Companies & Sectors
Manufacturing PMI moderates to a 50-month low in May

Overall, the PMI suggests the economy is in a weak growth/low inflation environment

India’s manufacturing PMI moderated to 50.1 in May from 51 in April. In Q2 (Apr-

May), the PMI has averaged 50.6 versus 53.1 in Q1, suggesting that the manufacturing growth momentum weakened early in Q2, dashing hopes of a recovery. The decline has been attributed to a slower pace of new work and continuing power outages.


Though the May reading was the lowest since March 2009, the overall index has held above the watershed 50 level that divides growth from contraction.


The output index fell into the sub-50 contraction zone, at 48.6. Export new orders picked up in May, but domestic new orders were weaker, data from a survey by Markit Economics and HSBC Bank showed.


Weak growth is reflected in falling prices, with both input and output prices lower this month. In fact, the output price index fell below 50 to 49.8, suggesting a sharp fall in core inflation ahead. Overall, the PMI suggests the economy is in a weak growth/low inflation environment.


Commenting on the India Manufacturing PMI survey, Leif Eskesen, chief economist for India & ASEAN at HSBC said: “Economic activity in the manufacturing sector slowed further in May as output contracted in response to softer domestic orders. In addition, power outages hampered output and led to a jump in backlogs of work as businesses struggled to meet orders. Inflation gauges also eased, and output prices even fell in sequential terms on the back of tougher competition and receding raw material prices. These numbers have heightened the probability that the RBI will fire another salvo at its June policy meeting.”


Bursting Bond Bubbles

As the economy weakens, so does the ability of companies, consumers and countries to pay back what they have borrowed. It is not just the fear of rising interest rates that can prick a bubble. What can bring an end to the bull market is simpler: the fear of losing money

Investors in the US bond market experienced their worst monthly loss since December 2010. Despite the continuing easy money policies of the Federal Reserve (Fed), bond yields have moved up from 1.6% to 2.2% in May.  Is this the beginning of the end? Is there a bond bubble? If so, has it burst?


Central bankers and famous economist would argue that it has not. Western central bankers have issued an estimated $7 trillion worth of quantitative easing, about equal to the GDP (gross domestic product) of China. This has pushed interest rates down to historic lows. Generally when bond yields get this low, or their prices get this high, they represent a losing proposition. The last time the Federal Reserve owned a large chunk of the US government bonds market was in 1945. In that year, yields on American Treasury Bonds were also just 2%. Investors who bought those bonds did not see a gain in purchasing power until 1989. The only exception has been Japan where, thanks to deflation, 2% bonds still have a positive return at least until now.


In theory we don’t have to worry about bond bubbles because the central banks have infinite fire power to force yields down. A few key strokes and there are another trillion dollars or yen to buy up bonds. Paul Krugman, the Nobel Laureate economist and columnist, rests his case against bond bubbles on this idea.


His argument is that there isn’t a bond bubble created by the Fed because the Fed won’t let there be a bond bubble. The bubble won’t burst because the Fed won’t let interest rates rise during periods of high unemployment and low inflation. We should not worry about historically low interest rates because the economy is in such terrible shape. With a bad economy “the usual rules about what constitutes a reasonable level of interest rates don’t apply.”


But isn’t that the point? If the rules don’t apply, how can we assume that the Fed can prevent a bubble? The argument is circular. We assume that the Fed can prevent any problem that crops up. But the problem is that the Fed does not operate in a closed system. History is the only place to begin a forecast, but it is imperfect because the environment keeps changing. An integrated global economic system introduces issues far beyond the US economy, the limit of the Federal Reserve’s mandate.


There is another issue. The Fed has suppressed interest rates. Let us assume that the Federal Reserve will continue to do so even though rates have already risen in both the US and Japan. The assumption is that if the Fed can prevent interest rates from rising, there won’t be an issue. But there is another aspect to bonds than just interest rates. A more important aspect: solvency. Interest rates could easily rise regardless of central banks, if investors are worried about getting their money back. As a result of the Fed’s distortion of the market and risk, the question of solvency is more important than ever. So even if the US government bond market is not a bubble does not mean they don’t exist.


The first candidate would be Asia. The global hunt for yield has made raising money in Asia easier than ever. Companies which never could have issued bonds are now issuing them at a rapid rate. Since the beginning of last year the number of Asian companies issuing local currency debt for the first time has risen to 20% of the market. In the US and Europe the proportion is usually 3%. The Asian debt market has doubled in size to $6.5 trillion since the end of 2008. It is not just companies. Consumer debt has grown even more rapidly than corporate debt. In Malaysia it has grown to 76.6% of GDP from 65.9% in 2007. In the US consumer debt has fallen from 100% in 2007 to 85% now.


It is argued that Asian debt growth is simply following the economic and demographic growth. But economics and demographics do not determine risk. Risk is a function of the probability of getting repaid. Getting your money back is determined by institutional efficiency. Economic growth diminishes the probability of reform, so institutional efficiency has not kept up.


It is not just Asian corporations and consumers. The hunt for yield has spread money to new sovereign borrowers. The sovereign debts of peripheral European countries have been shown to be questionable, but at least these countries do have revenues. Rwanda just issued its first bonds, $400 million, to finance a new conference centre. Rwanda gets a large part of its revenue from gifts of aid. Rwanda is not alone. Honduras and Mongolia have recently issued debt. These countries barely have institutions.


