Influencers, Changes in the No. of Millionaires, and Air Pollution

WSJ – Online Influencers Tell You What to Buy, Advertisers Wonder Who’s Listening – Suzanne Kapner & Sharon Terlep 10/20/19

Bloomberg – U.S. Mints More Than Half of World’s New Millionaires – Patrick Winters & Marion Halftermeyer 10/21/19

WSJ – Daily Shot: statista – Deaths from Air Pollution by Country 10/21/19

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Government Debt Burdens and How Long do you wear your clothes?

WSJ – Debt by Sector as Share of GDP, Q1 2019 (Select Countries) 10/13/19

WSJ – Avg No. of Times a New Garment is Worn 10/2/19

It’s tough to buy a home, even if you make good money

WSJ – So You Make $100,000? It Still Might Not Be Enough to Buy a Home. – Ryan Dezember, Laura Kusisto, and Shane Shifflett 10/15/19

In 2019, about 19% of U.S. households with six-figure incomes rented their homes, up from about 12% in 2006, according to a Wall Street Journal analysis of Census Bureau data that adjusted the incomes for inflation. The increase equates to about 3.4 million new renters who would have likely been homeowners a generation ago.

It isn’t unusual for high-earners to rent in pricey coastal cities like New York and San Francisco, where sky-high real-estate prices have long limited homeownership. Yet these markets account for less than 20% of the new six-figure renters, according to the Journal’s analysis.

To accommodate well-off renters, developers have raced to erect luxury apartment buildings around city centers. Investors, meanwhile, have bought hundreds of thousands of suburban houses to turn into rentals and are increasingly building single-family homes specifically aimed at well-heeled tenants.

The average tenant of the country’s two largest single-family landlords, Invitation Homes Inc. and American Homes 4 Rent, now earns $100,000 a year, the companies say. These companies own some 133,000 houses between them in attractive neighborhoods with good school districts around growing cities, like Houston, Denver and Nashville, Tenn.

In each of those cities as well as in Seattle, Cincinnati and Ann Arbor, Mich., the number of six-figure renters doubled or better between 2006 and 2017, making them the fastest-growing segment of renters in these markets, according to the Journal’s analysis.

The big home-rental companies are betting that high earners will continue renting. Bankrolled by major property investors like Blackstone Group Inc., Starwood Capital Group and Colony Capital Inc., these companies snapped up foreclosed houses with the expectation of renting them to educated workers who could afford to pay a lot every month but perhaps not buy.

High earners also tend to stay put and are willing to absorb regular rent increases if it means not having to move their children to new schools. That translates to lower turnover and maintenance costs for the landlords. “These tenants are treating our houses as if they are their homes,” American Homes CEO David Singelyn said at a real-estate investment conference this summer in New York.

Invitation and American Homes have reported record occupancy and rent growth as well as ever-growing retention as their average renters’ income has risen into six-figure territory.

Those who do want to buy a home face the additional hurdle of high prices that have surged beyond the reach of even relatively high earners in cities with strong jobs growth. Prices in 75 of the country’s 100 largest metro areas have surpassed their precrash highs, not adjusting for inflation, according to mortgage data and analysis firm HSH. Many of those cities, such as Salt Lake City and Raleigh, N.C., also have some of the fastest growth in high-paying jobs. The sharpest recovery, according to HSH, has been in Denver, where home prices have doubled since 2012 amid an influx of California tech workers and New York finance firms. Prices are nearly twice their precrash high.

It takes an annual household income of about $90,000 to afford Denver’s median-priced house, which costs around $471,000, according to HSH. But that is assuming buyers have 20%, or about $94,000, for a down payment.

“The lack of savings for a down payment in this country is grossly underestimated,” said John Pawlowski, a housing analyst at Green Street Advisors, who estimates that the typical renter’s net worth is about $5,500. “Consumer balance sheets are not good.”

