Wall Street boosted by financial, energy stocks

Traders work on the floor of the New York Stock Exchange (NYSE) as the market closes in New York, U.S., October 3, 2016. REUTERS/Lucas Jackson(Reuters) – Wall Street rose for the first time in three days on Wednesday, powered by gains in financial and energy shares.

Activity in the U.S. services sector saw a big rebound in September, after having slowed to more than a six-year low in the previous month, a report from the Institute of Supply Management showed.

The data raised the prospects of a U.S. interest rate hike in the near term and comes before a carefully watched non-farm payrolls report on Friday.

Oil prices touched their highest levels since June following a bigger-than-expected draw in U.S. crude inventories.

“The markets are taking the economic news positively, but it is a double-edged sword in our opinion because a better economy means the Fed is going to finally start moving on rates,” said Brad Lamensdorf, co-manager at Ranger Alternative Management in Connecticut.

Traders priced in a near 65 percent chance of a rate hike in December after the ISM report, according to the CME Group’s FedWatch tool.

The odds had slightly fallen earlier in the day after data showed that fewer-than-expected jobs were added in the private sector last month.

A growing number of Fed officials have argued for a rate hike before the year ends as conditions in the labor market improve and inflation inches toward the central bank’s 2 percent target.

The S&P financial sector rose 1.46 percent to more than a three-week high.

Wells Fargo and Bank of America rose 2.5 percent and were the top influences on the benchmark S&P 500 index.

Deutsche Bank’s U.S.-listed stock was up 1 percent, while its Frankfurt-listed shares rose 2.6 percent.

The European Central Bank sees no risk of a banking crisis in the Euro zone despite some “individual cases” of lenders in trouble, ECB supervisor Ignazio Angeloni said.

At 11:03 a.m. ET (1503 GMT), the Dow Jones Industrial Average was up 103.82 points, or 0.57 percent, at 18,272.27.

The S&P 500 was up 9.03 points, or 0.42 percent, at 2,159.52.

The Nasdaq Composite was up 28.48 points, or 0.54 percent, at 5,318.14.

Seven of the 11 major S&P 500 indexes were higher, with energy rising 1.4 percent. Exxon Mobil was up 0.6 percent and Chevron 0.9 percent.

Chesapeake Energy rose 5.8 percent and was the biggest gainer on the S&P.

High-dividend paying sectors telecom services, consumer staples and utilities were the worst hit.

Twitter rose 4.4 percent after the Wall Street Journal reported that the micro-blogging website is expected to field bids this week.

Advancing issues outnumbered decliners on the NYSE by 1,899 to 922. On the Nasdaq, 1,901 issues rose and 702 fell.

The S&P 500 index showed 15 new 52-week highs and four new lows, while the Nasdaq recorded 64 new highs and 15 new lows.

Current account deficit to narrow to 0.5% of GDP

Money

India’s current account deficit may narrow to 0.5 per cent of GDP in 2016 from 0.7 per cent in 2015 owing to lower commodity prices, particularly oil, says a report.

“Given lower oil prices, we expect the current account deficit to narrow to 0.5 per cent of GDP in 2016 from 0.7 per cent in 2015, despite weak exports and strengthening domestic demand,” the report by financial services major Nomura said.

The current account deficit, which occurs when the value of imports and investments is larger than value of exports, is expected to narrow to 0.5 per cent of GDP in 2016 largely owing to lower commodity prices, particularly oil.

The report noted that export volumes are likely to remain sluggish on account of weak global demand, while import volumes would rise mainly due to strong domestic demand and real effective exchange rate appreciation.

According to official figures, exports contracted for the 13th month in a row in December 2015, as outward shipments shrank 14.75 per cent to $22.2 billion amid a global demand slowdown.

Imports also plunged 3.88 per cent to $33.9 billion in December over the same month previous year.

However, gold imports shot up which increased the trade deficit to a 4-month high of $11.66 billion as against $9.17 billion recorded in December 2014.

Commenting on the trade data, Nomura said that these mirror the diverging growth trends between domestic demand and external demand.

“We expect export volumes to remain sluggish (weak global demand) but import volumes to rise (stronger domestic demand and real effective exchange rate appreciation),” the report added.

The current account deficit in the July-September quarter of current fiscal rose to $8.2 billion or 1.6 per cent of the GDP from 1.2 per cent or $6.1 billion in the April-June quarter.

