Sree Iyer: Hello and welcome to PGurus channel. I’m your host Sree Iyer. This is episode number 63, December 29 2020. I have with me our special guest Sridhar Chityalaji. Namaskar Sridharji and a warm welcome to you, sir.
Sridhar Chityala: Namaskar and good morning to you all.
Sree Iyer: Sridharji, yesterday the details of the signed Stimulus Bill have now started coming out. It is indeed true that every American is going to get $2,000 per head plus the dependence, I don’t know the numbers for that. Could you please shed a little bit more light on how the money was found to go from $600 – $2000? And what does that impact in general?
Sridhar Chityala: Well, I think that President Trump and the house seems to have come to some sort of an alignment to recap on the budget. The principal area of contention was around two things, the first contention, the first point of contention was around the $600. The second point of contention was around the pork and belly offers that were all jumbled up close to the numbers that we balanced in reported $55 billion. The house voted as a separate amendment to the bill that was sent to the president increasing the allowance from $600 to $2000. So the house by a two-thirds majority including some Democrats voted, sorry Republicans voted. Now, it’s gone to the Senate. We will know what happens in the Senate today. Let’s assume that the Senate rejects it and the president is going to use the impoundment Control Act of 1974. And he said that he will take it to $2000. So this is one part of The Ledger. The second part of the Ledger is pork and belly. What is he going to cut and what’s going to be the incrementality of these $2000. We don’t know about the pork and belly, certainly, that was not a resolution that was reflected. But they all agreed that they would do that. So, therefore, that reconciling part of it would come. I think the other thing is that we need to be cognizant whether there is any change to the dependant allowance and whether there’s any change to the unemployment elements, we need to recognize and see what happens to that. Both Lindsey Graham and Rand Paul have been talking about the need for, Rand Paul is not very supportive of this type of stimulus directly into the hands, he calls it as socialism, but the president made a very interesting point that the small businesses also require more support as part of his tweet and briefing. Small businesses are the beachhead of our economy and they are impacted, they’re coming back to work, so we need to kind of support them. Whether they would be any his words with more is coming if you see the press release, so whether he’s going to add anything to support the small businesses as an augmentative to what is already in the plan as part of the PPP program, we will come to know of it.
So in all, in a summary, I think the stimulus has moved in the right direction from the perspective of public sentiments as well as the political sentiments between the president and Democrats. Republicans are frugal and they’re cognizant that presidents come, presidents go, some of these guys are sitting forever in the Senate, for generations and years and their concern is what is going to be the burden of the budget.
Remember today the average interest rate is, sorry, the cost is 1.2% of the GDP, and it’s manageable within the overall if this is even around $21- $22 trillion dollars at roughly around 3.2% it was close to about $695 to $700 billion dollars as an expense. Today is 1.2% so even at let’s say 28 trillion we added the number to be 27 it’s less than $400 billion. So there is a 200 Delta derived from the benefit. So this is going to be the issue with the senate in terms if we are going to put so much money on the interest costs and in one year we have added $5 trillion of debt what’s going to happen. So I think this is the opposite side of the argument which is fair.
Sree Iyer: The one overarching question that remains is that this is something that is a man-induced thing and where nobody is now talking about who was the cause of this problem and what kind of a compensatory scheme that has to be put in place so that something like this does not happen again. The world itself doesn’t seem to have come together to try and find out the cause of this whole pandemic, isn’t it?
