Nifty...

Sell Nifty @  7330-7370
Stoploss 7410

NIFTY- Yipee.....

100 Points gain in NIFTY in 3 hrs...

ENJOYED?????

Hedge Fund That Called Subprime Crisis Urges 50% Yuan Drop

Mark Hart, the hedge fund manager whose bets against U.S. subprime mortgages and European sovereign debt proved prescient, said China should weaken its currency by more than 50 percent this year.

A one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.

“There wouldn’t be anything underhanded about a sharp devaluation,” Hart, who runs Corriente Advisors from Fort Worth, Texas, said in an interview on Real Vision, a subscriptionvideo service targeting Wall Street. “Why should China be forced to suffer deflationary effects of defending its currency when everyone else isn’t?"

Hart, whose prescription clashes with consensus forecasts for the yuan and recent comments from senior government officials, said China would be justified in weakening the currency after central banks in Europe and Japan fueled declines in their exchange rates to stoke economic growth in recent years. Such a move would likely come as a surprise to global investors, who were rattled by a drop of less than 3 percent in the yuan last August.

China’s current approach to managing the currency’s decline has been costly. Foreign-exchange reserves dropped by a record $513 billion last year as the central bank intervened to ease the currency’s slide, while an estimated $843 billion of capital flowed out of China in the 11 months through November as some investors sought to get in front of further yuan weakness.

Aside from intervention, policy makers have moved to curb bearish bets against the yuan and tighten restrictions on the flow of money across the country’s borders. Those measures have fueled doubts among global investors about the ruling Communist Party’s commitment to give markets a central role in the world’s second-largest economy and make the yuan an international currency.

“They’re trying to drive a car with one foot on the brake,” said Hart, who estimates the People’s Bank of China spent more than $100 billion supporting the yuan in onshore and offshore markets during the first 12 days of January. “If China were to devalue to a level that wasn’t actually a true equilibrium they will get run over pretty quickly, they will blow through FX reserves, and then they will lose face because they’ll be forced to devalue.”

Currency War

While a one-off drop in the yuan could ease selling pressure on the currency and support exports, it would also entail risks for China and the rest of the world. Chinese borrowers have amassed $1.5 trillion of foreign-currency debt, according to an official estimate at the end of September, which would become instantly harder to repay after a sharp decline in the yuan.

A devaluation could also fan fears of a global currency war -- a risk that Mexico’s finance minister cited earlier this month -- and spur the U.S. Federal Reserve to backtrack on plans to raise interest rates, according to Hart.

Chinese policy makers have signaled there are no plans for a big drop in the yuan. Premier Li Keqiang on Friday pledged a “stable” exchange rate and said the nation has no intention of stimulating exports through a competitive devaluation. Bets against the currency will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said last week in New York.

1994 Precedent

China’s currency, which traded at 6.5793 in the onshore market at the 10:43 a.m. in Hong Kong, will end the year at 6.7 per dollar, according to the median estimate in a Bloomberg survey of analysts. Rabobank, which has the most bearish forecast in the survey, predicts a 13 percent drop to 7.6.

There is a precedent for a sharp devaluation. The currency slid 33 percent at the start of 1994 as authorities unified official and market exchange rates, and the yuan has stayed stronger than that level ever since March of that year. That decision was a “wild success,” helping to set the stage for years of economic growth and foreign-exchange inflows, said Hart, who founded his hedge fund in 2001.

While a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position, according to Hart. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

Yuan Bears

Despite recent weakness against the dollar, the yuan has gained 36 percent over the past decade against a Bloomberg basket of 13 currencies designed to replicate the official CFETS RMB Index. The gains have come even as China’s economic growth dropped to the weakest annual pace in a quarter century last year.

Hart started a China fund in 2009 to bet on the country’s economic slowdown, telling a conference in New York two years later that he was wagering on declines in the currency. While he may have been early to enter that trade, some of his past forecasts have played out. Hart handed investors a six-fold gain by betting against U.S. subprime mortgages before the global financial crisis, and profited in 2010 with wagers against European government debt. 

He’s not the only hedge fund betting against the yuan. Carlyle Group’s Emerging Sovereign Group in New York and Omni Partners in London are also positioned for are treat in the currency. Crispin Odey, who runs Odey Asset Management, said in September that the yuan should fall by at least 30 percent.

