Man versus market: Powell and Adani Go it Alone

Published Feb 3, 2023, 7:53 PM

John Authers and Mark Cranfield pick apart the market reaction to Fed Chair Jerome Powell's post-FOMC news conference. They appraise the market's response to what it heard. Indian industrialist Gautam Adani found himself at the mercy of the market this week too. Shuli Ren explains Adani's predicament and what any permanent damage may mean for India's growth trajectory.  

Welcome to Bloomberg Opinion. I'm Ronnie Quinn. This week cats continue to jump out of backs. John Authors and Mark Grantfield on the f o MC meeting that may have invited back the Central Bank? Put later, how does the empire strike back? Over the years, About thirty percent of Adanni's financing is denominated in foreign currencies. They have borrowed extensively on the dollar market. They have also thought funding from foreign banks in the overseas expansion. Julie Ran on the outlook for Gotamadanni's Adanni Enterprises, the conglomerate responsible for so much of India's infrastructure central to its industrial growth, rocked by a short seller's report. First though to the f O m C and Bloomberg opinions. John Authors, so John is Michael Foley of Jake Morgan put in, Powell doesn't find the market. That's the old saw turned on his head. But that's exactly what happened. Where was Powell's hat costume? He said he needed to put it on and snarl, but he didn't. He needed to put on his hook costume. I think he probably tried to do some extent, but he didn't do a good enough job where I didn't hear very much of anything hawkish. Oh. I think he started out by making clear that they did expect to hike rates further. He made rather route like comments that the Fed's job wasn't done. He said, in as many words that we low from history that the risks from listening too soon are very serious, and it's not clear what you do about it if you make that mistake, whereas we know what we can do if we overtighten, we have tools to deal with that. So it's fairly clear to me that he meant to be hawkish. He was trying to do the kind of thing like you rightly said, I was suggesting that in a column he would need to do, which would sound really, really aggressive. He did, I think, make one awful mistake. And I don't know whether this was a simple flub or whether it's a Freudian slip to reveal his whole thinking. But when he was asked if he was bothered about financial conditions having eased since the last which is wrong. Yeah, exactly and so wrong that I suspect it wouldn't amaze me if he just admitted I misheard that question. And because what he absolutely had to say in that situation was yes, I'm worried that financial conditions have eased. They cannot carry on like this or otherwise we'll have to keep hiking. Or it was straightforward requirement of him from the text. And it just isn't true that the financial conditions, whether you use our Bloomberg measure with the Goldman Sax measure, which are the two most popular, but on any sensible measure, they are somewhat tighter than they were in December, and a lot sorry tighter. I just did the same thing. That wasn't a Freudian lip that I suspect might have been what held it, And they are considerably looser than they were in August before inflation began to come down. Maybe he was afraid to talk about the market again. This is the dangerous area where it's almost like we're getting into Freudian psychoanalysis of this one man's personality, or it's almost like a textual analysis, hypertextual it's it has There was one time when they changed one word in their communication from one meeting to the next, and I still let to write an eight hundred word column about it, And there was probably eight hundred words, right, that's the funny thing about the federal area. Yes, But I think in this case, perhaps the bottom line, and this may be the line that holds up, is that he did say that the FED would be data dependent in future. And if you're being data dependent, you cannot therefore be absolutely committing yourself to tightening and tightening and technique. There is another potential. Is there something the third is seeing about the economy that markets may be seeing but that we're not. Is it possible that er Powell is actually worried about a deeper recession. It's possible. It's possible. It's also possible for activities worried about overheating, that we have not a soft lending but no landing. We keep flying, which would be wonderful on many levels, except that it would mean inflation and still had been vanquished, and he would need to keep greats higher. And that's something we should pretty much all hope happens, except those of us who have invested in assets that require low interest rates, and for those of us that for the that that includes a huge junk of our clients, readers, and viewers, obviously, but that is a concern that does worry me if you look at again, this was perhaps unwise of him. Either this was unwise or it was his revealing his hands too clearly. He did make the point that inflation expectations have notably come under control, that they haven't become If anything, they have been re anchored, which is true. The FED Zone New York Fed Zone survey very clearly shows that. And he then made the point, what we don't want to do is cut too soon and then see expectations come unmoored again. But you could look at that more as some kind of a Freudian slip, or tell that he does actually think he's winning and that he can turn turn around quite soon. There was something else that jumped out of