Sridhar Chityala: Yeah, I think the pandemics happen in maybe once 100 – 150 years. Last was the Spanish Fly. Yes, right. So I think there is no answer. This is the fundamental difference between the concept of budgeting which is namely whether you go with government taking more debt and trying to manage everything from the government side or everything to be managed from the public enterprises’ side. There is a history where when we had a big debt crisis in the United States JP Morgan, John Pierpont Morgan when a bunch of people came together and solve the problem by assembling, this whole concept called as the government dead type of programs and the enterprise’s the people bought the dead and help the government to overcome. So the question here, therefore, is in these types of situations, are you going to drawdown? Now, it seems like on the political, doesn’t matter whether it’s Republican or Democrat, those who are sitting on what you call, I call, not on the exterior extremities, which is left or too much to the right somewhere to the centre-right a little bit to the centre-left these people seem to believe that it’s like a balance sheet. I think I had mentioned this in the program before which is there are generally on the Republican side, you have a treasury secretary who is from the banking side of the business not because I have a special favour for coming from that side, but we look at the balance sheet, which is to say, what’s our assets, what’s a liability, what’s our income, what’s our… how we are going of managing the expenses if you take a look at the income and expense side of the United States, it’s not a moving feast in the sense that you’re not going to add new sources of income. It’s fixed. You can manage the expenses side by saying that okay, you can cut certain areas, but the mandatory spending is a significant part of the overall budget. So the question therefore that comes up is how do you tweak the balance sheet? So then Steve Mnuchin is saying if I go back and say ‘okay, I rebalance, can I observe this debt in the balance sheet of the Government if by doing so I’m are accusing the cost of the debt on the expense side. So in his view, as we saw that you can actually rebalance and look at the 10-year bonds and 10-year bonds are the ones, which, they use a combination of 10-year and 30-year tenure, today is around when he rebalanced it was 0.7% if it was at 1.2%, would he have done it, we don’t know, right but the story at 0.70 rebalance the budget so, therefore, I think it becomes an exercise which is effective to state that ‘I can balance the budget. I can cut my deficit by reducing the expense side, by rebalancing the cost that I pay on the interest. Can I kind of do it domestic or can I do it internationally?’ Historically, being an importer, net importer the United States has always used the overseas people to say ‘you have to buy my debt x% of the debt if you want to be exporting to the United States. So, therefore, you had the major exporters like China and Japan and Saudi Arabia etc. we’re buying a pot, but today, there’s also a lot of domestic consumption of this specific debt, and they don’t want, Japan will always be one of the debt holders, India is slowly building up nowhere near China and China is deleveraging the USDA. So the point, therefore is, this is why I say that they look at this as an overarching balance sheet and when you look at the balance sheet, you can only vary two things liability and the asset side of the balance sheet in the US government and see what you can do to manage your expenses. You don’t want your expenses to be running out of control. Already, I mentioned, we mentioned this in the budget presentation. In the presentation, we have increased the expenses from $4.14 trillion to $6.5 trillion in this on a revenue base of 3.5 versus 3.7 trillion dollars, so he had to therefore take the over expenses and add it to the total debt rather than leaving it and trying to fund it fiscally for the specific year.
Sree Iyer: Viewers, we are going to talk a little bit more about the effect to the Common Man about the strategic fiscal and monetary policies that are probably going to play out in 2021. This should be covered in the next few days as Sridharji will expand a little bit more on what is going to happen at the ground. What is going to be your interest rates, your home equity loans, how much it’s going to cost you, where real estate will be headed, will the stock market see new highs, we’re going to give a quick look at all these things in the next couple of days as the year winds down.
Sir, let’s take a quick look at Nashville. A lot of things are not adding up still. What are your thoughts because why was the airport closed, why was… I can ask a lot of questions here. Somehow everything seems to have been magically solved and once the person of interest was identified and everything seems like a large blanket being put on top. What are your thoughts, sir? Is there more that we need to look into in terms of what really happened in Nashville? Was it somebody, was that some other country at work here? Is this really as simple as what they are saying, something doesn’t add up why your thoughts, sir?.
Sridhar Chityala: Oh, I think that I am moving along with your thought process in this which is when we now look at this, as we stand, as we sit here today, the situation is as follows.