This Is What A Financial Crisis Looks Like

people eyes

Just within the past few days, three major high yield funds have completely imploded, and panic is spreading rapidly.  Funds run by Third Avenue Management and Stone Lion Capital Partners have suspended payments to investors, and a fund run by Lucidus Capital Partners has liquidated its entire portfolio. 

We are witnessing a race for the exits unlike anything that we have seen since the great financial crash of 2008, and many of those that choose to hesitate are going to end up getting totally wiped out.  In case you are wondering, this is what a financial crisis looks like.  In 2008, other global stock markets started to tumble, then junk bonds began to crash, and finally U.S. stocks followed.  The exact same pattern is playing out again, and the carnage that we have seen so far is just the tip of the iceberg.

Since the end of 2009, a high yield bond ETF that I watch very closely known as JNK has been trading in a range between 36 and 42.  I have been waiting all this time for it to dip below 35, because I knew that would be a sign that the next major financial crisis was imminent.

In September, it closed as low as 35.33 at one point, but that was not the signal that I was looking for.  Finally, early last week JNK broke below 35 for the very first time since the last financial crisis, and since then it has just kept on falling.  As I write this, JNK has plummeted all the way to 33.42, and Bloomberg is reporting that many bond managers “are predicting more carnage for high-yield investors”…

Top bond managers are predicting more carnage for high-yield investors amid a market rout that forced at least three credit funds in the past week to wind down.

Lucidus Capital Partners, a high-yield fund founded in 2009 by former employees of Bruce Kovner’s Caxton Associates, said Monday it has liquidated its entire portfolio and plans to return the $900 million it has under management to investors next month. Funds run by Third Avenue Management and Stone Lion Capital Partners have stopped returning cash to investors, after clients sought to pull too much money.

When it says that those firms “have stopped returning cash to investors”, what that means is that many of those investors will be lucky to get pennies on the dollar when it is all said and done.

Like I said, now that the crisis has started, the ones that are going to lose the most are those that hesitate.

And just check out some of the very big names that are “warning of more high-yield trouble ahead”…

Scott Minerd, global chief investment officer at Guggenheim Partners, predicts 10 percent to 15 percent of junk bond funds may face high withdrawals as more investors worry about getting their money back. He joins money managers Jeffrey GundlachCarl IcahnBill Gross and Wilbur Ross in warning of more high-yield trouble ahead.

In this type of environment, the Federal Reserve would have to be completely insane to raise interest rates.

Unfortunately, that appears to be exactly what is going to happen.

If the Fed raises rates, that is going to make corporate debt defaults even more likely and will almost certainly drive high-yield bonds down even further…

Higher rates could make corporate bond defaults more likely and investors are already bailing out of the sector, pulling $3.8 billion out of high-yield funds in the week ended December 9, the biggest move in 15 weeks. The effective yield on U.S. junk bonds is now 17 percent, the highest level in five years, according to Bank of America Merrill Lynch data.

A whole host of prominent names are warning that the Fed is about to make a tragic mistake.  One of them is James Rickards…

“The Fed should have raised interest rates in 2010 and 2011 and if they did that they would actually be in a position to cut them today,” said James Rickards, a central bank critic and chief global strategist at West Shore Funds. “The Fed is on the brink of committing a historic blunder that may rank with the mistakes it made in 1927 and 1929. By raising into weakness, they will likely cause a recession.”

In 2015, we have already seen stocks crash all over the globe.  Coming into December, more than half of the 93 largest stock market indexes in the worldwere down more than 10 percent year to date, and some of them were down by as much as 30 or 40 percent.  At this point, conditions are absolutely perfect for a frightening collapse of U.S. markets, and the Federal Reserve is about to pour gasoline on to the fire.

Anyone that says that “nothing is happening” is either completely misinformed or is totally crazy.

I like how James Howard Kunstler summarized what we are currently facing…

Equities barfed nearly four percent just last week, credit is crumbling (nobody wants to lend), junk bonds are tanking (as defaults loom), currencies all around the world are crashing, hedge funds can’t give investors their money back, “liquidity” is AWOL (no buyers for janky securities), commodities are in freefall, oil is going so deep into the sub-basement of value that the industry may never recover, international trade is evaporating, the president is doing everything possible in Syria to start World War Three, and the monster called globalism is lying in its coffin with a stake pointed over its heart.

The financial markets held together far longer than many people thought that they would, but now they are finally coming apart at the seams.