me. He teased the minutes, which was the strangest thing. He wouldn't talk about whether the committee had talked about pausing, what that would look like, how much they had talked about it. But he did say that there will be more detail in the minutes which come out in three weeks. Why wouldn't he go into details. That's that was an interesting one. He The last time that happened from memory was last year on the subject of how they were going to do qut and he said it was very similar to that that. Well, we did discuss qute and you'll be finding out more about that in the minute um. And that was generally regarded as quite a successful piece of signaling and communication. They didn't want to hit people with everything all at once. I guess that's why. I guess, if you wanted a logical explanation, maybe it is that, in fact, they are feeling more dubbish than he wanted to let on today today. But it's also possible that they're actually more hawkish than he wanted to let on to day. Honestly, it was. It was quite a strange news conference talked to us about it wasn't the yield curve with saw the tenure yield come down from above three or around three below three or four. That was quite the move. It was a bit, I mean, that was more easying right there. Yeah, And well and the two year and yes, I mean cats continue to jump out of bags if you or if you if you want another version. You did see a significant weakening for the dollar. So the euro briefly got above one dollar ten cents for the first time since I think April of last year. And you know, obviously there's a very big deal with the ECB coming up to see whether that gets confirmed. That does ease conditions a little. You can see that as some kind of counteract because it does make it easier for people to sell stuff abroad exactly. Does also, however, hype up inflation a bit more makes important more expense, which is another reason why you wonder why he said that, why he did what he did. Javin Morgan, just to return sees one more basis point. Hikeers do a lot of people and then hold. But Jaf Morgan says, hold for a year. As you see conditions right now, would it take a year of holding to get rates inflation and the economy and to balance That's frankly been the scenario. I have been expecting a year of holding. If you remember back when Ben Bernanke stopped his hiking campaign that had gone on for years, started by green spanning eighty six, they kept the rate as I think it was five and a quarter five and a half, which is actually not at all dissimilar to way not too far away here. They kept rates there for over a year again and then everything fell apart because of the financial crisis. But that was one precedent. There's certainly no sign of the kind of ridiculous speculative activity going on in the economy now that there was then, and so less apparently risk of a really major accident resulting. So I don't think that's outlandish. I do think myself. And this is where I agree with J. Powell. It's just if I'm reading what he wants to do correctly, he should have said this louder and emphasized it more, or you do need to leave rates up there for a while. Otherwise you get into these logical self contradictions that you know that inflation will come down if rates stay high for a while, So why don't you preempt the rates coming down, with the result that inflation won't come down either. I therefore this I have more confidence about than the other things, unless there is a very much worse tumble into all out recession than currently seems likely. Because of course, the whole idea of a soft landing taking hold is because a lot of the data has suggested things are better than that's been fine. Yeah, then why would you reduce rates? They're historically not that high at all. There's still only just above inflation. Yeah, No, that's a great point. If something goes wrong, then they bring them down, as happened of course with Ben Banankey in dramatic style in two thousand and seven. But absent that, in which case you probably don't want to be holding stocks right now. Absently that, I think you expect to. I think one of my favorite economists predicted that the fit funds rate was going to grow roots at five and a quarter percent under Bernanke. And it did, and it wasn't that difficult to spot. There was just unless you have a clear reason to cut, you don't want to. And that's where I still think the market is wrong. But we will live in length. Bloomberg Opinions, John Author is there. We get more perspective on the central bank triple wammy this week in a moment from Mark Cranfield m Live Global strategist out of Singapore. You're listening to Bloomberg Opinion. I'm Vonnie Quinn. We get more perspective now on this week's central bank triple wammy. Here's Mark Cranfield m Live Global macro strategist out of Singapore. Mark Garfield Reynolds are Chief Asia Rates correspondent, talked about the fact that there actually might be a central bank put in the market again, that that might have been invited back this week. Do you agree with that interpretation. It's probably a bit strong, but it's certainly people are getting more confident that the major center banks that have fed with the inn CenTra Bank and the Bank of England, they get they themselves seem to believe that the inflation cycle is turning for the better, that is to say that inflation is falling, and they seem to be having a stronger conviction that that's the case. And obviously traders are taking heart from the one outlier, could be the Bank of Japan a lot with the pain and who