Hart said he’s wagering against the currency with put options, contracts that provide the right to sell at a specific price within a set period. Bets on a sharp devaluation aren’t common among his hedge fund peers, who only recently started to wager on a gradual depreciation, Hart said. He didn’t respond to a Bloomberg News request for additional information.

“It strikes me as odd that the world would assume that China wouldn’t pursue the same type of monetary policies” that led to weaker exchange rates in other nations, Hart said. “They’re between a rock and a hard place.”

Nifty..

Sell Nifty @ 7375-7440
Stop-loss 7470

Personally, today, I love junk if you have the time and can hold it through banckrupcy and be locked up for a decade..

Author: David Kotok

“When Currencies Collapse” is the title of a Peterson Institute essay by Simeon Djankov (December 30, 2015). Djankov discusses the drivers of recent currency devaluations in Azerbaijan, Georgia, and Russia, along with the fallout that lies ahead. In addition, there are violent currency adjustments visible in Asian currencies including China.

Our observations follow, with an eye toward the potential risk of contagion.

In order to dampen that risk, we have taken the financial sector to underweight and specifically lowered the large banks. Some bullets follow.

1. We remember 1997, when the very first currency in crisis was the Thai baht. Markets dismissed the baht’s collapse as an aberration. But by 1998 a major hedge fund had failed; the big banks were in retreat; and the Fed was intervening to avert a meltdown. Many currencies and their related debt were in trouble. What began as a seemingly isolated incident morphed into a contagion. The players in the Asian crisis of 1997-8 hadn’t learned from the Mexico crisis of 1994 or the European Monetary System crisis of 1992.

2. The Djankov essay names several currencies in trouble. Since that essay, China has made headlines with its problems and its use of reserves to defend its currency. Many of these currencies have or had managed links to the US dollar. Those links are now broken or are breaking. So debtors owe in dollars and attempt to earn in the local currency. When the link breaks, all hell can break loose. It may be doing so now.

3. History shows many examples of broken links and resulting shocks. Here are two. Argentina was once linked to the US dollar and then broke the link. Twenty years later, the country is still attempting to recover. I personally visited Argentina several times after the dollar-peso linkage dismembered. I personally watched the closure of the banks. And I personally witnessed what transpired after the banks were closed. Financial chaos and rapid deterioration of government ensued. Another recent example is when The Swiss National Bank broke its managed link to the euro and set off a financial market shock. That abrupt and extraordinary break caused a unique 38-standard-deviation move in the euro-Swiss franc currency exchange rate (math credit to Citigroup’s Brent Donnelly). The list of broken currency links in history is long. An attempt to peg exchange rates inevitably fails once the pressures to maintain them grow too costly. And the outcomes are never pretty.

4. The sequence of a meltdown in a contagion is unpredictable. Someone owes and cannot pay. But who is owed and how much is leveraged is not visible until the situation blows up. That is what the high-yield fund scandal is all about. So which sector of junk suffers first is not the issue. The linkages among institutional holders like the Third Avenue fund reveal the trouble spots in the system. Stephanie Pomboy (MacroMavens) notes that, “In the six years since 2009, junk-rated debt has doubled to $2t from $1t, taking it to one-third of the US corporate market.” Last year, after the Third Avenue revelation, we quoted research by Morningstar that listed some high-yield funds that were troubled. Some of them had exposure to foreign debt with currency hedges. We quoted from a Nuveen public document that permitted 20% of the fund to be positioned in this way. Those Nuveen funds were near the top of the Morningstar list. The Third Avenue fund was at the very top. It now has gated investors. “Gated” means the fund will not pay investors immediately if they redeem.

5. Gating by a fund is a tendency to induce contagion. We only learn of a gating when it is announced. The day before a gating there is no public information to help the investor front run a gating. We do not know who is considering gating, but we do know that fund investors do not place money in a fund with a plan to leave it there when adverse circumstances arise. Mutual fund investors expect to be able to redeem if and when they want or need cash. When the gate closes, it is the investors who suffer and may have to resort to some other action. It is those follow-on actions that start a contagion snowballing. Each action is followed by a reaction and a new action. The sequence is unpredictable … until it becomes visible. For a serious research discussion on Gates, Fees, and Preemptive Runs see the Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, staff working paper 2014-30 by Cipriaini, Martin, McCabe and Parigi (April 3, 2014). Here is the original link; serious readers may wish to read the updates to this work.http://www.federalreserve.gov/pubs/feds/2014/201430/201430pap.pdf.

