August 12 – August 18, 2016

Coming to a bank near you – fees on big deposits



    • “Almost half of the shadow banking products that have fueled China’s credit boom carry an ‘elevated’ risk of default, the International Monetary Fund has warned in its annual review of the world’s second-largest economy.”
    • “‘Wealth management products’ that allow banks to channel credit to local governments, property developers and industries struggling to access normal bank loans grew almost 50% to Rmb40tn ($6tn) last year, according to the IMF’s annual ‘Article IV’ review.”
    • “While the IMF noted that China’s big four state banks have relatively small exposure to wealth management products, it added that ‘several other listed banks and [unlisted banks] in aggregate have exposures that are several times their capital.’ Just over Rmb15tn of China’s outstanding wealth management products are held by banks, accounting for 8% of their assets and more than 90% of the capital buffers that protect them from losses.”
    • It’s not all bad, just part of the process of the downshift.
    • “All told, there have been 188 settlements since 2009, costing $219 billion, according to KBW, an investment bank. “
    • “Eleven firms have paid fines in excess of 10% of their market capitalization, with Bank of America having spent the most in absolute terms ($77 billion) and in relation to its net worth (50%).”
    • Economist_Bank settlements_8-13-16

Special Reports


FT – Banks look for cheap way to store cash piles as rates go negative – Claire Jones and James Shotter 8/16

FT_Negative rates in Europe_8-16-16

FT_How to store the cash_8-16-16

The Economist – Purchasing power: More bang for your buck 8/13

Economist_US purchasing power by state_8-13-16

Bloomberg – Norway Oil Fund Looks Into Trimming $520 Billion Stock Portfolio – Mikael Holter and Sveinung Sleire 8/17

Bloomberg_Norway SWF flows_8-17-16

Economist – The world’s most liveable cities 8/18

Economist_World's most liveable cities_8-18-16


*Note: bold emphasis is mine, italic sections are from the articles.

German bank charges negative rates on large deposits. James Shotter. Financial Times. 11 Aug. 2016.

The longer negative rates stick around and the deeper they go, expect more of this to follow…

“A Bavarian bank has become the second German lender to say it will levy a negative interest rate on private customers’ deposits, in the latest sign of the strain that the European Central Bank’s monetary policy is putting on the country’s financial system.”

“In an effort to boost the eurozone’s flagging economy, the ECB has slashed interest rates to record lows, and, since March, has charged a 0.4% fee on excess deposits left with it by eurozone banks.”

“The co-operative bank in Gmund am Tegernsee, a small municipality about 50km south of Munich, said that from September 1, it would levy a ‘custodian charge’ of 0.4% on deposits above 100,000.”

“The decision follows a similar move by Skatbank, a small German co-operative bank in the east of the country, which introduced negative interest rates for private clients on balances above 500,000 in 2014.”

“German banks are considering a variety of strategies in response to the low interest rate environment. These range from introducing fees for services previously offered for free, such as paper account statements, to keeping cash in vaults rather than parking it with the ECB.”

Other Interesting Articles

The Economist

Bloomberg – Barrack Says U.S. Real Estate Market Is Getting ‘Bubblicious’ 8/15

Contra Corner – The Daily Data Dive: Since 2007 Stocks Up 54%, Industrial Production Up 0.6% 8/18

Economist – Vladimir Putin’s powerful right-hand man steps down 8/12

FT – Investors stockpile cash to offset economic despair 8/11

FT – Record-breaking US stocks are a sideshow next to bond bonanza 8/12

FT – ‘Irrational exuberance’? Beware Bond Tantrum II – BAML 8/12

FT – London rents fall for first time in six years 8/15

FT – The end of deflation in China will be felt around the world 8/15

FT – Irrational exuberance begins to surface in US stock market 8/17

FT – Dollar hedging costs rise for yen and euro investors 8/17

FT – Hedge fund investors push for ‘hard hurdles’ 8/17

FT – If peak oil (demand) arrives, investors will need to get smarter 8/18

FT – South Korea in show of power as tensions rise with North 8/18 – SL Green Sells Stake In Midtown South Office Tower 8/11

NYT – Trillions in Murky Investments Could Rock China’s Economy 8/12

Reuters – Billionaire investors turn bearish as U.S. stocks hit record highs 8/15

WSJ – Pumped Up: Renewables Growth Revives Old Energy-Storage Method 7/22

WSJ – How Junk Bonds Can Look Attractive and Scary at the Same Time 8/17


August 5 – August 11, 2016

It’s a low-growth world for us…instead of high returns, we get zilch… Thus it is no surprise that funds are being pushed back to emerging markets in a big way.



    • Blackstone Group ($356bn in assets) is getting into the nontraded real estate investment trust business. Its first nontraded REIT – The Blackstone Real Estate Income Trust Inc. – was just registered on Wednesday.
    • The REIT is looking to raise $5bn and its manager “will receive a fee of 12.5% of the REIT’s total return after meeting a 5% hurdle.”
    • “Capped at close to 9%, the cost structure of the new Blackstone REIT is clearly different than the traditional full-commission nontraded REIT sold mainly by independent broker-dealers such as LPL Financial and Ameriprise Financial Services Inc. Such REITs typically carry loads of 12%, including a 7% (fee) to brokers at the time of sale. Nontraded REITs have been routinely criticized for their high fees and opaque cost structures.”
    • “Look for Blackstone to shun the traditional marketplace of independent broker-dealers and turn to wirehouses such as Merrill Lynch and Morgan Stanley, with whom they already have business relationships…”
    • “Central banks have always been able to make waves in markets. But never have they had such far-reaching effects, nor so quickly. The world of bonds is being turned upside down as a result.”
    • “The pull to par has become a drag: a buy-and-hold investor is guaranteed to lose money, even before taking inflation into account. The only way to make money is to find another buyer willing to pay a higher price – but that implies a bigger loss down the road.
    • “Germany now has more than 160 billion of zero-coupon bonds in issue. All of its two-year notes pay no interest, along with three of its five-year notes; all of them trade above face value.”
    • WSJ_German bonds becoming pricier_8-10-16
    • “The crucial thing to understand is that these instruments are no longer bonds – at least not in the traditional sense. With no income attached to them, they are simply bets on the price another investor is willing to pay. They will also be more volatile: the long wait for repayment means small changes in yield will have a big effect on current prices.”
  • Liyan Qi of the Wall Street Journal added context to China’s efforts to reduce the population of Beijing.
    • In an effort to reduce the problems from rapid growth and overpopulation, Beijing is seeking to push out residences to neighboring provinces such as Hebei and Cangzhou (see map).
    • WSJ_Cutting China’s Capital Down to Size_8-10-16
    • “Despite the city’s efforts to keep a lid on population growth, greater Beijing now has almost 22 million people, an increase of some 6 million in a decade, official data show. The central area, comprising of six districts grew at an average rate of 414,200 a year over the same period to about 13 million.”
    • “Municipal leaders’ latest five-year plan aims to keep greater Beijing’s population under 23 million and to shrink the urban center by 15% by 2020, effectively pushing out some 2 million people – roughly equivalent to excising more than the population of Manhattan from New York City and dispersing those people elsewhere.”
    • “The strategy is to move low-end businesses such as wholesale markets, to Hebei-the province surrounding Beijing where growth has flagged-and coax people to follow.”
    • Just think what will happen to real estate prices when you push out that much demand…but then again, the laws of economics are generally suspended in China.

Special Reports


WSJ – Companies Routinely Steer Analysts to Deliver Earnings Surprises – Thomas Gryta, Serena Ng and Theo Francis 8/4

WSJ_Managing earnings expectations_8-4-16

FT – Best coast tech is top and looking to the clouds for growth – Richard Waters 8/4

FT_Rise of the tech giants_8-4-16

Bloomberg – Manhattan Luxury-Condo Glut Ends Developer Rush for Land Deals – Sarah Mulholland and David M Levitt 8/3

Bloomberg_Manhattan Land Deals_8-3-16

FT – US economy: Decline of the start-up nation – Sam Fleming 8/4

FT_US Startup density_8-4-16

FT_20 counties generating new business_8-4-16

FT_Fewer young companies_8-4-16

WSJ – American Paradox: It’s Never Been Cheaper for Cities and States to Borrow Money…And They Refuse to Do It – David Harrison and Heather Gillers 8/7

WSJ_US Municipal borrowing_8-7-16

WSJ – Are Negative Rates Backfiring? Here’s Some Early Evidence 8/8

WSJ_Negative rates having unintended effects_8-8-16

WSJ – Productivity Slump Threatens Economy’s Long-Term Growth – Ben Leubsdorf 8/9

WSJ_Declining US Labor Productivity_8-9-16

FT – US bonds: where credit is due – Lex 8/11

FT_Credit Statistics for US debt issuers_8-11-16


*Note: bold emphasis is mine, italic sections are from the articles.

We’re in a Low-Growth World. How Did We Get Here? Neil Irwin. New York Times. 6 Aug. 2016.

“Slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2% a year from 1947 through 2000 – but starting 2001 has averaged only 0.9%. The economies of Western Europe and Japan have done worse than that.”

NYT_Growth lower than projected_8-6-16

According to a new analysis by the McKinsey Global Institute, 81% of the United States population is in an income bracket with flat or declining income over the last decade. That number was 97% in Italy, 70% in Britain, and 63% in France.”

NYT_Annual per capita GDP over preceding 10yrs_8-6-16

“An entire way of thinking about the future – that children will inevitably live in a much richer country than their parents – is thrown into question the longer this lasts.”

Bottom line, people are working fewer hours and there is less “economic output being generated for each hour of labor.”

Investing: The great escape. Jonathan Wheatley and James Kynge. Financial Times. 7 Aug. 2016

“The latest growth forecasts from the International Monetary Fund offer some optimism. It expects the pace of gross domestic product growth in emerging markets to increase every year for the next five years while developed markets stagnate.”

“But in truth emerging markets are growing from a shrunken base and a big part of the upturn is not due to things getting better but to things no longer getting worse. Big economies such as Russia and Brazil, for example, in deep recession for the past two years, are finally heading back to growth.”

FT_Investors flood into EMs_8-7-16

“Fund flows to EMs have gone through the roof, but this is best described as [the result of] push factors rather than pull factors.” – Peter Kinsella, head of EM research at Commerzbank

“The EM bond rally is really a global fixed income rally.” – David Hauner, head of EM strategy at Bank of America Merrill Lynch

BlackRock’s ($4.6tn money manager) Sergio Trigo Paz, head of emerging markets fixed income, “who changed his view on EM bonds in February, describes what is happening now as a ‘capitulation’ – a realization by big institutions that they can no longer afford to ignore the returns on offer in emerging markets, which have been as high as 13% in the year to date.”

“The impact of such flows on EM sovereign bond prices, which have risen 15% this year, has been amplified by the fact that the asset class is small. An estimated $12tn of developed market government bonds now offer yields of less than zero, while their emerging market equivalents add up to about $800bn, so their ability to offer an alternative is limited.”

“For now, the pressure on prices has all come from buyers and for those who got in early the returns have justified the risks. The trick will be to know when to head for what could quickly become a very crowded exit.”