has chosen as the next Bank of Japan chief And we probably know that in the next couple of weeks. But certainly as far as the Europeans, in the Americans concern that the center banks are acting much more favorably rewards risk assets than they were just a few months ago. And it was quite a surprise, particularly from the Federal Reserve right because we were anticipating that Powell would have to come out and at least school the market a little bit, if not out right slapped the market. Back, and he didn't. He actually said, you know, we're seeing some progress, and the market took it that way and rallied, I mean some of the industries rallied at least for once. It seemed like the market actually took him out his word. Yeah, I think he may regret using the word disinflation. I think that might be a bit premature, and that certainly sparked a lot of electivity in markets, particularly in the equity market. He could considering that the inflation numbers are still running something in the United States and it's been a gradual process of unwinding that and it's still the major issue for him to address. And he has also said that there's more rate heights to come, so he may be getting a little bit of head of himself there and he may have chosen better wording than that, And for the time being, it's got the market very excited. Of course, we've got lots of data coming up between now and the next meetings, so it's not going to be one way traffic by any means. There's going to be some bumps along the road, and we're going to hear more from other Fate speakers as well. They could push back. Some of the more hawkish members of the Federal Reserve, they want to push against that a little bit. They don't want markets getting overconfident. Before I said, has really finished their job of getting weights to where they want them to. Well, interestingly, we had a couple of high profile people signal this in advance. So we had Paul Krueman saying, you don't want to give any room for inflation to come roaring back. We had muhammadil Area and at some point also talking about how this is a time where the fat has to be very, very very careful. It really didn't seem like Powell was being that careful the other day. I think that that probably tells you more about who trades us listening to than anything else. I think, with all due respect to those kinds of pundits, I think traders have learned, especially during the process of the past couple of years and trying to train inflation, as far as that they is concerned, there's only really one band accounts. That's your own power, and you have to listen to what he says and look at what he does. And equally in other central branks as well, I think people have realized that you have to take the head of the central bank, and your senior people take them much more seriously and give a lot more weight to what they have to say than any outside voices. You may come across the ten Your yield dropped a below three forty from above three fifty, and we saw some other moves across the curve as well. Is there any chance that the third is a little concerned about recession, that that's why we're seeing lower rates. That's traders. That's not the face ye curve that you see his traders hedging, and it's not a particularly expensive way of doing it. So if you think that the fad is not going to be able to achieve a soft landing, if it's going to be more like a hard landing, the traders to take a defensive position through the yield curve is not too bad, particularly through derivative space. You can do that without a huge cost, especially if you're hedging it, say by being long equities or short the US do as well. So if you don't want a portfolio approach, it's not too bad. So really, what that's telling you is there's a number of people who've got portfolio bets as a kind of insurance in case the FED has made a mistake. I think we'll see that to get brantually get unwound, because I think one thing you can rely on is that when the FAID tell you they want to hold short term interest rates high for a long period, that is probably exactly what they need. So even if whether they stop rates at five percent or five and a half percent, once they get there, they don't plan to drop rates. I think that is the part which is probably the market has probably got wrong, is that there's going to be a rate cup this year. That's extremely unlikely. That process will slowly come out of the market. It's not going to come out all in a rush, because we've got a few head meetings to come, and gradually people will realize they can take the said that their words, they're going to hold rates. From where you stand right now, how long would the third have to hold rates for? Is it possible to even prognosticate? I think they intend to do it for the rest of this year, at least that is their aim. But we've seen in the party look previous cycles, particularly say for example, after the Internet double burst in the early two thousands, but took quite a while before they changed their hill rates for a long time. Then they finally moved about a year after the bubble burst. But when they did start to move, they cut rights quite quickly, and there was a series of weight cuts. So that probably means that if the equality er performs, if we do get the kind of hard slowdown which is possible, or we get a slowdown which that they thinks is too extreme, and maybe in the first quarture of next year, you'll start to see the rates coming down, and when they do, they'll probably be a succession as they cut after