Currency Stress Hits India: Rupee Near Record Low, Emerging Nations Face Capital Flight; Global Currency Crisis Awaits

Numerous foreign exchange issues have simultaneously hit the global economy recently. Latest on the list is India where a Funding Strain Grows as Fed Outlook Hurts Rupee.

India faces growing strain to fund the widest current-account deficit in major Asian nations after the rupee slid to an all-time low on concern the U.S. will curb monetary stimulus as its economy improves.

The rupee touched the weakest level versus the dollar on June 20 after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank will probably taper bond purchases this year if the American economy performs as it projects. The potential for reduced stimulus exposes emerging nations from India to Indonesia and Brazil to the risk of capital outflows.

“The prospect of the U.S. unwinding stimulus means that funding the shortfall will get more challenging,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “Even if the deficit narrows, it will remain too high for comfort.”

The rupee, which touched an all-time low of 59.98 per dollar last week, fell 0.6 percent to 59.6475 as of 11:33 a.m. in Mumbai.

The currency’s 9 percent tumble this quarter is the worst in Asia, according to data compiled by Bloomberg. India is prepared to take action to reduce volatility as needed, Raghuram Rajan, the top adviser in the Finance Ministry, said June 20.

The imbalance in the current account, the broadest gauge of trade, is the biggest risk to an economy that grew a decade-low 5 percent in the year ended March, according to the Reserve Bank.

Foreign-direct investment in India fell the most in more than a decade last fiscal year, increasing reliance on stock and bond inflows to fund the shortfall.

Currency reserves stood at $290.7 billion as of June 14, Reserve Bank data show, about 9.4 percent lower than an all-time high of $321 billion in 2011. They “provide a cushion” against shocks, Fitch Ratings said June 12, when it boosted the outlook on India’s sovereign rating to stable from negative.

The currency won’t stabilize until the central bank is able to “recoup” foreign-exchange reserves, Bank of America Merrill Lynch said in a note, adding the monetary authority will try to “defend expectations” at 60 rupees per dollar for now.

Defending the Rupee

Just like Brazil defending the real,  India now feels compelled to defend the rupee. Good luck with that idea if capital flight takes off in a major way (and I suspect it will).

India does have currency reserves, but those can vanish in a hurry if things get out of hand. And if India does use currency reserves to defend the rupee, I rather doubt the India bond markets will take all that kindly to it.

Thus defending the rupee against further declines is easier said than done if the markets  have indeed soured on the country, and that is precisely how it looks now.

Global Currency Crisis Awaits

A global currency crisis awaits. I do not know what country triggers first. It could easily be Japan, China, Brazil, India, Australia, Canada, the UK, or any of many countries in the eurozone (as well as numerous countries not on anyone's radar).

This sad state of affairs is courtesy of mad central bank monetary policies coupled with inane can-kicking fiscal policies everywhere you look.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Day Traders Take Control of Japanese Stock Market Using 300% Leverage; What Can Possibly Go Wrong?

High-Frequency-Trading (HFT) Algorithmic Programs dominate the equity markets in the US with as much as 80% of the volume in some markets.

Day Trading With 300% Leverage

It's different in Japan. In what seems like a flashback to dot-com trading in the US in 1999, Abenomics Spurs Day Traders as Japan Stock Volatility Hits 2-Year High.

Sitting before a cluster of computer screens in an apartment with the drapes shut, it took Naoki Murakami seconds to make $3,500 betting $1 million that Tokyo Electric Power Co. (9501) shares would fall a fraction of a percent.

Day trading helps explain why Japanese individuals now account for more than 40 percent of the nation’s equity volume, or about as much as the overseas institutions that once were the biggest traders. They’ve also helped make Japan the most volatile developed market.

Dramatic price movements aren’t the only thing that’s made Japan a day trader’s paradise. Deregulation of margin trading opened the flood gates, Murakami said. After rules were relaxed in January, investors can borrow three times as much as their brokerage account balances and turn loans over the instant they exit a trading position.

‘Borrow Endlessly’

“Now you can borrow endlessly,” Murakami said.

Pointing at price charts on his screens, the trader explained how each day he borrows millions of shares of fast-moving stocks like GungHo Online Entertainment Inc. (3765) and Fast Retailing Co. (9983), the most-heavily weighted company on the Nikkei 225, and sells them short.