Other Interesting Articles

The Economist

Bloomberg – Retail Outlets Are on the Outs 8/4

Bloomberg – There Are All Kinds of Signs of a High-End Real Estate Slowdown 8/10

Bloomberg – Blackstone Enters Nontraded REIT Market With $5 Billion Fund 8/10

FT – I’m from the central bank and I’m here to help 8/4

FT – Oil and gas downturn spells trouble for Singapore 8/7

FT – Demand drives $3bn Mexico bond deal at record rate 8/9

FT – Advisors quash Puerto Rico creditor differentiation 8/9

FT – China takes a gamble in scapegoating the west 8/11

InvestmentNews – Inland Real Estate Investment Corporation eliminates transaction fees on its nontraded REITs 8/9

NYT – New Photos Cast Doubt on China’s Vow Not to Militarize Disputed Islands 8/8

NYT – Chinese Tech Firms Forced to Choose Market: Home or Everywhere Else 8/9

WP – Venezuela’s death spiral is getting worse 8/8

WSJ – When Chinese State Support Evaporates on Investors 8/8

WSJ – New Rules and Fresh Headaches for Short-Term Borrowers 8/8

WSJ – WeWork Misses Mark on Some Lofty Targets 8/9

WSJ – The Typical Home in San Jose Now Costs More Than $1 Million 8/10

WSJ – Lopsided Housing Rebound Leaves Millions of People Out in the Cold 8/10

WSJ – Why China’s Bond Market Rally Is Risky Business 8/10

Yahoo Finance – Macy’s plans to close 100 stores, boost online investment 8/11

Zero Hedge – August Corporate Bond Issuance Breaks All Records Thanks to Relentless Demand For Yield 8/8


July 29 – August 4, 2016

Insurers having to rethink their business model. India makes a giant leap forward in tax reform.



    • “Sovereign wealth funds are investing less money directly than at any time in the past five years. This marks the end of a safety net whereby state-backed vehicles mopped up assets in times of market stress, according to research.”
    • “The Bocconi report found that state funds invested 48bn directly last year, down 57% from 112bn in 2008.”
    • “Given the low oil-price environment and lower revenues for oil producers, [state funds] no longer have the cash positions to get into the markets once they correct.” – Sven Behrendt, managing director of GeoEconomica, a consultancy
    • “What if all Londoners, no matter how young or frail, smoked for at least six years? In effect, they already do. The city’s air pollution exacts an equivalent toll on each resident, cutting short the lives of nearly 10,000 people each year and damaging the lungs, hearts and brains of children.”
    • Bottom line, more needs to be done to track and publish long-term air-quality indexes similar to the existing short-term gauges that people and cities can utilize to alter behaviors and make informed life choices.
  • Jonathan Wheatley of the Financial Times called attention to the demand that Emerging Market bonds have seen as the world has become devoid of ‘safe’ income yielding products.
    • “With an estimated 30% of global government debt now offering yields of less than zero, he (Daniel Senecal, head of credit research at Newfleet Asset Management) says traditionally conservative investors are being pushed into new areas.”
    • “If you’re a pensions guy you have to do something. With German 10-years at zero, you need to change your mindset. Your whole view migrates into US high-yield and EMs.” – Daniel Senecal
    • Geez it’s a tough world to invest in right now…

Special Reports


WSJ – Why Bank of Japan Dipped Into Bag of Small Tricks 7/29

WSJ_Why Bank of Japan Dipped Into Bag of Small Tricks_7-29-16

Visual Capitalist – The Rise and Fall of Yahoo 7/29

Visual Capitalist_The rise and fall of Yahoo_7-29-16

Economist – Comparing urban air pollution 8/1

Economist_Nitrogen dioxide city comparison_8-1-16

FT – Japan launches $45bn stimulus package – Robin Harding 8/2

FT_Japan stimulus_8-2-16

FT – Emerging market bonds lure investors seeking yield – Jonathan Wheatley 8/2

FT_EM sovereign rally_8-2-16

WSJ – Bank of England Cuts Key Interest Rate to New Low 8/4

WSJ_Bank of England rate reaction_8-4-16


*Note: bold emphasis is mine, italic sections are from the articles.

Insurers: Forced to dig deep. Oliver Ralph and Alistair Gray. Financial Times. 1 Aug. 2016.

“Insurers globally are having to come to terms with the idea of ‘lower for longer’ interest rates, making deep changes to business models that had been unaltered for decades. Whereas previously they might have clung to the hope that higher rates were around the corner, there is a realization that the industry has to do things differently – from investing in assets that might once have been seen as too risky, to experimenting with new products.”

As to how much cash are we talking about, PwC estimates that by 2020, insurance companies will manage about $35tn worth of assets.

“Traditionally, much of that has gone to relatively safe homes, such as bonds. At the end of last year, bonds made up about 68% of US property insurers’ total investments and 76% of life insurers’, according to S&P Global Market Intelligence. When those bonds offered decent yields there was no problem. Insurers could fulfill promises to customers and still have plenty left for shareholders.”

But “by last year the net yield on US life insurers’ overall invested assets had fallen to 4.7% – about a quarter lower than 2002 levels.”

Hence, the performance of US life insurance companies has tended to move in tandem with the 10-year Treasury yield…

FT_US life insurance companies and bond yields_8-1-16

In regard to attaining higher returns, insurers can either take on higher risks or tie up cash for longer.  “Many prefer the latter, investing in more illiquid assets such as property. UK insurer Aviva says 80% of the new investments it is making to back its annuity business will be in long-duration assets rather than traditional gilts or corporate bonds.”

“Infrastructure investments are particularly popular as they offer the long-term cash flows life insurers need to back their promises. Germany’s Allianz, for example, is one of the main backers of London’s £4.2bn supersewer.”

Consider the alternative…“Nobody likes to invest at negative yields but life insurers have so much cash that they need to invest, and they need to do something with it.” – James Peagam, head of global insurance solutions at JPMorgan Asset Management

As to the other side of the equation, ‘new products’ or raising premiums, this is already underway.

“Life assurance customers may see the biggest changes. For decades, the industry has offered savings and retirement products that offer guaranteed minimum returns. In the future, these may no longer be on offer.”

“This would be a major shift. In the US, products with guarantees account for 60-80% of the US life insurers’ balance sheets, Moody’s estimates. The average outstanding guarantee is returning between 2% and 4%.”

The replacement product: “unit-linked products. These make no promises: customers’ investments simply rise and fall with the markets. They are similar to traditional asset management products.”

Which of course puts them in direct competition with traditional asset managers that are facing a major business model challenge from low-cost index fund companies like Vanguard and BlackRock.

“As Jon Hocking, an analyst at Morgan Stanley, points out, the unit-linked model distances insurers from their customers. ‘The risk is that you open Pandora’s box and the industry loses its dominant position in the long term savings market. The customer chooses between products and the only distinction is the fund performance” and fees…

So which insurers are under particular pressure, in the US these are the companies specializing in long-term care (“low interest rates have exacerbated the problems caused by rising treatment costs”) and those that have sold ‘universal life’ protection (“policies that combine death benefits with tax-advantaged savings”).

“Transamerica, a large US provider, is being sued by the advocacy group Consumer Watchdog on behalf of policyholders who bought coverage decades ago. It said consumers who had been offered guaranteed interest of at least 5.5% a year had been stung by premium increases of almost 40%.”

India’s economy: One nation, one tax. Economist. 4 Aug. 2016.

India just passed a new goods-and-services tax (GST) that will “unify the country’s 29 states and 1.3 billion people into a common market for the first time.”

“Few countries are fiddlier than India when it comes to paying taxes; the World Bank ranks it 157th out of 189 for simplicity… Because the rates differ between states, making stuff in one and selling it in another is often harder within India than it is in trade blocs such as NAFTA or the European Union.”

“That should change with the GST, essentially an agreement among all states to charge the same (still to be decided) indirect tax rates.”

“Better yet, the GST will be due on the basis of value added. That avoids businesses being thwacked by taxes on the entire value of the products they buy and sell rather than the value they create – a situation that often made it cheaper to import stuff rather than make it locally. Just as importantly, by requiring businesses to document the prices at which they buy inputs and sell products, it will force vast swathes of the economy into the reach of the taxman.”

The tax is supposed to be enacted in April 2017. There is a lot to be buttoned up by then and chances that exceptions will be inserted; however, it is good step forward and has the chance of boosting India’s GDP by 1-2 percentage points.

Other Interesting Articles

The Economist

Bloomberg – Rich Investors Fear Fortunes Will Fade While They’re Playing Golf 7/28

Bloomberg – Fragile U.S. Economy Now Facing a Slowdown in Building Boom 7/31

Bloomberg – Allianz Buys Stake in Manhattan’s 10 Hudson Yards Skyscraper 8/1

Bloomberg – Where First-Time Homebuyers Can Go Big 8/2

Fast Co. Design – An Exclusive Look At Airbnb’s First Foray Into Urban Planning 8/2

FT – The US student debt bubble is a study in financial dysfunction 7/29

FT – Ant’s Alipay challenges China Unionpay’s dominance 7/31

FT – US $18bn credit card debt spree sparks fears 7/31

FT – WTI closes in bear market 8/1

FT – Microsoft sells $20bn of debt to fund LinkedIn Deal 8/2

FT – European bank shares fall in brutal start to August 8/2

FT – Star designers side with Apple in Samsung patent case 8/4

LAT – As new apartments flood downtown L.A., landlords offer sweet deals 8/3

NYT – Harnessing the Immune System to Fight Cancer 7/30

NYT – Zika Cases in Puerto Rico Are Skyrocketing 7/30

NYT – Russia’s Acres, if Not Its Locals, Beckon Chinese Farmers 7/31

NYT – Bank of England Cuts Interest Rate to Historic Low, Citing Economic Pressures 8/4

WSJ – The Divide Between GDP and Jobs 7/29

WSJ – Uber in China: Why Foreigners Never Win in Tech 8/1

WSJ – Chinese Head to the Web to Feed Infants 8/2

WSJ – Why Investors Everywhere Should Watch Japan’s Bond Market 8/2

WSJ – Rio Projects Fail to Reach the Finish Line 8/2

WSJ – Chinese Insurers Need Another Leg to Stand on 8/3

WSJ – What Oil in the $40s Means for Oil Majors 8/4

WSJ – London Falls Behind New York and Hong Kong in Most Expensive City Rankings 8/4

July 22 – July 28, 2016

How much spare crude oil is there – hard to tell.  Nontraded REIT sales struggling.  There are a lot of dangers lurking in the Chinese P2P market, but the yield is just SO GOOD…