Moving forward, the “winners” are going to be the people that pull their money out the fastest.  This is especially true for high risk funds like the three that just imploded.  If you hesitate, you could end up losing everything.

And as this rush for the exits accelerates, sellers are going to greatly outnumber buyers, and this is going to push prices down at a very rapid pace.  We are going to hear a lot about a “lack of liquidity” in the days ahead, but the truth is that what we will really be looking at is a good old-fashioned panic.

The Fed Hikes Rates – What Next?

Federal Reserve

As expected, the Federal Reserve hiked interest rates this week, and there’s obvious nervousness out there regarding the impact this will have, if any.

In his recent Big Picture podcast, Jim Puplava, Founder of Financial Sense and Chief Investment Strategist at PFS Group, said the Fed should hike once and stay quiet, in reference to the highly active “Open Mouth Committee,” as he calls it.

In terms of risks to the market, Puplava cites two: one is procedural and the other coming from China.

“Can they really get this right? We have a saying here that they keep raising until something breaks. Number two is China’s devaluation…because China pegs its currency to the dollar, and the dollar has risen 20 percent against other major currencies.”

As the Fed tightens, ostensibly making the dollar more attractive, the Chinese Yuan will come under increasing pressure, he noted. This means China is more likely to devalue, which could cause further disruption, as we saw earlier this year (see our recent interview with Felix Zulauf).

Another aspect of the global economy that’s playing into concerns are energy prices, with companies in the United States cutting back on drilling, and with rig counts also falling.

These companies are responding to market pressures by cutting production and reducing supply, Puplava noted, and interestingly OPEC is unlikely to cut back on production in this scenario. OPEC countries are more dependent on oil revenue to pay government expenses, he said, and if they were to cut back on production, the response in the West would be to increase production.

“I think … OPEC has figured that out, so right now OPEC producers from Saudi Arabia on down are scrambling to maintain market share,” Puplava said. “In a world of oversupply and reduced demand, the tendency is for prices to remain weak.”

However, we’re beginning to see signs typical of a bottoming process, he added, where companies pull back on investment. This is typical of what we see in the final phases of a bear market, and it’s a bottoming process of the cycle, he said.

In addition to layoffs in the energy sector amounting to hundreds of thousands of jobs and declining production, companies are struggling to remain solvent. And this is spilling into the mining industry as well, Puplava noted, highlighting Anglo America’s plan to cut 85,000 jobs from its work force, sell major assets and suspend its dividend to remain solvent.

Ultimately, the company that will emerge will be more cost efficient, leaner and focusing on profitability, he noted. Other miners are taking similar, though perhaps less drastic measures and many are focusing on high-grade ore deposits to maximize production value.

“The result is what we are seeing now, where the inefficient companies go under,” he said. “Expect to see more of that next year, or they’re taken over by the big guys, the big guys deleverage and divest in order to survive, and the result is you’ll see supply contract to the point that it becomes less than the demand, setting up the stage for the next bull market.”

There are a lot of aspects in play, Puplava stated, and many companies are still producing oil and miners are still mining to keep their operations going and service debt. Many producers hedged their production, but that is coming off in 2016, Puplava noted. What needs to happen is supply needs to contract dramatically, and not just gradually, for the bottoming process to play out, he said.

“At some point, we’re going to see a balance,” he said. “I like the blue chip energy stocks. Most of the companies are cutting back on (capital expenditures).”

Even though energy companies’ earnings are down about 70 percent over a year ago when the price of oil was over $100 a barrel, so far the expense cuts in CAPEX expenditures have allowed these companies to cover their dividends, Puplava said.

“If (oil) prices stay down at $30 for another year or two, the big guys would have to think seriously about maintaining their dividends,” he added. “This is what you see in a bear market. It’s that washout … (we’ve seen these) Maalox Moments, and you want to see that.

You want to see an acceleration of this and you want to see it pick up pace.”

Financial Armageddon Approaches: U.S. Banks Have 247 Trillion Dollars Of Exposure To Derivatives

Stock Market Crash

Did you know that there are 5 “too big to fail” banks in the United States that each have exposure to derivatives contracts that is in excess of 30 trillion dollars? 

Overall, the biggest U.S. banks collectively have more than 247 trillion dollars of exposure to derivatives contracts.  That is an amount of money that is more than 13 times the size of the U.S. national debt, and it is a ticking time bomb that could set off financial Armageddon at any moment.  Globally, the notional value of all outstanding derivatives contracts is a staggering 552.9 trillion dollars according to the Bank for International Settlements.