Leveraging Millions

One of Murakami’s friends, who goes by the blog name Tesuta, said looser rules let him leverage $4.5 million in cash into as much as $67 million in daily stock bets. He held up a hand-written ledger and showed his account balance at SBI Holdings Inc. as proof. He asked that his name not be cited for privacy reasons.

The number of shares traded by individuals rose to a record in May, some 43 percent of Japan’s total equity volume, up from 27 percent before the rally started in November, according to the Tokyo Stock Exchange.

On an average day, the group of seven day traders to which Murakami and Tesuta belong buy and sell somewhere between $80 million to $100 million in Japanese stocks, according to estimates from the members.

Tesuta has tripled his fortune to $4.5 million this year, he said in an interview at a Chinese restaurant in Osaka. Making 200 to 300 trades each day and cutting losses quickly to minimize the cost of bad bets, the 33-year-old said he’s managed to profit even amid the market’s recent decline by trading stocks like Tokyo Electric.

Battered by the meltdowns at Fukushima, the utility has become a favorite of speculators, moving more than 7 percent on an average day this year and accounting for about one in every 10 shares changing hands on the Nikkei 225 last month.

What Can Possibly Go Wrong?

With speculators borrowing millions to day trade on 300% leverage utilizing an "endless" supply of margin, and some utility stocks swing 7% every day ... inquiring minds may be asking "what can possibly go wrong with that?"

Actually, the resurgence of leveraged day trading (along with wicked gyrations in the bond markets) is a huge warning sign that something already has seriously gone wrong.

Every ramification of the upcoming blowup of Abenomics cannot be predicted in advance, but the consequences are 100% guaranteed to be severe.

Right now, Japanese prime minister Shinzō Abe is considered a hero for his Abenomics program. When the dust finally settles, Abenomics is more likely to be considered in the same vein as John Law's Mississippi Bubble than Abe will be considered any kind of hero.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

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Million Engineers Struggling to Find a Job

It's tough to find a job everywhere: in the US, in China, in Europe, and in India.

Think education is the answer? I don't.

Economic Times reports a million engineers in India struggling to get placed in an extremely challenging market

Somewhere between a fifth to a third of the million students graduating out of India's engineering colleges run the risk of being unemployed. Others will take jobs well below their technical qualifications in a market where there are few jobs for India's overflowing technical talent pool. Beset by a flood of institutes (offering a varying degree of education) and a shrinking market for their skills, India's engineers are struggling to subsist in an extremely challenging market.

According to multiple estimates, India trains around 1.5 million engineers, which is more than the US and China combined. However, two key industries hiring these engineers -- information technology and manufacturing -- are actually hiring fewer people than before.

For example, India's IT industry, a sponge for 50-75% of these engineers will hire 50,000 fewer people this year, according to Nasscom. Manufacturing, too, is facing a similar stasis, say HR consultants and skills evaluation firms.

According to data from AICTE, the regulator for technical education in India, there were 1,511 engineering colleges across India, graduating over 550,000 students back in 2006-07. Fuelled by fast growth, especially in the $110 billion outsourcing market, a raft of new colleges sprung up -- since then, the number of colleges and graduates have doubled.

Engineers Churned Out in Spades



So what does India do with those excess engineers?

Some end up in the US on work visas because the US citizens purportedly do not have the right skills. In reality, there are plenty of skills here, but foreign workers will work for a lot less. Since companies can hire a programmer from India or Russia for 1/3 the cost of a US worker, that's what happens.

Training more engineers, here, or in China, or in India will not help. There is a glut of high-tech talent.

On Tuesday, wrote Epic Glut of Graduates Depresses Wages; Fake Job Offers Taint Hiring Statistics.

The article was about a glut of graduates in China with no job, but it could just as easily been about India or the US. This is what I said:

How is [the situation in China] different than the average liberal arts major in the US expecting the world at their doorstep just because they have a useless degree that prepares them to do nothing more than work as a part-time retail clerk, 25 hours a week, dumped into the Obamacare system?

Yet, we are told education is the answer, without ever addressing the questions "for who? at what cost? in what field?"

These articles were purportedly about China. Change the names and faces and the stories are not much different than you can find right here in the US, in Italy, in France, or anywhere else in a slow-grow global economy.