6. The contagion risk in the world seems to be rising. And the rating agencies are seeing it and acting prospectively, so we see fast action by raters, and warnings. One of the legacies of the financial crisis is that rating agencies now move faster. This is true for larger agencies like Moody’s or Standard & Poor’s or Fitch, and it is true for a specialized rater like Kroll. Credit rating changes are to be heeded in this post-crisis and newly regulated environment.

7. A. Gary Shilling’s INSIGHT dated January, 2016 makes two important observations. He notes that “as of last September 30, the Focused Credit Fund had 28.4% of its assets in its top holding of illiquid junk bonds.” Focused Credit Fund experienced large withdrawals in the fourth quarter of last year. Shilling reports that “in an unprecedented step, the fund suspended redemptions without SEC approval and fired David Barse, the fund‘s manager, after stating that it couldn’t meet redemptions. Instead, it transferred all of its investments to a liquidating trust.”

Gary shilling and his superb research team note that this is not only a mutual fund problem. He wrote that while “junk mutual fund assets reached a high of $305 billion in May 2014, triple their 2009 level, insurance companies joined the throng. Allstate more than doubled its portfolio of junk securities from 2008 to a level of $8.4 billion. That equals 11% of total investments and 41% of shareholder equity. AIG had 35% of its shareholder equity in junk as of last September 30.”

8. In December of last year (2015), Standard & Poor’s downgraded the credit ratings of the non-operating holding companies (NOHC) of all eight US global systemically important banks: Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., The Goldman Sachs Group, and Wells Fargo & Co. Of note is that S&P divided those eight into two categories depending on the structure of the operating components in each company. S&P stated, “We are keeping our ratings on the core and highly strategic operating subsidiaries of Bank of America Corp., Citigroup Inc., Morgan Stanley, and The Goldman Sachs Group on CreditWatch withpositive implications….” Readers may note that the other 4 are BNY-Mellon, JPMorgan Chase, State Street & Wells Fargo. Also note that Cumberland has some type of business activity with all eight banks. Some of the eight banks host or use our services. Some act as custodians for Cumberland clients. And some may be the successful counter party in a transaction we do for our clients. Also, note that we only manage separately managed accounts at Wells Fargo at the specific direction of the client.

Let’s sum this up. (1) There is a developing credit concern focused on energy debt, emerging-market debt, and the conduit form of mutual fund investments. Such mutual funds have blended US high-yield with currency-hedged emerging-market debt. (2) A contagion is possible at any time. Whether we are heading for a contagion in 2016 is unknown. It will not be known until it is visible. If it happens, it is likely to develop without warning.

Nifty...

Sell Nifty @ 7435-7500
Stoploss 7560

PBoC Says It Wants Yuan Volatility: The Worst Scenario For Stocks

China wants a moderate depreciation of yuan while encouraging two-way volatility, according to The Wall Street Journal, which conducted interviews with insiders at the People’s Bank of China.

 Lingling Wei wrote:

The goal, these people say, is to allow the yuan to depreciate modestly this year, while encouraging it to move up and down along the way, like a normal currency. That touch of volatility could make betting against the yuan more expensive, and tamp down the flow of money heading out of the country—a problem for China in recent months.

Officials at China’s central bank have long seen one-way movement of the yuan, either up or down, as a big thorn in their sides. For many years, prevailing investor sentiment was that the yuan had nowhere to go but up, as the Chinese economy hummed along.

The central bank bought dollars and other foreign currency to keep the yuan from appreciating too much, resulting in a doubling of China’s foreign-exchange reserves in just over five years, from less than $2 trillion in early 2009 to nearly $4 trillion in mid-2014.

This is the worst thing that can happen to stocks.

First of all, a weaker yuan is no good for Chinese companies listed in Hong Kong. They make money in yuan but have to report in Hong Kong dollars, which is pegged to the US dollar.Morgan Stanley last week cut its yuan forecast to 7 and then Hang Seng China Enterprises Index by 10% for precisely this reason.

Second, a more volatile currency tampers investors’ appetite for risky assets such as stocks.Credit Suisse strategist Vincent Chan also cut his China stock targets. He looked at currency volatility and price-to-earnings multiples across emerging markets and concluded that markets with higher FX volatility tend to be cheaper. “A possible explanation might be investors demand a premium for currency risk, which suppresses stock market valuation.”

Chan now has 3,150 price target for the Shanghai Composite Index.