    • Chinese wealth management products are looking a lot like the junk bonds used for corporate raiding in the late 1980s rather than the traditional insurance policies they are supposed to be.
    • “China’s insurance regulator has warned against insurers becoming ‘automatic teller machines’ for activist shareholders, in a veiled reference to the battle for control of China Vanke, China’s largest residential developer, by insurance conglomerate Baoneng Group.”
    • “We will let those that truly want to do insurance come and do insurance and absolutely not allow companies to become financing platforms and ‘ATMs’ for large shareholders.” – Xiang Junbo, chairman of the China Insurance Regulatory Commission
    • “There are major regulatory gaps that need to be addressed. These ‘universal’ products have absolutely nothing to do with insurance. Some of them are very risky, but commercial banks are distributing them, and people trust the banks.” – senior financial regulator
    • With Puerto Rico facing approximately a $2bn interest and principal payments due on its general obligation bonds on July 1 and not being able to make the payments, the U.S. Congress recently passed a law that was meant to give Puerto Rico a temporary reprieve from “legal sanctions by creditors so it could restructure its obligations in an orderly way, and to maintain essential services.”
    • Well, Puerto Rico took this reprieve to pay about half of the amounts due, only they chose to whom went the payments.  “Puerto Rico did not pay any interest or principal on the most senior, or general obligation bonds, but did make payments on more junior bonds. The government also paid its employees’ pension funds $170m more than what was required for this year, despite the pensions supposedly being legally subordinated to bondholders.”
    • The thing is that US Treasury officials advised on some of this reprioritization… you can see the dangerous precedence this sets for municipal bonds…
    • “The bonds on which interest payments were made on July 1, such as the Puerto Rico convention center district and the Puerto Rico Highways and Transportation Authority, are disproportionately owned by bondholders on the island. Supposedly more-sophisticated mainland US investors had avoided these lower ranked issues on the misinformed premise that financial and legal analysis should outweigh political calculation.”
  • The Buttonwood column of The Economist highlighted a rather large potential problem the world is facing: the vanishing of working age adults
    • “The world is about to experience something not seen since the Black Death in the 14th century-lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter of this century, projections by the United Nations suggests there may be more than 100.”
    • “The big question is whether economic growth and rising debt levels go hand-in-hand, or whether the former can continue without the latter. If it can’t, the future can be very challenging indeed. To generate growth in our ageing world may require a big improvement in productivity, or a sharp jump in labor-force participation among older workers.”
  • Christian Shepherd of the Financial Times covered that China is now enforcing its ban on original news reporting.
    • “A spokesman for Beijing Cyber Administration confirmed that state press reports that said conducting original reporting was a gross violation of the regulations (rule in place since 2005) and brought about ‘extremely nasty effects.’ The reports also said that the companies had been given a fixed period to ‘rectify’ the offending sites.”
    • “The trigger for the shutdown, according to media analysts, was coverage of flooding in northern China which – according to the official count – has left 130 dead and racked up damages of more than Rmb16bn ($2.4bn) in Hebei province alone.”
    • “The government does not want these platforms to provide their own news. They are only allowed to forward reports by outlets like Xinhua and the People’s Daily.” – Qiao Mu, a journalism professor in Beijing.

Special Reports


FT – Renminbi drops to sixth in international payment ranking 7/20

FT_Top currencies for global payments_7-20-16

FT – Tough outlook for Hong Kong property – 7/21

FT_Tough outlook for Hong Kong property_7-21-16

Visual Capitalist – The Illusion of Choice in Consumer Brands – 7/21

Visual Capitalist_The illusion of choice in consumer brands_7-21-16

Bloomberg – Relief for Renters Will Prolong Fed’s Wait to Hit Inflation Goal 7/24

Bloomberg_Rising MF Supply_7-24-16

The Daily Shot 7/25

Daily Shot_Norway's Oil fund flows_7-25-16

FT – Landscape shifts for pipeline operators – Ed Crooks 7/24

FT_US Pipeline companies flow of funds_7-24-16

Economist – Buttonwood – Vanishing workers: Can the debt-fueled model of growth cope with ageing population? 7/23

Economist_Buttonwood - who will fill the jobs_7-23-16

WSJ – Why Pensions’ Last Defense Is Eroding – Timothy W. Martin 7/25

WSJ_Waning gains in public pensions_7-25-16

Economist – The Big Mac index: Patty-purchasing parity 7/23

Economist_Big Mac Index_7-23-16


*Note: bold emphasis is mine, italic sections are from the articles.

How Much Oil Is in Storage Globally? Take a Guess. Dan Strumpf and Nicole Friedman. Wall Street Journal. 24 Jul. 2016.

“The historic fall in oil prices has created a pileup of inventories, much of it stashed in tanks in the U.S. and other industrialized countries that are committed to disclosing the latest tally, but millions of barrels of oil are flowing to locations outside the scope of industry trackers.”

“At the beginning of July, 23 supertankers capable of holding 43 million barrels of oil were anchored for a month or more in the Singapore straits, according to Thomson Reuters’s vessel-tracking service, up from 15 ships at the start of the year. If they were full, it would be enough to meet the U.S.’s oil needs for more than two days.”

WSJ_Counting Crude Oil_7-24-16

“‘OPEC has stopped being a swing supplier,” said Antoine Halff, director of the oil market program at Columbia University’s Center on Global Energy Policy. ‘Given the uncertainty about whether shale-oil production in the U.S. can take the role of swing supplier, it falls on stocks’ to replace lost barrels in the case of a supply disruption.”

“Uncertainty around storage was highlighted after attacks on Nigerian oil facilities in May and June. Following the assaults, some analysts forecast that Nigerian output would fall, which helped push oil prices above $50 a barrel. But shipping data showed Nigerian exports holding steady above 1.5 million barrels a day, according to data provider Windward.”

“Where did the exports come from?”

“In China, another storage mystery is unfolding. Government data show oil imports rising at a faster rate than refiners are processing it. The figures suggest the country has built a surplus 160 million barrels during the first half of the year, enough to meet its oil needs for about two weeks.”

“Analysts believe those barrels have gone to commercial tanks or to government-owned strategic reserves.”

“The distinction is critical. If most of the oil has gone to strategic reserves, demand could shrink once the tanks reach capacity, which some analysts say could happen this year.”

Nontraded REIT sales fall off a cliff as industry struggles to adapt. Bruce Kelly. InvestmentNews. 24 Jul. 2016.

“Over the first five months of the year, sales of full-commission REITs, which typically carry a 7% payout to the adviser and 3% commission to the broker-dealer the adviser works for, have dropped a staggering 70.5% when compared with the same period a year earlier, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.”

“Their recent sharp drop in sales is part of a longer cycle. The amount of equity raised, or total sales of nontraded REITs, has been sinking by about $5 billion a year since 2013, when sales hit a high watermark of nearly $20 billion.”

As a result, independent broker-dealer company commissions are down in tandem.  “Industry bellwether LPL Financial said in its first-quarter earnings release that commission revenue from alternative investments, the lion’s share of which comes from nontraded REITs, was just $7.8 million, a staggering decline of 86.7% when compared with the first quarter of 2015.”

IN_Nontraded REIT sales fall off a cliff as industry struggles to adapt_7-24-16

Four key factors have hit the industry.  The blowup of Nicholas Schorsch’s REIT empire, recent FBI raids of United Development Funding (after hedge fund manager Kyle Bass called the company a Ponzi scheme), the Financial Industry Regulatory Authority Inc. rule 15-02, and the new DOL fiduciary rule.

  • The first two basically have brought the public and regulatory spot light to the industry and has shown the light on the less savory parts of the industry and its excessively high fees.
  • Finra rule 15-02 basically have caused an increase in transparency in the fees that the industry charges, now making them more accurately reflected on account statements.
  • And the DOL fiduciary rule “which will be phased in starting April, requires advisers to select investments for retirement accounts that are in the client’s best interest. Investments with high commission structures might not pass that test.” However, this rule also has a flip side, nontraded REITs may now be placed in retirement accounts (also as of April thanks to a Dept. of Labor ruling).

IN_Public Non-Listed REIT Fundraising since 2013_7-24-16

On the plus side, the industry is changing. New T shares are meant to reduce upfront commissions while spreading them over time (still high commissions) and larger financial institutions like Blackstone Group and Cantor Fitzgerald & Co. are looking at getting into the industry.  Hence references are made to the evolution of the mutual fund industry that also started out with high commission structures.

As Allan Swaringen, CEO of Jones Lang LaSalle Income Property Trust, put it “nontraded REITs have lived almost exclusively across independent broker-dealer channels. I don’t think that’s a model that will be successful going forward. It has to be sold by a variety of advisers.”

IN_2015 Top RE Sponsors_7-24-16

Chinese P2Ps plagued by flaky guarantees (fintech blog). Gabriel Wildau. Financial Times. 25 Jul. 2016.

“‘It’s just too easy to attract investment. That’s why it draws so many scammers,’ says Michael Zhang, chairman of Beijing-based Puhui Finance, a large P2P platform with a clean reputation.”

FT_Chines P2P plagued by flaky guarantees_7-25-16

“Beyond the problem of outright fraud is the thornier issue of raising risk awareness in a culture where debt investments are traditionally seen as carrying an implicit guarantee from issuers who are mainly state-owned institutions.”

FT_Chines P2P growth_7-25-16

“, one of China’s largest P2P platforms, investment products carry a label that says ‘multiple guarantees.’ While the Chinese term used – baozhang – is distinct from the word for legally binding guarantees, it still translates as ‘guarantee’ or ‘safeguard.’ Many platforms now divert a portion of borrower interest payments into a ‘reserve fund’ used to protect investors from defaults, an arrangement that looks a lot like bank capital.”

“Soul Htite, the co-founder of who previously co-founded US-based Lending Club, says that in an investing culture where defaults are rare, Chinese investors tend to choose products purely based on yield.”

“In the US we have a very good history of investing and people understand risk. (But) one problem we had in the first couple of years with Chinese investors is, we noticed that when you listed all the loans – this one yields 8% and another one yields 14% – people put all their money on the 14%. And we explained, ‘It’s not guaranteed, it might default.’ Still they put their money there. So that’s when we started forcing diversification on them.” – Soul Htite

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Gasoline Prices Around the World: The Real Cost of Filling Up 7/18

Business Insider – Hong Kong is ‘stuck between a rock and a hard place’ 7/23

FT – Brazil sees strong demand for bonds as market rallies 7/22

FT – Moscow’s building boom belies recession 7/22

FT – Thermal coal bears gripped by Chinese capacity squeeze 7/24

FT – Balance of power tilts from fossil fuels to renewable energy 7/25

FT – Chinese default exposes creditor anger at political interference 7/26

FT – Fossil fuels have had an aeon’s head start 7/26

NYT – Justice Dept. Rejects Account of How Malaysia’s Leader Acquired Millions 7/22

NYT – Uncle Sam Wants You – Or at Least Your Genetic and Lifestyle Information 7/23

NYT – Delusions of Chaos (Paul Krugman) 7/25

July 15 – July 21, 2016

Helicopter money coming to Japan? GMO on EU immigration and the Brexit. Hong Kong and China at a cross road.  ECB coming up against its quantitative easing boundaries.



    • China’s 2nd quarter gross domestic product came in at 6.7%, which is 10 basis points higher than forecast; however, the concern is where that growth has come from.
    • “Figures from the People’s Bank of China the same day showed that money supply growth was faster than expected, reaching levels last seen post 2008. New loans also rose by over $200bn, more than $50bn higher than economists’ estimates.”
    • Bottom line, “the reversion to state-led growth is unsustainable. Should China continue to shun reforms in favor of a quick fix, the short-term benefits of stabilized growth will be outweighed by the cost of persistent imbalances.”
    • The World Federation of Advertisers “estimates that between 10 and 30% of online advertising slots are never seen by consumers because of fraud, and forecasts that marketers could lose as much as $50bn a year by 2025 unless they take radical action. At that scale, the fraud would rank as one of the biggest sources of funds for criminal networks, even approaching the size of the market for some illegal drugs.”
    • “Global spending on online advertising has almost doubled in the past four years – reaching $159bn in 2015, according to research group eMarketer. This money underpins the internet economy and supports trillions of dollars of equity in media and technology.”
    • “Google, the biggest player in the online ad industry, generated revenues of $67bn from it last year.”
    • Bottom line, digital ad platforms and major buyers of online ads are emphatically building methods to track and prevent fraud and where they can and to the event that they can’t expect the federal government to step in.
  • Mark Heschmeyer of CoStar reported on Simon, WP Glimcher turning over the keys on two malls to their respective lenders.
    • Goes to show that just because a company is worth several billion dollars, doesn’t mean they pay back all their debts.
    • “While the overall retail property sector appears to be strengthening, a handful of loans for lower-quality shopping centers and malls financed at the height of the previous CRE cycle are coming due now and proving to be a thorn in the side of publicly traded REITs.”
    • “Simon Property Group and WP Glimcher both turned malls back over to the lenders this week, and Kimco Realty Corp. disclosed that it doesn’t expect one of its joint venture-owned malls will be able to refinance a loan set to come due this fall.”
    • “All three of the malls involved in the foreclosure actions were last financed in 2006 and securitized in mortgage backed bond conduits.”
    • As the saying goes, don’t hate the player, hate the game.

