MARKET PERSPECTIVE

By J Mulraj

Apr 20-26, 2024

IMF warns America to cut spending

At its spring meeting in April, the IMF warned USA, and China, about their excessive levels of debt, advising both to lower their borrowings, for fear of profound impact on the global economy should they not.

The warnings fell on deaf ears. Less than a fortnight later, the US passed a $95 b aid package for Ukraine, Israel and Taiwan, to be spent, not to build assets of construction, but those meant for destruction. During the Biden Presidency, US debt has increased by some $2.5 trillion. That, however, pales in comparison to the $6.7 trillion increase under Trump Presidency, which paled compared to the $ 7.6 trillion increase under Obama!. Do they all assume that money grows on trees?

The picture of a tree on the White House lawns clearly shows green leaves, not greenbacks! Do American Presidents need to be told by the IMF to be prudent in borrowing?

And do those buying US Government not realize the risks they are assuming? The interest payment on US Government will exceed $ 1 trillion this year. This will make interest payment the largest item of expenditure in the US budget, more than the spend on Defense, social security, healthcare, or any other head.

Does the President or the Congressmen not understand that there is neither more road, nor remnants of the can to kick down on, left?

China, too, is in several messes of its own making. Due to its zero tolerance to Covid policy, which caused complete lockdowns, Chinese manufacturers lost their status as a reliable supplier. Some of the messes were:

> Foreign direct investors were discouraged by several adverse policies, including a new anti-espionage law that made normal business inquiry (how’s business?) a possible ‘espionage crime’ which could lead to arrest and other unfriendly policies.

> The exit of foreign direct investors led to high levels of youth unemployment, so high that the Government stopped releasing statistics.

>Then came the crisis in the realty sector, which had been earlier encouraged to overbuild, because it could absorb the output from steel and cement industries, whose production capacities had been overbuilt. Purchase of land parcels by the realty companies also sustained local, or provincial, Governments whose main revenue source was land auctions.

> An earlier ‘one child’ policy has created a demographic crisis by reducing the required birth rate to below the norm needed to sustain a population.

China’s woes are creating a further risk for America. China, once the largest holder, after Japan, of US Treasuries, has been selling them, and investing in gold. It’s a step towards de-dollarization, trying to position the renminbi as a gold backed alternative currency to the USD. Should it succeed in denting the position of the USD as the only globally accepted currency, it would much more difficult for USA to borrow.

Bizarrely, Biden is making America’s future even more dependent on others!  Take energy resources. In 1923, President Warren Harding had designated an area of 23.5 million acres as a National Petroleum Reserve area, the largest in USA. This week Biden restricted oil and gas drilling on 13 m. acres in Alaska, in order to preserve caribou and polar bears, and for environmental protection. The State of Wyoming is discouraging the mining of minerals, which are vital for the EV industry, for environmental reasons.

But here’s the thing. The demand for energy, or for minerals, or for anything, will not reduce! It will be met, and by others. And the world will get polluted, not by USA, but by producing countries. It is one world! As these columns have often pointed out, there cannot be a ‘no-pee zone’ in a swimming pool!

So, Biden is flooring the pedal whilst hurtling America into bankruptcy through over indebtedness, a foolish ban on Alaska National Petroleum Reserve, an impossibility of attaining his EV dreams without domestically produced minerals, and, not to forget, an open border policy for America (contrasted with generous and continuous aid to other countries to protect their borders)! One wonders why he thinks these actions would endear him to his citizens, before November.

Last week the BSE sensex ended at 73730, for a weekly gain of 642 points.

One of the thrusts of India to tackle climate change is Green Hydrogen. A study titled ‘India – the new Global Green Hydrogen Powerhouse’ by Harvard Kennedy School highlights what needs to be done to achieve these ambitions. The main issues are availability and cost of land, water scarcity and infrastructure challenges. For availability and cost purposes, hydrogen would need to be produced in less densely populated areas, and there needs to be good roads to transport it. Domestic capacity for the manufacture of electrolyzers would need to be built up lest the hydrogen industry meet the same fate as the solar industry, relying on Chinese solar panels. With India’s A team behind it (Ambani and Adani), the dream to be a global green hydrogen powerhouse may be achieved.

Stock markets are likely to move in a narrow range during the general elections, ending June 1. Results will be declared on June 4. Should the ruling alliance win with a comfortable majority, the Stockmarket may rally in anticipation of more economic reforms and a stable Government. That rally would be an opportunity to get lighter.

The November US Presidential elections would have a bigger impact on global stock markets. Can Trump get control of the car hurtling towards the debt abyss and would he take his foot off the borrowing accelerator and onto the prudential brake pedal?

That’s the million, sorry, trillion, dollar question!

Picture Source: https://www.nps.gov/whho/learn/historyculture/jackson-magnolia.htm

For comments please contact Jmulraj@asiaconverge.com