Year-to-date, the iShares China Large-Cap ETF (FXI) fell 11.4%, the iShares MSCI China ETF (MCHI) dropped 11.3%, the Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund (ASHR) tumbled 14.4%, the Market Vectors China ChiNext ETF (CNXT) retreated 21.5%.

Nifty...

Sell Nifty @ 7430-7520
Stop-loss 7560

A Towering Chinese Debt Mountain Looms Over Markets

Lost in all the Chinese stock and currency market gyrations, policy missteps and mixed data is this economic reality: The government is constrained by a credit bubble that has ballooned to $28 trillion in an economy growing at its slowest pace in 25 years.

Policy zig-zags have left investors divided over how wedded President Xi Jinping and Premier Li Keqiang are to financial sector reform and shifting their $10 trillion-plus economy from one powered by investment and exports to one more focused on consumption and services. 

China has appeared to backtrack on pledges to make its management of the yuan more market driven and there’s uncertainty over the government’s willingness to remove stock price supports imposed during a $5 trillion sell-off last summer. Amid the confusion, the benchmark CSI 300 Index, down 14 percent in 2016, has revisited the lows of last year’s rout and pressure on the currency continues.

Against that backdrop, Chinese officialdom faces the high-wire act of trying to keep the economy growing rapidly enough to repay past obligations, without resorting to a fresh pick-up in debt to fund more stimulus. It was China’s reliance on credit-fueled growth in the wake of the 2008 global financial crisis that resulted in one of the biggest debt expansions in recent history, and today’s hangover.

"China is nowhere close to reining in its debt problems," said Charlene Chu, the former Fitch Ratings Ltd. analyst known for her warnings over China’s debt risks and now a partner of Autonomous Research Asia Ltd. "It is one of the key factors weighing on GDP growth and one of the reasons why foreign investors are so concerned about China’s trajectory."

A report Tuesday is forecast to show China’s 2015 expansion slowed to 6.9 percent -- the weakest pace since 1990. Strength in services and consumption last year cushioned a slowdown in old growth drivers like heavy industry and residential construction.

Chinese renewed share rout has roots in the debt mess: an eye-popping rally late 2014 and early 2015 was fueled in part by official media commentary that championed the surge as a new way for companies to finance growth and repay borrowing. But instead of companies deleveraging, the result was a surge in margin traders taking loans to pile in as the number of equity investors surpassed the number of communist cadres. When the inevitable bust came, policy makers responded to cushion the fall.

The meddling has proved largely ineffective and often counterproductive: Leaders had to abandon a newly imposed stock circuit-breaker system introduced on Jan. 4 after price plunges cut short trading sessions twice last week. Even as regulators tried to calm sentiment, the People’s Bank of China surprised traders as it weakened the yuan the most since August by cutting the currency’s daily reference rate against the dollar. 

Meantime, the central bank has been spending hundreds of billions to offset massive capital outflows and support the yuan. Its stockpile of foreign exchange reserves plunged by $513 billion in 2015 to $3.33 trillion.

With global assets from commodities, U.S. blue chips and emerging currencies shaken this year by China’s sliding equities and weakening yuan, policy makers have been criticized.

"The government has made a complete hash of the past six months in terms of sending signals," said Fraser Howie, co-author of the 2011 book “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise."

Examples abound. When authorities last year lifted a ceiling on bank deposits to allow freer pricing, they followed up with guidance to banks not to use too much of their new-found freedom, showing the tension between reform and control. In Shanghai, a much championed free-trade zone has largely disappointed. 

Policy Blunders

"It makes one wonder whether Chinese policy makers are students of Goethe -- ‘By seeking and blundering we learn,’" said Barry Eichengreen, a University of California-Berkeley professor.

In an effort to restore confidence among investors and strengthen oversight, China’s cabinet has created a new department to coordinate financial and economic affairs, under the General Office of the State Council, according to a person familiar with the matter. The No. 4 secretary office is tasked with coordinating between financial and economic regulators and gathering data from local offices.

Hand of State

How effective that move will be remains to be seen. Since taking power in late 2012, President Xi has consolidated power and dominates economic policymaking, a role traditionally left to the premier. Xi promised in 2013 to let markets have a decisive role, but analysts have been disappointed by the pace of change. 

The Communist Party is unlikely to relinquish its control over economic matters any time soon, said Chen Zhiwu, who sits on the International Advisory Board of the China Securities Regulatory Commission (CSRC), the nation’s stock market regulator. "It’s that misunderstanding that goes to the heart of China’s dilemma," the Yale University academic said.