Number one, they have found who this person is. He seems to be a very quiet person. They’ve talked to some of the neighbours and who said he is a very quiet unusual type of guy. The bombing seems to have occurred pretty close. There are two types of opinions. One who thinks that the word ‘t’ should not be used and it should be viewed as a random kind of an incident. That’s one thing that they have indicated. The second is, but on the contrary, what you find is that the target is the AT&T centre. Now, the more information that has come out around the AT&T Center is that it is switching, major AT&T switching service centre where the telephone lines of Nashville and around the neighbourhood, the downtown neighbourhood is taken care from this. So, therefore, there is a significant impact and to that extent, the data as well as the telephone services according to AT&T is being restored.
So there were so many other buildings but this building was chosen as the target, right? So that’s whats seems to have been chosen and at least one of the republican nominees have indicated that this is the case, which is namely that the AT&T Center was the target. The other thing that bothers is that how they have come to so quick conclusion because we don’t have details of what’s specific, is it a bomb is you know, first they said it’s the suicide bomber, we don’t have any details around, but the intensity seems to be, quite humongous in terms of the velocity and the ferocity of it. Also that particular time the airport was shut down.
There have been wild theories lying around in social media channels, wild theories ranging from some flying missiles to maybe alien attack to anything that you can think of wild theories. But as far as the media is concerned investigation is concerned they have not touched on that. So what prompted somebody, okay, you have voice and data network services impacted, so you suspend in and out flights until that is restored. But there was a no-fly zone in operation on top of Nashville. So that brings the question which is, what was it? Is it some kind of, a satellite launched or what is the scenario that we are talking about here? Also, 15-minute warning that was coming from that little truck, RV vehicle? What’s the 15-minute? Why exactly, precisely the 15-minutes? Who were the people who were, having fighting gunshots around that point of time? So we touched on these questions. Because the reason is, we are restating the same facts that we have stated because it is not taking us to a conclusive outcome. The questions that you’re posing are very valid and right questions and you are asking the questions which is to say is this investigation quarter complete or is the investigation not revealing all types of data which is very logical in these types of circumstances. If you take the 9/11 attack, very clear in terms of what happened in this specific instance. It is not of magnitude it’s very small but yet it is in the middle of so many things that are happening in the United States, right now. Conspiracy theories, the involvement of foreign agencies, National Investigative Agency investigation. So many people involved from ballot machines to forensic. The last thing that we may want to see here is the Dominion systems having some office in the AT&T Center. Let’s assume that gets thrown in in the next couple of days. Then it this thing will kick off into something even more catastrophic than what is being pursued. I’m not suggesting there is something there but in case it turns out that there is something there or in case something turns out that AT&T is doing some strategic workaround the elections then it makes more questions as to what exactly it is. So more to come, Iyerji.
Sree Iyer: Yes. If someone were to try and erase some data that would be the suspicion, the needle of suspicion would point to that direction if it does happen you heard it here first. Now you also have to look at the statement of a former South Carolina, Senator Bill Bledsoe who suggesting that the president constitute a Military Tribunal to look into this whole election interference. And so these are all not likely spoken. He’s a senator of long-standing although he’s not a senator currently. But there are many many people asking questions, but they are all being asked in pockets. There is no overarching narrative that can help explain and understand what really went down on Christmas day in Nashville. Stay tuned. There’s going to be more information coming out on this and let’s go on to global politics, sir with your permission. We can go to the next thing which is, what is happening to the state of the people who are stranded off of China’s course. I’m going to show with an image deck. We’re looking at, first of all, we’re going to look at Taiwan. We are looking at the Taiwan Straits where the Chinese and Russian planes have been trespassing into the Taiwanese airspace and I have the image up here, sir. please go ahead.
Sridhar Chityala: Right, which image you have put up?
Sree Iyer: The one on Taiwan showing close to China border, that one.