that. Mark. Did you find it odd that when Powell was asked about the discussion around the pause, that he wouldn't go into detail, but that he teased the minutes. He said, the minutes coming out in three weeks will tell you a lot more. Why make traders and investors wait for the minutes to hear more about the pause? Why not talk about it this week? He probably wants to make sure that he doesn't give any wrong impression that people can suddenly jump upon. There is probably a consensus has probably formed within the Federal Reserve, and he probably wants to make sure that everybody is on the same page. Exactly what that kind of sense as if the other wants a front run any opinions on that, and he doesn't. He knows that when he's when he speaks in public, there's always the risk of people misinterpreting what he has to say. Is particularly when the headlines are triggered that are then read by AI machines and by other trading systems, which will immediately react to certain words in headlines. So if he sends out something that has the word pausing it, you can probably think of an extreme reaction in markets, which he doesn't want to see. He wants people to see the full message, not just one or two words. He wants them to understand if the fact I've had the full discussion on a pause, he wants you to know exactly what that discussion was. That's such an interesting point. Finally, anything surprising to you out of the e c B or b E. I think if it was a surprise, it was that the ECB was able to be so clear on what they said more or less told you that for the next meeting, they're very confident they're going to raise rates fifty basis points again, which is unusual to project that far. Into the future and they've given markets certainly a reasonable hint that that there could be the last one in the series. The Bank of England also seems to have given very good guidance that they're very close to finishing. They possibly have finished with great heights as well. That's a lot more than central banks have been telling us for some times. So that's why you've seen a strong reaction. For examples, you look in the French change market. The euro is very strong against the pound because people are now assuming that the rate differential between euro yields and spelling years could narrow quite significantly over the next few months. That's probably not something that people expected before. This week and Live micro strategist Mark Cranfield, they're out of Singapore statues and Shulei Wren joins next on the incredible story of a Donnie Group fighting the short seller. This is Bloomberg Opinion. You're listening to Bloomberg Opinion. I'm Vonnie Quinn. Now to the incredible story of Hindenburg Research versus the Indian industrialist tycoon. Go to Madonnie's a Donni Group. Over the course of a handful of trading sessions, Hindenburgh's allegations that a Donnie Group is pulling off the largest Cohn incorporate history percolated through markets and caused a Donnie Group shares and bonds to take a severe tumble Bloomberg opinions. Shuli ran As followed Asia nation builders for some time, as well as the dollar bond traders they tend to attract. She joined for some perspective. So, Shuli, this is an insane story and it's picked up steam. First of all, tell us how much does a Dannie Enterprises depend on outside investors? Quite a bit? Surprisingly so, Adannie has been very good at having on two global investors well their industrial adventure. For instance, they're doing a lot of in energy stuff like going hydrogen so and so forth. So over the years, about thirty percent of Adanni's financing is denominated in foreign currencies. They have borrowed extensively on the dollar bank market. They have also thought something from foreign banks in their overseas expansion. So quite a bit. At first glance, it didn't seem like this was going to hurt Adanni too much, this Hindenburgh research report. Perhaps the Adanni Enterprises group was too big for something like this to actually have an impact. Now it seems like it might actually succeed. Adani had to pull a share sale for example, explained to us what you see going on? To be honest, I was very surprised because I have been covering, you know, Chinese conglomerates for a decade as a journalist and then what we've seen, which China's h and a group unbound and kinda ever ground group. Yeah, like all these companies they had a received their short sellers reports for years, right, they didn't humble. The only humble that when the political wind in Beijing change, you know, like when China decided to crack down on private enterprises that did a lot of overseas skills a China fell in one when China was doing the real estate developer cracked China Evergrand group here. So I was, to be honest, very surprised. And I will have to say that it says something about the Indian market as a capital market. I mean, China is very opaque. Foreign investors basically play the Beijing's game, right, They basically play along with Beijing's political agenda, where it seems they have more sway when it comes to Indian companies, so I was quite surprised. And also adone has quite a bit of oversees something I'm talking about thirty percent. Now, how similar is the Adani story to the likes of China Evergrand other companies like that. It's not really a public company, but we're seeing a different public market reaction. Yeah, it's interesting because in many ways they're very similar. Right. They're very heavy leverage, thether conglomerates using perhaps one cash called subsidiary