"In my lifetime, an American-style free market will never become a reality in China," said Chen, who advised the government on establishing the China Investment Corporation, one of the nation’s sovereign wealth funds. "China is much more for a very active government hand. That cultural heritage will not be easy to change."

Debt Pile

There’s also been no real progress in chipping away at the debt burden, supercharged by spending on infrastructure and housing, that delivered average economic growth of 10 percent over the past 30 years. Government, corporate, and household borrowing totaled $28 trillion as of mid-2014, or about 282 percent of the country’s GDP at the time, according to McKinsey & Co. 

"Some of the recent policy moves on the stock and foreign-exchange markets are indicative of tension between the leadership’s desire for market-oriented reform and the apparent fundamental objective of control by the government and, ultimately, the Party," said Louis Kuijs, head of Asia economics at Oxford Economics Ltd in Hong Kong. "Indeed, the response of international markets may in part reflect rising worries about this tension."

The dilemma for the nation’s leadership is that they have highlighted the need for a more market-driven allocation of capital, which would stoke productivity gains and drive growth as the working-age population shrinks. Yet the turbulence that markets produce threaten to undermine confidence in the party that’s dominated government since 1949.

Markets Spooked

To be sure, it doesn’t take much to spook investors on China these days, and recent market ructions appear disconnected from signs of stabilization in the underlying economy. Evidence indicates consumers are still spending, house prices are steadying and export demand is recovering.

"The international reaction has probably been bigger than it should have been, given that China’s equity markets are not very related to the real economy nor yet very connected to international markets," said Tim Summers, senior consulting fellow on Asia at Chatham House.

There’s also been some progress on the reform front. Most interest rates are now at least influenced by market forces, and the PBOC scored a big win by qualifying for reserve currency status for the yuan from the International Monetary Fund late last year. All this while Xi’s drive to root out government corruption continues to roll ahead.

Still, given the ever-present debt overhang and muddled market policies, there’s been an erosion in confidence as to whether Xi and his policy makers are in control and have the ability to manage the scale of the tasks at hand.

"At the most basic level, we have no idea whether Xi understands what modern markets require," Arthur Kroeber, the Beijing-based founding partner and managing director at Gavekal Dragonomics, a research firm, wrote in a note. "China is unlikely to collapse. But it is losing its way. And it is this loss of direction, rather than a moment of confusion on foreign exchange markets, that should really worry investors."

Nifty...

Sell Nifty @ 7500-7570
Stoploss 7610

2016.... Less Deflation, More Expansion

100 points in pocket today!!!!!

Whoever has followed our figures and shorted this morning....


100 points plus in pockets!!!!!

Middle East - Complications within Complications..

Syria’s bloody civil war, which has killed more than 220,000 people and uprooted millions, began in 2011 as a conflict between Bashar al-Assad’s government and the rebels fighting to overthrow him, with a number of foreign powers backing each side. The emergence of ISIS, a new destabilizing force opposed to both Assad and the rebels, complicated the picture significantly and spread the conflict into neighboring Iraq. Entry of Russian airpower has scrambled a conflict already defined by overlapping and contradictory alliances and rivalries. Shooting down of the Russian jet will in the next few months see a lot of realignment in these alliances, either on their own or forced or created by the powers involved

The chart below,, provides a look at who’s fighting whom in the dizzyingly complex and brutal war.

 

Pull USA, its allies and Russia out of this matrix and see the result:

  It will become all Red

                                                      

  Saudi Arabia vs Iran

  Sunni vs Shi'a

Nifty..

Sell Nifty @ 7555-7610
Stoploss- 7660

A Year of Sovereign Defaults?

When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”).

If history is a guide, such conversations may be happening a lot in 2016.

The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.Like so many other features of the global economy, debt accumulation and default tends to occur in cycles. Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults.

Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts. But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions.

And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. As my recent work with Vincent Reinhart and Christoph Trebesch reveals, peaks and troughs in the international capital-flow cycle are especially dangerous, with defaults proliferating at the end of a capital-inflow bonanza.

As 2016 begins, there are clear signs of serious debt/default squalls on the horizon. We can already see the first white-capped waves.

For some sovereigns, the main problem stems from internal debt dynamics. Ukraine’s situation is certainly precarious, though, given its unique drivers, it is probably best not to draw broader conclusions from its trajectory.