Low Interest Rates Here to Stay…

Bloomberg – Central Banks Can’t Create Negative Rates by Themselves – Jim Bianco 10/8/19

It’s been a decade since the worst financial crisis since the Great Depression, and yet here we are in a world where the highest government bond yield starts with the number “2.” Among the world’s major developed economies, only the English speaking countries – the U.S., U.K., Canada, New Zealand and Australia – still have monetary policy rates above zero. But there is more to low yields than monetary policy rates, and those factors are likely to stay in place for an extended period.

The following table shows the highest interest rates culled from the 20 largest developed countries from the policy rate to the 30-year bond. Over 200 interest rates were considered and the only one to yield above 2% is the 30-year U.S. Treasury bond at 2.04%. Never has the highest yield among these countries been so low.

Core inflation has been low and stable for 15 years and shows no signs of a secular acceleration anytime soon. Low rates of inflation mean interest rates should be in the low single digits. Without a serious return of developed world inflation, which has not been the case for almost 25 years, gone are the days of 4% to 6% yields without a crisis, like the one in Europe’s government debt market around 2012.

Next is the global savings glut, a phrase coined by former Federal Reserve Chairman Ben S. Bernanke in 2005. As populations age, they have a propensity to save. This is shown by the following chart from the International Monetary Fund. Note that prior to 2005, the global saving rate was never above 24.5%. Since then, it’s only been lower during the panic of 2009. The rate equaled its record high of 26.7% in 2018. This works out to roughly $21 trillion saved every year. Since many seek to match the investments in their savings to their life expectancies, they tend buy bonds. 

The savings glut is leading to massive bond buying that is resulting in yields dropping below the inflation rate nearly everywhere in the developed world.

The two factors above alone should be enough to make investors understand that the fair value for developed world yields now start with a “1” or “0,” but two other factors are driving yields even lower, and into negative territory.

One is the global flight-to-quality. As the world economy slows, the natural reaction is to allocate into safe fixed-income securities. Look no further than last week’s reaction to the poor manufacturing data in the U.S. Bonds rallied and equities slid. Yes, flight-to-quality is a cyclical factor that is present when the concern is about a slowing world economy. So, expect this factor to come and go over time. Right now, though, it is “coming.” This flight-to-quality has created to much demand for bonds that the amount of negative yielding debt increased by $8 trillion this year to $14 trillion.

Yes, central banks might reverse from their negative interest-rate policies, but that only means developed world rates, without a crisis, will only go up to 1% or maybe 2%. Every future downturn will add back in flight-to-quality buying and negative central bank rates, and down market rates will go again to zero or even lower.

The secular outlook has changed and those applying the thinking from previous economic cycles about inflation and real yields conclude these low yields represent a bubble. They are not considering aging populations that are buying bonds and pushing yields below inflation rates driven lower by advances in technology. Add aggressive central banks willing to take monetary policy rates into negative territory and the standard rules that say bubble have not worked for almost a decade. Don’t expect this to change anytime soon.

The most commonly asked question from U.S. investors is where they can find yield. Unfortunately, for those still hoping for a previous cycle to return, we have bad news, you have it now at 1%. Embrace it and be lucky U.S. yields are not negative – yet.

Bloomberg – Even Greece Is Getting Paid to Borrow Money in Debt Markets – Michael Hunter 10/8/19

Investors are now paying for the privilege of lending it cash. A sale of 487.5 million euros ($535 million) of 13-week bills Wednesday drew a yield of minus 0.02%. Greece joins the likes of Ireland, Italy and Spain benefitting from the European Central Bank’s supportive monetary policy and deepening fears of a global recession.

Number of Listed Companies (US & China)

FT – US has fewer listed public companies than China – Robin Wigglesworth 10/6/19

So that happened.

Has Non-GAAP Reporting Reached its Red Line?