to fund new business ventures of other business arms. So it's one humble the others work for as well. They are also very much family one, right, Like of the shares are held by company insiders, brothers, sisters, everyone is in it. So in many ways they are very similar. But I think Adani is a bit more international than the Chinese ones in that, you know, like they have received funding from everyone. And also Dani, believe it not before the Hindenberg report is do investment grade. Their dollar bombs are all rated as investment grades, whereas the Chinese ones they were always high yled. So whenever there is a little bit of a gendering I imagine investment grade funds they will panic a little bit more right, high yold traders, they always knew what they were going to. Whereas if you have very blue chip as a managers that were made by into bombs that have very little risk, if they see this kind of headlines they were thought to sell. We'll see how long that last. Because bonds of the Flagship and Danni enterprises have plunged now to the stress levels for different ports bonds hit distress levels this week. Green Energy bonds also declined. They didn't reach the stress level, but they're not far off it, so we'll see how long those ratings last. How much has got a Madani himself concerned right now? Is there something that the Indian administration can do? Will he be calling Prime Minister Modi? For example? They are very well known to be literally close, although Alarney has said that that he has not received any favors from from the Modi government. I mean he has to be very very worried because his whole business endeavor depends on funding. He's trying to grow his business on many funds, right, ports, airports, green Hydrogen, all of them need money, so was their funding channel thoughts. He's in big trouble, so I think he has to be very worried right now. And going back to the bunk issue, if you look at all these ADONNEI dollarbams sports to bring energy to the Mumbai subsidiary, they're all investment grade. So if one of the rating agencies found grade into high yield, Adanni will be a fallen angel. And then we're no longer talking about three to five percent something because we're talking about a ten percent. So he has to be very, very worried right now. Surely why our investors pulling out? It's likely that there are some extraordinarily valid statements in the Hindenburg research report. At the same time, we all know how some of these companies operate in markets like India's. Were investors concerned that this would pick up steam? What would make themselves? I think they're true conferent investors were talking about for instance, overnight we saw the news clip about Norwegian solving from they actually were always under way Adani because they just didn't feel very good about it. I mean a lot of Adonis foreign investors. They are yes, chief fund because he is doing the green energy evening right, That's why they're bodying. But yes, chief funds are very worried when they are this kind of global headlines accusing Adanni of disball corporate governments, because yes, she is not just environmental, it's also governments, so they can be very worried. And an another thing is going back to investment Gray Thompson. As soon as Aganis bounds are downgraded into high yells, they have to sell because it's their funds mandate, right, So there's probably some concern that that's going to happen soon and they want out before that happens. Now, a share offering was also pulled. It was a two and a half billion dollar share offering that Adanni says was fully subscribed. It was a fascinating week because Jeffreys was part of the underwriting syndicate. So there was some speculation that if Jefferies did its due diligence, particularly after this report, that Jeffreys would have to pull out before any of that may or may not have happened. Adannie pulled the share sale. Why pulled the share sale if it was fully subscribed thanks to some Indian and golf investors, According to a Dannie, So I did some reporting on my end and here's what I heard, Like your true series right once. That's the more damaging one is that Danny didn't even have one billion dollars to buy up this year himself. I mean, the whole sear sal it's only two point five billion. One point five billion was already subscribed by investors from a middle US et cetera. Right, so he just needs another billion. So that's the more damaging theory. But what I heard on the street is that, you know, like the years there was at over three thousand rubies per share, and then the actual market price is at true Thouland, it's one third bid old below what Danni is asking investors to buying it. So they probably just didn't want to, you know, cause troubles down the road that they don't want to have discruntled investors saying why am I buying these shares at pre Tholand will be a piece when in the marketplace I can buy for two thousand, So that's why they pulled. Wow. Now, India's massive country. Obviously a lot of this infrastructure is needed and we'll get built at some point. Is there a better way? I mean, somebody like Dannie comes along and decides he's going to do it all, isn't there political support for that because at the end of the day, it helps GDP growth. It needs to get done anyway, somebody needs to take the reins. Why would short seller's report, even if the shares are overvalued, even if there's all sorts of opaque subsidiaries and so on, why would that really matter in India? Well, I think it was a part of India's world