Sridhar Chityala: So the Taiwan Strait, you’re showing the Taiwan Strait, right? Okay. So look Taiwan Strait is the latest fulcrum point where, if you can see the wedge between China and Taiwan, the Taiwan Strait is the Hot Potato. Down on the south, you have the South China Sea, upon the North to the right you have Japan and then about you have Korea, right? So if you take these specific points you find that this Taiwan Strait has become a hot potato. There is a median line. So this median line is the Fine Line border between China and Taiwan. China thinks it as part of its historical heritage. To tell especially after the 19 planes intruded and flew over and then prior to that there was also the Chinese planes stepping in and they said it is routine surveillance. So a major aircraft carrier of the United States passed through the Taiwan Strait about five days ago. Around the same point, you found two days ago the big Shandong Chinese carrier passing through that specific point. So they’re flexing the muscle in that area which prompted the rear Admiral of the United States to make a surprise visit to Taiwan and hold discussions with the Taiwanese government and the military? Why is this of importance? This is of importance for three specific reasons. We have covered this even in the RCEP and the other discussions. It’s very important because even Japan has stood up and stated that Taiwan is a red line. China incursion into Taiwan is a Redline. Effectively this is another choking point, right now Taiwan acts as the buffer right so you can see that it can be a choking point especially, down as one looks at the South China Sea and up. Well, also up in the north you have Senkaku Islands, which is a dispute between China and Japan so it is a very hot fulcrum in terms of the Strategic Maneuvers that is going on.
What is most compelling here is on the lines of this, You also had the Indian Head of Armed Forces visiting the region which we touch but he also made a visit to South Korea to expand the military ties with South Korea. So therefore already the United States is taking care of Taiwan. Japan to some extent is Acting as the what you call the red flag razor the path that India is with Japan and India is with South Korea and then down in the South China Sea you can now begin to see as to why this particular straight and Taiwan has become strategic importance. Again, China is not doing something for Sovereign reasons. If you read all the economic reports, which we may do one program separately Taiwan is considered in next Twenty Five years is far more strategic as an industrial manufacturer compared to China because China is saturated Taiwan is where there’s massive kind of expansion not just in Taiwan, but around the adjacent regions as well as stepping into India. Like Taiwan is expanding big in Vietnam. Taiwan is trying to expand big in India. Taiwan is establishing its semiconductor fact so as an economic fulcrum. It’s a very important point. So, therefore, you find this particular dispute while this election stuff is going on has emerged and Russia is also flexing its muscles Jointly with China. They seem to be irritating the South China neighbours, whether they see some vulnerability in the US Security and foreign policy as a concession to China. We don’t know but certainly, there is a flurry of activity and India and Japan are right in the thick of it with the Taiwanese, with the Koreans, with the Vietnamese
Sree Iyer: Now, sir, let’s take a quick look as close as which we want to show that the I have put it out. I have put it up about Dalian and learned about the status of many ships i.e., Merchant ships carrying cargo that are marooned on I would say maroon, but they are dog breeding to land a show but China is not allowing them. Where do you think the things stand sir. I have the map up.
Sridhar Chityala: Great. Thank you. So I think that let me remember the map in my mind. Okay. So the story is that that’s called as the Bohai sea, the Bohai sea area is where you know, you can see a like a little elliptical piece, its narrow funnel and then into the Bohai sea, adjacent to that sea you have Tianjin etc, etc. So the story is that the Caofeidian as well as there is one more area where two Indian Merchant ships are locked up for over six months with passengers marooned and China is not allowing them to come in or you know crew being replaced and they only met ensuring that the medical supplies and other stuff go. It’s not just to Indian ships. But there’s also the Korean ships, the Australian ships. So the coal is stuck there plus all other merchandise, especially from Australia and other places which passes through that port, is stuck around the Bohai sea region. There’s the whole bunch of vessels which has nowhere to go. So the story is if you look at that for the Bohai Sea and then the adjacent, you know, it is connecting to Beijing also which is a strategic point to the Beijing. It’s also a major kind of merchants trading besides the Shanghai and Shenzhen ports, which is up for the north you have this Dalian region, which is a kind of the major trading point. So what you’re witnessing in that area is that it’s not only the South China Sea, which is this area is called as the East China Sea so the East China Sea is also having this trade fulcrum and trade contest and no there is no other mechanism other than air for the people to come in, in case there is a conflict to rescue some of these people from various nationalities from Vietnamese to Filipinos to Indians to Westerners who are in this MV ships locked up in this specific region.
