Mobius believes that the rupee rout is almost over, but I am not so sure. Economic growth is slowing, consumers are continuing to purchase gold exacerbating India’s current account deficit and the government does not seem to be able to handle the situation before 2014 elections. More financial distress is within India’s immediate future.
The mainstream media continues to cheerlead the American economy, which makes it difficult for them to report accurately on the subject. This is the first line from the Bloomberg article:
Manufacturing in the U.S. expanded more than forecast in August to the fastest pace since June 2011, a sign the sector will contribute more to the expansion in the second half of the year.
The first part clause from the quote is accurate, though it does not place the number into the proper context. It is true that the PMI has not been higher since June, 2011, but we should not confuse this month’s spike in the number with a trend. The number has been at 55 twice before since 2011 as indicated by the red circles in the chart above. You can look to the right of the circles to see what happened next.
Furthermore, a PMI around 55 indicates a moderate expansion, but our economy requires stronger growth to stir the labor market from its torpor. A number around 60, as indicated by the red ellipse, for a sustained period of time would indicate excellent growth for manufacturing and would probably spur firms to hire more workers.
The second part of the clause is pure cheerleading. First, the article assumes that there will be an expansion in the second half of the year. Second, it gives too much credit for what a strong manufacturing sector may do for economic growth. Manufacturing accounts for only about one-eighth of US GDP. This means that a whopping 8% rise in output will grow the economy by only 1%. However, the same 8% rise in consumer spending accounting for 70% of the economy would lead to a 5.6% rise in GDP.
The only sign one needs to examine to ascertain the true state of the American economy is consumer income. If they have it, they will spend. If not, well, then it is more of the same: a corporate/upper class recovery simultaneous with a labor market recession for virtually everyone who works for a living.
First, T-bills yields began rising in response to the ISM manufacturing report. Then, Barry and Boner began talking about bombing Syria and rates fell. 3% is the magic number for T-bills. While this rate may be attained, it will not be sustained. Tepid economic growth coupled with periodic haven inflows will hold rates down for now. On the other hand, stock markets usually drop during a standard Middle Eastern crisis while oil and gold prices rise. Place your bets accordingly.