The bankers assure us that these financial instruments are far less risky than they sound, and that they have spread the risk around enough so that there is no way they could bring the entire system down.  But that is the thing about risk – you can try to spread it around as many ways as you can, but you can never eliminate it.  And when this derivatives bubble finally implodes, there won’t be enough money on the entire planet to fix it.

A lot of readers may be tempted to quit reading right now, because “derivatives” is a term that sounds quite complicated.  And yes, the details of these arrangements can be immensely complicated, but the concept is quite simple.  Here is a good definition of “derivatives” that comes from Investopedia…

A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets includestocks, bonds, commodities, currencies, interest ratesand market indexes.

I like to refer to the derivatives marketplace as a form of “legalized gambling”.  Those that are engaged in derivatives trading are simply betting that something either will or will not happen in the future.  Derivatives played a critical role in the financial crisis of 2008, and I am fully convinced that they will take on a starring role in this new financial crisis.

And I am certainly not the only one that is concerned about the potentially destructive nature of these financial instruments.  In a letter that he once wrote to shareholders of Berkshire Hathaway, Warren Buffett referred to derivatives as “financial weapons of mass destruction”…

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Since the last financial crisis, the big banks in this country have become even more reckless.  And that is a huge problem, because our economy is even more dependent on them than we were the last time around.  At this point, the four largest banks in the U.S. are approximately 40 percent larger than they were back in 2008.  The five largest banks account for approximately 42 percent of all loans in this country, and the six largest banks account for approximately 67 percent of all assets in our financial system.

So the problem of “too big to fail” is now bigger than ever.Nuclear War - Public Domain

If those banks go under, we are all in for a world of hurt.

Yesterday, I wrote about how the Federal Reserve has implemented new rules that would limit the ability of the Fed to loan money to these big banks during the next crisis.  So if the survival of these big banks is threatened by a derivatives crisis, the money to bail them out would probably have to come from somewhere else.

In such a scenario, could we see European-style “bail-ins” in this country?

Ellen Brown, one of the most fierce critics of our current financial system and the author of Web of Debt, seems to think so…

Dodd-Frank states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors. That includes depositors, the largest class of unsecured creditor of any bank.

Title II is aimed at “ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claimssecured and unsecured, insured and uninsured.

The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds. OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties.

For some inexplicable reason, the hard-earned money you deposit in the bank is not considered “security” or “collateral.” It is just a loan to the bank, and you must stand in line along with the other creditors in hopes of getting it back.

As I mentioned yesterday, the FDIC guarantees the safety of deposits in member banks up to a certain amount.  But as Brown has pointed out, the FDIC only has somewhere around 70 billion dollars sitting around to cover bank failures.

If hundreds of billions or even trillions of dollars are ultimately needed to bail out the banking system, where is that money going to come from?

It would be difficult to overstate the threat that derivatives pose to our “too big to fail” banks.  The following numbers come directly from the OCC’s most recent quarterly report (see Table 2), and they reveal a recklessness that is on a level that is difficult to put into words…

Citigroup

Total Assets: $1,808,356,000,000 (more than 1.8 trillion dollars)

Total Exposure To Derivatives: $53,042,993,000,000 (more than 53 trillion dollars)

JPMorgan Chase

Total Assets: $2,417,121,000,000 (about 2.4 trillion dollars)

Total Exposure To Derivatives: $51,352,846,000,000 (more than 51 trillion dollars)

Goldman Sachs

Total Assets: $880,607,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $51,148,095,000,000 (more than 51 trillion dollars)

Bank Of America

Total Assets: $2,154,342,000,000 (a little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $45,243,755,000,000 (more than 45 trillion dollars)

Morgan Stanley

Total Assets: $834,113,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $31,054,323,000,000 (more than 31 trillion dollars)

Wells Fargo

Total Assets: $1,751,265,000,000 (more than 1.7 trillion dollars)

Total Exposure To Derivatives: $6,074,262,000,000 (more than 6 trillion dollars)

As the “real economy” crumbles, major hedge funds continue to drop like flies, and we head into a new recession, there seems to very little alarm among the general population about what is happening.

The mainstream media is assuring us that everything is under control, and they are running front page headlines such as this one during the holiday season: “Kylie Jenner shows off her red-hot, new tattoo“.

