Modi’s Demonetization Called “Colossal Failure That Ruined Economy” As India GDP Growth Slumps To 2-Year Lows

India's embattled Prime Minister Narendra Modi faced a double whammy of abuse this week as his nation's economic growth collapsed to its weakest since Q1 2014 and India's Central Bank released a report on Modi's extraordinary "demonitization" plan last year showing that 99 per cent of the high denomination banknotes cancelled last year were deposited or exchanged for new currency, crushing Modi's lie that his contentious 'war on cash' would wipe out huge amounts of so-called 'black money'.

When Modi announced in November that Rs1,000 ($16) and Rs500 notes would no longer be legal tender, he suggested that corrupt officials, businessmen and criminals — popularly believed to hoard large amounts of illicit cash — would be stuck with “worthless pieces of paper”. At the time, government officials had suggested that as much as one-third of India’s outstanding currency would be purged from the economy – as the wealthy abandoned or destroyed it, rather than admit to their hoardings – reducing central bank liabilities and creating a government windfall.

Since he unleashed his cunning plan, India's GDP growth has slowed dramatically.

After India's Composite PMI collapsed, India's Q2 GDP growth slowed to 5.7% – its weakest since Q2 2014…

 

And now, as The FT reports, the Reserve Bank of India’s annual report on Wednesday suggested that most holders of the old currency managed to dispose of it, estimating that banned notes worth Rs15.28tn ($239bn) were returned to the bank. That amounts to 99 per cent of the Rs15.44tn of the old high-value notes that were in circulation when Mr Modi made his announcement, according to the finance ministry.

The government’s critics were quick to seize on the RBI’s announcement as evidence of the policy’s failure.

“99 per cent notes legally exchanged! Was demonetisation a scheme designed to convert black money into white?” former finance minister P Chidambaram tweeted.

 

Rahul Gandhi, de facto leader of the opposition Congress party, tweeted: “A colossal failure which cost innocent lives and ruined the economy. Will the PM own up?”

The bank’s figures are a political embarrassment to Mr Modi, who had appealed to the nation to endure the disruption and hardship to punish the rich and corrupt, and deprive them of their ill-gotten gains.

Many lower income Indians hard hit hard by cash shortages supported the demonetisation policy because they believed the rich were suffering more.

It appears they were suckered!

Van Halen, M&Ms, And The Next Market Downturn

Authored by Adam Taggart via PeakProsperity.com,

The planet-sized egos of rock & roll performers are legendary.

Few things symbolize this better than the outrageous requests they often make when on tour.

These requests are referred to as "riders", and appear in the contract a tour venue receives in advance of the artist's arrival. These contract riders specify the physical conditions that the singer/band requires to be in place before arriving to perform. Stage lighting settings, sound equipment, furnishings, etc — that kind of stuff.

And these rider requests can get pretty funky – often extremely so — when it comes to backstage perks the performers want.

For example: A wooden pond filled with koi carp (Eminem). A driver who will not speak or make eye contact (Katy Perry). 20 white kittens and 100 doves (Mariah Carey). Seven dwarves (Iggy Pop). 50,000 bees (Slayer). A sub-machine gun (Mötley Crüe). And, yes, even a great white shark (Hank III).

The practice of making these kind of outrageous demands stems from a rider Van Halen inserted into the contract for its 1982 world tour, which insisted on a bowl of M&Ms to be provided backstage, but with all of the brown M&Ms removed.

As this image below of the actual rider shows, the band was very explicit in its seriousness about this:

Once the media got whiff of this, it had a field day roasting the band's narcissistic chutzpah. A new high-water mark of diva capriciousness had been established, which quickly became legend. A feat of prima donna pampering that subsequent performers have been trying to top ever since.

But as crazy as it sounds, Van Halen's "no brown M&Ms" rider had nothing to do with caprice. There was a solid rationale behind it.

In fact, it was quite brilliant.

The Importance Of Effective Indicators

Van Halen's 1982 world tour was a massive production, involving a tremendous amount of gear and technical complexity. The contract the band sent in advance to venues was so thick due to all the details within, it was referred to as the "Chinese Yellow Pages".