Greece’s situation, by contrast, is all too familiar. The government continued to accumulate debt until the burden was no longer sustainable. When the evidence of these excesses became overwhelming, new credit stopped flowing, making it impossible to service existing debts. Last July, in highly charged negotiations with its official creditors – the European Commission, the European Central Bank, and the International Monetary Fund – Greece defaulted on its obligations to the IMF. That makes Greece the first – and, so far, the only – advanced economy ever to do so.

But, as is so often the case, what happened was not a complete default so much as a step toward a new deal. Greece’s European partners eventually agreed to provide additional financial support, in exchange for a pledge from Greek Prime Minister Alexis Tsipras’s government to implement difficult structural reforms and deep budget cuts. Unfortunately, it seems that these measures did not so much resolve the Greek debt crisis as delay it.

Another economy in serious danger is the Commonwealth of Puerto Rico, which urgently needs a comprehensive restructuring of its $73 billion in sovereign debt. Recent agreements to restructure some debt are just the beginning; in fact, they are not even adequate to rule out an outright default.

It should be noted, however, that while such a “credit event” would obviously be a big problem, creditors may be overstating its potential external impacts. They like to warn that although Puerto Rico is a commonwealth, not a state, its failure to service its debts would set a bad precedent for US states and municipalities.

But that precedent was set a long time ago. In the 1840s, nine US states stopped servicing their debts. Some eventually settled at full value; others did so at a discount; and several more repudiated a portion of their debt altogether. In the 1870s, another round of defaults engulfed 11 states. West Virginia’s bout of default and restructuring lasted until 1919.

Some of the biggest risks lie in the emerging economies, which are suffering primarily from a sea change in the global economic environment. During China’s infrastructure boom, it was importing huge volumes of commodities, pushing up their prices and, in turn, growth in the world’s commodity exporters, including large emerging economies like Brazil. Add to that increased lending from China and huge capital inflows propelled by low US interest rates, and the emerging economies were thriving. The global economic crisis of 2008-2009 disrupted, but did not derail, this rapid growth, and emerging economies enjoyed an unusually crisis-free decade until early 2013.

But the US Federal Reserve’s move to increase interest rates, together with slowing growth (and, in turn, investment) in China and collapsing oil and commodity prices, has brought the capital inflow bonanza to a halt. Lately, many emerging-market currencies have slid sharply, increasing the cost of servicing external dollar debts. Export and public-sector revenues have declined, giving way to widening current-account and fiscal deficits. Growth and investment have slowed almost across the board.

From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn’t count on it.

Nifty...

Sell Nifty @ 7575-7635
Stoploss 7690

A Perilous Outlook for Asia in 2016- Barron's

Seeing the back of 2015 suited many investors just fine. But what if 2016 is even worse? At the risk of tossing fuel on a raging fire, here’s an inventory of ways Asia could blindside the world.

INSTABILITY IN BEIJING

China’s 2016 is already off to a bad start, if last week’s nearly 10% plunge in the Shanghai Composite Index is any guide. We can debate just how far gross domestic product slipped last year—Lombard Street Research says to 3.7%—but the key indicators of the economy will be in the halls of Beijing power and on the streets of the country’s major cities.

A chill beyond anything China has seen since the 1990s is descending on living standards and corporate profits. At the same time, its share of the world’s most polluted skies, rivers, and food supplies is rising apace.

President Xi Jinping’s efforts to replace smokestack industries with a services sector independent from state-owned enterprises have been glacial. His go-slow approach could backfire and catalyze a bull market in protests—not of the magnitude of Tiananmen Square, perhaps, but enough pressure to spook markets and fuel power struggles between Beijing’s reformer and advocates of the status quo.

Xi’s most ambitious campaign has been policing chatter in cyberspace—including seven-year prison stints for “spreading rumors” and forcing companies to rat out users engaged in “security incidents.” Clearly, he’s afraid of his 1.4 billion people and running out of options to keep them—and vital allies in Beijing—happy. That could lead to missteps and misunderstandings that unnerve markets.

TERRORIST MAYHEM

In the weeks after the Paris attacks in November, Russia issued a sobering warning to Thailand: Islamic State sent a 10- member squad to kill tourists. Indonesia, site of a devastating 2002 attack in Bali, also is tightening security. But what if China is the real soft target? On Nov. 15, Foreign Minister Wang Yi framed China as an equally vulnerable victim of terrorism at a Group of 20 meeting. The fight against militant groups demanding independence in China’s northwestern Xinjiang region, Wang said, “should become an important part of the international fight against terrorism.” Imagine the political chaos a single suicide bomber on a bullet train could generate. Or what if Uyghur militants targeted the Three Gorges Dam? That would be CNN’s story of the year.