WSJ – Minding the GAAP Matters to Investors – Lauren Silva Laughlin 10/7/19

The number of companies reporting non-GAAP numbers has proliferated. In 1996, only 59% of filers used non-GAAP figures according to firm Audit Analytics. By 2017, that had grown to 97%. A gander at the wide range of valuations that non-GAAP creativity implies shows just how dangerous creative accounting can be for investors, too. Zion Research Group recently calculated Ebitda figures four different, but often used, ways for companies in the S&P 500 by sector. The communications sector produced the widest range between the lowest and highest figures—a difference of $25 billion for the sector as a whole between the most and least flattering techniques.

Expanding Auto Loan Term Lengths

WSJ – The Seven-Year Auto Loan: America’s Middle Class Can’t Afford Its Cars – Ben Eisen and Adrienne Roberts 10/1/19

Walk into an auto dealership these days and you might walk out with a seven-year car loan.

That means monthly payments that last well past when the brake pads give out and potentially beyond when the car gets traded in for a new one. About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to credit-reporting firm Experian PLC. A decade ago, that number was less than 10%.

For many Americans, the availability of loans with longer terms has created an illusion of affordability. It has helped fuel car purchases that would have been out of reach with three-, five- or even six-year loans.

Just 18% of U.S. households had enough liquid assets to cover the cost of a new car, according to a Wall Street Journal analysis of 2016 data from the Fed’s triennial Survey of Consumer Finances, a proportion that hasn’t changed much in recent years.

Even a conservative car loan often won’t do it. The median-income U.S. household with a four-year loan, 20% down and a payment under 10% of gross income—a standard budget—could afford a car worth $18,390, excluding taxes, according to an analysis by personal-finance website Bankrate.com.

But the size of the average auto loan has grown by about a third over the past decade to $32,119 for a new car, according to Experian. To keep payments manageable, the car industry has taken to adding more months to the end of the loan.

The average loan stretches for roughly 69 months, a record. Some last much longer. In the first half of the year, 1.5% of auto loans for new vehicles had terms of 85 months or longer, according to Experian. Five years ago, these eight- and nine-year loans were practically nonexistent.

As a result, a growing share of car buyers won’t pay off the debt before they trade in their cars for new ones, either because the car is in need of repairs or because they want a newer model. A third of new-car buyers who trade in their cars roll debt from old vehicles into their new loans, according to car-shopping site Edmunds. That is up from about a quarter before the financial crisis.

Americans have been borrowing to buy their cars for decades, but auto debt has swelled since the financial crisis. U.S. consumers held a record $1.3 trillion of debt tied to their cars at the end of June, according to the Federal Reserve, up from about $740 billion a decade earlier.

So far this year, dealerships made an average of $982 per new vehicle on finance and insurance versus $381 on the actual sale, according to J.D. Power, a data and analytics company. A decade earlier, financing brought in $516 per car and the sale made dealers $837.

US Home Sales by Month and Change in North American Bird Population

WSJ – Daily Shot: US Home Sales by Month 10/1/19


NYT – Birds Are Vanishing From North America – Carl Zimmer 9/19/19

Soaring Costs of Health Insurance and Increasing Use of Marijuana by Workers

Bloomberg – Health Insurance Costs Surpass $20,000 Per Year, Hitting a Record – John Tozzi 9/25/19

The cost of family health coverage in the U.S. now tops $20,000, an annual survey of employers found, a record high that has pushed an increasing number of American workers into plans that cover less or cost more, or force them out of the insurance market entirely.

“It’s as much as buying a basic economy car,” said Drew Altman, chief executive officer of the Kaiser Family Foundation, “but buying it every year.”

While employers pay most of the costs of coverage, according to the survey, workers’ average contribution is now $6,000 for a family plan. That’s just their share of upfront premiums, and doesn’t include co-payments, deductibles and other forms of cost-sharing once they need care.

The seemingly inexorable rise of costs has led to deep frustration with U.S. health care, prompting questions about whether a system where coverage is tied to a job can survive. As premiums and deductibles have increased in the last two decades, the percentage of workers covered has slipped as employers dropped coverage and some workers chose not to enroll. Fewer Americans under 65 had employer coverage in 2017 than in 1999, according to a separate Kaiser Family Foundation analysis of federal data. That’s despite the fact that the U.S. economy employed 17 million more people in 2017 than in 1999.