Non-compliance with the requirements in the contract could have serious consequences that could ruin the show, or even jeopardize lives.

So when the band rolled up to its next venue, it needed a quick way to determine if the stage crew there had complied with all of the specifications within its contract.

And that's why the "no brown M&Ms" rider was inserted. The band could simply hop off the bus and check the candy bowl. If they found brown M&Ms, they knew the contract hadn't been carefully read. And then they'd immediately call for a full-line check of the entire set.

As lead singer David Lee Roth detailed in his autobiography:

Van Halen was the first band to take huge productions into tertiary, third-level markets. We’d pull up with nine eighteen-wheeler trucks, full of gear, where the standard was three trucks, max. And there were many, many technical errors — whether it was the girders couldn’t support the weight, or the flooring would sink in, or the doors weren’t big enough to move the gear through.

 

The contract rider read like a version of the Chinese Yellow Pages because there was so much equipment, and so many human beings to make it function. So just as a little test, in the technical aspect of the rider, it would say “Article 148: There will be fifteen amperage voltage sockets at twenty-foot spaces, evenly, providing nineteen amperes …” This kind of thing. And article number 126, in the middle of nowhere, was: “There will be no brown M&M’s in the backstage area, upon pain of forfeiture of the show, with full compensation.”

 

So, when I would walk backstage, if I saw a brown M&M in that bowl … well, line-check the entire production. Guaranteed you’re going to arrive at a technical error. They didn’t read the contract. Guaranteed you’d run into a problem. Sometimes it would threaten to just destroy the whole show. Something like, literally, life-threatening.

Genius.

Through its rider, the band had created a easy-to-monitor and trustworthy indicator. No brown M&Ms, and the show was likely set up to go smoothly. But if otherwise, don't perform until the entire venue is scrutinized for other missed requirements.

The lesson to take from Van Halen's wisdom is that having good indicators is key to achieving success.

This is also extremely true for the world of investing, where you are deploying capital based upon an expected future return. How do you determine when it's a good time to enter into an investment? Once in it, how do you monitor the conditions supporting your rationale for holding it — are those changing? And if so, are they getting better or worse? When should you exit the position?

For all of these questions, the better the indicators you use, the more accurate and informed your decision-making will be. And the better your returns as an investor will be.

When The Indicators Are Giving A Signal, Pay Attention

Over the years, we've compiled a large number of indicators that we monitor closely on an ongoing basis here at PeakProsperity.com. They most definitely inform our economic outlook and forecasting.

We'll dedicate an upcoming report to laying out the sources and metrics we place the greatest weighting on. But several that we're watching closely right now come from two market analysts that we highly respect.

The first set comes from Lance Roberts, chief strategist/economist for Clarity Financial. Lance is renowned for his excellent charts and ability to highlight key changes in data trends. Below are several indicators he's recently featured, suggesting weariness in the US financial markets and growing likelihood of economic recession.

First, the S&P 500 is showing signs of topping out, having broken below the trading range of its latest 8-month bullish trend, and its MACD momentum indicator displaying two recent sell signals:

Lance warns that such signals suggest that further price gains will be "volatile and limited" unless the S&P returns into its bullish channel. If it indeed does not and drops below the key resistance level of 2390, he sees a swift price correction of 12% as a real possibility.

But he then combines this near-term technical analysis with more far-sighted data to make the point that the financial markets are not just overbought, but dangerously overvalued at this point. Similar to John Hussman (another producer of market indicators we value highly), Lance shows that, because today's prices are the result of pulling so much of tomorrow's valuation into today (e.g., via the suppression of interest rates and overexuberant speculation), we are living at a rare time in history where the average market return for the next 20 years may well be negative:

And he recently caught our attention by surfacing this chart of the change in annual Real Value Added to the US economy, a metric that hadn't been on our radar beforehand. This has been a reliable indicator of recession in the US for nearly 70 years, and is now signaling that we've likely already entered one:

Couple Lance's indicators with those of our other expert, Grant Williams, portfolio advisor at Vulpes Investment Management and co-founder of Real Vision TV. Grant and the team at Real Vision recently issued their latest Killer Charts series, which adds validation and additional weight to Lance's warnings.