But underneath the surface, trouble is brewing.

A new financial crisis has already begun, and it is going to intensify as we head into 2016.

And as this new crisis unfolds, one word that you are going to want to listen for is “derivatives”, because they are going to play a major role in the “financial Armageddon” that is rapidly approaching.

HUL, ITC, HDFC taught us the intrapreneurship culture: R Venkataraman

Being part of an exciting journey in IIFL, it has been a continuous learning curve. We picked up a lot of strategies based on hits and misses in our own experiences besides of course learning from the mistakes of others. In our initial days, our founder Nirmal (Jain) was very process-driven given what he had picked up during his stint at HUL.Claim to fame

Has close to two decades of experience in financial services, having worked at ICICI, GE Capital and BZW, amongst other firms

The lesson

Being part of an exciting journey in IIFL, it has been a continuous learning curve. We picked up a lot of strategies based on hits and misses in our own experiences besides of course learning from the mistakes of others. In our initial days, our founder Nirmal (Jain) was very process-driven given what he had picked up during his stint at HUL.

As our business grew, we were inspired by the systems and processes in HDFC Bank and by the leadership of Aditya Puri who redefined industry parameters, challenging fossilised thought processes and archaic work methods. Employee ownership was something we happily borrowed from successful entrepreneurs as we saw the success it gave to firms like Infosys.
Nirmal was also very impressed by the culture of intrapreneurship in organisations like HULBSE 0.22 %, ITC, HDFC where the intrapreneurs led the show. It led us to create a culture of intrapreneurship within IIFL, which has been very fulfilling.
When markets were in a downcycle, we saw many leading brokers succumb to the pressures of competition and the bear market. We managed to successfully diversify into various verticals but always keeping our focus on the financial space. We have seen players diversify randomly into unrelated businesses and lose whatever they had built in their core business. So even today we remain completely focused on the financial service space.

Are we safer?

The Brookings Institution hosted a conference last week on the regulatory response to the global financial system with that provocative title. The conference featured former Fed Chairman, Ben Bernanke, and other prominent speakers, including professor Gary Gorton of Yale University and Fed Governor, Dan Tarullo. See the conference program, here.

The title could be considered provocative in light of the massive amount of new regulations introduced since the global financial crisis exploded in 2007. The Dodd-Frank act alone runs to over 2,300 pages. “Surely,” you might think, “all of that regulation means a more resilient financial system; one that is better able to absorb the kind of shocks that I very nearly brought global collapse.” As the conference discussion revealed, there are some who would argue with you.

As noted previously, before the crisis, international banking was incredibly efficient in terms of transforming a small of capital into a much, much larger volume of assets. Unfortunately, the system was also very unstable. The metaphor I used to describe the situation was an inverted pyramid.

In the immediate aftermath of the global financial crisis I wondered if we would see a ‘pole switching’ problem–that is, a jump from too little regulation to  too much regulation in a “never again!” reaction. That response might be understandable, but it would not be without potential costs: a financial system that is impervious to shocks by virtue of holding a surfeit of capital is unlikely to be in a position to finance the investments that will be needed to deal with the challenges of climate change or meet the infrastructure needs of the 21st century. As in most fields of human endeavor, the optimal outcome is unlikely to be a so-called “corner solution.” If we want a financial system that is capable of funding risky investments supporting innovation (that lead, ultimately, to higher growth), we need to accept some degree of fragility.

To some extent, the story of the past decade is a lax regulatory regime that led to crisis, which in turn triggered a regulatory response. That response has included higher capital and liquidity requirements. The question is whether those higher standards have had unintended effects.

For example, while regulations have largely driven out the Structured Investment Vehicles (SIVs) that played a role in the run up to the crisis, they may have fostered the growth of shadow banking. As Gary Gorton put it, regulations determine whether an activity is carried out in the formal (regulated) banking sector or in the shadows of unregulated banking. Darrell Duffie, meanwhile, argued that regulations have inadvertently equalized capital requirements on safe assets (collateralized by Treasuries) with, say, real estate loans. Since the expected returns on real estate loans exceed the return on safe assets, one effect has been to increase the relatively risky activity.

All of this isn’t a fatal criticism of regulations. After all, every (well-designed) constraint changes behavior in the way it was intended;  and sometimes in subtle ways that are not anticipated. The issue is whether the negative unintended effects are greater than the ills that the regulation was designed to prevent. That is the $15 trillion question, the estimated cost of the global financial crisis.