JAPANESE DEBT CRASH

Shorting Japanese government bonds has been the ultimate widowmaker trade; a country running out of people can’t manage the world’s biggest debt burden indefinitely. Could it pay off in 2016? For all his talk about fiscal austerity, Prime Minister Shinzo Abe is borrowing with abandon. In April, the Organization for Economic Cooperation and Development warned a debt-to-GDP ratio approaching 250% will swell to more than 400% by 2040 without reforms. Last year, Tokyo’s debt hit a high of 1.057 quadrillion yen (about $9 trillion). Japan has three options: Make more babies in a hurry, import millions of workers, or slash borrowing. Since this government is likely to do none of the above, Japan’s bond bubble will only grow—until it can’t any longer.

FIREWORKS AT SEA

That brings us to rising tensions over tiny islands, rocks, and atolls. Beijing claims pretty much all of the South China Sea, blowing off overlapping claims from Brunei, Malaysia, the Philippines, Taiwan, and Vietnam. Yet the plot is thickening now that the U.S. and Japan are increasing naval patrols in ways that enrage Xi’s government. Tokyo and Beijing are engaged in an escalating territorial tit for tat. And Abe just reinterpreted Japan’s war-renouncing constitution as Washington drives warships through contested waters, much to China’s chagrin. All this potential war gaming, coupled with Asia’s accelerating arms race, makes for dismal economics. You don’t need Tom Clancy’s imagination to see how two ships, or fighter jets, colliding could quickly escalate into full-blown conflict.

THERE ARE MYRIAD other wild cards to ponder, including Taiwanese voters this month electing Tsai Ing-wen as the island’s first female president. The return to power of her Democratic Progressive Party, which has long favored independence over rapprochement, deeply worries Beijing. Might Najib Razak’s party in Malaysia grow tired of the numerous scandals swirling around the prime minister and seek new leadership? Could Kim Jong Un do something crazy in North Korea—even beyond Wednesday’s alleged hydrogen-bomb test? How about the military junta running Thailand into the ground being challenged by another band of power-hungry generals? What if further declines in commodities pushed Australia into its first recession in two decades or destabilized President Joko Widodo of Indonesia? All we can say is, fasten your seatbelts.

Nifty...

Sell Nifty @ 7575-7655
Stoploss 7690

Sale of the century?

Saudi Aramco

A possible IPO of Saudi Aramco could mark the end of the post-war oil order.

“THE amounts of oil are incredible, and I have to rub my eyes frequently and say like the farmer: ‘There ain’t no such beast.’” So wrote an American oilman in the Persian Gulf a few years after the discovery in 1938 of a gusher of oil from Saudi Arabia’s Well Number Seven, 4,727 feet (1,440 metres) below the desert floor.

You could say the same today about Saudi Aramco, the state-owned firm that for decades has had exclusive control of Saudi Arabia’s oil and is the world’s biggest, most coveted and secretive oil company. On January 4th the kingdom’s deputy crown prince, Muhammad bin Salman, told The Economist that Saudi Arabia was considering the possibility of floating shares in the company, adding that personally he was “enthusiastic” about the idea.

It was a stunning revelation. Officials say options under preliminary consideration range from listing some of Aramco’s petrochemical and other “downstream” firms, to selling shares in the parent company, which includes the core business of producing crude. The staggered nationalisation of the Arabian American Oil Company (Aramco), made up of four big American firms, in the 1970s was emblematic of a wave of “resource nationalism” that has helped define the industry (see chart 1).

Aramco is worth, officials say, “trillions of dollars”, making it easily the world’s biggest company. It says it has hydrocarbon reserves of 261 billion barrels, more than ten times those of ExxonMobil, the largest private oil firm, which is worth $323 billion. It pumps more oil than the whole of America, about 10.2m barrels a day (b/d), giving it unparalleled sway over prices. If just a sliver of its shares were placed on the Saudi stock exchange, which currently has a total market value of about $400 billion, they could greatly increase its size.

Prince Muhammad says a listing would not only help the stockmarket, which opened to foreigners last year. It would also make Aramco more transparent and “counter corruption, if any”. A final decision has yet to be taken. Yet the prince has held two recent meetings with senior Saudi officials to discuss a possible Aramco listing and diplomats say investors are being sounded out. The talk is of at first floating only a small portion of the company in Riyadh, perhaps 5%. In time that could rise—though not by enough to jeopardise the kingdom’s control of decision-making.