First off, Grant and his team see similar technical signs of "exhaustion" in the S&P 500 and predict lower prices ahead:

Note that they don't just expect the S&P to correct slightly and then continuing powering higher. Other indicators they track, like the equities-vs-commodities ratio, strongly suggests a bubble peak for the S&P. From here they predict a secular bear trend for stocks (possibly paired with a new bull trend in commodities):

And like Lance, Grant sees signs that the US economy is poised to slow further…

.. and is likely, as Lance also concludes, tipping into recession:

When smart analysts independently find the same patterns in the data, it's time to take notice.

The charts above are only a few of the indicators Lance and Grant monitor that are now sending strong cautionary warnings about the near-term prospects for the financial markets and the underlying economy. What other key metrics should we also be tracing closely right now?

To dig much deeper into this, Lance and Grant will be presenting their latest indicators, analysis and forecasts at the Dangerous Markets webinar on September 13th — where they will take ample questions live from the audience. For more information on the webinar, click here.

 

North Korea Conducts Nuclear Test, Riling International Community

Shortly after the news that North Korea announced it was in possession of an "advanced Hydrogen bomb", to which we said that if "the bomb appears to be authentic, it would confirm that the North is preparing for its most provocative action yet: its sixth nuclear test, which would force Trump to respond, having vowed never to allow North Korea to become a nuclear power with offensive capabilities", this is precisely what happened, when on Sunday morning, North Korea conducted what appears its sixth nuclear test, triggering a tremor 10 times as powerful as that from its test a year ago and just hours after it showed off what it called a hydrogen bomb capable of being mounted on a long-range missile.

The U.S. Geological Survey said it had recorded a M6.3 earthquake that it described as a “possible explosion” in northeastern North Korea—near the site of Pyongyang’s past nuclear tests—at a depth of zero kilometers at noon Pyongyang time. The agency initially assessed it to be a magnitude-5.1 temblor.

South Korea’s Joint Chiefs of Staff assumed North Korea conducted its sixth nuclear test, after an artificial earthquake was detected near the site of the North’s previous nuclear tests earlier today. Additionally, the Korea Meteorological Administration said that it had detected a revised magnitude-5.7 earthquake in the same area of North Korea, in what it described as likely being a “man-made” earthquake.

Because earthquakes are measured using a logarithmic scale, a magnitude-6.3 quake would be 10 times as powerful as the one triggered by the North’s September 2016 nuclear test, which triggered a magnitude-5.3 earthquake, according to the USGS.

Leaving all suspense out of it, shortly after the earthquake reports, North Korea says Kim Jong-un ordered the test of a hydrogen bomb that can be fitted onto an ICBM, and the device was successfully detonated. Additionally, North Korea confirmed the nuclear test on local television.

In response to the nuclear test, which will be the harhest test of Trump's diplomatic resolve vis-a-vis North Korea yet, a spokesman for South Korea’s military said that it had strengthened its military posture in response to the likely nuclear test, adding that the Joint Chiefs of Staff had preliminarily assessed the incident to be a nuclear test. Elsewhere, Japan's Prime Minister Shinzo Abe said his country would work together with the U.S., South Korea, China and Russia on a response to the apparent nuclear test.

“We can never accept it. We will need to make a strong protest,” Mr. Abe said. It is unclear just how a "strong protest" will change anything at this point.

According to the WSJ, North Korea’s September 2016 test had a likely yield of about 10 kilotons, larger than any of its previous four tests, but likely short of the hydrogen bomb that Pyongyang claimed that it detonated. In this case, the magnitude-6.3 explosion would likely mean explosive power of around a megaton, according to Jeffrey Lewis, director of the East Asia Nonproliferation Program at the Middlebury Institute of International Studies.

 

* * *

Earlier:

A day after Russian President Vladimir warned that the US and North Korea are “balancing on the verge of a large-scale conflict," North Korean leader Kim Jong Un is doing everything in his power to validate Putin’s words.