“What we’ve been seeing is a slow, slow kind of drip-drip erosion in employer coverage,” Altman said.

Employees’ costs for health care are rising more quickly than wages or overall economy-wide prices, and the working poor have been particularly hard-hit. In firms where more than 35% of employees earn less than $25,000 a year, workers would have to contribute more than $7,000 for a family health plan. It’s an expense that Altman calls “just flat-out not affordable.” Only one-third of employees at such firms are on their employer’s health plans, compared with 63% at higher-wage firms, according to the Kaiser Family Foundation’s data.

The survey is based on responses from more than 2,000 randomly selected employers with at least three workers, including private firms and non-federal public employers.

Deductibles are rising even faster than premiums, meaning that patients are on the hook for more of their medical costs upfront. For a single person, the average deductible in 2019 was $1,396, up from $533 in 2009. A typical household with employer health coverage spends about $800 a year in out-of-pocket costs, not counting premiums, according to research from the Commonwealth Fund. At the high end of the range, those costs can top $5,000 a year.

After years of pushing health-care costs onto workers, some employers are pressing pause. Delta Air Lines Inc. recently froze employees’ contributions to premiums for two years, Chief Executive Officer Ed Bastian said in an interview at Bloomberg’s headquarters in New York last week.

“We said we’re not going to raise them. We’re going to absorb the cost because we need to make certain people know that their benefits structure is real important,” Bastian said. He said the company’s health-care costs are growing by double-digits. The Atlanta-based company has more than 80,000 employees around the globe.

And on that note… marijuana use appears to be up.

WSJ – Daily Shot: Positive Testing for Marijuana in the Workplace 9/27/19

The Changing Insurance Business Model & An Illustrative Comparison between WeWork and IWG

Economist – Why WeWork doesn’t work yet – Daily Chart 9/17/19

Economist – Climate change could put insurance firms out of business 9/17/19

Insurance companies are uniquely exposed to these sorts (climate) of changes. Tens of millions of businesses buy policies every year to protect themselves from risks. As a result the industry is vast—last year the premiums paid for property and casualty insurance worldwide reached $2.4trn, according to Swiss Re, one of the big reinsurance firms on to which consumer-facing insurers pass the risk of mega-losses. Insurance companies spent $180bn on reinsurance premiums. Extreme events becoming the norm could force insurers to fork out ever greater payouts to policyholders, as well as lower the value of the assets they hold. The best case is that insurers reinvent themselves, helping the world cope—risk is, after all, how they make their money. The worst is that some fail and, more worryingly, that swathes of the global economy become uninsurable.

Already, insurers are seeing disasters of unprecedented scale. Earlier this month Hurricane Dorian, one of the two largest storms ever known to have made landfall in the Atlantic, battered the Bahamas and then the Carolinas. In July Hurricane Barry brought the heaviest rainfall ever measured to Arkansas. The Indian Ocean basin has seen three huge cyclones so far this year, one of which caused Mozambique’s severest flooding since 2000. Last November California saw wildfires over the largest area ever recorded.

Very costly disasters are becoming more frequent. Between 1980 and 2015 America saw an average of five events causing over $1bn in damage (in current prices) each year. Between 2016 and 2018 the yearly average was 15. In the 20th century, according to AIR Worldwide, a climate-modelling firm, a hurricane on the scale of Harvey, America’s costliest ever, would have been regarded as a one-in-2,000-year event. By 2017, when Harvey blew in, that frequency was estimated at one in 300 years. By 2100, says Peter Sousounis of AIR, it will be once a century, and tidal surges that used to be classed as once-a-millennium events will be expected to strike every 30 years.

Catastrophes are also getting harder to predict. Though newer models are starting to take account of climate change, most still rely on crunching numbers from the previous few decades, which are already obsolete. And insurers struggle to handle “compounding effects”—the mutually reinforcing impact on each other of events associated with global warming.

