Its The Growth, Or The Lack of it !

Now the first thought you will get in your mind is that this is just an election Lollipop. Is it? Now having gulped that down think again. Is this what people want? If there is demand for higher rates then can rates go down. Yes if they are forced down your throat but not if you have a free market. So if RBI goes ahead onto a rate cutting spree will interest rates come down? Just two days ago there was an article in the Business daily's the Governor pushing for rate transmission. Haven't you heard that story before! So by lowering the risk free rate you cannot lower the risk rate. And all that will end up happening is that interest rate spreads will go up, if you know what that means. So will banks lower interest rates for borrowers if they cannot lower it for depositors. The cost of capital has to also come down else bank profitability is to be sacrificed. Ideally EPFO rates should have been reduced to build the right expectation from rates but then it is an election year.

The market is not taking this lightly and bond yields are going up anyway, unless the RBI kicks off more OMOs, a sidekick of the QE in India. From the wave 4 low of 7.2% the 10 year is now near 7.6%. Not a lot but technically Elliott wave wisse it may travel back to the highs.

This next headline though was an even bigger surprise, to all I guess but it was not the front pages unless I missed it. The real question should be why did this happen?

You may have read recently that investment is not happening. This was not the problem a year back when projections were that the investment cycle is picking up and would drive growth. The narrative keeps searching for a new home to keep the growth story going till it just gives up. India seems the last market to confirm economic growth slowing in a world that has already slowed. At least one number is out. Earnings growth for Nifty stocks is near 6-7% for the quarter ended Dec'18. So much for double digits projections. So when I say that the delta in GDP growth is not equal to or greater than the delta in earnings growth, it is on this chart below and the reason is the one and only one culprit, high corporate debt, Non govt debt to GDP is crossing 100% this year based on RBI data, including all non govt sources from Bank credit to NBFCs to ECB to FCB etc. These numbers include household debt as well.

So while the saviour for earnings growth this quarter is the private sector corporate lenders. Surprises me as corporate debt is the elephant in the room not just in India but around the world. This chart from Hedge Eye finally took on the topic with a Bubble chart that shows 2018-2019 as off the charts in history. We may not be in trouble today but we could be.

The US growth data is clearly falling off a cliff. Hedgeye reports 412 S&P 500 companies show a growth rate of 11-12% for the Dec quarter v/s 23-25% in the previous quarter, which puts their March projections to near Zero then. And while YOY comparisons is one reason for this the other that will keep building on for the rest of the year is a contraction in margins from Wage pressures. Here is another chart from Hedgeye showing this.

So how will all this front running on China and Trade talks help in improving US earnings? It won't. The US trade War's were designed to raise duties with one month lags leading to the greatest front running of demand for imports from both sides of the ocean to stimulate growth in the short term. That has run its course. now reducing duties will not stoke demand that has already been brought forward from the future. Instead it will hurt comparative growth data for the rest of the year. So the short term rally in commodities expecting demand to pick up is speculating against smoke. But the media for now continues to publish this news everyday for the lack of anything better to talk about driving the belief that it is the reason why stocks are up in the US. Unlikely to be supported by the data that will follow.