To wit, in a segment broadcasted Saturday by the Korean Central Broadcasting Network, the North’s state-run television-news network, the regime claimed that it has “succeeded in making a more developed” hydrogen bomb. In the broadcast, Kim can be seen looking on as a purported thermonuclear warhead is loaded onto an intercontinental ballistic missile, which KCNA described as having “great destructive powers." KCNA added that all hydrogen bomb components are homemade, so the North can "produce as many as it wants." The report also claimed that the North have developed a powerful electromagnetic pulse weapon.

According to the Wall Street Journal, experts fear an attack with this type of weapon could wipe out electrical networks in the U.S.

Here are more details from Dow Jones Newswires:

  • North Korea Says It Has ‘Succeeded in Making a More Developed’ Nuclear Weapon
  • Kim Jong Un Witnesses Hydrogen Bomb Being Loaded onto a ‘New ICBM’ —North Korea State Media
  • New Hydrogen Bomb’s Explosive Power Goes Up to Hundreds of Kilotons —North Korea State Media
  • North Korea Threatens ‘Super-Powerful’ EMP, or Electromagnetic Pulse, Attack
  • North Korea Claims All Hydrogen Bomb Components Are ‘Homemade,’ Can Produce ‘As Many As It Wants’

Reuters explains that the hydrogen bomb's power is adjustable to hundreds of kilotons and can be detonated at high altitudes. Kim Jong Un "set forth tasks to be fulfilled in the research into nukes," KCNA said, but it made no mention of plans for a sixth nuclear test.

As a reminder, in July, the North launched two ICBMs capable of reaching the US mainland, and after a monthlong break, Kim resumed his provocative missile tests last Friday by launching three short-range missiles into the Sea of Japan – and then on Monday, in another unprecedented provocation, the North fired an intermediate-range missile over the northern Japanese island of Hokkaido.

Of course, there is no way of knowing whether the warhead is authentic, though we’re sure the intelligence community’s army of analysts will promptly opine one way or the other. Here’s Reuters with a more detailed account of the broadcast…

“Kim visited the country’s Nuclear Weapons Institute and “watched an H-bomb to be loaded into new ICBM,” KCNA said. “All components of the H-bomb were homemade and all the processes … were put on the Juche basis, thus enabling the country to produce powerful nuclear weapons as many as it wants, he said.”

 

Juche is North Korea’s homegrown ruling go-it-alone ideology that is a mix of Marxism and extreme nationalism preached by state founder Kim Il Sung, the current leader’s grandfather.

 

Kim Jong Un “set forth tasks to be fulfilled in the research into nukes,” KCNA said, but it made no mention of plans for a sixth nuclear test.”

Whether or not the claim of having an H-bomb is a fabrication, professional observers of the Kim regime warn that the report is a signal that the North Korean leader is preparing to carry out what would be the country's sixth nuclear test. North Korea last year conducted its fourth and fifth nuclear tests, claiming that the fourth in January 2016 was a successful hydrogen bomb test, though outside observers raised doubts about this claim. The North conducted a fifth nuclear test in September 2016, which was measured to be possibly North Korea’s biggest detonation ever, but the earthquake it caused was still not believed to be big enough to demonstrate a thermonuclear test, according to Reuters.

And at least one observer who weighed in on Twitter said that the bomb appears to be authentic, which would confirm that the North is preparing for its most provocative action yet: its sixth nuclear test, which would force Trump to respond, having vowed never to allow North Korea to become a nuclear power with offensive capabilities.

Meanwhile, China and Russia have repeatedly urged the US and North Korea to engage in talks – even going so far as to offer a “roadmap” to de-escalation that would ask the North to halt progress on its missile program while the US and South Korea end military exercises.  As always, we await a response from President Donald Trump, who spent Saturday visiting disaster victims of Hurricane Harvey in Texas. As WSJ noted, the State Department has yet to comment.

Red Cross Admits It Doesn’t Know How Hurricane Harvey Donation Money Is Spent

Authored by Carey Wedler via TheAntiMedia.org,

Though the Red Cross has a historical reputation for providing relief to victims of natural disasters and other emergencies, the organization’s practices have tarnished its name over the last few years.

Amid the catastrophic earthquake in Haiti in 2010, the Red Cross reportedly accepted nearly $500 million in relief money but built only six homes with the funds even though they claimed they had provided homes to 130,000 people. These failures prompted some Haitians to advise the world against donating funds to the Red Cross.