Special Reports


FT – Do sovereign credit ratings still matter? 7/14

FT_Decline of AAA rating countries_7-14-16

FT_Declining government yields_7-14-16

FT – US oil rig count rises for third-straight week 7/15

FT_US oil rig count_7-15-16

FT – Auto sales and the oil price: the Great Unwinding continues beyondbrics – Paul Hodges 7/18

FT_Energy consumption in the US_7-18-16

Temporary work – How the 2% lives: Temping is on the increase, affecting temps and staff workers alike

Economist_US temporary employment_7-16-16

FT – Independent Chinese PMI gauge suspended indefinitely – Hudson Lockett 7/20

FT_China Minxin PMI vs official_7-20-16


*Note: bold emphasis is mine, italic sections are from the articles.

Japan flirts with helicopter money. Gavyn Davies. Financial Times. 17 Jul. 2016.

“Whether or not they choose to admit it the Abe government is on the verge of becoming the first government of a major developed economy to monetize its government debt on a permanent basis since 1945.”

“There are many ways of defining helicopter money, but the essential feature is that it involves an increase in the budget deficit which is financed by a permanent increase in the central bank’s monetary base, not by the issuance of government debt.”

“This is different from quantitative easing, since QE involves the ‘temporary’ purchase of government debt, which is subsequently sold back into the market, at least in theory. And QE does not necessarily need to involve any increase in the budget deficit…”

While “the direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act.” It looks like the government is coming up with a work-a-round.

One method proposed is the issuance of perpetual bonds “…which basically involves the central bank printing money and giving it to the government to spend as it chooses. There would be no buyers of this debt in the open market, but it could presumably sit on the BoJ balance sheet forever at face value.”

Thing is, that “there is no doubt that the BoJ is now monetizing much of the increase in government debt needed to fund ¥10 trillion fiscal stimulus planned by the government. Since the market fully expects the BoJ’s debt purchases to be permanent, it is helicopter money by any other name.”

Why do this when the labor market is at close to full employment?  Basically the inflation expectations in Japan are REALLY low and the BoJ is seeking to reduce its vulnerability to “…any new deflationary shock, from China for example.”

The key point that helicopter money will confer is that debt sustainability (which is why the sales tax increases have been/are being implemented) is not the priority. Rather that Japan will live with whatever debt level it takes to achieve inflation.

“The key problem is that it might restore inflation far too well. It is very difficult to calibrate the amount of helicopter money that is needed to hit the inflation target.”

Expect the delicate dance to continue, which may fail to get Japan out of its deflationary rut.

Immigration and Brexit. Jeremy Grantham. GMO. Jul. 2016.

While this is piece is a commentary on immigration and the Brexit, I think it does a good job of presenting the scale of the immigration challenge that the EU is facing.  I will only highlight two specific items (the full commentary is a good read) for brevity.  1) Grantham’s stance on the markets “despite brutal and widespread asset overpricing, there are still no signs of an equity bubble about to break…” and 2) some of his thoughts on immigration to the EU.

“The truth about immigration to the EU, in my view, is bitter. As covered in earlier quarterlies, I believe Africa and parts of the Near East are beginning to fail as civilized states.”

“They are failing under the pressure of populations that have multiplied by 5 to 10 times since I was born; climate for growing food that is deteriorating at an accelerating rate; degraded soils; insufficient unpolluted water; bad governance; and lack of infrastructure. Country after country is tilting into rolling failure.”

“This is producing in these failing states increasing numbers of desperate people, mainly young men, willing to risk money and their lives to attempt an entry into the EU.”

“For the best example of the non-compute intractability of this problem, consider Nigeria. It had 21 million people when I was born and now has 187 million. In a recent poll, 40% of Nigerians (75 million) said they would like to emigrate, mostly to the UK (population of 64 million). Difficult. But the official UN estimate for Nigeria’s population in 2100 is over 800 million! (They still have a fertility rate of six children per woman). Without discussing the likelihood of ever reaching 800 million, I suspect you will understand the problem at hand. Impossible.”

“I wrote two years ago that this immigration pressure would stress Europe and that the first victim would be Western Europe’s liberal traditions. Well, this is happening in real time as they say, far faster than I expected. It will only get worse as hundreds of thousands of refugees becomes millions.”

Hong Kong: One country, two economies. Ben Bland. Financial Times. 19 Jul. 2016.

Integration of Hong Kong with the Chinese mainland continues to be a delicate issue that is being stressed by a slowdown in the Chinese economy.

As Lily Lo, an economist at DBS, a Singaporean bank, put it “Hong Kong is really dependent on China and external trade. The Chinese economy is slowing down and this is a structural slowdown so we don’t think there will be a V-shaped recovery any time soon. There’s no quick fix.”

Further, as China has opened its economy more and more, Hong Kong is no longer the only or primary route to do business with China.  “Its container port, which was the world’s busiest in the 2000s, has fallen to fifth place, overtaken by Shanghai, Shenzhen and Ningbo.”

“Mr. Tsang (John Tsang, the financial secretary of Hong Kong) and Li Ka-shing, the billionaire whose interests in Hong Kong stretch from ports to property and retail to telecoms, have both warned that the economic outlook is worse than that faced during the Sars epidemic in 2003, which killed 299 people and prompted the last sharp slowdown.”

“Chow Tai Fook, the biggest jeweler in the world by market capitalization, is seen as a bellwether for mainland demand for Hong Kong’s luxury goods. Its sales in Hong Kong and Macau fell on an annualized basis by 22% in the three months to the end of June.”

FT_Hong Kong retail sales_7-19-16 

“Yu Kam-hung, managing director of investment properties at CBRE, an estate agent, predicts that prices could fall up to 10% over the next year, and they are already 10 to 15% off their peak of 18 months ago.”

Then of course it doesn’t help that “there is a deep-seated animosity to (Chinese) mainlanders in Hong Kong. So why would they want to go somewhere they are not welcome when there are so many other choices.” – Shaun Rein, China Market Research in Shanghai

ECB faces QE dilemma after Brexit vote. Claire Jones and Elaine Moore. Financial Times. 20 Jul. 2016.

It wasn’t long after the Brexit referendum vote that government bond yields in the safest markets dropped even further (see graphic on Sovereign credit ratings above).  Problem is that the current structure in place within the European Central Bank (ECB) is reaching its limits.

Currently the ECB is buying €80bn a month in European member country debt to stimulate the overall European economy (aka Quantitative Easing or QE).

Well, “under current rules, the scale of purchases under QE match the size of a member state’s economy, meaning that Germany’s Bundesbank must buy around €10bn of government debt each month – more than any other central bank in the region.”

“But because of the recent bond market shifts, more than 50% of German bonds previously eligible for QE have now become too expensive for the Bundesbank to purchase, yielding less than the ECB’s self-imposed floor of minus 0.4%, according to data from Bank of America Merrill Lynch.”

FT_ECB looking for more bond options_7-20-16

So, now the ECB is essentially faced with three primary options (there are other options – see “Five ways to change the rules within the article).

  1. Scrap the minus 0.4% floor. The “economists at Goldman Sachs calculate (this) would buy the ECB the most time, enabling the Bundesbank to keep buying for up to another 18 months.”
    • “The option, however, would expose the eurozone’s central banks to heavy losses, which they have until now avoided because the minus 0.4% floor mirrors the ECB’s deposit rate charged on banks’ reserves.”
  1. “Scrap the rule that bond purchases match the size of a member states’ economy.”
    • “But such a shift would open the way to buying more bonds from the most indebted countries, and would so be the most controversial of the fixes. Nowhere would it attract more criticism in Germany, where the change would be viewed as a bailout by the back door for profligate member states.”
  1. End QE.

Don’t know if the EU or the world is ready for that.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Blackstone Said to Plan Invitation Homes IPO for First Half 2017 7/17

CoStar – Internet Commerce Drives Strongest Surge in Demand for US Industrial Space Since 2001 7/20

FT – The chronic spin that blights China’s economy 7/14

FT – New wealth management products power Anbang and rivals 7/17

FT – Major cities drive China property price gains 7/17

FT – Trump leads the west’s flight from dignity 7/17

FT – Apple Watch sales fall 55% as consumers mark time on category 7/21

InvestmentNews – REIT with a twist – and a high commission – is new darling of independent brokers-dealers 7/14

NYT – The Risk of Building on Real Estate Funds’ Profitable Past 7/15

NYT – Why Land and Homes Actually Tend to Be Disappointing Investments 7/15

NYT – Vast Purge in Turkey as Thousands Are Detained in Post-Coup Backlash 7/18

WSJ – Surprise: The Economy Is Looking Much Better 7/14

WSJ – China Economy Tilts Further in Wrong Direction 7/15

WSJ – Japan and Helicopter Money: Fan Blades Aren’t Turning Just Yet 7/17

WSJ – Big Chinese Developers Push Into Hong Kong Market 7/19

July 08 – July 14, 2016

AR Global REITs paying amount more than they make by a wide margin. Commercial property prices vulnerable to bank regulatory pressures. 



  • The Economist covered why the IMF (or anyone else for that matter) should no throw Zimbabwe a financial lifeline.
    • “Right now we literally have nothing.” – Patrick Chinamasa, Zimbabwe Finance Minister 
    • This isn’t the first time. “In 2009 Mr. (Robert) Mugabe’s (President) inept and murderous regime printed so much money that inflation topped 500 billion per cent at its peak.”  The government eventually had to dollarize the economy which worked to stabilize the country in tandem with the opposition government party gaining some seats to check Mugabe.
    • “But then Mr. Mugabe’s cronies rigged elections in 2013 and took back full control of the country. They celebrated by doubling the size of the civil service. After three years of misrule and dazzling corruption, the treasury is bare again.” 
    • Now the country is seeking $1 billion to pay off arrears amounts owed to the World Bank.  But “by Mr. Mugabe’s own admission, $15 billion has been stolen from the country’s diamond mines in the past seven years.” The culprits according to Global Witness, a watchdog, are the party elite…
  • In this week’s Economist there is a special report on Chinese Society. Among the articles was an interesting piece on how now those that emigrate from China are the wealthiest and brightest.   
    • “The extraordinary outflow of people from China is one of the most striking trends of recent decades. Since the country started opening up in 1978, around 10m Chinese have moved abroad, according to Wang Huiyao of the Centre for China and Globalization, a think-tank in Beijing. Only India and Russia have a larger diaspora, both built up over a much longer period.”
    • “Since 2001 well over 1m Chinese have become citizens of other countries, most often America.”
    • How, well mostly through school. “Studying abroad has become an ambition for the masses: 57% of Chinese parents would send their child overseas to study if the family had the means, according to the Shanghai Academy of Social Sciences.”
    • Bottom line, “China has long been a land of emigration, establishing small outposts of its people in almost every country in the world. Their main motive was to escape poverty. But those now bowing out are among China’s richest and most skilled. It is a profound indictment of their country that being able to leave it is such a strong sign of success.”
  • Eliot Brown of The Wall Street Journal pointed the spot light on WeWork’s competitive position in light of its rich valuation.
    • Talk about a trend, “throughout the U.S., the number of co-working spaces rose to nearly 3,000 in 2015 from about 250 in 2010 (which is also when WeWork opened its first location in Manhattan), said Steve King, a researcher who studies co-working at small-business-focused data firm Emergent Research.” 
    • “The market’s rapid growth underscores a big challenge for WeWork: low barriers to entry. Competition can come from anyone who has a lease and the money to set up offices.”
    • Will WeWork’s brand and network win out or will have they to erode margins to maintain/grow market share? Either way, their private “$16 billion (valuation) is greater than all but two publicly traded office landlords, despite controlling a fraction of their square footage.”
  • Michael Mackenzie of the Financial Times provided some interest perspective on the current stock and bond environment as both reach new highs.  
    • For some perspective, “it has taken the S&P 14 months to reach a peak of 2,168. The  nominal gain since the market ascended to 2,130 back in May 2015 is a paltry 1.7%. Including dividends, the performance improves to about 3.6%.”
    • “A fresh market peak tends to signal one of two outcomes: the start of an extended breakout for prices such as investors enjoyed during 2013, or a topping-out process that ultimately defines the end of a bull run as seen in 2000 and 2007.”
    • “The bottom line for investors is that both US equities and bonds – corporate bonds have not missed out on the sovereign rally – trade at expensive levels and face a reckoning of epic proportions at some juncture.”
    • “However, unlike Japan and Europe – where negative yields dominate and equity markets remain well under water for the year – the US remains an outlier, or what some traders are saying: ‘The only game in town.'”
    • “Plenty of juice remains in US bond yields that can be squeezed a lot lower from their present levels, helping drive equity prices higher.”