A follow up post will tackle that question.

Preventing Sovereign Debt Restructuring

At a recent private conference on sovereign debt restructuring, an old friend argued that, in addition to talking about what to do once a country has crossed a tipping point and needs to restructure its debt, efforts should also be made at prevention. It is, of course, a good point; one on which I have written in the past. His comment got me thinking about an idea I had a decade or so ago, in those halcyon days before the global crisis.

The concern then was that debt relief initiatives, which improved the debt-carrying capacity of many highly-indebted countries, created space for others to fill. Export credit agencies and private sector lenders, recognizing an opportunity to grow their balance sheets, rushed to lend to these countries, leading to widespread concerns that a number of countries whose longer-term growth prospects had been constrained by high levels of indebtedness prior to debt relief would, once again, take on too much debt and encounter debt-servicing problems when the global economy slows, interest rates rise, and commodity prices fall.

As things turned out, the global crisis of 2007-2010 didn’t play out the way many observers (including me) thought it would. The crisis was met with extraordinary counter-cyclical stimulus measures, with China leading the way. This stimulus kept the global commodity ‘super cycle’ going, fueling a quick recovery for developing countries. At the same time, the crisis led advanced country central banks to take equally extraordinary measures to prevent the global financial system seizing up. Global interest rates fell to (effectively) zero. All things considered, it was a good crisis for developing countries and emerging markets.

That being said, the policy issue I was pondering in the spring of 2006 was how to prevent export credit agencies (ECAs) from excessive lending that could impair future development. At the time, there were fears that some ECAs may have been pursuing non-economic (or “strategic”) objectives, such as securing control of natural resources or market share. If other ECAs didn’t play the game, the argument goes, they would lose access to key resources or find markets closed to them.

I wanted to address the collective action problem associated with lending to countries that had low levels of indebtedness owing to debt relief initiatives, but whose medium-term economic prospects remain uncertain. By taking on too much debt, the borrower increases the probability of default on all lenders. Moreover, because the return on previously issued fixed rate debt does not respond to this deterioration in the expected return, the borrower has an incentive to take on too much debt to invest in excessively risky projects. The collective action problem arises because, while lenders have a collective incentive to limit new lending, each has an individual incentive to lend as much as quickly as possible before other lenders do so. In this environment, the likelihood of a misallocation of investment resources must be judged to be high.

Of course, this problem is not new: it is encountered in virtually every lending situation. In the domestic context, legal arrangements have evolved to attempt to align incentives such that borrowers are penalized for taking on excessive debt loads. These include contractual provisions, such as parri passu and acceleration clauses, bond covenants restricting the range of investment projects financed by borrowing, and the enforcement of priority of claims. Such legal restrictions binding the interests of private lenders are reasonably successful domestically, though not without the threat of protracted legal disputes.

At the international level, however, contractual provisions are much less effective given the absence of a mutually agreeable process for the timely restructuring and adjudication of conflicting claims. The question is whether some form of ex ante government action.

One option to deal with this problem would be to secure agreement among ECAs on priorities of claim in the event of future debt-servicing difficulties. The idea would be to relax the “joint and several” rule that has governed past Paris Club restructurings by tying restructurings of particular ECAs to their relative contribution to the debt load. The earlier a credit is made, the greater the “protection” it would receive in any subsequent debt restructuring. Conceptually, the process is relatively straightforward. Paris Club members would agree on the extent of NPV reduction needed to restore sustainability (on the assumption that the country in question maintains a debt-servicing moratorium on non-Paris Club creditors). This quantum of debt relief to be provided by Paris Club creditors would then be distributed on a sliding scale that punishes creditors that came into the game late, pushing the country over the sustainable debt threshold.

This approach has a number of noteworthy features:

  • First, it would tend to align incentives by forcing lenders to consider the potential consequences of their lending. This would hopefully result in a rising cost of capital schedule faced by potential borrowers. A higher cost of capital, meanwhile, would create incentives for the borrower to ration excessive debt accumulation and take actions to ensure that the funds are invested wisely.
  • Second, it provide strong incentives for lenders to exercise due diligence in monitoring the use of borrowed funds-including adopting a probabilistic approach to loan evaluation (what is the probability that current high commodity prices will fall over the life of the loan, etc.).
  • Third, it would create an incentive for borrowing countries to be more forthcoming in revealing their outstanding obligations.
  • Fourth, it would provide an incentive for non-members of the Paris Club to cooperate with the international community (given the fact that Paris Club debt relief would be predicated on a continuing standstill on interest payments to non-members).