The organization was accused of diverting resources and supplies to bolster its public image during Hurricane Sandy. As an investigation by NPR and ProPublica found:

The Red Cross national headquarters in Washington ‘diverted assets for public relations purposes.’  

 

A former Red Cross official managing the Sandy effort says 40 percent of available trucks were assigned to serve as backdrops for news conferences.

The outlets reported that [d]istribution of relief was ‘politically driven instead of [Red Cross] planned,’” noting many organizational failures.

Further, a report released last year by Iowa Sen. Chuck Grassley found that 25% of funds donated to aid in relief for victims of the earthquake was actually spent on internal costs. That amounted to roughly $124 million.

Now, amid the hurricane in Texas, the Red Cross is admitting it currently doesn’t know how the funds it’s receiving are being spent.

NPR’s Morning Edition interviewed Red Cross executive Brad Kieserman to ask how the funds will be distributed.  Kieserman said that as of Wednesday morning, “had spent $50 million on Harvey relief, mainly on 232 shelters for 66,000 people.”

Through donations, how much of every dollar goes to relief? NPR’s Ailsa Chang asked him.

But he responded without actually providing an answer to her question:

Yeah, I don’t think I know the answer to that any better than the chief fundraiser knows how many, how much it costs to put a volunteer downrange for a week and how many emergency response vehicles I have on the road today. So I think if he was on this interview and you were asking how many relief vehicles in Texas, I don’t think he’d know the answer and I don’t know the answer to the financial question I’m afraid.”

She pressed him about the Red Cross’ previous failures and misallocation of resources. According to NPR’s transcript:

Is that still happening? Such a substantial percentage of donations going to internal administrative costs, rather than to relief?

 

“Kieserman: It’s not something I would have any visibility on. I can talk about what it costs to deliver certain relief services.

 

“Chang: Yeah.

 

“Kieserman: But the way the internal revenue stream works, uhh …

 

“Chang: You don’t know what portion of that amount.

 

“Kieserman: Not really.

 

“Chang: You don’t know what portion of that total amount is for relief.

 

“Kieserman: No, I really don’t. I wish I could answer your question, but it’s not something I have visibility on in the role that I play in this organization.

The executive ultimately claimed that “The folks I work for are very, very attentive to cost effectiveness and cost efficiencies in making sure that as much as every dollar that we spend on an operation is client-facing.”

Slate reporter Jonathan Katz also reported the organization declined to disclose how much money they had spent or raised so far. Katz ultimately urged readers not to contribute to the Red Cross.

The Red Cross continues to face criticism and urgings for individuals who want to help to take their donations elsewhere. The Independent reports that over the weekend, Dan Gillmor, author and professor at Arizona State University’s Walter Cronkite School of Journalism, advised against donating to the Red Cross. Many other social media users have expressed similar sentiments.

Despite the Red Cross’ failings, however, there are still many organizations doing important work.

The group A Just Harvey Recovery lists a number of local efforts accepting contributions. The Cajun Navy, a volunteer effort that previously rescued victims of Hurricane Katrina and the Louisiana floods last year, has also been working round the clock in Texas and is accepting donationsThere are many organizations and shelters working locally to provide relief and essential services. If you would like to contribute or volunteer, you can find some of them herehere and here.

Are Grocery Chains About To Join The Retail-Bankruptcy Bloodbath?

Amazon officially assumed control of Whole Foods Market on Monday and by noon, channel checks at WFM stores revealed that its new tech overlords had already slashed prices by nearly 50%, sending bonds of its grocery-chain rivals reeling as grocers confronted a new dilemma: either slash prices to the point of unprofitability, or hold the line and risk seeing sales evaporate.

And as bonds of even highly rated grocery chains have underperformed this week, Bloomberg is questioning whether the WFM acquisition has fundamentally changed market dynamics in what was previously an island of stability in a retail sector beset by bankruptcies.

Even before the WFM acquisition, the industry experienced the first signs of strain as Amazon launched its Amazon Fresh grocery service and Wal-Mart started stocking up on reasonably priced organics – factors that contributed to the massive drop in WFM’s market cap, allowing Amazon to scoop it up for less than $14 billion.