Special Reports

  • Mauldin Economics – When the Future Becomes Today – John Mauldin 7/10
    • “Right now the problem is that monetary policy is carrying a load it was not designed to bear. Strong central bank action during the crisis was necessary and appropriate, says the BIS report, but the extended wind-down hasn’t served the desired goals. This protracted reliance on extraordinary monetary policy carries the risk of causing the rest of us to lose faith in the policymakers.”


WSJ – The Big-Bank Bloodbath: Losses Near Half a Trillion Dollars 7/6

WSJ_Big bank losses_7-6-16

FT – Beijing warns neighbors after South China Sea ruling 7/12

FT_South China Sea Territorial Claims_7-12-16

Economist – Keeping up with the Wangs

Economist_Gini Coefficient - 7-9-16

Economist – China’s debt: Coming clean

Economist_Non-financial sector debt_7-9-16

FT – US shale is lowest-cost oil prospect 7/12

FT_Oil exploration costs_7-12-16

Economist – The long march abroad: China’s brightest and wealthiest are leaving the country in droves 7/9

Economist_China - making for the exit_7-9-16


*Note: bold emphasis is mine, italic sections are from the articles.

Dividend cuts possible at AR Global REITs, analysts say. Bruce Kelly. Investment News. 11 Jul. 2016.

Nicholas Schorsch again…

“Investors in a number of AR Global-sponsored real estate investment trusts face the potential danger of a cut in distributions, according to industry analysts and consultants.”

“The culprit is a REIT cash flow metric known as MFFO – or modified funds from operations, or cash flow – at seven AR Global REITs that in the first quarter of 2016 failed to match or exceed their distributions by wide margins.”

Exsqueeze me… what did you say?

Basically “it is typical for nontraded REITs to overpay distributions to investors in their initial stages while the companies buy properties, find tenants and negotiate leases. Over time, however, REITs cash flow and distributions – or dividends – should match up, or investors will see the value of the REIT erode.”

Nontraded REITs also use the lure of 6% to 7% initial annual distribution rates as a marketing tool for advisers to hook clients.”

“This is what I call sucker yield. It’s the chase for yield that leads investors to impulsively react to dividend quantity over dividend quality. When a company is paying dividends beyond its earning power, it is eroding capital.” – Brad Thomas, editor of Forbes Real Estate Investor newsletter.


“Meanwhile, the AR Global REITs, which control more than $10 billion in real estate assets, are continuing the process of seeking to merge with each other under the roofs of two AR Global REITs that have unusual 20-year management contracts, according to REIT executives.”

Doesn’t seem to be in the best interest of the investors…

“Five of the AR Global REITs in the quarter that ended in March had dividends that far exceed cash flow, while two REITs, American Realty Capital Global Trust II Inc. and American Realty Capital New York City REIT Inc., had negative cash flow.”

“American Finance Trust has $2.2 billion in total assets, and its “payout ratio,” or dividend divided by its MFFO, was 149.4% during the first quarter of the year, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.”

“According to Stanger, other AR Global REITs with high payout ratios are: the $2.4 billion, American Realty Capital Hospitality Trust Inc., at 280.8%; the $2.3 billion Healthcare Trust Inc., at 185.9%; Realty Finance Trust Inc., a mortgage REIT with $1.3 billion in assets, at 176.5%; and American Realty Capital Healthcare Trust III, Inc., with just $144 million in assets, at 183.5%.”

“The AR Global REITs are ‘paying out a lot more than they’re earning,’ said Kevin Gannon, managing director at Stanger. ‘At the end of the day you have to address what those companies are going to do dividend wise, relative to what they’re earning. At present, the payout ratios are not sustainable. The REITs have to acquire more assets with decent yields or cut the distributions.'”

Regulator sounds new alert on banks’ property lending. Alistair Gray. Financial Times. 11 Jul. 2016.

“A top US regulator (Thomas Curry, comptroller of the currency) has sounded a new alert over banks’ commercial real estate lending, adding to concerns that bubbles may be forming in parts of the country’s property market.”

“CRE (commercial real estate) loans originated by banks in the first quarter leapt by 44% from the same period in 2015, according to Morgan Stanley. Banks’ share of CRE originations has risen from just over a third in 2014 to more than half in the first quarter of 2016 – a record.”

“Mr. Curry suggested CRE was of even greater concern to regulators than both car loans – an area into which some banks have expanded aggressively – and lending to already-indebted companies.”

“Our exams found looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements, and deficient-stress testing practices.” – Thomas Curry

Mr. Curry “singled out small banks. More than 180 institutions, he added, had more than doubled their CRE portfolios within the past three years.”

“While two-fifths of banks with more than $20bn in assets said lending standards for apartment blocks had ‘tightened somewhat,’ for instance, only one-fifth of smaller banks said they had.”

“Banks have pushed into CRE as other lenders – notably capital market investors – have retreated from the market. Issuance of commercial mortgage-backed securities has dropped to four-year lows.”

“In a report published separately on Monday, Morgan Stanley warned of the risk that commercial property prices would decline if regulatory pressures caused banks to pull back from CRE.

“A withdrawal by banks would have a knock-on impact on commercial mortgage-backed securities, more of which could default, Morgan Stanley added.”

“The report said the retail sector was especially vulnerable. ‘We are already seeing increased defaults on loans secured by shopping malls, which is a trend we expect to continue.'”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Global Cloud Coverage Shifting in Ominous Sign of Climate Change 7/11

Bloomberg – Pimco Loads Up on Treasuries; Gundlach, Gross Voice Caution 7/12

Bloomberg – The Housing Market Is Waving a Red Flag 7/14

FT – Negative interest rates: a remarkable financial moment 7/7

FT – Rare governance and takeover battle breaks out in China 7/10

FT – Strong performance of real estate suggests top for the sector 7/12

FT – Bank of Tokyo quits as primary dealer for Japanese government bonds 7/13

Miami Herald – Many boomers in denial over problems they face growing old in suburbs 7/11

NYT – What the Seesaw Jobs Numbers Are Really Telling Us 7/8

NYT – Can We Ignore the Alarm Bells the Bond Market Is Ringing 7/11

NYT – China Pledged to Curb Coal Plants. Greenpeace Says It’s Still Adding Them 7/13

Project Syndicate – The Promise of Regrexit (George Soros) 7/8

Reuters – China’s Wanda shows interest in Viacom’s Paramount 7/13

Vanity Fair – Trouble is Brewing on Billionaires’ Row 7/13

WSJ – China’s Outlfows Aren’t Over 7/7

WSJ – Coming to Terms with Low Bond Yields 7/7

WSJ – The Most Hated Bull Market Keeps Chugging Along 7/11

WSJ – Buybacks Pump Up Stock Rally 7/12


July 1 – July 7, 2016

The bad debt in Italian banks is looking like a BIG problem. The world has become more reliant on Middle Eastern oil. Not looking so rosy for hedge fund reinsurers.



    • As yields the world over drop “the effective yield on 7-to-10 year investment-grade corporates was 3.19%, according to Bank of America Merrill Lynch.” But relative to everything else, that’s really quite attractive.
    • “Indeed, in the universe of investment-grade debt, U.S. corporate bonds are close to the only game in town for investors looking for any yield. BofA Merrill Lynch credit strategist Hans Mikkelsen calculates that U.S. corporate bonds account for around 12% of all investment-grade debt outstanding world-wide yet they now represent about 33% of investment-grade yield income. Put otherwise, U.S. corporate bonds generate one out of every three dollars paid out by the entire universe of investment-grade debt.
    • “Almost 87% of Japanese government bond yields are now below zero.”
    • “Unlike other major central banks, the BOJ is a buyer at almost any price and mainly purchases government bonds, which represent almost two-thirds of negative-yielding global sovereign debt globally.”
    • “Further buying will only push yields lower. Cutting back, while helpful in the short- to medium-term, means that the BOJ has to find other Japanese securities. But, unlike Europe or the U.S., asset-backed securities and corporate bonds are hardly an option because of their relatively small market sizes.”
    • For reference, “the BOJ now holds almost 30% of its government’s bonds.”
  • Rich Miller and Steve Matthews of Bloomberg called attention to the challenge that Janet Yellen faces in regard to setting rates when the US economy is running short of labor.
    • “Seven years into the economic expansion, the U.S. is showing signs it’s running short of job seekers qualified to fill openings. The shortfall, which has been evident for some time for highly skilled workers, is spreading to workers with less education as unemployment falls further.”
    • “We are now close to eliminating the slack that has weighed on the labor market since the recession.” – Janet Yellen, Federal Reserve Chair on June 6
    • “At 4.7% in May, the jobless rate is around the level that most Fed policymakers consider to be full employment.”
  • Central Banks are putting a squeeze on the bond market according to Min Zeng and Christopher Whittall of the Wall Street Journal.
    • “A buying spree by central banks is reducing the availability of government debt for other buyers and intensifying the bidding wars that break out when investors get jittery, driving prices higher and yields lower.”
    • “Central banks themselves are having trouble finding all the bonds they need. The ECB, for example, can’t buy bonds with a yield lower than its deposit rate of minus -0.4%. As of July 1, 58% of German bonds eligible for ECB purchases traded below that level, according to Frederik Ducrozet, a senior economist at Pictet Wealth Management.”