At the same time, however, the proposal could be criticized as not giving borrowers sufficiently strong incentives to observe the bonding role of debt. This is indeed the case. But it is also true of the status quo. The suggestion here, if successful, would at least result in a rising cost of capital to the borrower. Moreover, the proposed arrangements could be further strengthened by securing ex ante agreement among Paris Club members that any country that does seek debt relief from the Club automatically goes off cover for some specified period of time. Member countries could make loans (as at present) but they could not call on Paris Club “solidarity” in recovering amount owing when the country goes back on cover.

*****

The discussion here is obviously an abstraction, given its static nature. Debt-servicing capacity changes over time in response to both external (commodity price) shocks and domestic factors (policy frameworks, the nature of the investments made, etc.). Regardless, a very large stock of debt has been contracted over the past decade; some of it will not be repaid. How quickly and efficiently it is restructured will have an impact on the global economy. This fact underscores the ongoing efforts to improve the framework for restructuring sovereign debts. At that same time, it should also focus efforts on preventing the need for future sovereign debt restructuring going forward by better aligning incentives.

Planning to make a realty investment in 2016? Best options for you

realty L

Buying a home is in everyone’s wishlist and this investment involves financial planning and strategy. If you are planning to buy a property in the year 2016 ensure that that you make a smart choice and not a hurried one.

Indian real estate sector has been sluggish for a few years but is expected to make a turnaround in 2016. Experts believe that the sector is expected to record increase in sales and a reduction in unsold inventories. They believe the government initiatives announced this year will give a push to the sector and reinstate investor confidence.

Sanjay Dutt, managing director, Cushman & Wakefield said,” Overall, the next few years would see forging of some strategic partnerships with select developers, private equity investors also looking at liquidating assets. Consolidation through joint development activities would unlock development potential in major cities, going ahead.”

Real estate experts believe that government’s promotion of 100 Smart Cities, AMRUT (Atal Mission for Rejuvenation and Urban Transformation), Housing for All by 2022 and infrastructure development are some of the government steps that would not only benefit the economy, but would also create a sector-wise
positive impact.

“The government’s easing of FDI policy, the probable implementation of the Real Estate Bill and Smart Cities, and the introduction of REITs(real estate investment
trust) would bring in the much-required transparency into the sector and enhance investor confidence in the coming years. The year 2016 is likely to begin on a
cheerful note on the back of reforms and increased investor confidence,” Dutt added.

The RBI has cut rates by 125 basis points in 2015 and both the developers and buyers expect to see the transmission of these lower rates to consumers in 2016.

If you are planning to invest in real estate in the new year then the buyer should keep in mind certain points as the market has multiple choices to offer.

“It is important for a buyer to get a detailed information on the shortlisted projects including the builder type, locality, to name a few. As a buyer you must not get
lured by freebies and discounts that are being offered all around and rather check all the legal documents thoroughly and carefully. Buyers must get all the documents thoroughly verified by a professional,” CommonFloor Groups, co-founder and head Vikas Malpani said.

5 Ways to Splurge on a Budget

Women window shoppingYou’ve been great about saving and not going on a spending spree, but every now and then, it’d be nice to loosen the budget belt a little. Ever feel that way? It’s healthy. In fact, some experts say that splurging or spending freely on something you don’t need can be good for you.

Financial expert Kyle Winkfield put it this way:

“When you splurge responsibly, it’s like a successful diet with built-in cheat days. With any great budget that’s successful, you build in a splurge. It’s your cheat day.”

So, can you cheat with a splurge and not blow your budget completely? If you plan for the splurge with a “fun money” account and stay within your budget limits, it’s doable. Everyone has the urge to splurge, especially as the holidays approach. Nevertheless, smart spending is still within your grasp. Read on to find out how to splurge on a budget.

1. Use Credit Card Rewards

Using the money you’ve already spent to buy a little something extra is genius. “If your credit card offers rewards, check your statement and add up the available rewards points,” said consumer finance expert and Freedom Financial Networkvice president of sales and Phoenix operations, Kevin Gallegos. “Visit the rewards website — your splurge area — to see what you can get by converting rewards into gifts, cash or gift cards.”