After growing at an astronomical rate for years, the cost of education is going to plunge. Job statistics will force that outcome.

If education was the answer, there would not be millions of engineers looking for jobs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

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Fairy Tale Investing: "Believing in Bernanke is like believing in Father Christmas"

Marc Faber, publisher of the Gloom, Boom and Doom Report, told Bloomberg Television's Trish Regan and Tom Keene on "Street Smart" today that believing in Ben Bernanke is like believing in Father Christmas.

Faber  said, "If you say that if he means what he says, then you believe in Father Christmas… As I said already three years ago, we are going to go with the Fed to QE99."

Faber said, "I think the market is on the high side, corporate profits are inflated and we could easily, from the recent high, May 22 at 1687 on the S&P, drop by 20% to 30%, easily."



Link if video does not play Faber: S&P 500 Could Fall 20% to 30%

Faber is correct. Of course I said the same thing two years ago, and so did Faber. Yes, believing in Bernanke is like believing in Santa (or the tooth fairy), but those believers have fared well to this point (at least from a cherry-picked starting point of March 2009).

Will the believers all suddenly become disbelievers? Hardly. It's never happened before and will not happen this time either.

People who rode the fairy tale up will ride it back down again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Obamacare Effects Hit Local Governments, Small Businesses, Temp Staffing Agencies; Chicago Dumps Retirees Into Obamacare

19% of Small Businesses Reduced Employees Because of Obamacare

CNBC asks and answers the question Will Obamacare Hurt Jobs? It's Already Happening, Poll Finds

Small business owners' fear of the effect of the new health-care reform law on their bottom line is prompting many to hold off on hiring and even to shed jobs in some cases, a recent poll found.

"We were startled because we know that employers were concerned about the Affordable Care Act and the effects it would have on their business, but we didn't realize the extent they were concerned, or that the businesses were being proactive to make sure the effects of the ACA actually were minimized," said attorney Steven Friedman of Littler Mendelson. His firm, which specializes in employment law, commissioned the Gallup poll.

Forty-one percent of the businesses surveyed have frozen hiring because of the health-care law known as Obamacare. And almost one-fifth—19 percent— answered "yes" when asked if they had "reduced the number of employees you have in your business as a specific result of the Affordable Care Act."

The poll was taken by 603 owners whose businesses have under $20 million in annual sales. The poll supported that anecdotal data with the finding that 48 percent of owners think the law will be bad for their bottom line.

Just 9 percent of the small employers surveyed agreed that Obamacare would be "good for your business," while another 39 percent saw "no impact."

The prevalent pessimism tracks other answers in the poll, which showed that 55 percent of small business owners believe that the ACA will lead to higher health-care costs. By contrast, about 5 percent said the law would lead to lower costs.

Local Governments Reeling Under ObamaCare Costs

Investors Business Daily reports Local Governments Reeling Under ObamaCare Costs.

When Regal Entertainment Group (RGC) in April blamed ObamaCare for the fact that it was cutting some of its workers' hours, backers of the law mounted a furious backlash against the theater chain, among other things filling its Facebook page with boycott threats.

"Greed and selfishness make me sick," one of them said.

Darden Restaurants (DRI) felt this intense heat last year after suggesting it might shift to more part-time work to minimize the cost of the law's mandate that companies offer coverage to all their full-time workers. CEO Clarence Otis even blamed its lowered outlook for 2013 in part on "recent negative media coverage" over "how we might accommodate health care reform."

Yet while private companies are getting all this unwelcome and hostile attention, local governments across the country have been quietly doing exactly the same thing — cutting part-time hours specifically so they can skirt ObamaCare's costly employer mandate, while complaining about the law in some of the harshest terms anyone has uttered in public.

The Unfordable Healthcare Act

IBD lists 13 examples of local government layoffs resulting from Obamacare. Here are a few of them

Allegheny County, Pa.: "There's frustration and anger and sadness and resentment, you know, but you don't have a voice," said adjunct English professor Clint Benjamin in the wake of the Community College of Allegheny County's decision to cut hours for about 400 adjunct faculty and other employees so it wouldn't have to pay $6 million in ObamaCare-related fees next year.