Special Reports


FT – Government bond yields fall to fresh record lows led by UK Gilts 7/1

FT_UK 10 year gilt yield_7-1-16

FT_US 10 yr treasury yield_7-1-16

WSJ – Debt for Cheap: U.S. Companies Can Profit from Sinking Rates – Justin Lahart 7/1

WSJ_Debt for Cheap, U.S. Companies Can Profit from Sinking Rates_7-1-16

The Big Picture – China spends more on economic infrastructure annually than North America and Western Europe combined 7/4

The Big Picture_China economic infrastructure spending_7-4-16

FT – Bad-debt warnings triggers fresh fears for Italian banks 7/4

FT_Italian banks bad debt fears_7-4-16

Visual Capitalist – This Map Shows the Average Income of the Top 1% by Location 7/6

Visual Capitalist_Avg income of top 1%_7-6-16

WSJ – Central Bank Buying Puts Squeeze on Bond Market – 7/6

WSJ_Central bank holdings of govt bonds_7-6-16


*Note: bold emphasis is mine, italic sections are from the articles.

Bad Debt Piled in Italian Banks Looms as Next Crisis. Giovanni Legorano. Wall Street Journal. 4 Jul. 2016.

In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.”

“Although Italy has only one bank classified as globally significant under international banking regulations – UniCredit – some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.”

According to Lorenzo Codogno, former director general at the Italian Treasury, “Brexit could lead to a full-blown banking crisis in Italy. The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”

“The profitability of Italian banks has long been among the worst in Europe, weighed down by bloated staffs and too many branches, leaving the banks with little extra capital to cover loans that go bad. Today’s low interest rates have hit Italian banks especially hard because of their heavy focus on plain-vanilla lending activities, with relatively little in fee-generating activities such as asset management and investment banking.”

“…impaired loans at Italian banks now exceed 360 billion – quadruple the 2008 level – and they continue to rise.”

“Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25% – implying an additional 40 billion in write-downs.”

“One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years.”

“There is an epidemic, and Italy is the patient that is sickest… if we don’t stop the epidemic, it will become everybody’s problem… The shock of Brexit has created a sense of urgency.” – Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry

However, European officials are loath to let the Italians use the Brexit as an impetus to gain permission to bend the rules of the banking regime that were only just established at great pains.  The Italians though are concerned “about the 187 billion of bank bonds in the hands of retail investors that would be wiped out by a bank resolution under the EU banking rules.”

IEA warns of ever-growing reliance on Middle Eastern oil supplies. Anjli Raval and David Sheppard. Financial Times. 6 Jul. 2016.

“The world risks becoming ever more reliant on Middle Eastern oil as lower prices derail efforts by governments to curb demand, the west’s leading energy body has warned.”

“Middle Eastern producers, such as Saudi Arabia and Iraq, now have the biggest share of world oil markets since the Arab fuel embargo of the 1970s.”

“Demand for their crude has surged amid a collapse in oil prices over the past two years that has cut output from higher-cost producers such as the US, Canada and Brazil.”

“Middle Eastern producers now make up 34% of global output, pumping 31m barrels a day, according to IEA data. This is the highest proportion since 1975 when it hit 36%. In 1985, when North Sea production accelerated, their share fell to as little as 19%.”

Further, the adoption of more fuel efficient vehicles has slowed since the cost of gas has come down significantly. “In the US, more than two-and-a-half times as many sport utility vehicles were being bought compared with standard cars.” – Fatih Birol, executive director of the International Energy Agency.

“Even more concerning for policymakers is China, where more than four times as many SUVs were bought, suggesting the country’s rapidly growing car culture has adopted America’s taste for larger more fuel-hungry cars.”

“Lower oil prices are proving to be bad news for efficiency improvements.” – Fatih Birol

Bottom line, “‘the Middle East is reminding us that they are the largest source of low-cost oil,’ said Mr. Birol. He said the region was expected to meet three-quarters of demand growth over the next two decades.”

“Mr. Birol said policymakers needed to impose stricter fuel efficiency targets to reduce demand, arguing it was not feasible in a world market to completely sever reliance on Middle Eastern oil.”

“US oil production will increase, but it is still an oil importer and will be for some time.” – Birol

S&P sounds alarm on hedge fund reinsurers. Alistair Gray and Miles Johnson. Financial Times. 6 Jul. 2016.

“So-called hedge fund reinsurers (HFRs) have failed to make a profit from providing reinsurance cover for more than four years, according to Standard & Poor’s.”

“S&P found that HFRs had performed considerably worse than traditional reinsurers, which have complained that the entry of new money into their sector has driven profitability down for all.”

“Conventional reinsurers tend to invest their income in conservative assets such as corporate bonds, since they do not know in advance how much they will need to pay out in claims.”

“In contrast, HFRs pursue what S&P described as ‘meaningfully risker’ investment strategies. Their assets are managed by their affiliated hedge funds. Allocations vary but include exposure to speculative-grade leveraged loans, private equity and short positions.”

“So-called combined ratio for the HFRs – claims paid and expenses incurred as a proportion of premium income 0 has been above 100 in every year since 2012, meaning a loss from underwriting.”

“Last year the ratio came in at 110.2%, compared with a profitmaking 88.6% for their conventional reinsurance peers.”

“S&P said the HFRs’ investment performance had also been ‘rough’. Overall net investment income dropped 63% from 2014 to $247m last year.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – SMU, Yale Endowments Unload Real Estate Assets Due to Cooling Markets 7/1

Bloomberg – Blackstone Tenants Get a Shot at Buying Their Rental Houses 7/4

Bloomberg – Treasuries Deliver $700 Billion Windfall to World Safety Seekers 7/6

CNBC – This private equity giant wants to give landlords millions – here’s how 6/30

FT – Mexico raises interest rates to shore up peso 6/30

FT – Zenefits agrees to halve its valuation to $2bn 6/30

FT – Puerto Rico declares moratorium on debt payments 6/30

FT – Cash-starved Zimbabwe closes in on IMF deal to clear debts 7/6

MarketWatch – This economist thinks China is headed for a 1929-style depression 7/1

NYT – Italy’s Plan for Banks Could Roil Europe 7/6

Vanity Fair – Are We At The Start Of  A Tech World War? 7/6

Wharton – The Case for ‘Regrexit’: Why Britain Won’t Really Leave the EU 6/30

WSJ – Manhattan Apartment Sales Sputter 6/29

WSJ – Why Vanke Sank After Its Wake-Up Call 7/4

WSJ – Foreign Interest in U.S. Homes Cools 7/6


June 24 – June 30, 2016

Japanese banks wary of property risks. Negative-yielding sovereign debt jumps to $11.7tn.

This week all the media outlets were blanketed with coverage on the Brexit and of course the synopsis varied from catastrophe (a lot of money was lost in the equity markets around the world immediately – which have already made up a lot of lost ground), to concern over the survival of the European Union, to a general ‘meh.’  Remember, the world moves on.  Importantly, Britain is still part of the EU. No one has triggered Article 50 of the Lisbon Treaty yet and even when Britain does trigger the article, there is a two-year exit process with the EU.  As such, some even think that Britain may not eventually leave.  So for now as the Brits like to say, keep calm and carry on.



    • “Moody’s Investors Service is predicting that China’s property markets are facing a double-whammy of growing margin pressures for developers and tapering growth in home sales nationwide.”
    • “The rapid growth in land costs will raise the developers’ capital requirements and will also likely add margin pressure in the next 12-24 months. Furthermore, developers that acquired land with high unit costs in major cities will face increased business risks, given our expectation that price growth in these cities will moderate.” – Dylan Yeo, Moody’s analyst
    • “The report from Moody’s follows a note from S&P Global Ratings last week reiterating expectations for growing bond defaults onshore in China, with those for property developers forecast to have the biggest potential impact.”
    • “Between 2005 and 2015 the world’s cities swelled by about 750m people, according to the UN. More than four-fifths of that growth was in Africa and Asia; specifically, on the fringes of African and Asian cities. With few exceptions, cities are growing faster in size than in population. Lagos, the capital of Nigeria, is typical: it doubled in population between 1990 and 2010 but tripled in area. In short, almost all urban growth is sprawl.”
    • “London took two millennia to grow from fewer than 30,000 people to almost 10m; Shenzhen in China managed that within three decades. And most African and Asian cities are growing more chaotically.”
    • “Like it or not, this is how the great cities of the 21st century are taking shape.”
    • “Shlomo Angel of New York University has studied seven African cities in detail: Accra, Addis Ababa, Arusha, Ibadan, Johannesburg, Lagos, and Luanda. He calculates that only 16% of the land in new residential areas developed since 1990 has been set aside for roads – about half as much as planners think necessary. And 44% of those roads are less than four meters wide.”
  • Laura Kusisto of the Wall Street Journal highlighted that yes, today’s renters really are worse off than their parents.
    • “Inflation-adjusted rents have risen by 64% since 1960, but real household incomes only increased by 18% during that same time period, according to an analysis of U.S. Census data released by Apartment List, a rental listing website.”
    • “Renters fared the worst during the decade between 2000 and 2010, when inflation-adjusted household incomes fell by 9%, while rents rose by 18%, according to Apartment List.”
    • In regard to inflation “…housing still largely relies on U.S. labor and materials (and zoning restrictions), making it one of the few essentials that haven’t become cheaper with globalization.”
  • Claire Jones and James Shotter of the Financial Times reported on the IMF’s recent opinion that Germany do more to reform its banks.
    • “The International Monetary Fund has warned that ultra-low interest rates pose a threat to the profitability of Germany’s 13tn financial sector, as it steps up its call for the country’s banks and insurance groups to restructure.”
    • “The IMF has supported the ECB’s aggressive monetary easing and indicated that the onus was on German banks and their regulators and supervisors to reform.”
    • “Given its high share of savings and co-operative banks – whose business revolves around taking deposits from and making loans to local communities – the German banking system is highly dependent on interest rates.”
    • “A study by BaFin, the German financial watchdog, and the Bundesbank last year found that Germany’s 1,500 small and midsized banks expected profits to fall by an aggregate of 25% by 2019, mainly owing to the collapse in net interest income. The study projected that if rates fell a further 100 basis points, lenders’ profits would plunge at least 60% by the same date.”

Special Reports


FT – Fed on alert for US economic recoil – Sam Fleming 6/24

FT_Fed funds futures curve_6-24-16

FT – Unicorns: Between myth and reality – Richard Waters and Leslie Hook 6/27

FT_Venture capital invested in US_6-27-16

Bloomberg – San Francisco Landlords Gird for Slowdown as Startup Frenzy Ebbs – Alison Vekshin 6/28

Bloomberg_San Francisco Office Vacancies rise_6-28-16

Economist – Foreign direct investment 6/25

Economist_Foreign direct investment_6-25-16

WSJ – Today’s Renters Really Are Worse Off Than Their Parents – Laura Kusisto 6/29

WSJ_Today’s Renters Really Are Worse Off Than Their Parents_6-29-16


*Note: bold emphasis is mine, italic sections are from the articles.

Overheating Risk Makes Japanese Banks Wary of Property Lending. Tesun Oh Katsuyo Kuwako. Bloomberg. 27 Jun. 2016.

“Japanese banks are reining in their exposure to the property market on concern the central bank’s negative-rate policy is fueling overheating.”

“We’re watching the market carefully because we get a strong sense that the market is being pushed up mainly by a lot of lending.” – Michiya Fujii, head of the real estate finance department, Tokyo Star Bank, Ltd.

“Lending to the real estate sector rose to a record high in March, exceeding levels during Japan’s asset bubble in the late-1980s, according to Bank of Japan data.”

Bloomberg_Japanese real estate bank loans_6-27-16

When you look at the options for income investors you can understand why. “While the average expected yield for central Tokyo office property fell to 3.7% in the first quarter, its lowest since at least mid-2007, that is still 82 times the 0.045% yield an investor can earn from buying 20-year government debt. Ten-year yields have dropped 10 basis points this month to minus 0.22%.”