The aim would be to foster greater shareholder involvement in Saudi Arabia; a senior official said there was no intention of surrendering control of Aramco or its oil resources to foreign firms. But it is part of a frenzy of reforms proposed by the prince that his government is rushing to keep pace with. “Everything is on the table. We are willing to consider options we were not willing to get our heads around in the past,” an official says.

For many investors, a listing of Aramco, however partial, would be a prize even at today’s low oil prices. Its “upstream” business is mouth-watering. Rystad Energy, a Norwegian consultancy, says no other country except Kuwait can produce oil at a lower break even cost (see chart 2).

By the standards of national oil monopolies, analysts say that Aramco is well run. In the 1940s and 1950s, when the American consortium recruited young Saudis, it was an “unlikely union of Bedouin Arabs and Texas oil men, a traditional Islamic autocracy allied with modern American capitalism”, writes Daniel Yergin in “The Prize”. Under American ownership, it built towns with schools, wiped out malaria and cholera, and helped farmers become entrepreneurs, officials recall, explaining why it was popular with Saudis.

It was a different story in Iran and elsewhere, where citizens grew sick of the colonial-era concessions taken by British and French firms, and a wave of nationalisation began. The Saudis, having declared their first 25% stake in Aramco in 1973 “indissoluble, like a Catholic marriage”, were unable to resist the tide. Full nationalisation of Aramco came in 1980. But an American business ethic survived. Just over a decade ago Matthew Simmons, an American banker, argued that Saudi wells were past their prime and that production would soon peak. Yet Aramco has increased output by more than 1m b/d in the past five years, reaching record highs. “They’ve proven their resilience,” says Chris DeLucia of IHS, a consultancy.

INTERACTIVE: Explore how oil prices affect OPEC and non-OPEC production and viability

Questions surround the company, though. Mr DeLucia says 87% of its output is oil; it needs to develop more gas to satisfy the country’s needs for cleaner, cheaper power. Some argue that its reserves, which have barely budged since the late 1980s, are overstated. Internal documents about them are “phenomenally closely guarded secrets” says a local observer.

The company does not report its revenues. Its fleet of eight jets, including four Boeing 737s, and a string of football stadiums suggest that it is not run on purely commercial lines. It is the government’s project manager of choice even for non-oil developments, and runs a hospital system for 360,000 people. A listing would require it to become more transparent.

But even with greater disclosure, minority shareholders may play second fiddle. The company is integral to the social fabric of Saudi Arabia and the survival of the ruling Al Saud dynasty, providing up to nine-tenths of government revenues. Cuts in its output have been a foreign-policy lever through which OPEC, the producers’ cartel, has often sought to rescue oil prices.

Investors in Russia’s Gazprom, another national champion, have watched in frustration as the company has been used as an arm of the Russian foreign ministry. Elsewhere, selling stakes in national oil companies has had mixed results.

Prince Muhammad’s desire for reform fits a pattern that some consider reckless. Saudi Arabia has recently forced OPEC to maintain production despite oil falling from a peak of $120 a barrel to below $35. Its decision on January 3rd to suspend diplomatic relations with Iran, a fellow OPEC member, makes it harder for both to agree on production cuts, though Saudi officials are in any case adamant that they have no intention of rescuing prices.

Others believe Saudi Arabia’s strategy makes sense. They think it wants to protect its share of the global oil market by driving high-cost producers to the wall at a time when unconventional forms of oil, such as American shale, have had gushing success.

Another threat is alternative forms of energy, such as wind and solar, which may well challenge fossil fuels. Selling shares in Saudi Aramco could thus be intended to cash in before the “decarbonisation” of the economy starts to gain credibility. It would also fit with a trend that has started to transform the oil industry for the first time in half a century—denationalisation.

Paul Stevens of Chatham House, a British think-tank, says a cadre of well-educated technocrats from oil-producing nations are wondering whether their national oil companies are “ripping us off”, through corruption or inefficiency. Brazil’s corruption-plagued Petrobras proves that public markets are no guarantee of probity. But as in Mexico, which is opening up its oil industry for the first time since 1938, many want to impose market-based checks and balances, so that no company can operate as a state within a state. If that happens to Saudi Aramco, the biggest of them all, it will have global repercussions