The bubble in bonds is also in the level of risk accepted for Western debtors. The returns on “high yield” or junk bonds have reached a historic low of 5.39%. The alphabet soup of financial products has reappeared. We have a return of structured finance. There is a great demand for the demand for collateralized loan obligations (CLOs), and an even greater demand for commercial mortgage-backed securities, (CMBS). These debt are being issued with ever fewer creditor protections. The number “cov-lite” loans has increased to more than 50% of all leveraged loan issuance so far this year, double the level during the credit boom in 2007.


Apparently the global economy has not gotten the memo. Despite the central bank cash, it has refused to be stimulated. The International Monetary Fund trimmed its global growth forecast last month and recently did the same for its forecast of the Chinese economy. As the economy weakens, so does the ability of companies, consumers and countries to pay back what they have borrowed. It is not just the fear of rising interest rates that can prick a bubble. What can bring an end to the bull market is simpler: the fear of losing money. 


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)



Dayananda Kamath k

4 years ago

does it mean just like to help enron we created dhabol power project. and fdi in retail to bail out walmart. killing the indian economy to provide returns to fii's all that this govt has done in the name of reforms is selling the country to fiis nothing else. and garnering votes by throwing money at poor in the name of inclusion.india will be the originator next financial crisis.



In Reply to Dayananda Kamath k 4 years ago

Indians have to be choosy while General Elections take place in the year 2014.

A case to make prosecutors personally accountable

Alexina Simon was picked up as a witness in a minor criminal case. Prosecutors in Queens held her over two days without a lawyer. Now, she wants to hold them to pay individually for what she says was misconduct

It wasn't much of a case: Queens prosecutors wanted to prosecute a woman for having falsely reported her car stolen in a bid to collect on theft insurance. A non-violent crime. Small-time really.

But the prosecutors went to unusual lengths in 2008 to try and make the case. They tracked down a person they thought had information about the alleged fraud, told her she was under arrest, and over the course of two days interrogated her in a room in the Queens District Attorney's office. The woman, Alexina Simon, was not a suspect. She was, in truth, nothing more than a potential witness.

Today, Simon is the named plaintiff in a federal case that has reached the U.S. Court of Appeals for the Second Circuit. The case is noteworthy for two reasons:

It shines a light on the issue of what are known as material witness orders, a poorly understood aspect of New York's criminal justice system in which people who are potential witnesses to crimes can be detained, evaluated and perhaps compelled to disclose what they know.

The case is also seeking a remedy that those concerned about misconduct by the country's district attorneys have long sought, namely that individual prosecutors be held personally liable for their misdeeds.

Lawyers for Simon have argued that the prosecutors in the case failed to do what is required when such material witness orders are granted by a judge — bring the witness before that judge and make sure that witness has a lawyer. Simon, they say, had no meaningful information about the alleged fraud. That might have been sorted out had proper procedures been followed, they say. In all likelihood, they suggest, prosecutors not only would have figured out that she had no information, but also that she, owing to a mix up in names, was not the person they were actually looking for.

Instead, Simon says she was detained twice — arrested first at work and then at home the following day — and questioned for hours without a lawyer.

Lawyers for the Queens prosecutors have insisted Simon willingly cooperated and thus the warrant they had obtained, and the requirements that came with it, didn't apply. They argue further that, even had the prosecutors erred, they were, under the law, immune from being held personally liable for their misconduct.

A district court judge ruled for the prosecutors, holding that the broad protections given to law enforcement officials as they pursue cases applied in this instance. But the case was appealed, and since then, a brief has been filed by the U.S. Department of Justice in support of the district court's ruling and another has been submitted by defense lawyers in opposition. A decision is expected soon.

The issue of the use and misuse of material witness orders came under scrutiny after 9/11. Federal authorities used the warrants to lock up any number of people they suspected might have information about terror investigations. A subsequent lawsuit that sought to hold former U.S. Attorney General John Ashcroft personally liable for the abuse of material witness orders made it to the Supreme Court, which held that Ashcroft was immune.

The use of material witness warrants in state cases has garnered far less attention and the Simon case has to date been a relatively obscure one. But a lawsuit brought by a man who says he was wrongly prosecuted for murder could give the use of material witness warrants in state prosecutions an explosive airing.

Lawyers for Jabbar Collins, who spent 16 years in prison before prevailing in a rare federal petition for his freedom, have accused Brooklyn District Attorney Charles J. Hynes of running what amounts to his own civil jail system. Collins's lawyer, Joel Rudin, has charged in court papers that he has evidence Hynes's office routinely and illegally detained witnesses to compel and sometimes coerce testimony.

Hynes's office has denied the assertion.

For Rudin and other defense lawyers, the misuse of such warrants — locking people up until they tell a story the prosecutors need told to make a case — could be a central cause of the kinds of wrongful convictions that, again and again, have been uncovered across the country in the last decade or so. And they argue that the problem is not likely to be corrected unless prosecutors can be held personally responsible.

The abuse of such warrants, Rudin wrote in a brief that is part of the Simon case before the appeals court, "threatens the rights of individuals held as material witnesses to prompt arraignment, representation by counsel, and an independent determination of their status." Granting prosecutors immunity when they abuse the warrants, he wrote, "would deny aggrieved individuals any compensation or other remedy for their constitutional injuries and would encourage law enforcement authorities to continue such practices."




We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)