“Considering the downside risks, this is not a time when we can aggressively lend. What’s important is, when the time comes and the market turns, how much durability we’ve built into the portfolio.” – Katsumi Taniguchi, head of the planning team of the real estate finance department at Sumitomo Mitsui Trust

Additionally, while rates are low real estate investment trusts and large developers are taking advantage of the opportunity to lower their borrowing costs.  “Nippon Building Fund Inc., Japan’s largest REIT, sold 30-year debt this month at a coupon of 1%, while the largest developer Mitsubishi Estate Co. issued 40-year bonds at 0.789%.”

Negative-yield government debt surges $1.3tn to $11.7tn Adam Samson. Financial Times. 30 Jun. 2016.

“The universe of negative-yielding government debt has increased by more than $1tn in the last month to reach a high of almost $12tn in one of the most tangible results of Britain’s decision to leave the EU.”

“Low sovereign bond yields reflect gloomy economic outlooks and expectations of central bank stimulus. In turn a record $11.7tn of global sovereign debt has now entered sub-zero territory – an increase of $1.3tn since the end of May, according to data released by Fitch Ratings.”

FT_Gobal negative yielding sovereign debt rises to $11.7tn_6-30-16

“You have to look at the response by central banks after the Brexit shock. You’re seeing a ubiquitous tilt toward easing among G4 central banks (Federal Reserve, European Central Bank, Bank of Japan, and the Bank of England).” – Ben Mandel, a global strategist at JPMorgan Chase

Because of this, “futures markets suggest investors saw a roughly 75% chance that the Federal Reserve will not raise interest rates over the next 12 months.”

FT_Government debt yields under pressure_6-30-16

Other Interesting Articles

The Economist

Bloomberg – China’s Idled Wind Farms May Spell Trouble for Renewable Energy 6/28

Economist – Why Brexit is grim news for the world economy 6/24

FT – The perfect financial crime 6/25

FT – South Korea plans stimulus boost in wake of Brexit 6/27

FT – Broad, deep and brutal – Asia’s Brexit reaction 6/29

FT – Brazilian bankruptcies create opportunities for debt investors 6/29

Project Syndicate – Brexit and the Future of Europe (George Soros) 6/25

Reuters – Post-Brexit global equity loss of over $2 trillion worst ever: S&P 6/26

The New Yorker – Why Brexit Might Not Happen at All 6/27

WSJ – Shareholder Fight Puts China’s Market Resolve on the Line 6/28


June 17 – June 23, 2016

Eight massive shifts underway in energy. U.S. men of prime working age are dropping out of the labor force. Venezuela on the brink of social and economic collapse.



    • “Prices for land, the main ingredient of the property world, have hit record highs in auctions this year in many Chinese cities. The average land price per square meter for the top 100 cities in the first five months of this year jumped nearly 50% from same period last year, according to Wind Information. Some land prices are even higher than housing prices nearby.”
    • Interestingly, “most of the buyers of the most expensive parcels are state-owned enterprises. A property subsidiary of China Gezhouba Group, a state-owned builder of power plants and dams, spent 3.3 billion yuan last month to buy the most expensive land, in terms of price per square meter, in Nanjing. Another state dam construction company, Power Construction Corp. of China, snapped up a piece of land in China’s bubbliest property market, the southern metropolis of Shenzhen, for 8.3 billion yuan.”
    • “The domestic bond market and growth in asset-backed securities have made financing easier for developers, causing companies to chase whatever assets they can. Continuing reforms of state-owned enterprises could also be a trigger, as these firms have incentives to inflate their balance sheets to gain clout in consolidation talks. For some which have already invested heavily in real estate, keeping land prices high makes sense.”
    • In 2015 a record 960m cubic meters of cargo passed through the canal, starting June 26 the canal will have capacity of 1.7 billion cubic meters of cargo annually.  “The biggest container ships that could use the old canal, known as Panamaxes, can carry around 5,000 TEUs (20-foot equivalent units, or a standard shipping container). Neo-Panamaxes that will squeeze through the new locks can carry around 13,000 TEUs. Although the world’s largest ships have space for nearly 20,000 TEUs, the majority of the global fleet will now fit through the canal.”
    • “America’s east-coast ports should get busier… And vessels carrying liquefied natural gas from America’s shale beds will be able to pass through the locks for the first time, heading to Asia. They are expected to account for 20% of cargo by volume by 2020.”
  • Anjani Trivedi of the Wall Street Journal drew attention to the potential credit black hole brewing in China.
    • “China’s M1 money supply, a measure of the most liquid assets in the banking system as cash and certain types of demand deposits, is growing at its fastest pace in six years. Meanwhile, M2 money supply, a broader gauge of liquidity including longer-term deposits, expanded at the slowest rate in a year. The ratio of these two rose to its highest since the data has been tracked.”
    • “One of the main sources of the rapid M1 growth is troubling: short-term, higher-yielding investments such as wealth-management products in the form of current deposits that now account for 95% of the growth of M1.”
  • Yukako Ono and Lucinda Elliott of the Financial Times reported on Nigeria’s recent decision to float its currency on Monday (June 20).
    • “Nigeria’s long-awaited flexible foreign exchange rate regime got off to an explosive start on Monday as the naira slid by as much as 27% to N254 to the US dollar.”
    • “The currency had been pegged at about N197 per dollar since March 2015. Nigeria, Africa’s biggest economy – where oil exports account for more than 90% of foreign revenue – did not follow other large oil exporting nations which began devaluing their currencies in 2014 as crude prices fell by more than half.”
    • “But short-term public finances are still in crisis. ‘Serious domestic reforms are needed that won’t be fixed by the exchange rate normalization,’ Mr. (John) Ashbourne (of Capital Economics) said. As a result of sabotage by resurgent militants in the oil-producing Niger delta, Nigeria has been losing about 700,000 barrels of oil a day. This, and the fall in oil prices since 2014, mean that the state is receiving a quarter or less of what it earned two years ago.”
    • As a follow up as of Thursday (6/23), the exchange rate was 283.50 Naira to $1 USD.
  • Patrick Jenkins of the Financial Times highlighted the slow moving financial crisis that is underfunded pensions.
    • “A recent report by Citigroup shone a light on just how big a nightmare is looming. It found most pension plans in the US and UK are underfunded, with an aggregate 18% deficit.”
    • “Government pension schemes are in an even worse state. Citi found the value of unfunded or underfunded liabilities for 20 OECD countries is $78tn – nearly double the $44tn published national debt number.”


WSJ – Why China’s Developers Can’t Stop Overpaying for Property – Jacky Wong 6/19

WSJ_Why China’s Developers Can’t Stop Overpaying for Property_6-19-16

WSJ – Credit Black Hole – Anjani Trivedi 6/20

WSJ_Chinese Cash Disappearing Down Credit Black Hole_6-20-16

FT – Nigeria’s currency tanks against dollar on float – Yukako Ono and Lucinda Elliott 6/20

FT_Nigerian naira falls_6-20-16


*Note: bold emphasis is mine, italic sections are from the articles.

The World Nears Peak Fossil Fuels for Electricity. Tom Randall. Bloomberg. 12 Jun. 2016.

“The way we get electricity is about to change dramatically, as the era of ever-expanding demand for fossil fuels comes to an end – in less than a decade. That’s according to a new forecast by Bloomberg New Energy Finance (BNEF) that plots out the global power markets for the next 25 years.”

“Call it peak fossil fuels, a turnabout that’s happening not because we’re running out of coal and gas, but because we’re finding cheaper alternatives. Demand is peaking ahead of schedule because electric cars and affordable battery storage for renewable power are arriving faster than expected, as are changes in China’s energy mix.”

The eight massive shifts underway:

  1. There Will Be No Golden Age of Gas
    • “The cost of wind and solar power are falling too quickly for gas ever to dominate on a global scale, according to BNEF.”
    • The peak year for coal, gas, and oil: 2025.

Bloomberg_Peak fossil fuels_6-12-16

  1. Renewables Attract $7.8 Trillion
    • “Humanity’s demand for electricity is still rising, and investments in fossil fuels will add up to $2.1 trillion through 2040. But that will be dwarfed by $7.8 trillion invested in renewables, including $3.4 trillion for solar, $3.1 trillion for wind, and $911 billion for hydro power.”
    • “But by 2027, something remarkable happens. At that point, building new wind farms and solar fields will often be cheaper than running the existing coal and gas generators.”
    • “By 2028, batteries will be as ubiquitous as rooftop solar is today.”

Bloomberg_Solar on the upswing_6-12-16

  1. Electric Cars Rescue Power Markets
    • “The adoption of electric cars will vary by country and continent, but overall they’ll add 8% to humanity’s total electricity use by 2040, BNEF found.”

Bloomberg_Electric cars go mainstream_6-12-16

  1. Batteries Join the Grid
    • “The scale-up of electric cars increases demand for renewable energy and drives down the cost of batteries. And as those costs fall, batteries can increasingly be used to store solar power.”

Bloomberg_Here come the batteries_6-12-16

  1. Solar and Wind Prices Plummet
    • “For every doubling in the world’s solar panels, costs fall by 26%, a number known as solar’s ‘learning rate.’ Solar is a technology, not a fuel, and as such it gets cheaper and more efficient over time. This is the formula that’s driving the energy revolution.”
    • “Wind-power prices are also falling fast – 19% for every doubling. Wind and solar will be the cheapest forms of producing electricity in most of the world by the 2030s, according to BNEF.”

Bloomberg_Beautiful math of solar power_6-12-16

  1. Capacity Factors Go Wild
    • The capacity factor (essentially the efficiency ratio) for renewable energy technologies is getting much better.
    • “Once a solar or wind project is built, the marginal cost of the electricity it produces is pretty much zero–free electricity–while coal and gas plants require more fuel for every new watt produced. If you’re a power company with a choice, you choose the free stuff every time.”

Bloomberg_Capacity factors getting better_6-12-16

  1. A New Polluter to Worry About
    • “China’s evolving economy and its massive shift from coal to renewables mean it will have the greatest reduction in carbon emissions of any country in the next 25 years, according to BNEF.”
    • But, “India’s electricity demand is expected to increase fourfold by 2040” and they have tons of coal which they intend to use.

Bloomberg_India the fastest-growing polluter_6-12-16

  1. The Transformation Continues
    • Unfortunately, the shift to renewables is not happening fast enough…

Bloomberg_Climate is still in trouble_6-12-16

US low-skill males drop out of jobs market. Sam Fleming. Financial Times. 20 Jun. 2016.

“Labor-force participation among men of prime working age has dropped by more in the US than in any other OECD country apart from Italy in the past quarter century.”

A recent report from the Council of Economic Advisers “shed light on one of the major concerns about America’s recovery: while unemployment has been falling, a large number of people have also been dropping out of the jobs market altogether.”

“Among so-called prime-aged men between the ages of 25 and 54, the participation rate fell more steeply than in all but one other country in the OECD from 1990 to 2014, the report found. It is now the third-lowest among 34 OECD nations.”

The report found that “this fall in the prime-age male labor force participation rate, from a peak of 98% in 1954 to 88% today, is particularly troubling since workers at this age are at their most productive.”

“The analysis shows that participation rates have diverged sharply between people who have a college degree or more, and those who do not. In 1964, some 98% of prime-age, college-educated men participated in the workforce, compared with 97% of those with a high-school degree or less. By 2015, the rate for college-educated men had slipped to 94%, while that for those with a high-school degree or less had plunged to 83%.”