So you can see now how this integrated architecture and integrated Maritime strategy is playing out. What started in the South China Sea is now extending it to Taiwan Strait and into the East China Sea, right? So, I think that’s the purpose of that specific discussion. I don’t know what if India covers it vary widely. But certainly, in the Western World, the gridlock of Australia and the gridlock of the two Indian ships, which is stranded there for more than six months is certainly getting a lot of media attention and strategic kind of importance in this little war that is going on between the China Russia and the major powers Indo-Pacific powers of Quad.
Sree Iyer: And let’s take a look at the next map which is that of West Asia the Indian foreign minister S Jaishankar has made yet another trip to Qatar and this assumes significance because of the fact that there have been so many trips and a lot of activities happening India is trying to perhaps take a more dominant role in terms of being able to take custody For an example of Mecca and Medina Masjid. Which Pakistan has been doing traditionally? In fact, the Pakistani TV channels have been going hyperventilating on this eventuality should that happen because then whatever little significance role that Pakistani army played in Saudi Arabia will be diminished even more. So what do you see in this trip of Sri Jaishankar to West Asia, sir?
Sridhar Chityala: If we take a look at that West Asia map, you know, which is you know, the mainland being Saudi Arabia and then come into the Persian Gulf right you find UAE you have Kuwait, you have Oman you have on the other side you have you know Bahrain, so it is a hot kind of potato that Persian Gulf segment Channel or Persian Gulf Channel again is a major ferry point of ports and trade but it is also if you look at Qatar, which is also groomed up there so Qatar is another strategic besides Saudi Arabia is a strategic venue, why you have the American Fleet permanently stationed in Bahrain, you know facing Saudi Arabia in terms of the oil wells, all the oil wells are located, you know facing, the Bahrain side of the border or the other side of the water. So the importance that it attaches which Mr Jaishankar, minister of external Affairs, this is the ninth visit by a dignitary, it is almost all of those states have been visited and he has made it very candid and very clear that the discussion is around three things – Investments, Security and trade because these nations which were once upon a time reliant on their positive balances in their reserves, which they meaningfully deployed in generating attractive returns, which allowed them to subsidize locally. The oil prices, they may not be able to afford. So that’s number one.
Number two is that Saudi has taken, it is looking beyond energy as a vehicle for it to develop Saudi as a major tourist attraction. So, therefore, they’re looking at alternate mechanisms or alternate ways. So security is very important to them as well as countries which are not hostile, which are development focused. At least UAE is one of the largest bilateral trading partners of India both within the context of Investments as well as trade, if I’m right UAE is in the top five, as a bilateral trading partner, as a significant investor in India. It’s also along with Singapore, Singapore is the number one I think, the United States is number two or United States is one of the top five. So you have this West Asia region, which has very significant importance. The other thing is West Asia is also important because a large number of Indians are employed in West Asia and many of the states are reliant on remittances from West Asia as a source of their GDP, one of the countries which got significantly impacted because of the role down in the employment is Bangladesh. A lot of people had to leave the UAE region as they began to deleverage employment from overseas. Indians still are a good chunk of the population. There also are business people who have invested significantly around all of the GCC countries – Gulf Cooperation Council countries. So West Asia, therefore, is significant so which is why India is looking at these countries as a significant partner. We have already touched on the energy, I think we talked about it yesterday. So when you look at that all the maps that we are presenting you are seeing that the next battle is around the control of trade, security and energy and whosoever controls these Maritime gateways they’re going to control the effective flow and geopolitical decisions of the world.
Sree Iyer: And, lastly a look at the markets. Goldman Sachs is predicting a 5% growth next year, whereas the United States is more modest, they are predicting 4% growth. What are your thoughts, sir? And after that, we can sign off on this episode.