People with cash-back credit cards typically earn about $25 a month in rewards, estimated one 2010 study. And if you use your card for reimbursed business travel and expenses, you might earn a nice-sized reward for your purchases.

Especially nice are the cards that offer discounts to your favorite stores, like Chase’s Amazon.com Rewards Visa Card. It rewards you 3 percent cash back at Amazon.com. Redeem your points, and you can fund some holiday shopping and pick up a little something extra for yourself, too.

But don’t go into credit card debt by getting a credit card for the sole purpose of earning points; only get a new cash-back credit card if you don’t have any credit card debt and you can pay off the monthly balance.

2. Go Big After a Little Research

If you’ve saved your splurge money for a big-ticket item like a TV or laptop, practice smart spending. “You’ll be able to score the best deals on major items with good research,” Gallegos said. “If you are choosing a high-dollar item, check reputable online review sources like Amazon and CNET. Then, use comparison-shopping sites such as PriceGrabber, Pronto or Shopping.com to find the best online prices. Finally, search for coupon codes online at sites, including RetailMeNot, FatWallet and DiscountCodes.”

Comparison shopping alone can save you significant dollars. PriceBlink, a browser add-on, alerts you as you online shop if there’s a lower price available elsewhere on the web. Sites such as Offers.com track product pricing over time, which “can help you decide if the splurge is a good one,” said Offer.com’s Kerry Sherin. Add a coupon code, and you could save even more on your splurge. Coupon code offers can range from free shipping to 25 percent or more off purchases. For purchases more than $100, that 25 percent can add up to significant savings.

To really amp up the savings, however, fill your virtual shopping cart with your intended purchase and abandon the sale. Many online retailers will email you a discount offer for the abandoned items to nudge you to make the purchase.

3. Spend Money on Small Items

Control the urge to splurge on items you can’t afford by buying small items that feel splurge-worthy. “To gain the feeling of purchasing something special, do so on little things,” said Gallegos. “Maybe it’s purchasing a $5 bar of handmade soap, a small amount of an expensive spice for holiday baking, a top-quality chocolate bar or a craft beer.”

Benjamin Glaser, features editor at DealNews.com, added, “Smaller luxuries can still make a big difference in how you feel. Fine cosmetics, bed linens, good razor blades, and yes, quality toilet paper, are all affordable treats that will leave you feeling like a million bucks.”

When you’re working toward achieving long-term budgeting goals, splurging can take a back seat. But buying a little something that makes you feel special can diffuse the feeling of “I never have any fun!” that could lead to a big budget blowout later. Even personal finance guru Dave Ramsey agreed. “When buying stuff that you really need, it’s okay to spend a little extra to avoid financial, or even physical, pain in the long run,” Ramsey wrote on his blog.

4. Buy Experiences Instead of Material Things

Research cited in The Wall Street Journal suggests that people are happier when they spend money on experiences rather than material goods. According to San Francisco State University associate professor Ryan Howell, “people think that experiences are only going to provide temporary happiness, but they actually provide both more happiness and more lasting value.”

An evening with friends, a vacation with family or a date night with a spouse all count as experiential splurges with a high return on happy memories. And, these experiences don’t need to derail your budget.

So, splurge on taking a day off to spend with your family, planning a special holiday dinner with loved ones or attending a concert to see your favorite band. As an added bonus, another study — this one published inPsychologicalScience.org — found that just the anticipation of the experience can be more exciting than buying a material item.

5. Buy at the Right Time

Many experts say certain months offer better deals on some products. For example, some of the best things to buy in October include air conditioning units, a new car and outdoor equipment. If your practice smart spending and buy your splurge item when it’s at its lowest price, you’ll probably feel better about spending the money.

For an everyday example, let’s say you’re itching to splurge on a fancy homemade dinner. With some pre-planning, you can usually buy what you need to make the meal more without spending a lot and still feel like you’re treating yourself. According to TheGroceryGame.com CEO, Teri Gault, holiday sales at grocery stores offer an average of 67 percent savings on steaks, whole rib roasts, shrimp, lobster and champagne. She said December is a great time to stock up on all these items so you’ll have them handy year-round for your next meal splurge.

Sticking to a budget doesn’t have to mean you deprive yourself every day. Allow yourself a cheat day every now and then to stay on track. Just plan for your splurge, make it proportional to your budget, don’t go on spending sprees, and you’ll avoid morning-after regrets and overspending fallout.