FT_Prime-age male labor force participation_6-20-16

Further, “more than a third of those prime-aged men who are outside the workforce are living in poverty, suggesting their decision to drop out is not a choice they made because they had other sources of income.”

Is Venezuela close to boiling point? Pan Kwan Yuk. Financial Times. 21 Jun. 2016.

You’ll note this week that there is a lot of coverage on this topic from the NYT piece about Venezuelans ransacking stores for basic goods, to the Bloomberg Businessweek article on how weak government structures fall apart when climate stresses get added to the mix, to the Financial Times article on how Chinese government officials have been meeting with the opposition politicians in Caracas to ensure that their loans will eventually be paid.  Bottom line, things are coming apart at the seams.

“Venezuela is on the brink of economic and social collapse. There is a high chance of a sovereign default and a removal of the president over the next eighteen months.” – Capital Economics

“The worst part of this story is that Venezuela hasn’t hit bottom yet – the only light at the end of this tunnel seems to be from another of a series of oncoming locomotives.” – Russ Dallen, managing partner at Caracas Capital Markets

“The violent food riots that have swept the country are but the latest sign that things in Venezuela might have reached a boiling point. The collapse in the bolivar “fuerte” – or strong bolivar – which is trading close to 1,100 per dollar in the black market – is another. To put this in perspective, the country’s biggest banknote – the 100 bolivar – is now worth just a mere 9 US cents.”

FT_Collapse of the bolivar_6-21-16

Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Nigeria changes course with painful devaluation 6/16

FT – Whatever happened to the China crisis? 6/19

FT – Perverse incentives lie behind Microsoft’s LinkedIn purchase 6/19

FT – Egyptians rush to invest in property to counter the pound’s slide 6/19

FT – Hedge funds seek long term money for distressed debt wagers 6/20

FT – Central banks’ front-loading leaves modest pickings for investors 6/20

FT- Chinese banks brace for storm in face of shadow finance calm 6/20

FT – The corn shortage that Brazil really can’t afford 6/21

FT – China bankruptcies surge as government targets zombie enterprises 6/22

Investment News – Allianz’ Mohamed El-Erian sees ‘common element’ between Brexit vote, negative rates, strange politics and Fed policy 6/20

MarketWatch – A storm is brewing in the real-estate market, Pimco warns 6/20

Vanity Fair – Leaked Documents Reveal How Much Uber Drivers Really Make 6/23

WSJ – Apartment Boom Needs Cooling-Off Period 6/16

WSJ – China’s Short-Term Lending Boom Won’t End Well 6/16

WSJ – Losers Abound in $7 Billion Chinese Takeover Scuffle 6/20

WSJ – Rents Are Booming, But for How Long? 6/21

Yahoo Finance – Jim Chanos shreds ‘shameful’ Tesla-SolarCity deal 6/22


June 10 – June 16, 2016

The shipping world is about to change with the opening of new Panama Canal locks. U.S. shale reserves: now you see me, now you don’t.



    • “About 40 trillion yen ($365 billion) in cash has piled up in homes across Japan, according to a Dai-ichi Life Research Institute estimate – equivalent to about 8% of GDP.”
    • “What it means for 40 trillion yen to be sleeping under mattresses is that the deflationary mindset is deeply rooted, and Japanese have become hypersensitive to risk.” – Hideo Kumano, chief economist at Dai-ichi Life
    • This of course has been a boon to safe manufacturers, with “sales of safes in March were up 86% from a year earlier, the highest level ever, according to government data.”
    • “The People’s Bank of China has spent about $473bn in foreign exchange reserves since it surprised global markets last August by changing the way it sets its daily guidance rate for the currency, according to Financial Times estimates based on official data.”
    • As a central bank official so aptly put it “the most important factor is confidence, both globally and within China. The cost of intervention in terms of reserves has been high but this policy can’t be evaluated just in terms of numbers. Once confidence is lost it can’t be easily restored. Then a lot of bad things can happen.”
  • Shawn Donnan and Tom Mitchell of the Financial Times highlighted how concern over China’s corporate debt balances is spreading, even to the likes of the IMF.
    • “China’s corporate debt risks sparking a bigger crisis if the authorities fail to tackle it, the International Monetary Fund has warned.”
    • “Mr. Lipton (David Lipton – the IMF’s number 2) highlighted the state-owned enterprises, which he said were responsible for 55% of the corporate debt pile despite representing 22% of economic output and which ‘are essentially on life support.'”
    • “While concluding the issue is ‘manageable’, he warned that a recent IMF estimate that put the potential losses for China’s banks from bad corporate loans at 7% of GDP was a conservative estimate that excluded exposures in the ‘shadow banking’ sector.”
  • With declining investment yields the world over and an abundance of negative government debt, Attracta Mooney of the Financial Times points to how sovereign wealth funds have been piling into real estate to boost returns.  As an aside, Yahoo Finance drew attention to a recent Urban Land Institute PricewaterhouseCoopers survey that indicated that many U.S. real estate pros are not as enthusiastic about U.S. property as their foreign counterparts.
    • “State-backed investment vehicles, which are used by countries either to save for a rainy day or to provide money for future generations, increased their allocations to property by 29% last year, according to research looking at 77 sovereign funds with $8tn in assets.”
    • “The push into property comes as interest rates have reached record lows, forcing investors into alternative asset classes in the search for better returns.”
    • “Sovereign wealth funds posted average returns of 4.1% last year, despite having a combined target of 5.9%, according to Invesco, the asset manager that carried out the research.”
    • “The study did not provide a breakdown of returns by asset class, but Norway’s fund said in March it had achieved 10% returns from its investments in property last year. Fixed income, in contrast, returned just 0.3%.”
    • On an allocation basis, there is plenty of room for increased real estate commitments “property still accounts for a tiny proportion of sovereign funds’ portfolios: 6.5% last year, up from 4.1% in 2014, according to Invesco.”
  • Data is data. Sometimes it’s good and other times not so much. Further, interpretation varies and can be misleading as the Economist points out in why the weak jobs report belies the resilience of the American economy.
    • Despite the weak jobs report, things aren’t that bad in America. “Personal consumption, adjusted for inflation, is up by 3% in the past year, having surged in April.”
    • The University of Michigan’s consumer-confidence index has been exceeding the average held during the 2003-2007 boom. “According to a recent Fed survey, 69% of Americans say they are ‘doing okay’ or ‘living comfortably’, up from 62% in 2013.”

Special Reports


FT – Stocks under pressure as bond yields rise 6/10

FT_JGB 10 year yield_6-10-16

FT – China spent $470bn to maintain confidence in renminbi – Gabriel Wildau and Tom Mitchell 6/12

FT_China spent $470bn to maintain confidence in renminbi_6-12-16

Mauldin Economics – Hot Summer Economic Weirdness – John Mauldin 6/11

Mauldin Economics_Race to Negative Bond Yields_6-11-16

WSJ – German Benchmark Bond Yield Dips Below Zero 6/14

WSJ_German 10-year bund drops below zero_6-14-16

The Big Picture – Foreigners selling US equities at record pace – Torsten Slok 6/15

Big Picture_Foreigners losing confidence in US equities_6-15-16

WSJ – China’s Suddenly Shrinking Corporate Bond Market 6/15

WSJ_China’s Suddenly Shrinking Corporate Bond Market_6-15-16

Visual Capitalist – The Shift to a Cashless Society is Snowballing – Jeff Desjardins 5/17

Visual Capitalist_Going Cashless Around the World_5-17-16

Bloomberg – China Dumping More Than Treasuries as U.S. Stocks Join Fire Sale 6/15

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*Note: bold emphasis is mine, italic sections are from the articles.

Panama Canal, the Reboot. Alex Nussbaum, Naureen Malik, and Christopher Cannon. Bloomberg. 2 Jun. 2016.

“Nine years of construction work, at a cost of more than $5 billion, have equipped the Panama Canal with a third set of locks and deeper navigation channels, improvements that will double its capacity. When the new locks slide open for the first time in late June, the reverberations will be felt at Asian gas terminals, on Great Plains farms, and in ports from Long Beach, Calif., to Santiago, Chile.”

Bloomberg_Panama Canal, the reboot_6-2-16

Why Billions in Proven Shale Oil Reserves Suddenly Became Unproven. Asjylyn Loder. Bloomberg. 14 Jun. 2016.

“Ultra Petroleum Corp. was a shale success story. A former penny stock that made the big leagues, it was worth almost $15 billion at its 2012 peak.”

“Then came the bust. Almost half of Ultra’s reserves were erased from its books this year. The company filed for bankruptcy on April 29 owing $3.9 billion.”

“Proven reserves – gas and oil resources that are among the best measure of a company’s ability to reward its shareholders and repay its debts – are disappearing across the shale patch. This year, 59 U.S. oil and gas companies deleted the equivalent of 9.2 billion barrels, more than 20% of their inventories, according to data compiled by Bloomberg.  It’s by far the largest amount since 2009, when the Securities and Exchange Commission tweaked a rule to make it easier for producers to claim wells that wouldn’t be drilled for years.”

For reference, after the 2009 rule change “reserves surged 67%” in the following five years based on the 53 companies with records that far back.  “Almost half the gains came from wells that existed only on paper.”

“Drillers face pressure to keep reserves growing. For many, the size of their credit line is tied to the measure.” Thing is that “there are two ways to increase reserves: buy more or find more.  Fracking made it easier to do the latter, and the industry lobbied the SEC to count more undeveloped acreage as proved reserves…”

“The SEC agreed, with two key limits. First, the wells must be profitable to drill at a price set by an SEC formula. The companies got a temporary reprieve for 2014 because the SEC number was about $95 a barrel even though crude had plummeted to less than $50 by the time results were reported in early 2015.”

“That advantage has disappeared.”

“The SEC also requires that undeveloped wells be drilled within five years of being added to a company’s books.”

Other Interesting Articles

The Economist

Bloomberg – Earth’s Heat Extends Unprecedented Streak of Shattered Records 6/16

FT – Nigerian economy drops further into freefall 6/8

FT – Chinese tourists search far and wide for Japan’s rare whiskies 6/9

FT – The hedge fund fee structure consumes 80% of alpha 6/11

FT – Why hasn’t the productivity crisis caused a bear market (yet)? 6/12

FT – Tax rises on foreign homebuyers in Australia 6/13

FT – Japanese government bond yields fall to fresh lows 6/13

FT – MSCI A-shares denial sends Beijing clear message 6/15

FT – Gold is no safe port in this storm 6/15

FT – Uber points to profits in all developed markets 6/16

Herald News – Wood tower at the University of British Columbia a game-changer for construction 6/14

NYT – A Russian Cybersleuth Battles the ‘Dark Ages’ of the Internet 6/10

NYT – At the Birthplace of a Graft Scandal, Brazil’s Crisis Is on Full Display 6/10

NYT – The Overinflated Fear of Being Priced Out of Housing (Robert Shiller) 6/10

REBusiness Online – French Billionaire Buys Manhattan Office, Retail Building from Thor Equities for $525M ($5,250 PSF) 6/13

WSJ – These Chinese Developers Shed Property in Name Only 6/10

WSJ – China’s Banks: How Fixing Problems Can Make Them Worse 6/10

WSJ – China Economy: That Sputtering Sound Returns 6/13

WSJ – MSCI and China: Why There’s No Fear of Missing Out 6/15

Yahoo Finance – Real estate pros see recession by 2017, survey shows 6/16