Prior to this, the conventional wisdom dictated that grocers were impervious to the onslaught of e-commerce that was decimating industries such as clothing and electronics. Investors reasoned that consumers would probably balk at buying perishable goods like food online.

But Amazon, with its seemingly infinite capacity to slash prices and brook losses, has created new risks for Whole Foods' rivals.

Apollo Global thought buying North Carolina-based Fresh Market for the “every day low price” of $1.4 billion would be a turnaround slam dunk after its success with Sprouts Farmers Markets. One year later, the future profitability of that deal is in doubt, and that uncertainty is being reflected in the price.

“The bonds that financed Apollo Global Management’s purchase last year of upscale grocer Fresh Market plunged to new lows this week. The cost of buying contracts to protect against a default in Albertsons Cos.’s debt has jumped. Bonds of Bi-Lo Holdings have lost almost half their value this year.”

 

When Apollo Global bought Greensboro, North Carolina-based Fresh Market for $1.4 billion last year, the grocery world seemed quite different. The chain, known for its fresh produce, had seen sales slow. To lure customers back to Fresh Market’s roughly 170 stores, the private-equity titan was betting it could rely on its experience with previous – and profitable – investments in companies such as organic grocer Sprouts Farmers Markets.

 

But Fresh Market is struggling for some of the same reasons that sent Whole Foods into the arms of Amazon. Mainstream competitors including Kroger Co. and Wal-Mart Stores Inc. have pushed deeper into sales of fresh produce and organic products. Supermarkets have opened so many stores that many analysts expect a shakeout. Before the Amazon deal, Fresh Market bonds traded as high as 91 cents on the dollar. Now they fetch less than 76 cents.”

The reason is simple: Amazon, which is insulated not only by its e-commerce hegemony but also by investors who don’t expect the company to turn a profit. One analyst aptly referred to this as the Amazon-Whole Foods "fear factor.”

“It’s the fear factor of Amazon,” said Mickey Chadha, an analyst at Moody’s Investors Service. “No retailer can under-price as long as Amazon can, make no money and get away with it. That’s why people are scared.”

* * *

News of the Amazon deal obliterated billions of dollars of grocers’ valuations, slicing $2 billion off Kroger’s market cap in one day. The grocer’s stock is down 35% this year. Yet its bonds have held steady.

Meanwhile, nearly $3 billion in Albertsons bonds due in 2021 have tumbled..

“Kroger’s bonds, which are investment grade, haven’t been hit. But about $3 billion of Albertsons debt coming due in 2021 has felt a chill. The loans have been trading at 97.6 cents on the dollar. Large, liquid, secured loans of that size typically command par, or 100 cents. A public stock offering for the Cerberus Capital Management-backed grocer was again put on hold after Amazon announced its purchase of Whole Foods.”

…causing the cost of insuring them to skyrocket.

As one might expect, analysts now believe that large chains with relatively low debt burdens will somehow manage to survive.

But smaller chains like Bi-Lo Holdings may soon find that their debt burdens are untenable:

“For example, Bi-Lo Holdings has borrowed hundreds of millions to make cash payouts to private-equity owner Lone Star Global Acquisitions. One of the bonds the company sold to pay the dividends now trades at levels indicating investors expect to recoup only a third of what they loaned the company.”

Tops Friendly Markets, another troubled grocer, is being choked by its $720 million debt pile.

“Tops Friendly Markets, which is reporting millions in losses, is straining under $720 million in debt. Using a maneuver typical of distressed companies, it put off repayments due in 2018 while it grapples with price deflation and traditional rivals in its western New York home turf. If earnings and the balance sheet don’t improve, investors holding the rest of Tops’ bonds could find they’re stuck with spoiled goods.”

However, there's at least one factor that may insulate the market's weaker hands, at least for a little while. There are 40,000 grocery stores in the US, only 400 of which are WFMs…

So, should investors be bracing for a wave of grocery bankruptcies resembling this year’s record run of failures among department stores, apparel sellers and electronics retailers? Maybe not right away. But once Amazon's had a few years to expand its footprint, a massive shakeout seems inevitable.