9 Trillion Exit: India May Revert 20 Years
On September 21st, as the Federal Reserve surrendered with a rate cut of 50 basis points in the hope of quickly adjusting interest rates to a neutral level to avoid an economic recession and push the US stock market to an all-time high, the "Bond King" Gundlach believed that the Fed's rate cut came too late, and that the US stock market would experience significant volatility in the next two months.
Gundlach believes that "the United States is already in a recession, and the Fed's significant rate cuts cannot prevent this from happening," and that "the degree to which it is now behind the growth curve is the same as it was behind the inflation curve two years ago."
Ray Dalio, the founder of Bridgewater Associates, also said in an interview with CNBC on September 20th that the US economy is facing the challenge of huge debts.
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As the United States' debt and budget deficits continue to soar, Dalio warned that the US debt crisis is imminent, and the Fed is struggling to maintain a balance between interest rates and debt pressure.
Dalio said that neither Trump nor Harris would prioritize the sustainability of debt, which means that no matter who wins the election, these pressures are unlikely to ease.
He predicted that the United States will increasingly rely on monetized debt and take a path similar to that of Japan.
Subsequently, Fed Governor Waller suddenly said in an interview with the media on September 21st, "The Fed may consider cutting rates by another 50 basis points," starting an emergency bailout of the market.
This indicates that after the Fed's significant rate cut, it has once again increased the expectation of a significant rate cut of 50 basis points, shocking Wall Street.
We have noticed that Waller's remarks in the media interview were not on the Fed's financial schedule, which is more like an emergency bailout action by the Fed.
Because on September 21st, the US stock market fell sharply before the opening, announcing in advance to the market that the Fed may cut rates by another 50 basis points, and deliberately doing so to stabilize market expectations.
This shows that they have heard the sound of the US stock market bubble bursting under the expectation of an economic recession, and the time for a major liquidation has arrived, and it is the most dangerous time.
This indicates that the US financial market will face a severe test of economic data, imminent election uncertainty, and the test of US corporate earnings in the coming weeks, and Wall Street traders are preparing to face a fiercer storm.
Because the Fed's unexpected emergency rate cut this time may become a catalyst for the repricing of US asset prices, and no one can predict what kind of financial storm will be experienced in the future, and no one can escape.
And when the Fed panicked at the September interest rate meeting and announced a one-time rate cut of 50 basis points, starting the first monetary easing cycle in the United States since 2020, and betting on its own credibility and turning sharply, readers should pay attention.
To make matters worse, as Japan's latest inflation indicators announced on September 20th continue to rise sharply, J.P. Morgan believes that Japan may surprise the market with another rate hike in December this year, and will contribute to the liquidation of the US financial market.
As the scale of the yen carry trade unwinding continues to expand, it will cause trillions of dollars of US market funds to withdraw, continuing to form a flood-like tidal reverse harvesting effect on the US financial market, making US assets continue to experience a major liquidation.
This reflects the problem of the US financial market's health deteriorating.
In the next four years, the United States' already severe fiscal predicament and debt problems are expected to expand further, and the time for a debt ceiling crisis is imminent, which may bring a reshuffling of the US financial market.
Analysts believe that the US economy and financial market are facing these adverse environments, superimposed with high interest rates, high debt, and low growth, and investors may be ready to press the sell button at any time, including iconic US dollar assets such as US Treasury bonds and US bank deposits.
What should the Fed do?
So, the answer is obvious, the United States will secretly accelerate the transfer of economic recession and debt default risks, and in addition to harvesting its own people, it will start to continuously harvest some economies with obvious economic structure and financial debt problems.
As the research team emphasized on different occasions, each strong dollar cycle in history always triggers shocks in the economy and financial markets.
This effect can refer to earlier vivid cases such as Venezuela and Zimbabwe.
The latest case that has occurred recently can also refer to Israel, Indonesia, Hungary, Chile, and Peru.
At the same time, authorities in South Korea, Thailand, and Poland have also recently stated that they are closely monitoring currency and financial market fluctuations and are ready to intervene at any time.
In addition, Vietnam, India, South Africa, Sri Lanka, Brazil, Myanmar, Turkey, and Argentina have also experienced sovereign debt defaults, and external debt problems have always been more serious.
This shows that the United States' debt default risk is using different dollar cycles of tightening and easing, and combining with the dollar's currency status to transfer to some economies with a single economic structure and fragile foreign reserves.
In addition to harvesting the above 16 countries, these four countries are more likely to become the victims of the United States' harvesting.
Lebanon, the Czech Republic, Bahrain, and Egypt may face the plight of the dollar tide harvesting effect due to the steep inverted mode of foreign debt and foreign reserves, because these countries' economies have fallen into a fragile mode of serious currency devaluation and debt crisis, and will be secretly charged by the United States for seigniorage.
Under the dollar tide effect, the economies, markets, assets, and exchange rates of these 20 countries will continue to be affected, which makes the Indian economy shudder.
It is clear that the high cost of dollar financing and external debt pressure are hitting India's economic activities and financial markets.
According to data disclosed by Refinitiv Eikon on September 21st, over the past 32 years, India's economic growth has largely been attributed to Indian companies being able to enter the Western world more easily, but now the economy has shown stagnation under the pressure of economic recession in Western countries, and there will be a significant slowdown.
If external risks increase, there is even a possibility of recession.
