as this demand holds up (overwhelmingly from China), it is worthwhile for poachers and traders to risk being caught.

The only way poaching will stop is when it is not worthwhile for a poacher to ply his trade. Either because the risk of being caught is too high or because the return on the enterprise is too low. The price for illicit ivory has to crash if poaching is to be curtailed. The volume of the demand can only be addressed by education and that is a slow process. The other factor which could help would be if a reducing demand could be met by “legal” ivory. Around 30,000 – 40,000 elephants, I estimate, die of natural causes every year. Their tusks are usually destroyed. But they could form part – or even all – of a “legal” trade which serves to depress the price of raw ivory. Mammoth ivory recovered from the Siberian permafrost could also form a useful addition to the “legal supply”.

Preventing poaching and prosecuting traders is all very well, but ultimately the consumer demand has to be educated out. Raw ivory price has to be brought down to a level where poaching is just not worthwhile.

Kenya would have done better to flood the market with this ivory. It would have prevented or at least delayed the poaching of some 5,000+ elephants.


BRICS is dead, long live MICKI

April 26, 2016

Brazil (-3.7%) and Russia (-1.3%) are experiencing negative growth and South Africa (+0.7%) is stagnating. Which leaves only China (+6.5%) and India (+7.5%) from the BRICS motor. But Indonesia(+5.1%), Kenya (+5.8%) and even Malaysia (+4.4%) are growing and it is time to bury BRICS and start talking about MICKI (Malaysia, India, China, Kenya and Indonesia).

(Map by Focus Economics)

MICKI - Emerging Markets (map by Focus Economics)

MICKI – Emerging Markets (map by Focus Economics)


Panama papers probably a CIA hacking operation

April 13, 2016

That the CIA engineered the hacking and release of the Panama papers makes a lot more sense than the cover story of it being the work of “intrepid journalists” based on a whistleblower’s revelations.

CNBC: ….. the political uproar created by the disclosures have mainly impacted countries with tense relationships with the United States. “The very fact that we see all these names surface that are the direct quote-unquote enemies of the United States, Russia, China, Pakistan, Argentina and we don’t see one U.S. name. Why is that?” Birkenfeld said. “Quite frankly, my feeling is that this is certainly an intelligence agency operation.”

…… Asked why the U.S. would leak information that has also been damaging to U.K. Prime Minister David Cameron, a major American ally, Birkenfeld said the British leader was likely collateral damage in a larger intelligence operation.

“If you’ve got NSA and CIA spying on foreign governments they can certainly get into a law firm like this,” Birkenfeld said. “But they selectively bring the information to the public domain that doesn’t hurt the U.S. in any shape or form. That’s wrong. And there’s something seriously sinister here behind this.”

…… Birkenfeld also said that during his time as a Swiss banker, Mossack Fonseca was known as one piece of the vast offshore maze used by bankers and lawyers to hide money from tax authorities. But he also said that the firm that is at the center of the global scandal was also seen as a relatively small player in the overall offshore tax evasion business. 

….. But Mossack Fonseca was just one of a number of firms in Panama offering such services, he said. “The cost of doing business there was quite low, relatively speaking,” he said. “So what you would have is Panama operating as a conduit to the Swiss banks and the trust companies to set up these facilities for clients around the world.”

I find all the indignation about “avoiding taxes” a hypocrisy and rather stupid. The politicians make the rules and if anybody pays more tax (allows more of his wealth to be confiscated) than the rules require, then he is just plain stupid. Any company paying more tax than it should is failing in its fiduciary duties.


Thinking the unthinkable – oil at $10 per barrel

January 12, 2016

Huge stocks, declining consumption and reducing prices. Yet, Saudi Arabian oil production is running at close to maximum, Iraqi oil is increasing and Iranian oil will soon hit the market. Economic theories are being overturned and more than one economist is turning in his grave. (Economists are not, and never have been, very good at forecasts though they are all past-masters at generating theories based on back-casts).

Now, the experts are beginning to contemplate what has been unthinkable so far – oil price diving to $10/barrel.

ReutersCrude oil fell 3 percent on Tuesday, heading toward $30 per barrel and levels not seen in over a decade, with analysts scrambling to cut their price forecasts and traders betting on further declines.

Prices are down around 20 percent since the start of the year, dragged lower by soaring oversupply, China’s weakening economy and stock market turmoil, as well as the strong dollar, which makes it more expensive for countries using other currencies to buy oil.

…… On the supply side, Iraq, which has become the second biggest producer within the Organization of the Petroleum Exporting Countries (OPEC), plans to export a record of around 3.63 million barrels per day (bpd) from its southern oil terminals in February, trade sources said on Tuesday, citing a preliminary loading program, up 8 percent from this month.

“The near-term outlook for the oil market is bleak. OPEC is producing flat-out into a market that is oversupplied by over 1 million barrels per day; already decelerating demand growth could further decay with slowing economic activity; and OECD inventories that are already at record levels are likely to expand through at least the middle of the year,” Jefferies said on Tuesday.

Adjusting to the price rout, analysts have been shifting their price outlooks downward, with Barclays, Macquarie, Bank of America Merrill Lynch, Standard Chartered and Societe Generale all cutting their 2016 oil forecasts this week.

StanChart took the most bearish view, saying prices could drop as low as $10 a barrel.

“We think prices could fall as low as $10/bbl before most of the money managers in the market conceded that matters had gone too far,” the bank said.

crude oil price 20160112

In my simplistic view, a reducing price for something I consume is fundamentally a “good thing”. But I can’t help feeling that this price drop is not a sound, sustainable reduction based on cost reduction. It is manipulated and artificial and is due to a misguided Saudi strategy against shale oil, Russian oil and Iran. And it is going horribly wrong.

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