Medina, Ohio: "We feel bad as a city administration and as a council in having to cut hours from 35 to 29," Medina Mayor Dennis Hanwell said. "We have the budget to pay the people, but we do not have the budget to pay for the health care." If they hadn't made that cut, the city faced up to $1 million in new health costs courtesy of ObamaCare.

Birmingham, Mich. Commissioner Gordon Rinschler may have summed up best the reaction that countless businesses and governments are having to ObamaCare, saying: "We simply can't afford the Affordable Care Act."

Obamacare Pushing Indiana Schools To Cut Hours Of Coaches, Bus Drivers, Cafeteria Workers

The Huffington Post reports Obamacare Pushing Indiana Schools To Cut Hours Of Coaches, Bus Drivers, Cafeteria Workers

Schools throughout much of Indiana are cutting the hours of coaches, teachers aides, bus drivers, cafeteria workers and other support staff in an attempt to avoid having to offer them health insurance under the 2010 Affordable Care Act, the Louisville Courier-Journal reports.

Under the law, also known as Obamacare, employers with more than 50 workers will be required to provide coverage for all official full-time employees. Some employers plan to try and skirt the law by pushing full-time employees into part-time work.

“We cannot go out and raise the price of our product to assist us covering this,” Les Huddle, superintendent of the Lafayette School Corporation, told the Courier-Journal.

Temp Staffing Jobs Hit Record as Firms Dodge ObamaCare Costs

Jed Graham, writing for Investors Business Daily reports Temp Staffing Jobs Hit Record as Firms Dodge ObamaCare Costs

Temporary staffing jobs hit a record 2.68 million in May as employers look to lighten the burden of ObamaCare's regulations and fines for failing to provide full-time workers health coverage.

Temp employment grew by 25,600, eclipsing the previous high seen in April 2000. In the past four months, the temp industry has added 99,000 jobs, a spurt that has outpaced the gains in every other sector, except the restaurant industry.

The boom in temp employment is no surprise because the industry offers ways to minimize ObamaCare's fines for firms with at least 50 full-time-equivalent workers.

One way temp firms can help is by helping employers to stay below that 50-worker threshold and free from ObamaCare's regulations. Firms above that level who don't provide health coverage will face a $2,000 per-worker fine (minus 30 workers), so the 50th employee could mean a $40,000 fine under ObamaCare.

Consider an employer who needs to hire a full-time worker for a six-month project. If the firm hired this worker directly, it would have to provide health coverage within 90 days of hiring, under ObamaCare rules.

But if an employer hires workers for a six-month stint through a temp agency, the rules are more favorable. Because virtually all temp-agency employment is for less than a year, such workers can still qualify as part-time under ObamaCare, even if they work full-time for up to six months (and perhaps longer).

"Most temporary or contract workers will be considered 'variable' and not eligible for insurance coverage," wrote PACE Staffing Network CEO Jeanne Knutzen in a message to clients last month.

This provision of ObamaCare "creates considerable opportunity for companies like PACE to offer our clients 'variable' workers at significantly less cost than would be required for the client to hire an employee directly."

Chicago Dumps Retirees Into Obamacare

The Chicago Tribune reports Emanuel to shift retired city workers to Obamacare

Mayor Rahm Emanuel plans to start reducing health insurance coverage next year for more than 30,000 retired city workers and begin shifting them to President Barack Obama's new federal system.

The move is aimed at saving the city money and comes as the Emanuel administration has been trying to wrangle significant pension cost concessions from employee unions.

Police officers and firefighters who retired between the ages of 55 and 64 and are not yet eligible for Medicare but whose coverage is guaranteed under union contracts, as well as workers who retired before August 1989 and are protected by a legal settlement.

Cut out as of Jan. 1 will be the rest. That's when the city will begin a three-year phaseout of the coverage, according to the letter signed by Comptroller Amer Ahmad. During that period, premiums, deductibles and benefits could change, the letter states.

Once the phaseout is complete, those retired workers would have to pay for their own health insurance or get subsidies under the Affordable Care Act.

The ill-effects of Obamacare mount every month.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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How Currency Wars End: Violence Erupts in Brazil, Fatalities Reported; One Million Protest

The flareup in Brazil erupted in violence overnight as millions protested corruption, inflation, bus fares and a seemingly growing list of items.

Unsurprisingly, the Brazilian real weakened against the dollar now in its sixth consecutive day of decline.