In this regard, Dr. Doom, economist Nouriel Roubini, also said that India may not be able to completely avoid the impact of the economic recession in Europe and the United States.
With the adjustment of global monetary policy, India's economic growth will also face headwinds.
For example, recruitment in manufacturing industries that rely on exports such as engineering, textiles, and software has slowed down, which has been confirmed by the continuous contraction of India's manufactured goods export data.
This also makes the latest data compiled by the Mumbai-based think tank Center for Monitoring Indian Economy (CMIE) on September 21st show that although India's economic growth and India's total employment reached the level of 410 million people before 2020, the urban unemployment rate in the first half of this year still rose to 9.8%, making economists increasingly worried that the Indian economy will fall into difficulties, and the deterioration of the employment situation may drag down private investment and damage growth prospects.
Although, the US rating agency Moody's report released on July 25th still has a negative outlook for India, the reason is the increasing risk of India's debt burden and low debt repayment ability, the continuous rise of the debt burden may weaken India's fiscal strength, and may further downgrade its negative rating.
Moody's predicts that India's federal government's total debt burden will soar to a peak of 84% of GDP in 2025, significantly higher than the 70% level before the epidemic, and obviously higher than the average of 55% among Baa-rated economies.
This also means that under the background of the US rating agency's less optimistic rating for India, this indicates that India has to pay a higher borrowing cost than other countries to raise international funds, directly leading to the rise of India's already high debt burden pressure, and endangering India's already fragile financial and monetary market.
Goldman Sachs said in a report updated and published on September 20th that due to the rise in borrowing costs, the decline in export earnings, and weak investment, India, which had the fastest-growing major economy in the last fiscal year, may lose momentum in 2025, and there is a risk of economic regression, bringing continuous shocks to the Indian financial market, while also needing to address the risks of non-performing dollar debt in the banking system.
According to the report released by the IMF in August, India is the country with the highest debt ratio among all emerging markets.
As of the second quarter of the 2024 fiscal year, although India's general government debt has declined compared to the same period last year, it has surged to 72.1% of GDP, and is at the highest level since the second quarter of 2018.
These signs all indicate that India may face a substantial economic recession due to the debt predicament.
This shows that India's high economic growth is due to a huge accumulation of dollar debt, which will intensify market fluctuations and squeeze international investment in India during the process of the United States raising the sickle and starting to harvest, because India does not have a broad foreign exchange reserve moat.
This has also led to a large number of wise investors withdrawing from India in advance in recent times.
For example, European and American manufacturers who control most of the profits of Indian manufacturing have started to withdraw since last year.
We have noticed that reports on foreign-funded enterprises withdrawing from India have been emerging in recent months.
Since last year, a series of exclusionary measures implemented by the Indian economy have led to news that car companies including Ford, General Motors, Harley Davidson, BYD, and Tesla have refused to cooperate with India, which has been widely reported by the media.
This also includes internationally renowned companies such as Foxconn, Google, Amazon, Nokia, Samsung, Coca-Cola, and Pepsi.
According to the latest data from the United Nations, in 2023, there were nearly 2,800 foreign-funded enterprises registered in India that voluntarily or forcibly closed their business in India and chose to withdraw from the Indian market, accounting for about one-third of the total number of foreign-funded enterprises in India, and up to 200 billion rupees of manufacturing investment has withdrawn from India since last year.
It is reported that Disney is also considering fleeing from India.The shocking data behind these figures reveal that India's economy is experiencing significant fluctuations and trials.
Even more concerning, according to incomplete media statistics, at least 190 Indian executives have been fired by American companies this year alone.
This situation is indicative of the underlying problem of India's high economic debt, which further suggests that the sustainability of India's economic model is not strong, exacerbating the possibility of a significant economic regression in India.
According to data released by official Indian agencies on September 7, foreign capital, including in manufacturing, has withdrawn nearly 9 trillion rupees from India since the country began tightening its monetary policy in 2022.
This amount is more than three times the net outflow during the 2008 U.S. financial crisis and is at least the highest annual withdrawal in the past 20 years.
The latest data shows that in the 24 months up to June of this year, India's foreign direct investment inflow was $48.79 billion, lower than the $59.6 billion in 2021, reflecting concerns about India's investment environment, tax disputes, restrictive procurement rules that limit competitive choices, and the overall business climate.
For instance, in August 2023, the Indian authorities suddenly announced restrictions on laptop imports to promote local production, causing panic in the industry.
Interventionist policies like these can dampen investor enthusiasm.
For example, recruitment in export-dependent manufacturing sectors such as engineering, textiles, and software in India has slowed down, as evidenced by a 7% year-on-year decline in India's manufactured exports in the last six months.
Morgan Stanley's report updated on September 21 predicts that India's manufacturing industry is unlikely to become a global hub.
If the Indian authorities fail to effectively address the issues caused by the withdrawal of manufacturing enterprises, against the backdrop of a slowing global economic growth, India could regress by 20 years, especially in its export industry.
This will become more evident as the U.S. and Japan start to reap the benefits of India's economy.
A study published by the World Bank in April this year estimated that India needs infrastructure investment of $1.7 trillion to $2.2 trillion.
Three years ago, India proposed a plan to invest 69.2 trillion rupees in infrastructure projects such as roads and bridges.
However, the latest news and some signs indicate that, to date, there has not been much change in India's infrastructure sector.
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