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

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 

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