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MACRO NOTES

Last fortnight was interesting and all eyes are now on US for various reasons. Quoting The Economists “US is undergoing three economic experiments at the same time:

  1. Huge fiscal stimulus (at around 14% of pre-Covid GDP)
  2. Monetary policy which is far more tolerant to inflation [In new framework FED is targeting average inflation of 2%]
  3. Households holding huge savings level and question is whether they will spend?

In the light of above facts, it pays to be attentive to what is happening in US on both Monetary and Fiscal front:

Fiscal

President Joe Biden has taken huge gamble by going in for big fiscal stimulus of $ 1.9 Trn upfront. Alternate approach suggested was nibble with small stimulus and wait for impact of Vaccine + recovery. Post that go for a larger stimulus, if required.  Composition of stimulus is as below:

  • Covid Containment and Aid to States and increased federal spending: $ 750 Bn=
  • Unemployment Benefits: Continuation of $300 per week unemployment benefits till September. Tax breaks on $ 10,000. [$ 400 Bn]
  • Stimulus Checks: $1400 check in addition to $ 600 Check to individuals earning $ 75,000 and couple earning $ 1,50,000 would still receive the full $1400 of full check. [$ 600 Bn]
  • Child Care: Up to $3,600 for children under 17
  • Housing Assistance: Emergency rental assistance and Mortgage home ownership assistance.

Analysts believe that total spending will go up $ 1 Trillion and may lift growth by 2 %.

Trivia : In 1943 entire automobile industry sold 139 cars. Come 1950 US alone was selling 8 Million cars. Yes 1940s was completely different circumstances due to war and end of war. But important thing to remember is recovery usually surprises on upside.

Monetary

 Equally imporatant is monetary policy inlight of rising yields in US. Last week US 10 Year yield touched 1.72% despite dovish message from FED chairman Jay Powel and dovish FOMC minutes :

  • No rate rise in US till 2024.
  • US growth pegged at 6.5% in 2021 [ Fastest expansion since 1984 ]
  • Unemployment rate at 4.5% [ Upward revison from 5% last time]
  • Core Personal Consumption Expenditure (PCE) forecasted at 2.2% in 2021 and 2% and 2.1% respectively in 2022 and 2023.
  • Continued bond buying of $120 Bn / Month till “ Substantial further progress” in recovery.
  • Interestingly 4 out of 18 FED official expected rate hike in 2022 and 7 out of 18 Fed Official expected rate hike in 2023.

Notable fact is 10 Year yield rose from 1.62 to 1.72 after release of FOMC meeting.

LIFE COMES FULL CIRCLE

Early 90’s was just a starting of retail lending in India. There was one heuristic for lending in auto segment. If borrower gives neighbour phone number he will rarely default due to social stigma attached with being defaulter and neighbour may come to know if lenders call them. Wiered but true.

Few must have thought this heuristic will make a come back in 2020 in the new form of  lending : Collateralizing Smartphones

Methodology is simple, only after one installs app at the point of sale. This app monitors repayment behaviour throughout the duration of loan. One late payment will lead to blocking of phone, rendering it useless.  Datacultr uses laundry list of technique to force borrower to pay loan. Find more, Here is the full story. https://restofworld.org/2021/loans-that-hijack-your-phone-are-coming-to-india/ [Source : marginalrevolution.com]


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