Bloomberg reports Brazilian Revolt Claims First Fatality as Violence Erupts.

Brazil’s swelling street rebellion claimed its second fatality in the largest and most violent protests yet, as 1 million demonstrators rallied for better public services and an end to corruption.

President Dilma Rousseff, who has been struggling to get in front of the mass movement, will meet with cabinet members today to discuss emergency measures to help quell violence and prepare proposals on education, health and other demands of protesters, a government official aware of her agenda said.

The movement triggered by an increase in bus fares this month has spread amid a groundswell of discontent among Brazil’s middle classes.

Brazil’s annual inflation through mid-June accelerated to 6.67 percent, its fastest pace since November 2011. Urban bus fares rose 1.83 percent in the month through mid-June and made the greatest impact on inflation of all components.

Almost 1 million people marched in 27 capital cities, Folha reported, citing police estimates in each state. That’s four times the estimated turnout on June 18, which was the previous record for the growing movement.

The biggest demonstration was in Rio, where O Globo newspaper estimates 300,000 people turned out. While the demonstrations there were largely peaceful, a group of stone-throwing protesters who set upon Rio’s city hall were met by cavalry and foot soldiers firing rubber bullets. More than 60 people were injured, including eight police officers, Mayor Eduardo Paes said to reporters today.

Brazilian Real Monthly Chart



click on chart for sharper image

How Currency Wars End

Brazil bitched an moaned about having a currency that was too strong. Finance minister Guido Mantega declared a "fresh currency war" in March of 2012 after having already used the term in 2010.

"When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil," said Mantega

The Keynesian and Monetarist fools in Brazil got what they asked, a weakening currency. Now they don't like the end results. Hot money is fleeing, the Real is sinking, inflation is soaring, and Brazil has no idea how to stem the tide (or the protests).

A similar fate awaits Japan's Abenomics as well as the Shadow Banking System in China.

As I said earlier, "Problems are easy to overlook in a seemingly good economy when jobs are plentiful. It's much different when the boom ends and the corruption becomes obvious."

For further reading, please see ...

• Ford CEO Calls Japan a "Currency Manipulator"; What Country Isn't a Manipulator?
• China Cash Crunch: 1-Day Interest Rate Spikes to Record High 25%
• No Hiding Places

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Ford CEO Calls Japan a "Currency Manipulator"; What Country Isn't a Manipulator?

I was wondering when someone would throw the "Currency Manipulator" label at Japan. It happened on Thursday.

Bloomberg reports Ford’s CEO Calls Japan Currency Manipulator Amid Weaker Yen.

Ford Motor Co. (F) Chief Executive Officer Alan Mulally called Japan a currency manipulator that’s giving local exporters an unfair edge as the weaker yen threatens to undermine U.S. automakers’ profits.

Japan is “absolutely” manipulating its currency, the CEO of the second-biggest U.S. automaker said in a Bloomberg TV interview today. “With the currency manipulation, we just have to get back to the place where the currencies are set by the markets and the free trade agreements really are free trade agreements.”

Mulally, who’s expressed concerns about the yen throughout this year, illustrates how the currency-led boon for Japanese exporters is drawing mounting international criticism. Bank of Korea Governor Kim Choong Soo this week urged Asian countries to work together to defend themselves against the side-effects of Prime Minister Shinzo Abe’s reflation campaign.

What Country Isn't a Manipulator?
 
Currency manipulation is everywhere you look: China, Brazil, Japan, Switzerland, the US, and every country actually.

Some countries intervene directly. Japan, Brazil, China, and Switzerland are in that list. The rest do it via interest rate manipulation (holding rates too low) and/or various Quantitative Easing schemes which act indirectly to weaken a currency.

Brazil holds the distinction of intervening to both weaken and strengthen its currency within the same year. For more on Brazil intervention madness, please see ...

• Brazilian Currency Touches Four-Year Low Prompting Intervention; Currency Intervention Madness Displayed in Chart Form
• 800,000 Protest in Brazil Over a 10-Cent Hike in Fares and the High Cost of Staging the World Cup; Police Join Protestors; Inflation, Corruption, as Boom Comes to an End

It's easy enough to stop the manipulation, at least in theory: Get rid of the central banks and their bubble-blowing currency debasement policies, end fractional reserve lending, and return to a gold standard.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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