Sridhar Chityala: Great, the situation with the United States is, with this for $600 Goldman Sachs has recalculated that the stimulus is coming in rather than the impact moving to Quarter 3, they believe that you will see positive buoyancy even in Q2, so they have repriced a growth in Q2 and Q1, average between you know, 2-3%. So they believe that even without the $2,000 the recalculated GDP numbers is 5% which we have not achieved for quite some time and we cross 4% or 4.2% which was projected by the FED for 2021. So they’re forecasting up 5% growth based on all these cash that is going into the economy. Now, you add if it becomes $2000 and more into the small business, so you have two other variables which is unemployment and cash in circulation in the economy. FED has projected that unemployment next year could be 5%, which is a record number. We went up to about 14.9% at the peak of the pandemic, we quickly came down to about 6.7% and next we go to 5% then that means that there are more people at work whether remote are otherwise, there’s more cash in the economy. That means they’re saying based on the trends that they have seen in Q2 and Q3. We have not shared this chart but we will share. As Sree IyerJi said you are either a trump believer or you’re a trump hater, there’s only two way, there’s nothing in between, there’s no objective or subjective, I like Trump or I hate Trump.
Trump’s policies have seen the fastest recovery in any type of such pandemic or asset bubble in one year. Within six months unemployment went from 14.9% to about 7% to 6.7%, the retail sales which dipped dramatically in the Q1 &Q2 went back to normalcy, we can show by way of charts by end of Q3. So, in two quarters, we saw the uptick and we can demonstrate both in the internet crisis as well as in the global financial crisis, the tapering of the stimulus over a period of three years delayed the recovery and hence restoration to normalcy to took a lot of time. Whereas, here this huge injection of stimulus targeted with a volume as one significant step the 2.1 trillion, I’m referring to in March/April gave the impetus for the economy to recover. Now, if you’re looking purely as a financial markets economist, you really have to admire the effort that was put in at the tweaking that occurred. Look at some of these retail stocks in the market and the retail sales, it’s quite amazing as to what the performance of this digital companies are during this period of fast recovery or fast evolution to normalcy. Now, we are projecting a 5% growth and we’re talking about pandemic and balance sheet when we started this conversation, will do a separate discussion. But, I may be called the next Trump or Junior Trump, but, I am only going by numbers, you see the numbers then, we can debate the story around the same period in the previous kind of the two administrations or the two major crisis. So, it’s a very positive this year, we will finish with about 15.6% or 15.7% growth in S&P, it is not a 29% that we saw in 2019. But, this is a pandemic year, let’s keep that in mind and then we saw 5.6 to 5.9% growth in Dow Jones and some astronomical 47% Growth in NASDAQ, which is the home of all the tech as well as the consumer discretionary. So, we expect again between 6 to 9% growth in the stocks in 2021 driven by this cash that is coming into the economy. That’s why I say it’s a finally architected balance sheet, which is putting money into the hands of the people who paid taxes to remember to put money into the people of the hands who paid taxes, who work because they will go back and with confidence, they will go and spend recognizing the jobs are intact as well as they have disposable money to kind of to spend. I think that’s the thematic that this economic model of Trump and Mnuchin is demonstrating and also we should not forget Larry Kudlow, I mean Larry has well has been instrumental in some of these things. So, this is my kind of overarching somebody I know I’ve taken a lot of time to give an explanation but, this is a very passionate topic. So, I’ve taken more time than that is over there what is required.
Sree Iyer: Just to add to what you just said sir, that there is another round of PPP (Payment Protection Plan) plan that is going to be put in place and many of the companies that availed of the first round are also eligible, as long as they can show that in the past few months, they have suffered at least a loss of 25% of their business from the previous year, that is your yardstick. If you get that then you are eligible and that hopefully will keep the boat sailing afloat and it is hoped that this V-shape recovery will continue. SridharJi, it was wonderful talking to you today, and this has been a most revealing session because we have covered the whole gamut of topics and we’ll be back again tomorrow same time, same place. Thanks for joining us. Do not forget to subscribe to PGurus Channel. Namaskar.
Sridhar Chityala: Namaskar and thank you so much.
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