story. I'm still seeing what happened to China. You know, global investors just lots a little bit face engaging and still actually fleeing through India, which also has one point for billion population, but it's population is younger and it's future prospects that brighter. Right, And then I think that right question to us is is there a better way to buy into India's growth stories other than any Yeah? Is there? Um? I think unfortunately it is not, Yes, not for now? Right? So what do investors do or what does India do? More importantly, I don't know. That's a really good question. I think the problem with India is that the growth potential is all there, but the valuation is just very expensive. Adoni, of course is an extreme case, but if you look at everywhere, you know, the Indian banks are way more expensive than the Chinese ones, and you can say, well, how about their that long exposure? What if the likes of Adoni blows what they will be also saddled with that? Why are they training at three or four times book value when the Chinese ones are trading at zero point five? Yes? Right, So I think the India's problem is its valuation. And in a way, if you're buying to India, you're kind of buying to an option, a core option, which fundamentally it's just very volived her. Surely, is it possible that there's all backfires eventually on the Moody administration or is it shielded from anything that happens with a large conglomerate. I think a point kids showed it right. He just needs to stay on the sidelines and see how it's going to unfold. I mean, of course the opposition party will point to his relationship with Adami, but so far he's showed it. And if you look at his budget, he's trying to cater to India's rising middle class. We're talking about over four hundred million people here. I think politically he is quite well established. Will he drop a Dannie if necessary? That's a very good question. I mean they found experience in China. I mean the Chinese government doesn't care what global investors have to say, right, Like, going by the China experience, he wouldn't care that India could be different. I mean Americans that are still India's biggest customers. Right. The Mouldi Lady in India dream has to be funded by a lot of U S dollars, so maybe he might. One of the Boomberg opinion editorials pointed out this week that if Dannie hadn't existed, India would have to invent him. Who or what would replace Adanni if somehow this ends up bringing him down or bringing part of his enterprise down, So it would be another entrepreneur who's willing to fast track India's industrial world like Adoni. It's not a Danny Pusson, but it has to be a private entrepreneur. I Thinkia works quite differently from China. I mean China's infrastructure spending, a lot of it is public money, right, But India still realize a lot on the private sectors. So somebody else who is ambitious fast charging will come and do what Adoni cannot finish. Couldn't done get help from the market. So if there was a re raising or a revaluation of his enterprises, would that help him eventually. I think there's just a lot of interesting Adonis funding stock right now, especially with the dollar bums. But it's not what I heard from, you know, dollar bound traders. A lot of them were looking like that. You can see the flow from brokerages. They were saying that so called real money funds have been selling. Basically those long only investment grade SM managers. They've been selling for a couple of days because they were very worried, right Swedish. But while the hedge funds have been buying, they just think it's a really good deal. You know, if Adani is trading avery, say sixty cents a dollar, maybe they just don't see that it will fail completely. So this is a very interesting jostle. On the one hand that there are new trip funds that are worried about s G. On the other hand, there are more risks youking, hedge funds looking to make them quick returns. And that's why you see the bandmarkets. They're very bullet high, can trade up and down twenty points daily. That's fascinating, and Trulie, did anything jump out at you from the Handenburg research report that it would be very easy to prove or that seems correct? I think to me the accusation about some manupulation is correct because they were saying, basically, according to the Indian security law, if you have insiders holding more than seventy of a company stock, that stock has to be delisted because there's two little publetful and it's too easy for stomb lint relation. So what Hindenburgh said is that adam l insiders used opaid overseas financing vehicles to buying to Adonisius a hundred percent of fun buying too Admi sious, which seems to me pretty unlikely. You wouldn't put a hundred percent of your money into this one stock, right, So to me, that's quite believable. Surely have we ever seen something like this before where a short seller, you know, Hindenberg Research in this case, a pretty small shop takes on basically an entire nation's growth story. No, I haven't, hinden there is quite an amazing company. I mean, it is only five year old that it's found that it's not even forty years old and it is quite amazing. Bloomberg Opinions Shui Wren. As always, we love to hear from you. Do send us an email at v Quinn at Bloomberg dot net. We're produced by Eric Mullow and Saralyzing. This is bloom Bring Opinion. I'm Bommy Quinn. Stay with us. Today's top stories and global business headlines are coming up right now. M

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