Adding to the losses is the growing number of properties being built in harm’s way, such as on flood plains and coasts. Average annual insured losses from catastrophic events have grown 20 times, adjusted for inflation, since the 1970s, to an average of $65bn this decade, with a peak of $143bn in 2017. That excludes knock-on effects such as business disruption. Last year the global figure totaled $85bn, the fourth-highest on record, even though it was a year without a mega-disaster.

Climate losses can also come from the other side of insurers’ balance-sheets: the investments they hold in order to cover potential payouts and park any spare funds. Insurers (including life as well as property and casualty) are the world’s second-largest institutional investors, with $25trn under management. They often place chunky bets on multinational firms, infrastructure and property—which are becoming riskier propositions as the climate changes. Moreover, structural changes in the economy, such as the move away from fossil fuels, could leave insurers’ portfolios exposed.

In the face of these threats, insurers are seeking to future-proof their businesses models. Part of this is about financial resilience. Most general policies are renewed annually, meaning firms can raise premiums promptly. And since a spate of mega-disasters caught them off-guard in the 1990s they have fortified their capital reserves. According to McKinsey, the policy holder surplus (crudely, the excess of assets over liabilities) available to pay claims in America’s property and casualty sector doubled in real terms over the last 20 years. In 1992 Hurricane Andrew sent 11 insurers to the wall. All survived the record hurricane season of 2017-18.

Regulators are doing more to prod insurers to hold sufficient capital—typically they aim to ensure they can withstand losses caused by the worst imaginable year in 200. But putting a figure on this is hard, because nobody has thousands of years of data. And the worst possible year is getting worse every year. The risks will keep rising long into the future, says Paul Fisher, a former supervisor at the Bank of England. A cataclysmic year could also hit markets, hurting insurers’ investments just when they need them most. Some could be forced to sell assets to cover giant payouts, pushing asset prices down further.

Most probably, payouts will continue to rise without capsizing insurers. But that still creates a problem. To absorb bigger losses, they must charge higher premiums. According to Marsh, a broker, global commercial-insurance prices rose by 6% in the second quarter of this year, compared with the previous quarter. That was the largest increase since records began. In America property rates jumped 10%; in the Pacific region they soared by nearly 18%. The rise is to meet the demands of reinsurers, which insure the insurers. Average reinsurance rates are set to rise by 5% next year, according to S&P Global, a rating agency—and in California, after the huge recent wildfires, by 30-70%.

A few calm quarters would probably see some of those increases unwound. But there is no doubt about the trend. And it cannot continue forever without causing at least some customers to rethink whether to buy insurance at all.

The global “protection gap” between total losses and insured losses is already wide and growing. The research arm of Swiss Re estimates that it more than doubled in real terms between 2000 and 2018, to $1.2trn. Half of last year’s losses from natural disasters were uninsured. Nine out of ten American homeowners have no flood insurance despite half of the population living near water, says Erwann Michel-Kerjan of McKinsey. The share of uninsured damage is especially high in developing countries, where infrastructure and risk-mitigation measures are not keeping pace with economic growth.

Where risks become uninsurable, states and firms may work hand-in-hand. In Britain, where a sixth of homes are at risk of flooding, government and insurers have set up Flood Re, a reinsurer of last resort that enables insurers to offer affordable premiums on 350,000 homes in flood plains. Every firm selling home insurance in the country pays into the scheme, spreading the costs across hundreds of thousands of policies. To avoid perverse incentives, houses built in high-risk areas after 2009 are excluded.

Developing countries are underinsured partly because the risks they face are poorly understood. And many are urbanizing fast, which means cities change from year to year, making the value at risk hard to track. More research would help deepen insurance markets, and making models publicly accessible would also enable officials and development financiers to evaluate mitigation measures. Above all, insurers need to take the lead in publicizing the growing risks posed by climate change, and the need for cover. According to Alison Martin of Zurich Insurance, often people do not take out insurance because they think the worst will not happen. Talking of one-in-2,000-year events is not very helpful, she says, “because many people would think we’re safe for another 1,999”.